<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED
IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement [ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)(S) 240.14a-11(c) or (S)(S) 240.14a-12
EQUALNET COMMUNICATIONS CORP.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies: Common
stock
2. Aggregate number of securities to which transaction applies:
7,636,986 shares of common stock issuable in the ACMI Acquisition
(assuming an average closing sale price of the Common Stock of $0.8906
per share for all purposes and assuming that the Commissionable
Revenue is $2.5 million, $3.0 million and $3.5 million in years one,
two and three following the closing of the ACMI Acquisition)
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $0.8906
4. Proposed maximum aggregate value of transaction: $6,801,500
5. Total fee paid: $1,360
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1. Amount Previously Paid: N/A
2. Form, Schedule or Registration Statement no.: N/A
3. Filing Party: N/A
4. Date Filed: N/A
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[EQUALNET LOGO]
June __, 1999
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Equalnet Communications Corp. to be held at 10:00 a.m., Houston time, on
_________, July __, 1999, at the Marriott Westside, 13210 Katy Freeway, Houston,
Texas.
This year you will be asked to vote in favor of the following proposals: (1) the
approval of an amendment to Equalnet's Articles of Incorporation effecting a
one-for-four reverse stock split of Equalnet's common stock capital; (2) the
ratification of certain transactions Equalnet entered into in September 1998 and
the approval of the issuance of common stock upon the exercise of warrants or
the conversion of securities issued by Equalnet pursuant to those transactions;
(3) the election of four directors; (4) the ratification of an amendment of the
Statement of Resolution of the Board of Directors with respect to the series A
preferred stock and the approval of the issuance of common stock upon the
conversion of series A preferred stock pursuant to the terms of the amended
Statement of Resolution; (5) the ratification of the acquisition by a wholly
owned subsidiary of Equalnet of the business and assets of LIMIT LLC (d/b/a
ACMI); (6) the approval of the issuance of warrants to certain officers and
former officers of Equalnet to purchase shares of Equalnet common stock; and (7)
the ratification of the Board of Directors' appointment of independent auditors
for Equalnet and its subsidiaries for fiscal year 1999. We describe and explain
these matters more fully in the attached proxy statement, which you should read.
The Board of Directors has approved the proposals described herein. WE BELIEVE
THAT THE PROPOSALS DESCRIBED HEREIN ARE IN THE BEST INTERESTS OF EQUALNET AND
ITS SHAREHOLDERS AND RECOMMEND THAT YOU VOTE FOR APPROVAL OF THE MATTERS
PROPOSED HEREIN.
In connection with our approval of the transactions entered into in September
1998 described herein, we received and took into account the opinion, dated
September 3, 1998, of G. A. Herrera & Co., Equalnet's financial advisor, to the
effect that, as of the date of such opinion and subject to certain matters
stated therein, the offering of the Notes (as defined in Proposal 2 of the Proxy
Statement) was fair to the holders of Equalnet common stock from a financial
point of view. No opinion was given as to the issuance of the warrants and
series D preferred stock referred to in Proposal 2. We have included a copy of
the opinion in the accompanying Proxy Statement as Annex C, and we encourage you
to read the opinion carefully in its entirety.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, IT IS IMPORTANT THAT YOUR SHARES
BE REPRESENTED AND VOTED. ACCORDINGLY, WE ASK THAT YOU MARK, DATE, SIGN AND
RETURN YOUR PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENVELOPE PROVIDED.
Thank you for your continued interest and cooperation.
Very truly yours,
__________________________________________________
Mark A. Willis, Chairman of the Board
<PAGE>
EQUALNET COMMUNICATIONS CORP.
1250 Wood Branch Park Drive
Houston, Texas 77079
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY ___, 1999
The Annual Meeting of the Shareholders of Equalnet Communications
Corp., a Texas corporation ("Equalnet"), will be held at 10:00 a.m., Houston
time, on _________, July __, 1999, at the Marriott Westside, 13210 Katy Freeway,
Houston, Texas, for the following purposes:
(1) to approve an amendment to Equalnet's Articles of Incorporation
effecting a one-for-four reverse stock split of Equalnet's common
stock;
(2) to ratify certain transactions consummated by Equalnet in September
1998 involving the issuance by Equalnet of:
. $3,000,000 aggregate principal amount of 6% Senior Secured
Convertible Notes due 2001 of Equalnet;
. two warrants to purchase, in the aggregate, 666,232 shares of
common stock; and
. 3,750 shares of series D preferred stock in exchange for 3,000,000
shares of common stock,
and to approve the issuance of common stock by Equalnet upon the
conversion of such 6% Senior Secured Convertible Notes due 2001 and
such series D preferred stock and upon the exercise of such warrants;
(3) to elect four directors to Equalnet's Board of Directors;
(4) to ratify an amendment of Equalnet's Statement of Resolution of the
Board of Directors with respect to the series A preferred stock and to
approve the issuance of common stock by Equalnet upon the conversion
of series A preferred stock pursuant to the terms of the amended
Statement of Resolution;
(5) to ratify the acquisition by a wholly owned subsidiary of Equalnet of
the business and assets of LIMIT LLC (d/b/a ACMI);
(6) to approve the issuance of warrants to certain officers and former
officers of Equalnet to purchase shares of Equalnet common stock;
(7) to ratify the Board of Directors' appointment of independent auditors
for Equalnet and its subsidiaries for fiscal year 1999; and
(8) to transact such other business as may properly come before the
meeting or any adjournment thereof.
THE BOARD OF DIRECTORS OF EQUALNET RECOMMENDS THAT YOU VOTE FOR ALL OF THE
PROPOSALS SET FORTH IN THE ATTACHED PROXY STATEMENT.
The holders of common stock and of series B preferred stock of record
at the close of business on June 18, 1999, will be entitled to vote at the
meeting.
By Order of the Board of Directors,
Dean H. Fisher
General Counsel and acting Secretary
June __, 1999
IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. EVEN IF YOU
PLAN TO BE PRESENT, YOU ARE URGED TO SIGN, DATE AND MAIL THE ENCLOSED PROXY
PROMPTLY. IF YOU ATTEND THE MEETING, YOU CAN VOTE EITHER IN PERSON OR BY YOUR
PROXY.
<PAGE>
TABLE OF CONTENTS
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PROPOSAL 1: TO APPROVE AN AMENDMENT TO THE ARTICLES OF INCORPORATION.......................... 1
Reasons for the Amendment...................................................................... 1
Effects of the Amendment....................................................................... 4
Exchange of Stock Certificates................................................................. 5
Federal Income Tax Consequences................................................................ 6
Required Vote.................................................................................. 6
Recommendation of the Board of Directors....................................................... 7
PROPOSAL 2: TO RATIFY THE NOTE ISSUANCE TRANSACTION AND TO APPROVE THE ISSUANCE OF
COMMON STOCK UPON THE CONVERSION............................................................. 8
Background of the Note Issuance Transaction.................................................... 8
The Note Issuance Transaction.................................................................. 9
Consideration to be Received by Equalnet....................................................... 9
The Note Purchase Agreement and Note Purchase and Exchange Agreements.......................... 9
The Notes...................................................................................... 9
Conversion..................................................................................... 9
Mandatory Redemption........................................................................... 10
Events of Default.............................................................................. 11
Optional Redemption............................................................................ 11
The Series D Preferred......................................................................... 12
Conversion..................................................................................... 13
Optional Redemption............................................................................ 14
Final Redemption............................................................................... 15
Mandatory Redemption........................................................................... 15
The Warrants................................................................................... 16
The Registration Rights Agreements............................................................. 17
The Security Agreement......................................................................... 17
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TABLE OF CONTENTS
(Continued)
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The Independent Committee of the Board of Directors............................................ 17
The Fairness Opinion........................................................................... 18
Use of Consideration........................................................................... 18
Possible Adverse Consequences of the Note Issuance Transaction................................. 18
Required Vote.................................................................................. 18
Recommendation of the Board of Directors....................................................... 19
PROPOSAL 3: TO ELECT FOUR DIRECTORS........................................................... 20
Director Nominees.............................................................................. 20
Background of Directors and Nominees........................................................... 21
Committees of the Board of Directors and Meeting Attendance.................................... 22
Compensation of Directors...................................................................... 23
Required Vote.................................................................................. 23
Recommendation of the Board of Directors....................................................... 24
PROPOSAL 4: TO RATIFY THE AMENDMENT OF THE STATEMENT OF RESOLUTION
OF THE BOARD OF DIRECTORS WITH RESPECT TO THE SERIES A
PREFERRED AND TO APPROVE THE ISSUANCE OF COMMON STOCK UPON THE CONVERSION
OF THE SERIES A PREFERRED PURSUANT TO THE TERMS OF
THE AMENDED SERIES A STATEMENT OF RESOLUTION.................................................. 25
Reason for Seeking Ratification of the Amendment of the Statement of Resolution
of the Board of Directors With Respect to the Series A Preferred and Approval
of the Issuance of Common Stock Upon the Conversion of the Series A Preferred................. 26
Possible Adverse Consequences of the Filing of the Amended Series A Statement of
Resolution and the Issuance of Common Stock Upon the Conversion of the Series A Preferred...... 26
Required Vote.................................................................................. 27
Recommendation of the Board of Directors....................................................... 27
PROPOSAL 5: TO RATIFY THE ACMI ACQUISITION.................................................... 28
Background of the ACMI Acquisition............................................................. 28
Description of ACMI's Business................................................................. 28
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TABLE OF CONTENTS
(continued)
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The ACMI Agreement............................................................................. 29
Transaction With Former Director Zane Russell in Connection With the ACMI Acquisition.......... 32
Reasons for the ACMI Acquisition............................................................... 32
Financial Information Regarding Equalnet and ACMI.............................................. 33
Regulatory Filings and Approvals............................................................... 33
Possible Adverse Consequences of the ACMI Acquisition.......................................... 33
Required Vote.................................................................................. 34
Recommendation of the Board of Directors....................................................... 34
PROPOSAL 6: TO APPROVE THE ISSUANCE OF WARRANTS TO CERTAIN OFFICERS AND FORMER OFFICERS....... 35
PROPOSAL 7: TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS................................. 36
Required Vote.................................................................................. 36
Recommendation of the Board of Directors....................................................... 36
EXECUTIVE OFFICERS AND COMPENSATION............................................................ 37
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION........................................ 38
Base Salary.................................................................................... 39
Annual Incentive Compensation.................................................................. 39
Stock Incentive Programs....................................................................... 40
SUMMARY OF COMPENSATION........................................................................ 40
WARRANT AND OPTION GRANTS IN FISCAL 1998....................................................... 41
PERFORMANCE PRESENTATION....................................................................... 41
EMPLOYMENT AGREEMENTS.......................................................................... 42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.................................... 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................. 43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................. 46
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE........................................ 51
</TABLE>
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(continued)
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PROPOSALS FOR NEXT ANNUAL MEETING.............................................................. 51
OTHER MATTERS.................................................................................. 51
CAUTION AS TO FORWARD-LOOKING STATEMENTS....................................................... 51
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................................. 52
</TABLE>
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<PAGE>
EQUALNET COMMUNICATIONS CORP.
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY ___, 1999
This Proxy Statement is furnished to the holders of common stock and
series B preferred stock of Equalnet Communications Corp., 1250 Wood Branch Park
Drive, Houston, Texas 77079 (Tel. No. 281/529-4600), in connection with the
solicitation by the Board of Directors of Equalnet of proxies to be used at the
Annual Meeting of Shareholders, or any adjournment thereof (the "Meeting"). The
Board of Directors is sometimes referred to in this Proxy Statement as "we" or
"us." We will hold the Meeting at 10:00 a.m., Houston time, on __________, July
__, 1999, at the Marriott Westside, 13210 Katy Freeway, Houston, Texas.
Proxies in the form enclosed, properly executed and received in time
for the Meeting, will be voted as specified therein. If you do not specify
otherwise, the shares represented by your proxy will be voted for the election
of each of the director nominees identified herein and for the other proposals
described herein. If you grant your proxy, you may still attend the Meeting and
vote in person. You may revoke your proxy at any time before it is exercised by
delivering written notice to Equalnet at or before the Meeting. We are mailing
this Proxy Statement on or about June __, 1999, to holders of common stock and
series B preferred stock of record on June 18, 1999 (the "Record Date").
At the close of business on the Record Date, 27,651,277 shares of
Equalnet's common stock, par value $.01 per share and 3,000 shares of series B
preferred stock were outstanding and entitled to vote at the Meeting. Only the
holders of common stock and the series B preferred stock (collectively, the
"Voting Shareholders") of record on the Record Date may vote at the Meeting.
Any shareholder of Equalnet may examine a list of Voting Shareholders at the
offices of Equalnet located at 1250 Wood Branch Park Drive, Houston, Texas
during usual business hours within 10 days before the Meeting.
The Voting Shareholders of record on the Record Date may cast one vote
per share on each matter presented to the shareholders at the Meeting. The
enclosed form of proxy provides a means for you:
(1) to vote for or against the approval of an amendment to Equalnet's
Articles of Incorporation effecting a one-for-four reverse stock split of
Equalnet's common stock as described herein or to abstain from voting on such
approval;
(2) to vote for or against the ratification of the transactions
consummated by Equalnet in September 1998 and the approval of the issuance of
common stock by Equalnet upon the conversion of the securities and the exercise
of the warrants issued pursuant to those transactions or to abstain from voting
on such ratification and approval;
<PAGE>
(3) to vote for or against each or any director-nominee named herein
or to withhold authority to vote for any or all of such director-nominees;
(4) to vote for or against the ratification of an amendment of
Equalnet's Statement of Resolution of the Board of Directors with respect to the
series A preferred stock and the approval of the issuance of common stock by
Equalnet upon the conversion of series A preferred stock pursuant to the terms
of the amended Statement of Resolution or to abstain from voting on such
ratification and approval;
(5) to vote for or against the ratification of the acquisition of the
business and assets of LIMIT LLC (d/b/a/ ACMI) by a wholly owned subsidiary of
Equalnet, or to abstain from voting on such ratification;
(6) to vote for or against the approval of the issuance of warrants to
certain officers and former officers of Equalnet to purchase shares of Equalnet
common stock; and
(7) to vote for or against the ratification of the Board of Directors'
appointment of independent auditors for Equalnet and its subsidiaries for fiscal
year 1999, or to abstain from voting on such ratification.
Equalnet's Annual Report to Shareholders for the year ended June 30,
1998, which includes, among other things, Equalnet's audited consolidated
balance sheets at June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 1998, is being mailed with
this Proxy Statement to all Voting Shareholders of record as of the Record Date.
2
<PAGE>
PROPOSAL 1: TO APPROVE AN AMENDMENT TO THE ARTICLES OF INCORPORATION
We have resolved to amend Equalnet's Articles of Incorporation and
will submit the amendment to a vote at the Meeting.
The amendment would effect a one-for-four reverse stock split of the
common stock. A copy of the proposed amendment is attached hereto as Exhibit A.
If the amendment is approved by the Voting Shareholders, each four shares of
common stock outstanding on the Effective Date (as defined below) will be
converted automatically into one share of common stock. To avoid the existence
of fractional shares of common stock, shareholders who would otherwise be
entitled to receive fractional shares of common stock will receive a cash
distribution in lieu thereof. See "Exchange of Stock Certificates." The
"Effective Date" will be the date on which the amendment is filed with the
Secretary of State of the State of Texas.
We expect that, if the reverse stock split is approved by the Voting
Shareholders at the Meeting, the amendment will be filed promptly. However,
notwithstanding approval of the reverse stock split by the Voting Shareholders,
we may elect not to file, or to delay the filing of, the amendment, if we
determine that filing the amendment would not be in the best interest of
Equalnet's shareholders at such time. Factors leading to such a determination
could include, without limitation, any possible effect on Equalnet's Nasdaq
listing or future securities offerings.
REASONS FOR THE AMENDMENT
On June 10, 1999, the Board of Directors signed a written consent
approving the amendment and directing that the amendment be placed on the agenda
for approval by the Voting Shareholders at the Meeting.
We believe that the reverse stock split will cause the stock price of
the common stock and the number of shares of common stock outstanding to be more
appropriately aligned with Equalnet's peers in the telecommunications sector.
The reverse stock split should cause the common stock to be more attractive to
the financial community and lower trading costs for the investing public.
Further, the reverse stock split will reduce administrative costs for Equalnet.
In conjunction with confirming and consummating the Seconded Amended
Joint Plan of Reorganization of EqualNet Corporation and Equalnet Communications
Corp. (the "Plan"), Equalnet had raised $2.2 million through the sale of
3,666,666 shares of its common stock, sold 833,333 shares of a newly designated
series E preferred stock for $500,000, and issued the 3,000,000 shares of common
stock to the trust as provided in the bankruptcy court orders concerning the
Plan. Equalnet also entered into a collateralized guarantee of a minimum stock
sales price of $1.00 per share for the shares of common stock transferred to the
trust, subject to a restriction on sales of no more than 375,000 shares of
common stock in any 6 month period. A portion of the funds raised through the
sale of these securities were used for (i) the payment of $1.35 million cash to
the trust for unsecured creditors, (ii) payment of approximately $1.4 million in
administrative claims and (iii) payment of $265,000 of obligations of Equalnet
under an agreement it had to guarantee certain obligations of EqualNet.
Equalnet also issued a warrant for the purchase of up to 300,000 shares of its
common stock at an exercise price of
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<PAGE>
$1.50 per share for a period of 5 years. In addition, Equalnet borrowed $550,000
from the purchaser of accounts receivable of its subsidiaries, EqualNet and USC
Telecom, Inc. to fund the balance of its obligations under the Plan, and to
provide funding for general corporate purposes. Equalnet also agreed to the
potential issuance of additional shares of its common stock to satisfy its "New
Value Contribution" obligations (as defined below). This is a commitment on the
part of Equalnet to pay to the trust for the unsecured creditors an amount equal
to 5% of the allowed claims in excess of the undisputed general unsecured claims
identified in Equalnet Corporation's bankruptcy schedules (the "New Value
Contribution"). Payment of this last item is to be in the form of newly issued
common stock valued at $1 per share, one half of which is subject to the
collateralized guarantee described in (iii) above. The number of shares required
to fund the New Value Contribution increases in the event the Average Closing
Price (i.e., the average closing price for Equalnet's stock during the 25
consecutive trading days immediately preceding the date that is two years after
the effective date of the Plan) for the common stock is below $1 per share, in
an amount equal to the quotient of (A) the product of (x) ($1 minus the Average
Closing Price) and (y) 1,500,000; and (B) Average Closing Price. The court also
entered a stipulation with a creditor of both EqualNet Corporation and Equalnet
for the release of the creditor's claim against Equalnet in exchange for an
immediate payment of $130,000, a second payment of $135,000 on or before June
30, 1999, and the issuance of a warrant for the purchase of up to 300,000 shares
of common stock at an exercise price of $1.50 per share for a period of 5 years.
The obligation of Equalnet arose out of a guarantee of several equipment leases
of EqualNet.
Equalnet has historically reserved shares of its authorized but
unissued common stock to ensure its ability to complete its obligations to issue
such shares at a later date. Equalnet has recently entered into agreements such
as the purchase of the assets of LIMIT LLC (d/b/a ACMI), the proposed
acquisition of The Intelesis Group Inc., the proposed issuance of warrants to
certain officers and former officers of Equalnet that would result, upon
exercise, in the issuance of shares of common stock, which the shareholders are
being asked to approve, the issuance of shares of common stock in connection
with raising the funding necessary to consummate the Plan, the payment to the
trustee under the Plan for the unsecured creditors of EqualNet Corporation of
shares of common stock as required by the Plan, a Common Stock Subscription
Agreement with Infinity Investors Limited ("Infinity") and IEO Holdings Limited
("IEO") and, with a newly formed acquisition subsidiary of Equalnet, Equalnet
Acquisition Corporation, an Agreement and Plan of Merger (the "Merger
Agreement") with e.Volve Technology Group, Inc. ("e.Volve").
The Common Stock Subscription Agreement initially provides for the
issuance of 1,666,666 shares of common stock and grants to Infinity and IEO the
option to acquire up to an additional 2,500,000 shares of common stock upon
similar terms to the original issuance. The Merger Agreement, if approved
(which approval will not be sought at the Meeting), could require the issuance
of a sufficient number of shares of common stock so that after the merger,
shareholders of e.Volve would own 55% of the common stock of Equalnet on a fully
diluted basis. The Merger Agreement provides for a guarantee by Equalnet of
approximately $7.65 million of debt of e.Volve to Infinity and IEO, which is
convertible into that number of shares of common stock of Equalnet representing
5% of the issued and outstanding Equalnet common stock on a fully diluted basis
after giving effect to such conversion, which percentage will be determined in
the same manner as used to determine the aggregate consideration in the Merger
Agreement. Summary financial information for Equalnet as of March 31, 1999, and
pro-forma financial data giving effect, on a per share basis, to the e.Volve
transaction, is attached to this Proxy Statement as Annex G. Financial
statements of e.Volve as of and for the three month period ended February 28,
1999 and the nine month period ended May 31, 1998 are attached to
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<PAGE>
this Proxy Statement as Annex H. Annex H also contains a management's discussion
and analysis of e.Volve's financial condition and results of operations for the
periods covered by the financial statements.
The proposed acquisition of Intelesis involves the merger of Intelesis
with and into a wholly owned subsidiary of Equalnet, as a result of which
Intelesis will become a wholly owned subsidiary of Equalnet. Equalnet has
entered into an Agreement and Plan of Merger with respect to the acquisition,
the closing of which is still pending. Intelesis's primary asset is a
proprietary program to provide long distance service to subscribers in exchange
for the subscriber listening to a short advertisement. As consideration for the
acquisition of Intelesis, Equalnet agreed to (1) issue 2,446,000 shares of
common stock to the shareholders of Intelesis (one of whom, Nathan Isaac Prager,
is a nominee for election to the board of directors as set forth in Proposal 4)
at the closing; and (2) issue additional shares of common stock after the
closing pursuant to earn-out provisions, subject to the condition that such
issuance must have been previously approved by the Voting Shareholders (which
approval will not be sought at the Meeting). In each instance in which Equalnet
agreed to issue shares of common stock in connection with an acquisition,
Equalnet used, to a greater or lesser degree, shares of stock that had
previously been reserved for other anticipated usages.
In order to have shares of common stock available to issue in
connection with each of the foregoing matters, Equalnet unreserved (i) 1,500,000
shares it had set aside for the earn out provisions under the ACMI Agreement (as
defined in Proposal 5), (ii) 2,072,862 shares it had set aside under the
Equalnet Employee Stock Option and Restricted Stock Plan, (iii) 400,000 shares
it had set aside under the Equalnet Non-Employee Director Stock Option Plan,
(iv) 2,225,000 shares it had set aside under the proposed Equalnet Independent
Contractor Stock Plan, and (v) 11,407,606 shares it had set aside for issuance
of common stock upon the conversion or exercise of the securities issued to
Willis Group, LLC, Genesee Fund Limited - Portfolio B and Advantage Fund Limited
in connection with the Note Issuance Transaction (as defined in Proposal 2).
The reverse stock split will enable Equalnet to again fully reserve shares for
issuance (1) under each of the foregoing stock and option plans, and (2) upon
the conversion or exercise of such securities.
Further, many institutional and other investors look upon stock
trading at low prices as unduly speculative in nature and, as a matter of
policy, avoid investment in such stocks. Accordingly, we believe that the
current per share price of the common stock may reduce the effective
marketability of the shares because of the reluctance of many leading brokerage
firms to recommend low priced stock to their clients. Further, various
brokerage house policies and practices tend to discourage individual brokers
from dealing in low priced stocks. Some of those policies and practices pertain
to the payment of brokers' commissions and to time-consuming procedures that
function to make the handling of low priced stocks unattractive to brokers from
an economic standpoint. Additionally, the structure of trading commissions also
tends to have an adverse impact upon holders of low priced stock because the
brokerage commission on a sale of low priced stock generally represents a higher
percentage of the sales price than the commission on higher priced issues.
Finally, rules of the Nasdaq SmallCap Market require that Equalnet's
common stock maintain a minimum bid price per share of $1.00. We believe that
the reverse stock split
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<PAGE>
will facilitate Equalnet's compliance with these rules. If Equalnet is unable to
maintain a minimum bid price per share of at least $1.00, Nasdaq will likely
delist Equalnet's common stock from trading on the Nasdaq SmallCap Market.
We believe that the shares of common stock will, as a result of the
reverse stock split, trade at higher prices than those that have prevailed
recently. We cannot assure you, however, that such increase in the market value
will occur or, if such an increase occurs, that it will equal or exceed the
direct arithmetical result of the reverse stock split since there are numerous
factors and contingencies that would affect such value, including the status of
the market for the shares of common stock at the time, Equalnet's reported
results of operations in future fiscal periods and general stock market
conditions. THEREFORE, WE CANNOT ASSURE YOU THAT THE SHARES OF COMMON STOCK
WILL NOT, DESPITE THE REVERSE STOCK SPLIT, TRADE AT PRICES THAT ARE LESS THAN
THE ARITHMETICAL EQUIVALENT SHARE PRICE RESULTING FROM THE REVERSE STOCK SPLIT.
Shareholders have no rights of dissent under Texas law or under
Equalnet's Articles of Incorporation and Bylaws in connection with the reverse
stock split amendment.
EFFECTS OF THE AMENDMENT
Subject to Voting Shareholder approval, the reverse stock split will
be effected by filing the amendment to Equalnet's Articles of Incorporation, and
will be effective immediately upon such filing. Although Equalnet expects to
file the amendment with the Texas Secretary of State's office promptly following
approval of the reverse stock split at the meeting, the actual timing of such
filing will be determined by Equalnet's management based upon their evaluation
as to when such action will be most advantageous to Equalnet and its
shareholders. Equalnet reserves the right to forego or postpone filing the
amendment, if such action is determined to be in the best interests of Equalnet
and its shareholders.
The reverse stock split will also result in some shareholders owning
"odd lots" of less than 100 shares of common stock received as a result of the
reverse stock split. Brokerage commissions and other costs of transactions in
odd lots may be higher, particularly on a per-share basis, than the cost of
transactions in even multiples of 100 shares.
Equalnet is authorized to issue 50,000,000 shares of common stock, of
which 27,651,277 shares were issued and outstanding at the close of business on
the Record Date. Equalnet is also authorized to issue 5,000,000 shares of
Preferred Stock, each share having a par value of one cent, of which 1,054,215
were issued and outstanding at the close of business on the Record Date.
If the amendment is approved by the Voting Shareholders, the principal
effect of the Reverse Stock Split will be to decrease the number of outstanding
shares of common stock from 27,651,277 shares to approximately 6,912,819 shares,
based on share information as of June 8, 1999. The reverse stock split will not
affect the number of authorized shares of common stock. After the reverse stock
split, Equalnet estimates that it will have approximately the same number of
shareholders. Except for the receipt of cash in lieu of fractional interests,
the amendment would not affect any shareholder's proportionate equity interest
in Equalnet or the
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relative rights, preferences or priorities of any shareholder. The amendment
will not affect the registration of the common stock under the Securities
Exchange Act of 1934, as amended.
As a result of the reverse stock split, Equalnet will have a greater
number of authorized but unissued shares of common stock than prior to the
reverse stock split. The increase in the authorized but unissued shares of
common stock could make a change in control of Equalnet more difficult to
achieve. Under certain circumstances, such shares of common stock could be used
to create voting impediments to frustrate persons seeking to effect a takeover
or otherwise gain control of Equalnet. Such shares could be sold privately to
purchasers who might side with the Board of Directors in opposing a takeover bid
that the Board determines is not in the best interests of Equalnet and its
shareholders.
The number of shares subject to stock options granted to officers,
directors and employees of Equalnet under stock option plans and the strike
price for such options will be proportionately adjusted for the reverse stock
split. The number of shares of common stock authorized for the stock option
plans will also be proportionately adjusted. The number of shares issuable upon
the exercise of outstanding warrants and nonemployee options and the conversion
of outstanding convertible securities of Equalnet will also be proportionately
adjusted for the reverse stock split.
EXCHANGE OF STOCK CERTIFICATES
The exchange of shares of common stock will occur on the Effective
Date without any action on the part of Equalnet's shareholders and without
regard to the date or dates certificates formerly representing shares of common
stock are physically surrendered for certificates representing the number of
shares of common stock such shareholders are entitled to receive as a result of
the reverse stock split. Equalnet's transfer agent, American Stock Transfer &
Trust Company, will effectuate the exchange of certificates.
As soon as practicable after the Effective Date, transmittal forms
will be mailed to each holder of record of certificates representing shares of
common stock to be used in forwarding their certificates for surrender and
exchange for certificates representing the number of shares of common stock such
shareholders are entitled to receive as a result of the reverse stock split.
After receipt of such transmittal form, each such holder will surrender the
certificates formerly representing shares of common stock of Equalnet and such
holder will receive in exchange therefor certificates representing the number of
shares of common stock to which such holder is entitled. These transmittal
forms will be accompanied by instructions specifying other details of the
exchange. SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE
A TRANSMITTAL FORM.
So that Equalnet may avoid the expense and inconvenience of issuing
and transferring fractional shares of common stock, shareholders who would
otherwise be entitled to receive a fractional share of common stock will receive
payment in cash in lieu of receiving a fractional share of common stock.
Payment for fractional shares will be based upon the closing price reported for
the common stock on the Nasdaq SmallCap Market on the Effective Date.
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FEDERAL INCOME TAX CONSEQUENCES
The following description of the material federal income tax
consequences of the reverse stock split is based on the Internal Revenue Code of
1986, as amended (the "Code"), the final, temporary and proposed Treasury
Regulations promulgated thereunder, judicial authority and current
administrative rulings and pronouncements as in effect on the date of this proxy
statement.
General Rules
Equalnet has not sought, and will not seek, a ruling from the Internal
Revenue Service or an opinion of counsel regarding the federal income tax
consequences of the reverse stock split. However, Equalnet believes that the
reverse stock split will constitute a recapitalization, and hence a
reorganization, within the meaning of Section 368(a)(1)(E) of the Code.
Generally, the holders of common stock will not recognize gain or loss for
federal income tax purposes as a result of the reverse stock split, except that
a holder of common stock who receives cash in lieu of fractional shares pursuant
to the reverse stock split may recognize gain or loss as provided in "-- Cash in
Lieu of Fractional Shares" below. No gain or loss will be recognized by
Equalnet as a result of the reverse stock split. Following the reverse stock
split, a holder of common stock received in the reverse stock split will have an
adjusted basis in such common stock (including any fractional share deemed
received) equal to the adjusted basis of the common stock held by that holder
immediately prior to the reverse stock split. In addition, a holder of common
stock will have a holding period for the common stock received in the reverse
stock split that includes the holding period of the common stock exchanged
therefor, provided that such common stock is a capital asset in the hands of
such holder at the time of the reverse stock split.
Cash in Lieu of Fractional Shares
Holders of common stock who receive cash in lieu of fractional shares
in the reverse stock split will recognize gain or loss equal to the difference,
if any, between such holder's adjusted basis in the fractional share of common
stock deemed received and the amount of cash received in exchange therefor.
Such gain or loss will be a capital gain or loss, long-term or short-term,
depending on the holder's holding period, if the common stock is held by such
holder as a capital asset at the time of the reverse stock split.
HOLDERS OF COMMON STOCK ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
REVERSE STOCK SPLIT.
REQUIRED VOTE
Approval of the amendment requires the affirmative vote of two-thirds
of the issued and outstanding shares of capital stock held by the Voting
Shareholders. If not otherwise provided, proxies will be voted "FOR" approval
of the amendment. Abstentions and broker non-votes will not be treated as
either a vote for or against approval of the amendment. However, because the
approval of the amendment requires the affirmative vote of two-thirds of the
issued
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and outstanding shares of capital stock held by the Voting Shareholders,
abstentions and broker non-votes will have the same effect as a vote against
approval of the amendment.
RECOMMENDATION OF THE BOARD OF DIRECTORS
We Recommend that You Vote "FOR" THE APPROVAL OF THE AMENDMENT.
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PROPOSAL 2: TO RATIFY THE NOTE ISSUANCE TRANSACTION AND TO APPROVE THE ISSUANCE
OF COMMON STOCK UPON THE CONVERSION
Effective as of July 31, 1998, Equalnet entered into a Master Purchase
Agreement, a Note Purchase Agreement and Note Purchase and Exchange Agreements
(collectively, the "Note Agreements") with certain buyers. Under the Note
Agreements, Equalnet received, in the aggregate, $3,000,000 in cash and
3,000,000 shares of common stock held by some of the buyers (the "Buyers'
Consideration") in exchange for:
(1) $3,000,000 aggregate principal amount of 6% Senior Secured Convertible
Notes of Equalnet due 2001 (the "Notes"),
(2) an aggregate of 3,750 shares of series D preferred stock of Equalnet,
and
(3) two Common Stock Purchase Warrants.
We refer to the foregoing transaction and the execution of all related documents
as the "Note Issuance Transaction." At the Meeting, we will ask you to vote to
ratify the Note Issuance Transaction and approve the issuance of common stock
upon the conversion or exercise (the "Conversion") of the securities issued
pursuant to the Note Issuance Transaction.
We are asking you to ratify the Note Issuance Transaction and approve
the issuance of common stock upon the Conversion to comply with rules of the
Nasdaq SmallCap Market that require such approval for any transaction involving
the issuance of common stock (or securities convertible into or exercisable for
common stock) equal to 20% or more of the issuer's outstanding common stock for
less than the market value of the common stock. The Note Issuance Transaction
does not currently require Equalnet to issue common stock in an amount in excess
of 19.99% of Equalnet's outstanding common stock immediately before the closing
of the Note Issuance Transaction. If, however, the Voting Shareholders do not
approve the issuance of common stock upon the Conversion at the Meeting, the
holders of the Notes and the series D preferred stock will have the right to
require Equalnet to redeem, at a 115% premium, all of the Notes and the series D
preferred stock. See "Mandatory Redemption." The payment of the entire
principal amount of the Notes and the entire value of the outstanding series D
preferred stock, and the 115% premium thereon, could have a material adverse
effect on Equalnet's financial condition. Equalnet may not have adequate funds
to effect any such redemption. Equalnet may have to file a petition for relief
under the United States bankruptcy code if it is required to effect such
redemption.
BACKGROUND OF THE NOTE ISSUANCE TRANSACTION
Because of the decrease in the size of the customer account base,
order activity and calling volume of its operating subsidiaries, Equalnet has
experienced significant operating and financial difficulties and is in default
under certain agreements. In addition, one of Equalnet's operating
subsidiaries, EqualNet Corporation, and its wholly owned subsidiary, EqualNet
Wholesale Services, Inc., filed voluntary petitions for relief under Chapter 11
of the United States bankruptcy code on September 10, 1998. On October 2, 1998,
EqualNet Wholesale Services, Inc. filed a motion to convert its bankruptcy
proceeding from a Chapter 11 reorganization to a Chapter 7 liquidation.
Equalnet currently is largely dependent on private
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sources of capital to fund its operations. Equalnet entered into the Note
Issuance Transaction to provide working capital needed to operate its
businesses.
THE NOTE ISSUANCE TRANSACTION
Consideration to be Received by Equalnet
Equalnet issued the Notes, an aggregate of 3,750 shares of series D
preferred stock and the Warrants to the buyers in exchange for $3,000,000 and
3,000,000 shares of common stock held by the buyers.
The Note Purchase Agreement and Note Purchase and Exchange Agreements
Equalnet entered into Note Purchase and Exchange Agreements with
Advantage Fund Limited and Willis Group, LLC. Under each agreement, Equalnet
issued 1,875 shares of series D preferred in exchange for 1,500,000 shares of
common stock and an exchange fee of $100,000. Willis Group also purchased a
Note in the principal amount of $1,500,000. Equalnet entered into a Note
Purchase Agreement with Genesee Fund Limited-Portfolio B under which Genesee
purchased a Note in the principal amount of $1,500,000. Each Note was issued
with a $100,000 original issue discount, and thus the net purchase price paid to
Equalnet for each Note was $1,400,000. Equalnet issued separate warrants to
Willis Group under the Note Purchase and Exchange Agreement and to Genesee under
the Note Purchase Agreement. Each warrant entitles its holder to purchase
333,116 shares of common stock at an exercise price of $0.9006 per share.
Equalnet did not register the issuance of the Notes and the warrants
and the exchange of the series D preferred for common stock under the Securities
Act of 1933, as amended, in reliance upon the exemptions from registration
afforded by Rule 506 and Section 3(a)(9) under the Securities Act. Equalnet
must pay the buyers for all of their reasonable expenses incurred in connection
with the Note Agreements. Under each Note Agreement, Equalnet granted the buyer
a right of first refusal with respect to any securities of Equalnet that are
issued at below-market prices until September 4, 1999.
The Notes
The Notes rank equally with all other unsubordinated debt obligations
of Equalnet and bear interest at the rate of 6% per year. The Notes mature
September 4, 2001. Equalnet's obligations under the Notes are secured by
certain collateral pursuant to the security agreement described below under "The
Security Agreement." Equalnet must pay interest on the Notes quarterly in
arrears commencing November 15, 1998 in cash or in the form of additional Notes.
Except as specified below, the Notes may not be prepaid or redeemed by Equalnet
before September 4, 2001. The terms of the Notes, as amended effective as of
March 25, 1999, are set forth below.
Conversion
Any holder of a Note may convert the Note, in whole or in part, into
shares of common stock at a conversion price per share equal to the lesser of:
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. the product of (1) the average of the lowest sales price of the common stock
on the Nasdaq SmallCap Market for any 5 trading days, whether or not
consecutive, during the period of 25 trading days immediately preceding the
date of conversion and (2) 85% (subject to reduction in the amount of one
percent per day for each day, following the delivery of a conversion notice
by the holder, on which Equalnet fails to deliver the common stock issuable
upon conversion); and
. $0.9006 (subject to reduction (x) in an amount that effects an aggregate
reduction in the conversion price of one percent per day for each day,
following the delivery of a conversion notice by the holder, on which
Equalnet fails to deliver the common stock issuable upon conversion; and (y)
upon the occurrence of a "Registration Event," on the thirtieth day during
each successive 30 day period during which such Registration Event is
continuing, by an amount of $0.02). "Registration Event" means (1) a
registration statement with respect to the sale of shares of common stock
issuable upon conversion of the Notes is not effective by December 18, 1998,
if such registration statement is on Form S-3, or by January 2, 1999, if such
registration statement is on Form S-1, (2) Equalnet fails to file such
registration statement with the Securities and Exchange Commission (the
"SEC") by November 3, 1998, (3) Equalnet fails to submit a request for
acceleration of the effective date of such registration statement in
accordance with Section 3(a) of the Registration Rights Agreement (as defined
below), (4) such registration statement ceases to be available for use by the
holder for any reason (including by reason of an SEC stop order, a material
misstatement or omission in the registration statement or the information
contained in the registration statement having become outdated); however, no
registration event pursuant to clause (4) is deemed to occur prior to the
date on which such registration statement is first declared effective by the
SEC, (5) the common stock is not listed for trading on any of the New York
Stock Exchange, the American Stock Exchange, the Nasdaq National Market or
the Nasdaq SmallCap Market, or (6) the holder is unable to convert the Note
in accordance with Article II of the Note for any reason (other than by
reason of the 4.9% limitation on beneficial ownership set forth therein).
However, as long as (1) the common stock is listed or quoted on the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York Stock Exchange or the
American Stock Exchange and (2) Equalnet is in compliance in all material
respects with its obligations to the holders of the Notes, the conversion price
will be at least $0.75 per share.
Mandatory Redemption
A holder of a Note may require Equalnet to repurchase the Note if any of
the following occur:
. certain defaults by Equalnet under the Note;
. a change of control of Equalnet by virtue of a consolidation or merger;
. Equalnet fails to obtain shareholder ratification of the Note Issuance
Transaction by January 2, 1999;
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. no sales price is reported for the common stock on the Nasdaq National
Market, the Nasdaq SmallCap Market or any national exchange for five
consecutive trading days or the common stock is not listed on the Nasdaq
National Market or any national exchange;
. the holder of a Note is unable pursuant to the Registration Statement to sell
common stock issued upon conversion of a Note for any reason for 45 or more
days; and
. any action is taken without the consent of the holders of a majority of the
aggregate outstanding principal amount of all Notes issued pursuant to the
Note Issuance Transaction (the "Majority Holders"), which action materially
and adversely affects the holder of any Note.
Events of Default
Events of default under the Notes include:
. Equalnet fails to pay principal or interest on the Notes, or any Notes issued
as interest upon the Notes, when due;
. the Nasdaq National Market delists the common stock;
. the commencement of voluntary or involuntary liquidation or reorganization
proceedings by or against Equalnet or any of its subsidiaries if such
commencement is not stayed or dismissed within 60 days;
. Equalnet fails to issue common stock upon the valid conversion of any Note or
the valid exercise of any warrant issued in the Note Issuance Transaction;
. Equalnet breaches certain representations, warranties or covenants under the
Note;
. a court enters a final judgment against Equalnet or any of its subsidiaries
in an amount in excess of $100,000, which is not discharged or satisfied
within 30 days; and
. except as agreed between Equalnet and the holder of the Note, Equalnet or any
of its subsidiaries default on a payment with respect to indebtedness for
borrowed money in excess of $100,000 individually or $200,000 in the
aggregate.
The holders of the Notes have agreed to waive all events of default under the
Notes arising on or before July 31, 1999.
Optional Redemption
If on any 20 consecutive trading days commencing on or after August 25,
2000, the lowest sales price per share of the common stock on the Nasdaq
SmallCap Market during each day of such 20 day period is at least $1.8012
(subject to certain conditions and adjustments), then Equalnet may redeem the
entire principal amount of any Note by paying to the holder of the Note the
unpaid principal amount of the Note as of that date, any accrued and unpaid
interest on the Note and any accrued and unpaid default interest on the Note.
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Additionally, if, at any time, (1) Equalnet is not in default under any
Note, (2) a registration statement is in effect with respect to the sale of any
shares of common stock issuable upon conversion of a Note, and (3) no event
requiring the repurchase of the Note has occurred, Equalnet may redeem any Note
at a price equal to the greater of:
(x) the product of:
. the sum of (1) the outstanding principal amount of the Note, (2) accrued
but unpaid interest on the Note and (3) accrued but unpaid default
interest on the Note; and
. 115%; and
(y) the product of:
. the number of shares of common stock that would be issuable if the
holder of the Note were to convert the Note into common stock on such
date; and
. the average of the lowest sales price of the common stock on the Nasdaq
SmallCap Market for the five trading days immediately preceding such
date.
Any amendment of the terms of a Note requires the consent of the Majority
Holders, and certain types of amendments also require the consent of any holder
of a Note affected thereby.
The Notes were issued with an original issue discount for federal income
tax purposes. The amount of the discount for each Note is $100,000, or the
excess of the stated principal amount over the actual issuance price. A portion
of the discount, on a gradually increasing basis, will accrue as income to the
holder of a Note on each day until the maturity date of the Note. Equalnet will
be entitled to an income tax deduction each year for the aggregate amount of the
discount accrued as income by the holders of the Notes during that year.
Equalnet will report this amount to the Internal Revenue Service.
The Notes contain adjustment mechanisms that protect the buyers against
dilution of the value of their conversion right through stock-splits,
combinations, reclassifications or declaration of dividends.
The Series D Preferred
In connection with the Note Issuance Transaction, Equalnet issued to
certain buyers, in the aggregate, approximately 3,750 shares of series D
preferred stock in exchange for, in the aggregate, 3,000,000 shares of common
stock and exchange fees of, in the aggregate, $200,000.
The shares of common stock that the buyers delivered to Equalnet are
materially different securities from the shares of series D preferred stock the
buyers received from Equalnet. Unlike the common stock exchanged by the buyers,
the series D preferred stock are not listed on the Nasdaq SmallCap Market or any
national securities exchange. The shares of common stock possess standard
voting rights. The shares of series D preferred stock have very limited voting
rights. The shares of series D preferred stock have preference over the common
stock with
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respect to dividends and liquidation rights and are convertible into common
stock at the option of the holder.
A copy of the Statement of Resolution of the Board of Directors
establishing and designating the series D preferred stock, as filed with the
Secretary of State of the State of Texas, as amended effective as of June 14,
1999, is attached to this Proxy Statement as Annex B. The holders of series D
preferred stock have no voting rights except that the vote of a majority of such
holders is required (1) to amend Equalnet's Articles of Incorporation if the
amendment materially and adversely affects the series D preferred stock, and (2)
to approve the creation of any series of stock that is senior to the series D
preferred stock in dividend or liquidation preference.
The series D preferred stock consist of 6,500 authorized shares, 1,500 of
which (the "Dividend Shares") may be issued only as dividends on the outstanding
shares of series D preferred. Equalnet does not expect to issue any shares of
series D preferred stock other than in connection with the Note Issuance
Transaction or as Dividend Shares. Each share of series D preferred stock will
be entitled to receive dividends at a rate of $60.00 per share per year, payable
if declared by the Board of Directors. Any dividends that accrue on the series
D preferred stock may be paid, at Equalnet's option (subject to certain
limitations), in cash or, in whole or in part, by issuing Dividend Shares.
Under the terms of the series D preferred stock, Equalnet may not declare or
distribute any dividends to holders of common stock unless all dividends on the
series D preferred have been paid.
Conversion
Holders of shares of series D preferred stock can convert each of their
shares into a number of shares of common stock equal to the quotient of:
. the sum of (1) $1,000 (subject to adjustment pursuant to the Statement of
Resolution to prevent diminution in the value of the conversion right upon
the issuance of certain securities), (2) accrued but unpaid dividends to the
applicable conversion date on the share of series D preferred stock being
converted, and (3) accrued but unpaid interest on the dividends on the share
of series D preferred stock being converted (we refer to the sum of the
amounts referred to in clauses (1), (2) and (3) as the "Principal Amount");
and
. an amount equal to the lesser of:
. the product of (1) the average of the lowest sales price of the common
stock on the Nasdaq SmallCap Market for any 5 trading days, whether or not
consecutive, during the period of 25 trading days immediately preceding
the conversion date and (2) 85% (subject to reduction in the amount of one
percent per day for each day, following the delivery of a conversion
notice by the holder, on which Equalnet fails to deliver the common stock
issuable upon conversion); and
. $1.2281 (subject to reduction (x) in an amount that effects an aggregate
reduction in the conversion price of one percent per day for each day,
following the delivery of a conversion notice by the holder, on which
Equalnet fails to deliver the
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common stock issuable upon conversion; and (y) upon the occurrence of a
"Registration Event" (as defined above under "The Notes") on the thirtieth
day during each successive 30 day period during which such Registration
Event is continuing, by an amount of $0.02;) (such amount, the "Ceiling
Price"),
subject to adjustment pursuant to the anti-dilution provisions set forth in
Annex B. However, as long as (1) the common stock is listed or quoted on the
Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange
or the American Stock Exchange and (2) Equalnet is in compliance in all material
respects with its obligations to the holders of the series D preferred stock,
the conversion price will be at least $0.75 per share.
Optional Redemption
Equalnet can redeem the outstanding shares of series D preferred stock for
cash at any time if:
. Equalnet is in compliance in all material respects with its obligations to
the holders of shares of series D preferred stock;
. on the date a notice of redemption is given and at all times until the actual
date of redemption, a registration statement filed with the Securities and
Exchange Commission (the "SEC") is effective and available for use by each
holder of shares of series D preferred stock for the resale of shares of
common stock acquired by such holder upon conversion of shares of series D
preferred stock; and
. at such time, no holder of series D preferred stock has exercised its right
to require Equalnet to redeem the series D preferred stock following an
Optional Redemption Event (as defined below under "Mandatory Redemption").
Equalnet can redeem the shares of series D preferred stock for an amount
equal to the greater of:
. the product of the Principal Amount (as calculated on the applicable
conversion date) and 115% (we refer to such product as the "Premium Price");
and
. as of the date of determination, the product of:
. the number of shares of common stock that would be issuable on conversion
of a share of series D preferred stock (and any accrued and unpaid
dividends thereon and any accrued and unpaid interest on dividends
thereon) effected under the procedures referenced above if the holder of
such share gave a notice on such date of determination of intent to
convert; and
. the average of the lowest sales price of the common stock on the Nasdaq
SmallCap Market for the five trading days immediately preceding such date
of determination.
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However, if in connection with any determination of the redemption price the
average market price is greater than 200% of the Ceiling Price on the date as of
which such amount is determined, then for purposes of computing the redemption
price in such instance, the average market price will be reduced by 20% of the
amount by which (A) the average market price exceeds (B) the Ceiling Price on
the date as of which such amount is determined.
The Statement of Resolution does not expressly prohibit Equalnet from
redeeming the series D preferred stock if dividends thereon are in arrears.
Final Redemption
Equalnet can redeem all of the outstanding shares of series D preferred
stock at any time on or after August 20, 2001 if:
. Equalnet is in compliance in all material respects with its obligations to
the holders of series D preferred stock; and
. at such time, no holder of series D preferred stock has exercised its right
to require Equalnet to redeem the series D preferred stock following an
Optional Redemption Event.
If Equalnet redeems all of the shares of series D preferred stock at its
election on or after August 20, 2001, each such share may be redeemed for an
amount equal to the product of:
. the sum of (1) 1,000, (2) an amount equal to the accrued but unpaid dividends
on such share, and (3) an amount equal to the accrued and unpaid interest on
dividends in arrears on such share; and
. 115%.
Mandatory Redemption
Any holder of a share of series D preferred stock can require Equalnet to
redeem all shares held by such holder if any of the following events (each an
"Optional Redemption Event") occurs on or before August 31, 2001:
. no sales price is reported for the common stock on the Nasdaq SmallCap Market
or any national exchange for five consecutive trading days;
. the holder of a share of series D preferred stock is unable pursuant to the
Registration Statement (as defined below under "The Registration Rights
Agreements") to sell common stock issued upon conversion of such share for 45
or more days;
. a change of control of Equalnet by virtue of a consolidation or merger;
. any action is taken without the consent of the Majority Holders that
materially and adversely affects the holder of any share of series D
preferred stock;
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. a material default by Equalnet under the Statement of Resolution or the
Registration Rights Agreements or any other agreement or document entered
into in connection with the issuance of the series D preferred stock;
. Equalnet fails to obtain shareholder ratification of the Note Issuance
Transaction by January 2, 1999; and
. Equalnet fails to issue common stock upon the valid conversion of the series
D preferred stock.
The redemption price per share for shares redeemed as a result of the
occurrence of an Optional Redemption Event is an amount equal to the Premium
Price. The occurrence of any Optional Redemption Events on or before July 31,
1999 has been waived by all holders of series D preferred stock. Accordingly,
Equalnet classifies the series D preferred stock as equity on its balance sheet.
If Equalnet were to be liquidated, the holders of the series D preferred
stock would be entitled to receive out of the assets of Equalnet $1,000 (plus
any accrued and unpaid dividends and accrued and unpaid interest thereon) per
share of series D preferred stock before any distributions would be made to the
holders of common stock (but only after liquidation preferences of Equalnet's
series A preferred stock, series B preferred stock and series C preferred stock
have been satisfied). The series D preferred stock will not have voting rights
except with respect to any amendment of the Articles of Incorporation that
materially and adversely affects the rights of holders of series D preferred
stock or with respect to the creation of any series of shares that has dividend
or liquidation rights senior to the series D preferred stock.
Article XI of Equalnet's Articles of Incorporation prohibits certain
changes in the control of Equalnet (for example, a merger, share exchange,
reclassification or sale of substantially all of Equalnet's assets) without the
approval of:
. the votes of at least two-thirds of the issued and outstanding shares of
capital stock held by the Voting Shareholders; and
. the votes of two-thirds of the issued and outstanding shares of capital
stock held by the Voting Shareholders, excluding shares held by Voting
Shareholders that hold an interest in the other party to the proposed
change of control.
The Warrants
Each of the two warrants entitles its holder to purchase (subject to
certain restrictions) 333,116 shares of common stock at a purchase price of
$0.9006 per share. The warrants expire on September 4, 2003. The warrants
contain customary provisions to prevent dilution of the rights of the holder of
the warrant in the event of stock dividends, stock splits, or dividends to
existing shareholders in the form of cash, other property or stock of another
company.
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The Registration Rights Agreements
In connection with the Note Agreements, Equalnet entered into
Registration Rights Agreements, each dated as of July 31, 1998, with each buyer.
These agreements grant to the buyers demand and "piggy-back" registration rights
with respect to the common stock issuable upon the conversion of the Notes,
Notes issued in payment of interest on the Notes, shares of series D preferred
stock or Dividend Shares or upon the exercise of the warrants. The Registration
Rights Agreements require Equalnet to prepare and file with the SEC a shelf
registration statement (the "Registration Statement") with respect to such
shares that will generally allow such shares to be resold by the buyers
publicly. The Registration Statement is required to be filed by November 3,
1998 and to be effective no later than December 18, 1998 for a filing on Form
S-3, or January 2, 1999 for a filing on Form S-1. Equalnet is currently not in
compliance with its obligations to file and obtain the effectiveness of the
Registration Statement within the required time periods. Equalnet must pay
substantially all costs associated with the Registration Statement.
The agreements also provide that if (1) Equalnet fails to file and
maintain the effectiveness of the Registration Statement for the buyers' shares,
or (2) Equalnet fails to otherwise comply with the Registration Rights
Agreements, then Equalnet must include the buyers' shares in certain future
registration statements that it files with respect to an offering of its shares
for its own account or the account of others. These piggy-back registration
rights do not apply to registration statements filed with respect to shares to
be issued by Equalnet solely in connection with (1) stock option or other
employee benefit plans or (2) mergers and acquisitions.
The Security Agreement
The obligations of Equalnet under the Note Agreements are secured by
certain collateral of Equalnet, EqualNet Corporation, USC Telecom, Inc. and
Netco Acquisition Corp. (collectively, the "Debtors"), pursuant to that certain
Security Agreement, dated as of July 31, 1998, by and among the Debtors, Willis
Group and Genesee. The collateral under the Security Agreement consists of
certain goods (including equipment), accounts, general intangibles and chattel
paper of the Debtors. The security interests granted to Willis Group and
Genesee under the Security Agreement are subordinate to security interests in
the collateral held by RFC Capital Corporation, Greyrock Business Credit, Finova
Capital Corporation, Netco, LLC, Frontier Communications of the West, Inc. and
Willis Group.
The Independent Committee of the Board of Directors
Some of Equalnet's directors are affiliated with the buyers that
participated in the Note Issuance Transaction. Those directors took part in the
meeting of the Board of Directors at which the Note Issuance Transaction was
approved. To ensure that the interested directors' interest in the transaction
did not improperly affect our approval of the transaction, we created a
committee of independent, disinterested directors to evaluate the fairness of
the Note Issuance Transaction to Equalnet and the holders of common stock. The
members of the independent committee were John Isaac "Ike" Epley, Zane Russell
and Ronald J. Salazar. All members of the independent committee reviewed and
approved the Note Issuance Transaction.
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The Fairness Opinion
The independent committee engaged G.A. Herrera & Co., a private
investment banking and consulting firm, to evaluate the fairness of the issuance
of the Notes to the holders of common stock. G.A. Herrera & Co. opined that as
of September 3, 1998 the Note Issuance Transaction was fair to the holders of
common stock from a financial standpoint. A copy of that opinion is attached to
this Proxy Statement as Annex C. No opinion was obtained regarding the issuance
of the shares of series D preferred stock and the warrants.
USE OF CONSIDERATION
Equalnet will use the consideration it received pursuant to the Note
Issuance Transaction and, if applicable, the proceeds from the exercise of the
warrants, to repay debt and for general corporate purposes. If Genesee and
Willis Group exercise all of the warrants, the aggregate proceeds to Equalnet
will be $600,008.
POSSIBLE ADVERSE CONSEQUENCES OF THE NOTE ISSUANCE TRANSACTION
The Note Issuance Transaction could have adverse consequences for the
holders of the common stock. Under the Note Agreements, Equalnet incurred
additional debt of $3,000,000. Given Equalnet's cash flow difficulties,
Equalnet may be unable to adequately service the additional debt. If Equalnet
were unable to make payments on its existing debt and the debt incurred in
connection with the Note Issuance Transaction as such debts become due, that
nonpayment could have a material adverse effect on Equalnet's business,
operations and cash flow.
There were 27,651,277 shares of Common Stock outstanding on the Record
Date. Equalnet initially reserved 11,407,606 shares of common stock for issuance
upon the Conversion. However, such shares have since been unreserved as
described in "Proposal 1 -- Reasons for the Amendment". If the buyers convert
the Notes or the series D preferred stock, or exercise the warrants, the equity
holdings of Equalnet's shareholders will be significantly diluted.
A shareholder holding 1,000 shares of common stock before the Conversion
holds approximately 0.0036% (1,000/27,651,277) of the then-outstanding common
stock. If a total of 11,407,606 shares are issued upon the Conversion, the
total number of shares of common stock outstanding after the Conversion will be
39,058,883 (assuming Equalnet does not issue any other common stock).
Accordingly, a shareholder holding 1,000 shares of common stock after the
Conversion will hold approximately 0.0026% (1,000/39,058,883) of the outstanding
common stock. Thus, assuming the Conversion results in the issuance of
11,407,606 new shares of common stock, shareholders who hold common stock before
the Note Issuance Transaction will experience dilution of approximately 20% in
their holdings of common stock as a result of the Conversion.
REQUIRED VOTE
The affirmative vote of a majority of the issued and outstanding
shares of capital stock held by the Voting Shareholders represented at the
Meeting, in person or by proxy, is
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required to ratify the Note Issuance Transaction and approve the issuance of
common stock upon the Conversion. Abstentions and broker non-votes will not be
treated as either a vote for or against ratification of the transaction and
approval of the issuance. However, because the ratification of the Note Issuance
Transaction and approval of the issuance of common stock upon the Conversion
requires the affirmative vote of a majority of the issued and outstanding shares
of capital stock held by the Voting Shareholders, abstentions and broker non-
votes will have the same effect as a vote against ratification of the
transaction and approval of the issuance.
RECOMMENDATION OF THE BOARD OF DIRECTORS
For the reasons set forth above, we believe the Note Issuance
Transaction is fair to and in the best interests of Equalnet and its
shareholders. WE RECOMMEND THAT YOU VOTE "FOR" THE RATIFICATION OF THE NOTE
ISSUANCE TRANSACTION AND THE APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON THE
CONVERSION.
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PROPOSAL 3: TO ELECT FOUR DIRECTORS
Equalnet's Articles of Incorporation provide for six directors or such
other number as is established by resolution of the Board of Directors.
Equalnet currently has eight director positions and four acting directors.
Michael L. Hlinak resigned his position as a director on June 12, 1998, James T.
Harris resigned his position as a director on October 15, 1998, Zane Russell
resigned his position as a director effective as of February 22, 1999 and Robert
H. Turner resigned his position as a director effective as of April 20, 1999.
The terms of directors Mitchell H. Bodian and Ronald J. Salazar will expire at
the Meeting. We have resolved that after the Meeting, Equalnet will have six
directors.
At the Meeting, four directors are to be elected, constituting two-
thirds of the Board of Directors. Equalnet's Articles of Incorporation provide
that the Board will be divided into three classes, each class to be composed as
equally as possible. The term of one class expires at each annual meeting of
shareholders and each other class serves three-year terms.
DIRECTOR NOMINEES
The Board has nominated the following persons (the "Nominees") to be
elected directors at the Meeting: Messrs. Mitchell H. Bodian, Nathan Isaac
Prager, R. Chadwick Paul, Jr. and Dr. Ronald J. Salazar. Mr. Bodian and Dr.
Salazar will serve three year terms expiring in 2001. Mr. Prager will serve a
two-year term expiring in 2000, and Mr. Paul will serve a one year term expiring
in 1999. Mr. Prager is a designee of LIMIT LLC (d/b/a ACMI), a party to the
transactions described in Proposal 5. The Board is required to nominate Mr.
Paul pursuant to the Plan.
The following table sets forth certain information with respect to
Equalnet's continuing directors and the Nominees as of the Record Date:
<TABLE>
<CAPTION>
POSITION WITH TERM AS DIRECTOR
NAME AGE EQUALNET WILL EXPIRE(1)
- ---- --- -------- ----------------
<S> <C> <C> <C>
Mark A. Willis 30 Chairman of the Board of
Directors 2000
Mitchell H. Bodian 48 Co-Chief Executive Officer,
President, Director and
Director Nominee 1998
John Isaac "Ike" Epley 33 Director 1999
Ronald J. Salazar, Ph.D. 52 Director and Director
Nominee 1998
Nathan Isaac Prager 46 Director Nominee --
R. Chadwick Paul, Jr. 45 Director Nominee --
</TABLE>
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(1) Directors' terms of office are scheduled to expire at the annual
meeting of shareholders to be held at the end of the year indicated.
BACKGROUND OF DIRECTORS AND NOMINEES
MARK A. WILLIS has been Chairman of the Board and a director since
March 1998. Mr. Willis founded Willis Group, LLC, an investment fund, in 1997
and serves as its President. The fund has made investments in industries such
as offshore oil platform equipment, geophysical services, oil and gas production
and telecommunications, and an aircraft parts supplier. Before forming Willis
Group, LLC, Mr. Willis worked at Eagle USA Airfreight, an air freight forwarder,
for two and one-half years, where he rose to the position of Regional Sales &
Marketing Manager. Before that, Mr. Willis served as a marketing and sales
representative for Talent Tree, a temporary help agency providing primarily
clerical and office staffing services. Dr. Salazar, a director, is married to
Mr. Willis's aunt.
MITCHELL H. BODIAN has been President and Chief Executive Officer
since July 1998 and a director of Equalnet since March 1998. Mr. Bodian has
been the Managing Director of Bodian Associates, an investment banking firm
providing financial advisory services to middle market companies, since 1990.
Bodian Associates specializes in providing merger and acquisition services to
niche telecommunications services providers. Mr. Bodian also served as Chapter
11 Trustee for Conectco, a switchless reseller that sold telephone debit cards
and provided one plus telecommunications services, and that filed for protection
under the United States bankruptcy laws in August 1996. Mr. Bodian has
approximately twenty years of experience in management consulting and investment
banking with Kearney Management Consultants, Warburg Paribas Becker and Merrill
Lynch. Mr. Bodian holds an MBA from Stanford Business School.
JOHN ISAAC "IKE" EPLEY has been a director of Equalnet since March
1998. Mr. Epley has been a Managing Director of Omni Ventures, L.L.C., a
venture capital and investment banking firm, since August 1995. He also has
been a Managing Director of Omni Securities, L.L.C., a registered broker/dealer,
since its inception in November 1997. He is a registered Principal and General
Securities Representative. Mr. Epley served as Vice-President of Alex Brown &
Sons, an investment banking firm in Houston, from January 1993 to 1995.
NATHAN ISAAC PRAGER, a certified public accountant, has been President
of LIMIT LLC (d/b/a ACMI), a network marketing company, since 1997. Mr. Prager
has also been President of Anderton Communication Marketing, Inc., a
telecommunications network marketing company, since 1996, President of Prager
and Associates, a firm of certified public accountants, since 1984, and Chief
Financial Officer of Meucci Originals, Inc., a custom pool cue manufacturer,
since 1995. None of the foregoing entities is an affiliate of Equalnet. Mr.
Prager has served as president of PIN, Inc., a marketer of prepaid calling card
products and 1+ long distance services formerly known as Anderton Communication
Marketing, Inc., since February 1996. PIN, Inc. filed a voluntary petition for
relief under Chapter 7 of the United States bankruptcy code in September 1998.
In August 1995, Mr. Prager filed a voluntary petition for relief under Chapter 7
of the United States bankruptcy code. None of the foregoing entities is an
affiliate of Equalnet.
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R. CHADWICK PAUL, JR. has served as Vice President of Conversion for
NEXTLINK, a competitive local exchange carrier, since 1998 and was Vice
President of Business Services from 1997 to 1998. Mr. Paul served as President
of Chadwick Telecommunications Corporation, a long distance carrier with
customers in 38 states, from 1983 through 1997. Since 1976, he has also been
President of Chadwick Telephone, a company that sells, services and installs
telephone systems and equipment. Mr. Paul holds an MBA and a B.S. in Economics,
both from Lehigh University.
RONALD J. SALAZAR, PH.D. has been a director of Equalnet since March
1998. Dr. Salazar received his Ph.D. in business administration from the
University of Texas in 1990 in the area of Strategic Management and Competitive
Strategy. Since 1995, Dr. Salazar has been a partner in the management
consulting firm of Palladian Analysis & Consulting, LLC in Houston, Texas. From
1988 through 1994, Dr. Salazar taught management courses as an assistant
professor at the University of Houston and Idaho State University. Dr. Salazar
is married to director Mark A. Willis's aunt.
The Merger Agreement, if the transactions contemplated thereby are
completed according to its terms, provides that e.Volve may designate director
nominees for a majority of the positions on the board of directors of Equalnet.
In order to comply with this provision of the Merger Agreement, Equalnet may
either increase the number of director positions, or some current directors,
including those current directors constituting Nominees, may resign their
positions in order to make their positions available for the e.Volve nominees,
or some combination of the foregoing. At this time, no decision has been made
as to how to comply with this provision of the Merger Agreement, provided the
merger becomes effective.
In addition, the Agreement and Plan of Merger by and among The
Intelesis Group Inc., Equalnet, and Intelesis Acquisition Corp. provides that
the Shareholder Representative (as defined in the Agreement and Plan of Merger)
may designate a director nominee, who Equalnet will then nominate for election
at the 1999 annual meeting of shareholders of Equalnet.
Committees of the Board of Directors and Meeting Attendance
During the fiscal year ended June 30, 1998, we held nine meetings.
Each director attended at least 75% of the total combined number of meetings
held by us and by the committees on which each director served.
We have an audit committee and a compensation committee. John Isaac
"Ike" Epley and Ronald J. Salazar are the only members of each of the audit
committee and the compensation committee. We have not established an executive
or nominating committee. Board nominees are proposed by management.
The audit committee:
. recommends to us the appointment of Equalnet's independent auditors,
. reviews their fees,
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. ensures that proper guidelines are established for the dissemination of
financial information,
. meets periodically with the independent auditors, the Board and certain
officers of Equalnet and its subsidiaries to ensure the adequacy of
internal controls and reporting,
. reviews consolidated financial statements, and
. performs any other duties or functions deemed appropriate by the Board.
The audit committee held one meeting during the fiscal year ended June 30, 1998.
The compensation committee awards options and stock awards pursuant to
Equalnet's stock option and restricted stock award plans, and determines the
terms and conditions of such options and awards, including (1) the persons to
whom such options and stock awards will be granted and (2) the form, terms and
provisions of any agreement pursuant to which such options or stock awards are
awarded. This committee also considers compensation matters for Equalnet's
executive officers. The compensation committee held two meetings during the
fiscal year ended June 30, 1998.
COMPENSATION OF DIRECTORS
Each non-employee director is paid $20,000 per year, plus $1,500 for
each meeting of the Board that he personally attends, $1,500 for each meeting of
a committee of the Board that he personally attends and $500 for each meeting in
which he participates by telephone. Equalnet reimburses its non-employee
directors for ordinary and necessary expenses incurred in attending Board or
committee meetings. Equalnet has adopted Equalnet's 1995 Non-Employee Director
Stock Option Plan (as amended in May 1998, the "Director Plan"), pursuant to
which each non-employee director receives:
. options to purchase a number of shares of common stock equal to $60,000
divided by the average of the highest and lowest price of the common
stock the day before the date of his election as a director ("Fair
Market Value"), and
. options to purchase a number of shares of common stock equal to $30,000
divided by the Fair Market Value of the common stock the day before each
annual meeting of Equalnet's shareholders for each year thereafter.
These options have an exercise price equal to the Fair Market Value of the
common stock. The initial grants vest over three years in 33-1/3% increments
and the annual grants vest six months from the date of grant. Employee
directors of Equalnet do not receive any additional compensation from Equalnet
for their services as directors.
REQUIRED VOTE
A Voting Shareholder entitled to vote for the election of directors
may withhold authority to vote for any or all of the Nominees. Nominees
receiving at least the votes of the
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<PAGE>
holders of a plurality of the shares of capital stock held by the Voting
Shareholders present in person or by proxy at the meeting and voting for the
position for which such Nominee has been nominated will be elected as directors.
Abstentions and broker non-votes will not be treated as a vote for or against
any of the Nominees and will have no effect on the outcome of the elections.
Any vacancies that occur during the year may be filled by an
individual appointed by the Board of Directors to serve for the remainder of the
term of that director position.
RECOMMENDATION OF THE BOARD OF DIRECTORS
We Recommend that You Vote "FOR" the Election of Each of the Nominees.
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PROPOSAL 4: TO RATIFY THE AMENDMENT OF THE STATEMENT OF RESOLUTION OF THE BOARD
OF DIRECTORS WITH RESPECT TO THE SERIES A PREFERRED AND TO APPROVE THE ISSUANCE
OF COMMON STOCK UPON THE CONVERSION OF THE SERIES A PREFERRED PURSUANT TO THE
TERMS OF THE AMENDED SERIES A STATEMENT OF RESOLUTION
We have filed, as an amendment to Equalnet's original Statement of
Resolution of Board of Directors Fixing the Rights and Preferences of the Series
A Convertible Preferred Stock, an amended Statement of Resolution of Board of
Directors Fixing the Rights and Preferences of the Series A Convertible
Preferred Stock (the "Amended Series A Statement of Resolution"). Equalnet
filed the Amended Series A Statement of Resolution pursuant to the terms of the
Amendment Agreement, dated as of July 31, 1998, between Equalnet and MCM
Partners. The Amendment Agreement was entered into in connection with the Note
Issuance Transaction. MCM Partners, the holder of all 2,000 shares of the
issued and outstanding series A preferred stock, is an affiliate of Genesee and
Advantage Fund Limited, two of the parties to the Note Issuance Transaction.
Under the Amendment Agreement, MCM Partners waived its right to
receive existing accrued and unpaid dividends on the series A preferred stock in
consideration for an amendment to the terms of the series A preferred stock.
The Amended Series A Statement of Resolution decreases the dividends per share
per year from $80 to $60, but increases the rate of interest on dividends in
arrears from 12% to 14%. In addition, unlike the original terms of the series A
preferred stock, the Amended Series A Statement of Resolution permits Equalnet
to pay dividends on the series A preferred stock in the form of additional
shares of series A preferred stock rather than in cash. A copy of the Amended
Series A Statement of Resolution is attached hereto as Annex D.
A summary of the original terms of the series A preferred stock is set
forth below under "Compensation Committee Report on Executive Compensation
Certain Relationships and Related Transactions." Except as set forth in the
next sentence, the amended terms of the series A preferred stock are similar in
all material respects to the terms of the series D preferred stock, the terms of
which are summarized above under "Proposal 2 - To Ratify the Note Issuance
Transaction and Approve the Issuance of Common Stock Upon the Conversion The
Series D Preferred." Under the amended terms of the series A preferred stock,
unlike the terms of the series D preferred stock, "registration events" (as
defined therein) do not include the event that the common stock is not listed
for trading on the Nasdaq National Market, the Nasdaq SmallCap Market, the New
York Stock Exchange or the American Stock Exchange. In addition, under the
terms of the series D preferred stock, the following constitutes an optional
redemption event and a registration event:
"There is no reported sale price for the Common Stock on the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York Stock Exchange or
the American Stock Exchange for any period of five consecutive trading
days."
Under the amended terms of the series A preferred stock, that clause reads as
follows:
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<PAGE>
"For so long as the Common Stock is listed for trading on the Nasdaq
National Market, the Nasdaq SmallCap, the NYSE or the AMEX, there is no
reported sale price for the Common Stock on the Nasdaq National Market, the
Nasdaq SmallCap Market, the New York Stock Exchange or the American Stock
Exchange for any period of five consecutive trading days."
Equalnet initially reserved 2,000,000 shares of common stock for
issuance upon the conversion of the series A preferred stock. Further, under
the terms of the Amended Series A Statement of Resolution, Equalnet is required
to reserve 666,667 additional shares of common stock for issuance upon the
conversion of the series A preferred stock.
REASON FOR SEEKING RATIFICATION OF THE AMENDMENT OF THE STATEMENT OF RESOLUTION
OF THE BOARD OF DIRECTORS WITH RESPECT TO THE SERIES A PREFERRED AND APPROVAL OF
THE ISSUANCE OF COMMON STOCK UPON THE CONVERSION OF THE SERIES A PREFERRED
We are submitting the amendment of the Statement of Resolution of the
Board of Directors with respect to the series A preferred stock for ratification
and the issuance of common stock upon the conversion of the series A preferred
stock for approval to comply with the shareholder approval requirements of the
Nasdaq SmallCap Market.
POSSIBLE ADVERSE CONSEQUENCES OF THE FILING OF THE AMENDED SERIES A STATEMENT OF
RESOLUTION AND THE ISSUANCE OF COMMON STOCK UPON THE CONVERSION OF THE SERIES A
PREFERRED
The change in the terms of the series A preferred stock could further
dilute the equity of the holders of common stock. Pursuant to the change in the
conversion terms of the series A preferred stock, Equalnet must increase the
number of shares of common stock that it reserves for issuance upon conversion
of the series A preferred stock from 2,000,000 to approximately 2,666,667.
Assuming that Equalnet has 27,651,277 shares of common stock
outstanding before the conversion of the series A preferred stock, a shareholder
holding 1,000 shares of common stock before the conversion holds approximately
0.0036% (1,000/27,651,277) of the outstanding common stock. If Equalnet issued
2,000,000 shares of common stock upon the conversion of the series A preferred
stock (the amount reserved under pursuant to the original terms of the series A
preferred stock), a shareholder holding 1,000 shares of common stock after the
conversion would hold approximately 0.0034% (1,000/29,651,277) of the
outstanding common stock. If Equalnet issues 2,666,667 shares of common stock
upon the conversion of the series A preferred stock (the amount required to be
reserved under the terms of the Amended Series A Statement of Resolution), a
shareholder holding 1,000 shares of common stock after the conversion will hold
approximately 0.0033% (1,000/30,317,944) of the outstanding common stock. Thus,
assuming the conversion of the series A preferred stock results in the issuance
of 2,666,667 shares of common stock, shareholders holding common stock before
the conversion will experience dilution of approximately 6% under the amended
terms of the series A preferred stock compared to dilution of approximately 4%
under the original terms of the series A preferred stock.
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<PAGE>
REQUIRED VOTE
The affirmative vote of a majority of the issued and outstanding
shares of capital stock held by the Voting Shareholders represented at the
Meeting, in person or by proxy, is required to ratify the amendment of the
Statement of Resolution of the Board of Directors with respect to the series A
preferred stock and to approve the issuance of common stock upon the conversion
of the series A preferred stock. Abstentions and broker non-votes will not be
treated as either a vote for or against the ratification of the amendment of the
terms of the series A preferred stock and approval of the issuance.
RECOMMENDATION OF THE BOARD OF DIRECTORS
For the reasons set forth above, we believe the filing of the Amended
Series A Statement of Resolution and the issuance of common stock upon the
conversion of the series A preferred stock are fair to and in the best interests
of Equalnet and its shareholders. WE RECOMMEND THAT YOU VOTE "FOR" THE
RATIFICATION OF THE AMENDMENT OF THE STATEMENT OF RESOLUTION OF THE BOARD OF
DIRECTORS WITH RESPECT TO THE SERIES A PREFERRED AND THE APPROVAL OF THE
ISSUANCE OF COMMON STOCK UPON THE CONVERSION OF THE SERIES A PREFERRED PURSUANT
TO THE TERMS OF THE AMENDED SERIES A STATEMENT OF RESOLUTION.
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PROPOSAL 5: TO RATIFY THE ACMI ACQUISITION
Effective as of December 31, 1998, Equalnet and ACMI Acquisition Corp.
("Acquisition Corp."), a wholly owned subsidiary of Equalnet, entered into an
Amended and Restated Asset Purchase Agreement (the "ACMI Agreement") with LIMIT
LLC, a Nevada limited liability company doing business under the name ACMI
("ACMI"), with its principal executive offices at 5425 E. Rains Road, Suite 1,
Memphis, Tennessee 39120, telephone number (901) 363-2100, and its members
(collectively, the "Members"), providing for Acquisition Corp. to acquire
substantially all of the assets (the "ACMI Assets") of ACMI (the "ACMI
Acquisition"). In exchange for the sale of the ACMI Assets to Acquisition
Corp., Equalnet will issue to ACMI 2,500,000 shares of common stock, subject to
reduction if Acquisition Corp. fails to meet certain revenue-based performance
targets within six months after the closing of the transaction. ACMI and the
Members will also have the right to receive additional shares of common stock if
certain conditions are met following the closing. See "-- Common Stock Issuance
Provisions."
We are submitting the ACMI Acquisition for ratification by the Voting
Shareholders to comply with the shareholder approval requirements of the Nasdaq
SmallCap Market and because the ACMI Agreement requires Equalnet to amend its
Articles of Incorporation to increase the number of shares of authorized common
stock.
BACKGROUND OF THE ACMI ACQUISITION
On or about September 16, 1998, Equalnet and certain members of ACMI
began discussions concerning Equalnet's use of ACMI as a marketing channel for
the long distance subsidiaries of Equalnet, EqualNet Corporation and USC
Telecom, Inc. Some of the principals of ACMI previously worked for a company
that was an independent contractor sales agent for EqualNet Corporation, and
were familiar with EqualNet Corporation's products, services and agent programs.
On October 8, 1998, the parties signed a Letter of Intent for the
acquisition of certain assets of ACMI, including ACMI's contracts with its
consultants. Equalnet sought to acquire the services of these consultants to
market the long distance products and services of Equalnet's long distance
subsidiaries. On October 24, 1998, the parties signed a definitive agreement
for the acquisition of certain assets of ACMI, subject to the approval of the
Board of Directors of Equalnet and other contingencies. An amended agreement
between the parties approved by the Board of Directors of Equalnet was executed
as of December 31, 1998. The transaction was closed in January 1999.
DESCRIPTION OF ACMI'S BUSINESS
ACMI is a network marketing company, the principals of which have been in
the telecommunication business since 1992. The business has evolved through
several different business entities; the first of these was Advantage
Communications, Inc., which marketed prepaid calling cards and 1+ and 0+ long
distance services under the name of ACI. In 1993 ACI changed its name to
Anderton Communications Marketing, Inc. and marketed its services and products
under the name ACMI. In December 1995, Anderton Communications Marketing, Inc.
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<PAGE>
sold its assets, including the name ACMI, to Conquest Telecommunications of
Dublin, Ohio. In April 1997, the current company, LIMIT LLC, purchased the
assets of the former ACMI, including the name ACMI, from Conquest and has
operated the business since then. ACMI's marketing has been and continues to be
headed by the same individuals since the inception of ACI in 1992.
ACMI is a commissioned sales agent for 1+ and 0+ and is a switch based
provider of prepaid calling cards. ACMI or its predecessors-in-interest have
been in the prepaid calling card business since 1993. ACMI has issued
promotional cards for many Fortune 1000 companies and is the principal provider
of telecommunications services for 240 Postal Annex stores. ACMI consultants
have the option of becoming independent travel agents to complement their sales
of prepaid travel cards. The termination of ACMI's relationship with Conquest
Telecommunications has required ACMI to rebuild its entire sales force since
April 1997. ACMI currently has 2,500 active agents. Equalnet expects the ACMI
Acquisition to enable it to expand its business and more effectively market its
telecommunications products through the addition of ACMI's marketing team. ACMI
has six members, and there is no public trading market for membership interests
in ACMI.
THE ACMI AGREEMENT
The ACMI Agreement provides for the acquisition by Acquisition Corp. of
the ACMI Assets in exchange for the assumption by Acquisition Corp. of certain
liabilities of ACMI and the issuance by Equalnet of 2,500,000 shares of common
stock to ACMI.
The ACMI Assets
The ACMI Assets consist of, among other things:
(1) the business operations of ACMI as a going concern,
(2) ACMI's right to use the assumed name of ACMI, and all goodwill
associated with that name, and
(3) except for certain excluded assets, all of the other assets of
ACMI, whether real property or personal property, tangible or
intangible, including, but not limited to, contract rights, choses
in action, accounts receivable, computer software, patents,
trademarks, service marks and related intellectual property rights,
goods, accounts, inventory, supplies and all of the customers and
customer contracts of ACMI.
Aggregate Consideration to be Paid by Acquisition Corp. and Equalnet
The aggregate consideration paid by Acquisition Corp. and Equalnet for
the ACMI Assets consists of (1) 2,500,000 shares of Equalnet common stock,
1,000,000 shares of which were issued at the closing and 1,500,000 shares of
which are issuable six months after the closing, subject to reduction as
described below under "--Adjustment to Purchase Price," and (2) if applicable,
the common stock issuable pursuant to the Common Stock Issuance Provisions.
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Assumed Liabilities
Under the ACMI Agreement, Acquisition Corp. assumed the following
liabilities of ACMI:
. accounts payable of approximately $63,020;
. a note payable in the principal amount of $1,000,000; and
. the obligation to pay a $20,000 placement fee payable by ACMI under
an agreement between ACMI and an executive search firm.
Common Stock Issuance Provisions
The ACMI Agreement contains two provisions that may require the issuance
of additional shares of Common Stock (such provisions, collectively, the "Common
Stock Issuance Provisions").
If the average closing sales price of the common stock on the Nasdaq
SmallCap Market for the period between 150 and 180 days following the closing
date (the "Post Closing Average Price") is less than $0.75, then Equalnet must
issue to ACMI an additional number of shares of common stock equal to the
quotient of:
. 1,875,000, minus the product of (a) 2,500,000 and (b) the greater of
(i) $0.50 and (ii) the Post Closing Average Price; and
. the Post Closing Average Price.
The ACMI Agreement also requires Equalnet to issue to individual Members,
if such Members continue to perform the same duties for Acquisition Corp. after
the closing as they have for ACMI before the closing, on the basis of conversion
percentages for such Members as set forth in a schedule to the ACMI Agreement,
an amount of common stock equal to:
. at the end of the first full year after the closing date, the quotient of:
. the excess of (A) the greater of (1) the sum of (a) the gross
revenues of Acquisition Corp. under certain scheduled existing
customer contracts, (b) all debit card revenues, (c) certain revenue
described in an Agent Marketing Agreement to be entered into by
Acquisition Corp. and the Members, and (d) all revenue from any other
activities of Acquisition Corp., less the commission received on any
revenue under clauses (a), (b), (c) and (d) and taxes or other
revenues collected that reflect pass-through items not truly
reflective of Acquisition Corp.'s revenue (the sum of such numbers,
the "Commissionable Revenue") for the 12 months immediately following
the closing date, and (2) $2,500,000 (the greater of (1) and (2), the
"Year 1 Number") over (B) $1,675,000; and
. the average closing sales price of the common stock on the Nasdaq
SmallCap
32
<PAGE>
Market during the period between 335 and 365 days after the closing
date; and
. at the end of the second full year after the closing date, the quotient of:
. the excess of (A) the Commissionable Revenue for the thirteenth
through twenty-fourth month immediately following the closing date
(the Commissionable Revenue for such period, the "Year 2 Number")
over (B) the product of (1) the greater of (x) the Year 1 Number and
(y) $2,500,000 and (2) 0.5; and
. the average closing sales price of the common stock on the Nasdaq
SmallCap Market during the period between 700 and 730 days following
the closing date; and
. at the end of the third full year after the closing date, the quotient of:
. the excess of (A) the Commissionable Revenue for the twenty-fifth
through thirty-sixth month immediately following the closing date
over (B) the product of (1) the greater of (x) the Year 2 Number and
(y) $2,500,000 and (2) 0.5; and
. the average closing sales price of the common stock on the Nasdaq
SmallCap Market during the period between 1065 and 1095 days
following the closing date.
However, if the Commissionable Revenue for any year is less than
$2,500,000 during any of the three consecutive one-year periods following the
closing, no common stock will be issuable under the earn-out provision for that
year.
Adjustment to Purchase Price
If Acquisition Corp. does not acquire new customer accounts with an
average monthly Commissionable Revenue of at least $670,000 per account within
six months after the closing date, then the 1,500,000 shares issuable to ACMI
six months after the closing will be reduced by a number equal to the product
of:
. 1,500,000; and
. the quotient of (1) the Commissionable Revenue for such six month
period and (2) $670,000.
Limitation on Shares Issuable Under the ACMI Agreement
The ACMI Agreement does not require Equalnet to issue in excess of
3,677,166 shares of common stock under the agreement unless Equalnet has
obtained, at the time of such issuance, the Voting Shareholder's approval of the
issuance of such shares for less than the book or market value of the common
stock. However, if ACMI does not receive the full number of shares that it
would otherwise have been entitled to receive under the agreement because of
this limitation, Equalnet is required to negotiate in good faith to provide
alternative compensation to ACMI in lieu of the shares that are not issued.
33
<PAGE>
Management of Acquisition Corp. after the Closing
The ACMI Agreement provides that, for so long as Acquisition Corp. meets
or exceeds certain financial return targets, ACMI management will have
meaningful input as to the strategic direction of Acquisition Corp. and will
manage the day to day affairs of Acquisition Corp. after the closing date.
Right to Designate Director Nominee
The ACMI Agreement requires Equalnet to cause one designee of ACMI to be
nominated to serve on the Board of Directors of Equalnet to be elected at the
first annual meeting of Equalnet's shareholders after the closing date. Nathan
Isaac Prager, a Nominee, is the designee of ACMI.
TRANSACTION WITH FORMER DIRECTOR ZANE RUSSELL IN CONNECTION WITH THE ACMI
ACQUISITION
As compensation for structuring and facilitating the ACMI Acquisition,
Equalnet issued 105,000 shares of common stock to Zane Russell. Mr. Russell was
a member of Equalnet's Board of Directors at the time of such issuance. Mr.
Russell's compensation in this transaction was approved by a majority of the
disinterested directors that considered this transaction. Mr. Russell
participated in the meeting approving the ACMI Acquisition, but did not vote on
the proposal regarding his compensation.
REASONS FOR THE ACMI ACQUISITION
Equalnet believes that the ACMI Acquisition was in the best interests
of Equalnet and its shareholders for the following reasons.
Increased Shareholder Value
Equalnet believes that the ACMI Acquisition will enhance shareholder
value by providing an experienced marketing team to market Equalnet's
telecommunications products. Equalnet believes that its expected financial
condition, results of operations and overall business prospects after the ACMI
Acquisition are likely to be better than those of Equalnet standing alone.
Equalnet believes that the expertise and management of personnel currently
employed by ACMI will add significant value to Equalnet's operations.
Cost Savings
Equalnet also believes that it can obtain greater sales volume and
customer exposure through the integration of ACMI's marketing team into
Equalnet's operations than could be obtained through contractual marketing
arrangements with third parties. Equalnet may realize additional savings from
the elimination of personnel needed to interact with third-party marketing
agencies.
34
<PAGE>
FINANCIAL INFORMATION REGARDING EQUALNET AND ACMI
Summary financial information for Equalnet for the fiscal years ended
June 30, 1998, 1997, 1996, 1995 and 1994 and for the six month periods ended
December 31, 1998 and 1997, and pro-forma financial data giving effect, on a per
share basis, to the ACMI Acquisition, is attached to this Proxy Statement as
Annex E.
Financial statements of ACMI as of and for the two years ended
December 31, 1998 are attached to this Proxy Statement as Annex F. Annex F also
contains a management's discussion and analysis of ACMI's financial condition
and results of operations for the periods covered by the financial statements.
The ACMI Acquisition will be treated as a purchase transaction for accounting
purposes.
REGULATORY FILINGS AND APPROVALS
No federal or state regulatory requirements are required to be complied
with, nor must any federal or state approval be obtained, in connection with the
ACMI Acquisition.
The high sales price of the common stock on the Nasdaq National Market on
October 23, 1998 (the trading day preceding the announcement of the proposed
ACMI Acquisition) was $1.94 per share; the low sales price on such date was
$0.25 per share.
POSSIBLE ADVERSE CONSEQUENCES OF THE ACMI ACQUISITION
The ACMI Acquisition could have adverse consequences for the holders
of the common stock. Equalnet might not be able to realize the value of ACMI's
goodwill and its customer base. Equalnet has attributed significant value to
such goodwill and such customer base in negotiating the ACMI Acquisition. An
inability to market Equalnet's products to that customer base could have a
material adverse effect on Equalnet's results of operations and cash flow.
Further, there were 18,385,832 shares of common stock outstanding
before the closing of the ACMI Acquisition. Equalnet has issued 1,000,000
shares, and may issue an additional 1,500,000 shares, of common stock pursuant
to the ACMI Agreement. If ACMI and/or the Members cause Equalnet to issue
common stock pursuant to the common stock Issuance Provisions, the equity
holdings of Equalnet's shareholders could be significantly diluted.
A shareholder holding 1,000 shares of common stock before the closing of
the ACMI Acquisition held approximately 0.0054% (1,000/18,385,832) of the then-
outstanding common stock. If 2,500,000 shares are issued pursuant to the ACMI
Acquisition, the number of shares of common stock outstanding after such
issuance will be 20,990,832 (including the 105,000 shares of common stock issued
to Zane Russell in connection with the ACMI Acquisition but otherwise assuming
Equalnet did not issue any other common stock after the closing). Accordingly,
a shareholder holding 1,000 shares of common stock after the issuance of all
common stock reserved for issuance pursuant to the ACMI Acquisition will hold
approximately 0.0048% (1,000/20,990,832) of the outstanding common stock. Thus,
assuming the ACMI Acquisition results in the issuance of 2,500,000 new shares of
common stock, shareholders who held
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<PAGE>
common stock before the ACMI Acquisition will experience dilution of
approximately 12% in their holdings of common stock as a result of the ACMI
Acquisition.
REQUIRED VOTE
The affirmative vote of a majority of the issued and outstanding
shares of capital stock held by the Voting Shareholders represented at the
Meeting, in person or by proxy, is required to ratify the ACMI Acquisition.
Abstentions and broker non-votes will not be treated as either a vote for or
against ratification of the acquisition. However, because the ratification of
the ACMI Acquisition requires the affirmative vote of a majority of the issued
and outstanding shares of capital stock held by the Voting Shareholders,
abstentions and broker non-votes will have the same effect as a vote against
ratification of the acquisition.
RECOMMENDATION OF THE BOARD OF DIRECTORS
For the reasons set forth above, we believe the ACMI Acquisition is
fair to and in the best interests of Equalnet and its shareholders. WE
RECOMMEND THAT YOU VOTE "FOR" THE RATIFICATION OF THE ACMI ACQUISITION.
36
<PAGE>
PROPOSAL 6: TO APPROVE THE ISSUANCE OF WARRANTS TO CERTAIN OFFICERS AND FORMER
OFFICERS
At the Meeting, you will be asked to vote in favor of a proposal to
approve the issuance of warrants to certain officers and former officers of
Equalnet to purchase shares of Equalnet common stock at an exercise price of
$0.86 per share, being the average of the closing prices for the common stock
for the 5 trading days preceding the Board of Director's approval of the
warrants, which approval occurred on June 18, 1999. The warrants are to be
issued to the individuals named below as follows:
Mitchell H. Bodian . 1,800,000 shares, 1,000,000 of such shares to vest
immediately upon approval by the shareholders and
800,000 of such shares to vest on the earlier of 6
months from the grant date or termination of Mr. Bodian
by Equalnet without cause.
David Kerr . 1,000,000 shares to vest immediately upon approval by
the shareholders.
Dean H. Fisher . 700,000 shares to vest immediately upon approval by the
shareholders.
The warrants have customary anti-dilution provisions, provide the
holders with registration rights to have the underlying shares included in the
next registration statement filed by Equalnet, and are exercisable for 7 years
from the date of the grant.
Mr. Bodian became Chief Executive Officer of Equalnet on short notice
at a time when Equalnet was in severe financial distress. He has spent long
hours and incurred significant personal sacrifice to take Equalnet from a
significant negative cash flow position to almost cash flow neutral in less than
one year. Discussions concerning the proposed granting of these warrants to Mr.
Bodian began at a time when the market value of the common stock was below the
exercise price contained in these warrants.
Mr. Kerr became Chief Financial Officer of Equalnet at a time when
Equalnet was in severe financial distress and in need of strong cash flow
management, which he provided. Discussions concerning the proposed granting of
these warrants to Mr. Kerr began at a time when the market value of the common
stock was below the exercise price contained in these warrants, and recognizes
the value of the service Mr. Kerr rendered on behalf of Equalnet.
Mr. Fisher has served as Equalnet's only General Counsel since its
inception. He is the only remaining member of management after two significant
management changes were made during calendar year 1998. He has spent many long
hours representing Equalnet and its subsidiaries under difficult situations,
including the preparation and negotiation of the Plan, which has now been
successfully confirmed and consummated. Discussions concerning the proposed
granting of these warrants to Mr. Fisher began at a time when the market value
for the common stock was below the exercise price contained in these warrants.
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<PAGE>
REASONS FOR THE ISSUANCE
We are asking you to approve the issuance of the warrants to comply
with rule 4310(c)(25)(H)(i)(a) of the Nasdaq Stock Market, which requires such
approval for any arrangement pursuant to which stock may be acquired by officers
or directors.
REQUIRED VOTE
The affirmative vote of a majority of the issued and outstanding
shares of capital stock held by the Voting Shareholders represented at the
Meeting, in person or by proxy, is required to approve the issuance of the
warrants. Abstentions and broker non-votes will not be treated as either a vote
for or against approval of the issuance. However, because the approval of the
issuance requires the affirmative vote of a majority of the issued and
outstanding shares of capital stock held by the Voting Shareholders, abstentions
and broker non-votes will have the same effect as a vote against approval of the
issuance.
RECOMMENDATION OF THE BOARD OF DIRECTORS
We believe the issuance of the warrants is appropriate. The Board of
Directors, with Mr. Bodian abstaining, unanimously approved the issuance of the
warrants. WE UNANIMOUSLY (WITH MR. BODIAN ABSTAINING) RECOMMEND THAT YOU VOTE
"FOR" THE APPROVAL OF THE ISSUANCE OF THE WARRANTS.
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<PAGE>
PROPOSAL 7: TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS
At the recommendation of the audit committee, we have appointed Ernst
& Young LLP ("Ernst & Young") to serve as the principal independent auditors for
Equalnet and its subsidiaries for the 1999 fiscal year.
We intend to submit the appointment to the Voting Shareholders for
ratification at the Meeting. Ernst & Young has served as EqualNet Corporation's
auditors from the 1992 fiscal year through the 1995 fiscal year, and has served
as Equalnet's auditors from the 1995 fiscal year through the 1998 fiscal year.
We are advised that no member of Ernst & Young has any direct or material
indirect financial interest in Equalnet or, during the past six years, has had
any connection with Equalnet in the capacity of promoter, underwriter, voting
trustee, director, officer or employee. Although we are not required by law to
submit this matter to the shareholders, we will reconsider our appointment of
Ernst & Young if the appointment is not ratified by the Voting Shareholders.
Representatives of Ernst & Young are expected to be present at the
Meeting, will have the opportunity to make a statement if they so desire and are
expected to be available to respond to appropriate questions.
REQUIRED VOTE
Ratification of our appointment of Ernst & Young to serve as the
principal independent auditors for Equalnet and its subsidiaries for the 1999
fiscal year will require the affirmative vote of the majority of shares of
capital stock held by the Voting Shareholders represented at the Meeting, in
person or by proxy. Abstentions and broker non-votes will not be treated as
either a vote for or a vote against ratification of our appointment of Ernst &
Young.
RECOMMENDATION OF THE BOARD OF DIRECTORS
WE RECOMMEND THAT YOU VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF ERNST &
YOUNG AS INDEPENDENT AUDITORS FOR EQUALNET AND ITS SUBSIDIARIES FOR THE 1999
FISCAL YEAR.
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<PAGE>
EXECUTIVE OFFICERS AND COMPENSATION
The following table sets forth the names, ages and titles of
Equalnet's executive officers as of the Record Date:
<TABLE>
<CAPTION>
Name Age Position with Equalnet
- ----- ---- ----------------------
<S> <C> <C>
Mitchell H. Bodian 47 President, Co-Chief Executive Officer
and principal financial officer
Barrett N. Wissman 36 Co-Chief Executive Officer
William D. Rhodes, Jr. 50 Chief Operating Officer
</TABLE>
For further information regarding the background of Mr. Bodian, see
"Background of Directors and Nominees."
BARRETT N. WISSMAN became Co-Chief Executive Officer of Equalnet in
June 1999. Mr. Wissman is a Managing Director of the general partner of HW
Partners, L.P., an investment management firm the principal business of which is
acting as an investment advisor to investment funds including Infinity and IEO,
both of which are Nevis, West Indies corporations. In addition to the
securities of Equalnet purchased by Infinity and IEO pursuant to the Common
Stock Subscription Agreement, Infinity and IEO together hold sixty-six and two-
thirds percent of the outstanding common stock of e.Volve. Barrett N. Wissman
also serves as a director of e.Volve Technology Group, Inc., for which he
receives no compensation other than customary reimbursement for expenses. In
addition, Mr. Wissman is the Manager of the general partner of HW Partners,
L.P., a Texas limited partnership, the principal business of which is acting as
an investment advisor to investment funds including Infinity Investors Limited
("Infinity") and IEO Holdings Limited ("IEO") both of which are Nevis, West
Indies corporations. In addition to the securities of the Corporation purchased
by Infinity and IEO pursuant to the Subscription Agreement, Infinity and IEO
together hold sixty-six and two-thirds percent of the outstanding common stock
of e.Volve Technology Group, Inc. Prior to joining HW Partners, L.P. in 1993,
Mr. Wissman served as Chief Executive Officer of Athena Products Corporation and
its subsidiaries and affiliates. These businesses manufacture and market
chemicals, fertilizers and household consumer products in both domestic and
international markets. Mr. Wissman's duties included overseeing the
administration, finance, marketing and production departments. Mr. Wissman also
managed the corporations' investment portfolios and cash flow. From 1985 to
1987, Mr. Wissman worked in the International Mergers and Acquisitions, and
International Project Finance Departments of Lazard Freres & Co. in New York
City. Mr. Wissman graduated from Yale University cum laude in 1985 with a
double degree in economics and political science.
WILLIAM D. RHODES, JR. became Chief Operating Officer of Equalnet in
March 1999. Mr. Rhodes has over 12 years of executive telecommunications
management experience, including roles as Marketing and Sales Director, Vice
President/Chief Operating Officer and President. Mr. Rhodes was President of
Valu-Line of Longview, a switch-based interexchange carrier with competitive
local exchange carrier authority in the state of Texas, from 1996 until 1999,
and Vice President and Chief Operating Officer of Advanced Communications Group,
a switch based, interexchange carrier with competitive local exchange carrier
authority in the state of Texas,
40
<PAGE>
from 1998 until 1999. During the prior 20 years, Mr. Rhodes served in various
capacities, including Marketing and Sales Director, for Rockwell International,
a diversified conglomerate in electronics, communications and avionics. None of
the foregoing entities is an affiliate of Equalnet. Through this experience, Mr.
Rhodes acquired knowledge regarding the business operations of an interexchange
carrier (IXC) and competitive local exchange carrier (CLEC), alternatives for
expansion of an IXC/CLEC customer base and the necessary methods for growing
corporate infrastructure while providing quality service to customers. Mr.
Rhodes holds an MSEE and a BSEE from the University of Missouri at Columbia.
All executive officers of Equalnet hold office until the regular
meeting of the Board of Directors following the annual meeting of shareholders
and until their successors are elected and qualified or their earlier
resignation or removal.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the
"Committee"), which is composed of non-employee directors and performs the
duties described above under "Committees of the Board of Directors and Meeting
Attendance," has furnished the following report on executive compensation for
fiscal year 1998.
Equalnet's compensation package is designed to benefit Equalnet's
shareholders by providing a variety of incentive compensation opportunities to
senior management and executive officers of Equalnet. The compensation plan
consists of base salary, annual cash incentive compensation and stock reward
plans (stock options and restricted stock awards).
41
<PAGE>
BASE SALARY
The base salaries of Equalnet's executive officers were determined in
1995 before, and in anticipation of, Equalnet's initial public offering. At
that time, salaries were targeted to be within the 50th to 75th percentile for
similar positions in other high technology companies with similar revenues ($40
million to $99 million), based on a published survey of such companies. The
survey relied upon in setting those salaries did not specify which companies
were included in the survey, and Equalnet thus did not attempt to use those
companies to determine its peer group for purposes of its comparative
performance presentation. Further, Equalnet believes that its most direct
competitors for executive talent are not necessarily those included in the peer
group used by Equalnet to compare shareholder returns. See "Performance
Presentation." Thus, the group of high technology companies by which Equalnet
measured executive compensation in 1995 are not the same as those included in
Equalnet's peer group index in its 40 Month Cumulative Total Return graph
included in this Proxy Statement. The Committee has not significantly increased
the salary for any of its senior executive positions during the period since
1995 in view of Equalnet's results of operations for those fiscal years.
The Committee evaluates the Chief Executive Officer's performance,
recommends changes to his annual compensation level for future years to the
Board and reviews and approves changes to compensation levels for all executive
officers. The Committee retained the services of a nationally recognized
executive search and placement firm for the placement of a chief executive
officer and used that firm's expertise and experience in the area of executive
compensation to help determine appropriate compensation packages for its
executive officers. The salary of Dean H. Fisher for fiscal 1998 was not
increased. No merit increases or other bonuses were awarded for fiscal 1998.
The Committee made these determinations because of Equalnet's financial
performance, the depreciation in its stock price and its liquidity problems.
ANNUAL INCENTIVE COMPENSATION
Equalnet's executive officers and other management employees are eligible
to receive annual cash bonus awards that may, in the discretion of the
Committee, be issued. None of the executive officers received a bonus for the
fiscal year ended June 30, 1998.
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<PAGE>
STOCK INCENTIVE PROGRAMS
The Committee believes that compensation in the form of stock provides
an incentive for management to increase shareholder value by closely aligning
management compensation with the performance of the common stock. Equalnet has
adopted the Employee Plan, under which the Committee may authorize grants of
stock options and restricted stock awards. During fiscal year 1998, the
Committee did not award shares of restricted stock to members of senior
management or key employees.
THE COMPENSATION COMMITTEE
JOHN ISAAC "IKE" EPLEY
RONALD J. SALAZAR, PH.D.
SUMMARY OF COMPENSATION
The following table summarizes compensation information concerning the
Chief Executive Officer and each of Equalnet's most highly compensated executive
officers as to whom total annual salary and bonus for the fiscal year ended June
30, 1998 exceeded $100,000 (the "Named Executive Officers").
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Common
Stock
Name and Fiscal Underlying All Other
Principal Position Year Salary Bonus Options Compensation(1)
- ------------------ ------ ------ ----- ------- --------------
<S> <C> <C> <C> <C> <C>
Robert H. Turner 1998 $100,961 - - $3,076
former Chief Executive Officer and 1997 -
Director 1996 -
Zane Russell 1998 142,931 - - 6,073
former Chairman of the Board, 1997 178,000 - 90,000 3,498
Director, Chief Executive Officer and 1996 178,000 - - 4,249
President
Michael L. Hlinak 1998 175,182 - - 6,434
former Executive Vice President, Chief 1997 155,000 - 90,000 3,607
Financial Officer and Chief Operating 1996 128,000 - - 6,576
Officer
Dean H. Fisher 1998 129,800 - - 6,059
General Counsel and former Senior 1997 129,000 - 35,000 3,451
Vice President and Secretary 1996 128,000 - - 6,097
</TABLE>
(1) Represents contributions in 1996 by Equalnet under Equalnet's 401(k) Plan
for Messrs. Russell, Hlinak and Fisher of $1,676, $2,477 and $1,676,
respectively, and health insurance premiums paid by Equalnet for Messrs.
Russell, Hlinak and Fisher of $4,572, $4,100 and $4,421, respectively.
Represents contributions in 1997 by Equalnet under Equalnet's 401(k) Plan
for
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<PAGE>
Messrs. Russell, Hlinak and Fisher of $1,676, $1,785, and $1,676,
respectively, and health insurance premiums paid in 1997 by Equalnet for
Messrs. Russell, Hlinak and Fisher of $1,823, $1,823, and $1,775,
respectively. Represents contributions in 1998 by Equalnet under
Equalnet's 401(k) Plan for Messrs. Russell, Hlinak and Fisher of $2,651,
$661, and $3,894, respectively, and health insurance premiums paid in 1998
by Equalnet for Messrs. Turner, Russell, Hlinak and Fisher of $3,076,
$3,422, $5,773, and $2,165, respectively.
WARRANT AND OPTION GRANTS IN FISCAL 1998
Equalnet did not grant options to any of the Named Executive Officers
during fiscal 1998. The following table sets forth information regarding the
value of unexercised warrants and options held by the Named Executive Officers.
None of the Named Executive Officers exercised any warrants or options in fiscal
year 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED WARRANTS AND IN THE MONEY WARRANTS AND
OPTIONS AT JUNE 30, 1998 OPTIONS AT JUNE 30, 1998(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert H. Turner --- --- --- ---
Zane Russell 90,000 --- $5,400 ---
Michael L. Hlinak 90,000 --- $5,400 ---
Dean H. Fisher 35,000 --- --- ---
</TABLE>
(1) The value of each unexercised in-the money warrant or option is equal to
the difference between the closing price of the common stock on the Nasdaq
National Market on June 30, 1998 of $2.06 per share and the exercise price
of the warrant or option.
PERFORMANCE PRESENTATION
The following performance graph compares the performance of the common
stock on an indexed basis to the Center for Research in Security Prices ("CRSP")
Index for The Nasdaq Stock Market (US Companies) and a CRSP index of Nasdaq
Stock Market telephone communications companies (SIC codes 4810 through 4819).
Information with respect to the common stock, the CRSP Index for The Nasdaq
Stock Market (US Companies) and a CRSP index of Nasdaq Stock Market telephone
communications companies (SIC codes 4810 through 4819) is from March 9, 1995,
the date on which the common stock first began public trading. The graph
assumes that the value of the investment in the common stock and each index was
$100 at March 9, 1995, and that all dividends were reinvested. Equalnet will
provide the names of the companies included in the telephone communications
index (SIC codes 4810 through 4819) upon written request to the Investor
Relations Department of Equalnet.
44
<PAGE>
[COMPARISON OF 40 MONTH CUMULATIVE TOTAL RETURN CHART APPEARS HERE]
<TABLE>
<CAPTION>
MARCH 9, 1995 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Equalnet Communications Corp. 100.0 134.8 34.8 18.5 18.5
Nasdaq Stock Market 100.0 117.3 150.8 183.4 241.89
Nasdaq Stock Market Telephone Communications
Companies (SIC 4810-4819 US Companies) 100.0 108.3 150.0 181.4 261.43
</TABLE>
Note: The indices are reweighed daily, using the market capitalization on the
previous trading day.
EMPLOYMENT AGREEMENTS
Equalnet terminated an executive employment agreement with Zane
Russell during the second half of fiscal year 1998. Ongoing payments due to Mr.
Russell are as follows: severance payments through January 31, 1999 at an
annualized rate of $87,500 and forgiveness and cancellation of the remaining
balance under a $75,000 note payable by Mr. Russell to Equalnet. Additionally,
Equalnet issued a warrant to Mr. Russell for the purchase of up to 90,000 shares
of common stock at an exercise price of $2.00 per share. Equalnet is currently
in default on its severance payments to Mr. Russell.
45
<PAGE>
Mr. Russell has agreed that for a period of time ending June 1, 1999
he will not engage in or participate in any business engaged in the sale or
marketing of long-distance service within the United States, employ any of
Equalnet's employees or induce any of Equalnet's employees to leave their
employment with Equalnet.
Equalnet terminated an executive employment agreement with Michael L.
Hlinak during the second half of fiscal year 1998. On April 7, 1999, Equalnet
executed an agreement with Michael L. Hlinak, former Chief Operating Officer, in
which Equalnet issued 100,000 shares of common stock to Mr. Hlinak in exchange
for a release of all remaining severance obligations of Equalnet to Mr. Hlinak.
Equalnet has agreed to register the shares transferred to Mr. Hlinak for resale
under the next registration statement Equalnet files.
Mr. Hlinak has agreed that for a period of two years after termination
he will not engage in or participate in any business engaged in the sale or
marketing of long-distance service within the United States, employ any of
Equalnet's employees or induce any of Equalnet's employees to leave their
employment with Equalnet.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Epley and Dr. Salazar served as members of the compensation
committee during fiscal year 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 11, 1997, Equalnet issued to The Furst Group, Inc., a New
Jersey corporation ("Furst Group") and an accredited investor, a $3,000,000 note
bearing interest at the rate of 10% per year and maturing December 31, 1998 (the
"Furst Note") and a warrant for the purchase of up to 1,500,000 shares of common
stock at an exercise price of $2.00 per share (the "Furst Warrant"), together
with certain rights in the event of a change of control. On March 9, 1998,
Equalnet and Furst entered into an Exchange Agreement (the "Exchange Agreement")
pursuant to which Furst exchanged the Furst Note, the Furst Warrant and the
aforementioned rights for 3,000 shares of series B preferred stock and 322,000
shares of common stock (representing the accrued and unpaid interest on the
Furst Note). The Exchange Agreement enabled Equalnet to reduce its debt and
increase its tangible net worth while allowing Furst to maintain a liquidation
preference over the common stock with respect to its initial $3,000,000
investment.
The series B preferred stock consists of 3,000, shares all of which
were issued in connection with the Exchange Agreement. Each share of series B
preferred stock has a stated value of $1,000 and is entitled to receive
dividends only if, as and when the Board of Directors declares dividends on the
common stock. Each share of series B preferred stock is convertible initially
into 500 shares of common stock (for an aggregate of 1,500,000 shares), subject
to adjustment pursuant to certain anti-dilution provisions. Each share of
series B preferred stock automatically converts into common stock, based upon
the conversion rate then in effect, on December 31, 1999.
If Equalnet were to be liquidated, the holders of the series B
preferred stock would be entitled to receive out of the assets of Equalnet
$1,000 per share before any
46
<PAGE>
distributions would be made to holders of common stock. Each shares of series B
preferred stock generally entitles the holder thereof to one vote on matters
submitted to the holders of common stock for approval, with the holders of
common stock and series B preferred stock voting as a single class. Holders of
series B preferred stock will be entitled to vote as a class on transactions
involving an amendment or waiver of the rights of holders of series B preferred
or in the creation of a series of shares with liquidation rights equal to or
greater than the series B preferred stock.
On March 6, 1998, the shareholders of Equalnet approved certain
transactions detailed below:
On March 6, 1998, as a result of various transactions, Willis Group
and its affiliates gained control of the Board of Directors of Equalnet, having
nominated for shareholder approval four of the seven members of the Board.
Willis Group beneficially owns more than five percent of Equalnet's voting
securities. Mark A. Willis, the Chairman of the Board of Directors of
Equalnet, owns a 48.5% membership interest in Willis Group.
On October 1, 1997, Equalnet issued to Willis Group a $1,000,000
Convertible Secured Note, bearing interest at the rate of 12% per year and
maturing April 1, 1998 (the "October Note"), and a warrant for the purchase of
up to 200,000 shares of common stock at an exercise price of $1.00 per share,
subject to adjustment (the "October Warrant"). The October Warrant is
exercisable for five years. As of the date of issuance of the October Note
Equalnet recorded an interest charge of $150,000 to record the impact of the
debt being convertible at a discount to market. On March 5, 1998, the October
Note and accrued interest were exchanged for 1,050,000 shares of common stock.
Under the terms of several related agreements (the "Agreements") among
Equalnet, Willis Group and MCM Partners entered into on December 2, 1997,
Equalnet acquired nine telecommunications switches (the "Switches") from Willis
Group for aggregate consideration consisting of $5,850,000 in cash, 1,400,000
shares of common stock, and warrants to purchase an additional 400,000 shares of
common stock. Equalnet secured financing of $6,050,000 for the cash portion of
the consideration through an unaffiliated third party lender, which loan is
secured by the Switches, bears interest at an annual rate of 6.42% above an
index rate based on U.S. Treasury Notes (the loan interest rate currently is
12.1%) and is payable in 36 consecutive monthly payments. In addition, Equalnet
granted 500,000 warrants to Michael T. Willis, a member of Willis Group and
father of director Mark A. Willis, for guaranteeing a portion of this
financing.
Under the terms of the Agreements, Equalnet acquired Netco Acquisition
Corp. ("Netco"), a Delaware corporation, from Willis Group. Netco held certain
intangible rights and assets previously acquired by Willis Group and formerly
held by Total National Telecommunications. These assets consisted of intangible
rights to use certain software and codes necessary to operate the Switches.
Equalnet acquired Netco for aggregate consideration consisting of approximately
3,581,633 shares of common stock, 2,000 shares of series A preferred stock and
the issuance of approximately 4,000,000 shares of common stock for $1.00 per
share in cash. MCM Partners, the holder of all 2,030 currently issued and
outstanding shares of series A preferred stock, beneficially owns more than five
percent of Equalnet's voting
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<PAGE>
securities. Mitchell H. Bodian, President, Co-Chief Executive Officer, principal
financial officer and a director of Equalnet, has been a consultant, on a fee
basis, for MCM Partners and its affiliates for several years.
Under the terms of the original Statement of Resolution with respect
to the series A preferred stock, the series A preferred stock had very limited
voting rights, had a stated value of $1,000 per share and were entitled to
receive dividends at the rate of $80.00 per share per year, payable quarterly.
Holders of series A preferred stock had the right to convert their shares into
common stock at the rate of 1,000 shares of common stock per share of series A
preferred stock (or the stated value divided by $1.00), or an aggregate of
2,000,000 shares of common stock, subject to adjustment pursuant to certain
anti-dilution provisions. The series A preferred stock had a $1,000 per share
liquidation preference over Equalnet's common stock. Dividends when not paid
were cumulative and bore interest at a rate of 12.0% per year. Cumulative
dividends in arrears at June 30, 1998 were approximately $52,000, or $25.78 per
series A preferred stock share. Equalnet may not declare or pay dividends on
the common stock unless all accrued dividends on the series A preferred stock
have been paid. Under the original terms of the series A preferred stock,
Equalnet could redeem the outstanding shares of series A preferred stock at a
price of $1,000 per share (plus any accrued and unpaid dividends and any
interest thereon) if the market price of the common stock exceeded $5.00 per
share.
The terms of the series A preferred stock have been amended. See
"Proposal 4: To Ratify the Amendment of the Statement of Resolution of the
Board of Directors With Respect to the Series A Preferred and To Approve the
Issuance of Common Stock Upon the Conversion of the Series A Preferred Pursuant
to the Terms of the Amended Series A Statement of Resolution."
During the quarter ended March 31, 1998, Equalnet obtained a cash flow
bridge loan of $400,000 from Netco Acquisition, LLC, an entity owned 50% by
Willis Group. This note was payable on March 31, 1998 and had an interest rate
of 10%. This note is secured by the accounts attributable to web page
customers. This note was renewed and extended by the execution of a Renewal and
Extension Promissory Note in the principal amount of $426,849.32 on December 31,
1998. The principal sum thereof, and interest at 10% thereon, must be paid on
or before July 31, 1999.
Willis Group received a finder's fee of $54,000 related to certain
financing transactions that closed during fiscal year 1998. Willis Group
entered into an agreement with Equalnet in April 1998 related to merger and
acquisition consulting services. The agreement requires Equalnet to pay Willis
Group $20,000 per month beginning in May 1998, and a success fee based on a
percentage of the purchase price of acquisitions closed by Equalnet.
On September 2, 1998, Equalnet executed a loan agreement in favor of
Willis Group in the amount of $241,106. The loan documents certain advances
Willis Group has made on Equalnet's behalf. This loan is secured by the assets
of Equalnet and its subsidiaries. The related note bore interest at a rate of
11% per year and matured on January 31, 1999. This note was renewed and
extended by the execution of a Renewal and Extension Subordinated Promissory
Note on January 31, 1999. The principal sum thereof, and interest at 11%
thereon, must be paid on or before July 31, 1999.
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<PAGE>
Equalnet pays Willis Group $12,500 per month for consulting services
performed by Mark Willis, Chairman of the Board of Equalnet, pursuant to an
Independent Contractor/Consulting Agreement entered into between Equalnet and
Willis Group on October 30, 1998.
Equalnet has also entered into certain other transactions with Willis
Group, Genesee and Advantage Fund Limited, which transactions are described
above under "Proposal 2: To Ratify the Note Issuance Transaction and Approve the
Issuance of Common Stock Upon the Conversion."
Nathan Isaac Prager, a director-nominee, is a shareholder in The
Intelesis Group Inc., a party to the transactions described under "Proposal 1 --
Reasons for the Amendment."
Barrett N. Wissman, Co-Chief Executive Officer of Equalnet, is an
affiliate of HW Partners, L.P. and HW Finance, L.L.C., and a director of
e.Volve, parties to the transactions contemplated by the Merger Agreement
described above under "Proposal 1 -- Reasons for the Amendment" and
"Proposal 3 -- Background of Director and Nominees".
The Plan empowers the trustee of the Unsecured Creditors' Trust to
select a director nominee to the board of directors. The trustee, in the
exercise of this authority, has selected Mr. Paul as such nominee. The Plan
provides generally for the establishment of the Unsecured Creditors' Trust and
payment to the trust by the plan proponents of $1.35 million plus 3,000,000
shares of common stock of Equalnet for the benefit of the unsecured creditors of
EqualNet Corporation. In addition, payments are to be made of administrative
claims of approximately $1.5 million.
John Isaac "Ike" Epley, a member of Equalnet's Board of Directors, has
been performing consulting services for Equalnet since June 1998. Mr. Epley has
consulted on such matters as mergers, acquisitions, strategy and corporate
development for Equalnet. He has been paid $85,400 to date under this
arrangement, based upon annual compensation of $175,000. Mr. Epley will
continue to serve as a consultant to Equalnet on a month-to-month basis in the
future.
In February 1999, Equalnet entered into an Employment Agreement with
William D. Rhodes, Jr., Equalnet's Chief Operating Officer, pursuant to which
Equalnet is required to grant to Mr. Rhodes, under Equalnet's Employee Stock
Option and Restricted Stock Plan, options to purchase an aggregate of 500,000
shares of common stock at an exercise price of $1.00 per share. One-third of
the options vests on February 8, 2000, one-third vests on February 8, 2001 and
one-third vests on February 8, 2002.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the Record Date
(unless indicated otherwise), with respect to the beneficial ownership of the
common stock and the series A, series B, series C series, D and series E
preferred stock of Equalnet by (1) persons known to Equalnet to be the
beneficial owners of more than 5% of any class of capital stock of Equalnet, (2)
each director, director nominee and Named Executive Officer of Equalnet and (3)
all directors and executive officers of Equalnet as a group.
49
<PAGE>
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
COMMON STOCK PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
DIRECTORS, EXECUTIVE ----------------------- ------------- ------------- ------------- -------------- -------------
OFFICERS AND 5.0% NUMBER OF % OF NO. OF % OF NO. OF % OF NO. OF % OF NO. OF % OF NO. OF % OF
SHAREHOLDERS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS
- --------------------- ---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael T. Willis 14,094,913(1) 41.8% - - - - - - 1,953(13) 50% - -
5005 Woodway
Suite 350
Houston, Texas 77056
James T. Harris 13,894,913(1)(4) 41.8% - - - - - - 1,953(13) 50% - -
5005 Woodway
Suite 350
Houston, Texas 77056
Willis Group, LLC 13,594,913(1) 40.9% - - - - - - 1,953(13) 50% - -
5005 Woodway
Suite 350
Houston, Texas 77056
Mark A. Willis 13,627,327(1) 41.0% - - - - - - 1,953(13) 50% - -
5005 Woodway
Suite 350
Houston, Texas 77056
James R. Crane 4,070,000(2) 14.6% - - - - - - - - - -
15350 Vickery Drive
Houston, Texas 77032
MCM Partners 2,706,667(3) 8.9% 2,030 100% - - - - - - 833,333 100%
10500 NE 8th
Suite 1920
Bellevue,
Washington 98004
Genessee Fund Limited 2,117,948(5) 7.1% - - - - - - - - - -
Portfolio B
10500 NE 8th
Suite 1920
Bellevue,
Washington 98004
Advantage Fund Limited 2,603,999(6) 8.7% - - - - - - 1,953 50% - -
10500 NE 8th
Suite 1920
Bellevue,
Washington 98004
SA Telecommunications, 2,119,460(7) 7.1% - - - - 211,946 100% - - - -
Inc.
1600 Promenade Center,
15th Floor
Richardson, Texas 75080
The Furst Group, Inc. 1,822,500(8) 6.3% - - 3,000 100% - - - - - -
459 Oakshade Road
Shamong, New Jersey 08088
James D. Kaylor 1,822,500(8) 6.3% - - - - - - - - - -
916 P. Street
Suite 200
Lincoln, Nebraska 68508
John S. Streep 1,822,500(8) 6.3% - - - - - - - - - -
15841 Kilmarmock Drive
Ft. Meyers, Florida 33912
Mitchell H. Bodian 25,444(15) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Robert H. Turner - - - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Barrett N. Wissman - - - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
R. Chadwick Paul, Jr. - - - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Zane Russell 1,152,556(4)(9) 4.2% - - - - - - - - - -
20607 Shadow Mill Court
Katy, Texas 77450
Nathan Isaac Prager 1,000,000(14) 3.6% - - - - - - - - - -
10545 Chapel Hill Rd.
Arlington, Texas 38002
Dean H. Fisher 267,601(10) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
COMMON STOCK PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
DIRECTORS, EXECUTIVE ----------------------- ------------- ------------- ------------- -------------- -------------
OFFICERS AND 5.0% NUMBER OF % OF NO. OF % OF NO. OF % OF NO. OF % OF NO. OF % OF NO. OF % OF
SHAREHOLDERS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS
- --------------------- ---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael L. Hlinak 190,000(9) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
John Isaac "Ike" Epley 20,910(15) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Ronald J. Salazar, Ph.D 94,196(15) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Frank Hevrdejs 1,400,000(11) 5.1% - - - - - - - - - -
8 Greenway Plaza
Houston, Texas 77046
Current directors and 13,767,877(12) 41.4% - - - - - - 1,953(13) 50% - -
executive officers as a
group (7 person)
</TABLE>
- ---------------
* Less than 1%.
(1) Includes warrants exercisable for an aggregate of 933,116 shares of common
stock, 1,953 shares of series D preferred stock convertible in the
aggregate into approximately 2,603,999 shares of common stock and notes
convertible in the aggregate into approximately 2,084,832 shares of common
stock. Michael T. Willis holds directly a warrant for the purchase of
500,000 shares of common stock and James T. Harris holds 300,000 shares of
common stock directly as the result of a transfer from Willis Group. None
of such shares was outstanding as of June 8, 1999. Information relating to
ownership by Willis Group and Messrs. Michael T. Willis, Mark A. Willis and
James T. Harris is based on Amendment No. 5 to Schedule 13D filed with the
SEC on March 12, 1999. Michael T. Willis and Mark A. Willis each own 48.5%
of the membership interest in Willis Group and Mr. Harris owns the
remaining 3% membership interest. Michael T. Willis is the Secretary of
Willis Group, Mark A. Willis is the President of Willis Group and Mr.
Harris is the Treasurer of Willis Group. According to the report, Willis
Group has sole voting and dispositive power with respect to all shares
other than shares or warrants held directly and Messrs. Michael T. Willis,
Mark A. Willis and Harris have shared voting and dispositive power with
respect to all shares other than shares or warrants held directly.
(2) Includes a warrant exercisable for an aggregate of 170,000 shares of common
stock, none of which had been issued as of June 8, 1999. Information
relating to ownership by James R. Crane is based on reports on Schedule
13D filed with the SEC on May 6, 1998.
(3) Consists of 2,030 shares of series A preferred stock currently convertible
in the aggregate into approximately 2,706,667 shares of common stock.
(4) Excludes 5,000 shares of common stock issuable upon exercise of stock
options awarded under the Director Plan that are not exercisable within 60
days.
(5) Includes a warrant exercisable for an aggregate of 333,116 shares of common
stock and notes convertible into an aggregate of approximately 2,084,832
shares of common stock.
51
<PAGE>
(6) Includes 1,953 shares of series D preferred stock convertible in the
aggregate into approximately 2,603,999 shares of common stock.
(7) Includes 211,946 shares of series C preferred stock convertible in the
aggregate into 2,119,460 shares of common stock.
(8) Includes 3,000 shares of series B preferred stock convertible in the
aggregate into 1,500,000 shares of common stock. Information relating to
ownership by Furst Group, James D. Kaylor and John S. Streep is based on
management's information regarding the transactions. Messrs. Kaylor and
Streep each own 45% of the common stock of Furst Group. Mr. Kaylor is the
Chairman of the Board of Furst Group and Mr. Streep is the Chief Executive
Officer of Furst Group.
(9) Includes a warrant exercisable for an aggregate of 90,000 shares of common
stock.
(10) Includes options exercisable for an aggregate of 35,000 shares of common
stock. Excludes 40,000 shares of common stock held by trusts for the
benefit of Mr. Fisher's children. Mr. Fisher has disclaimed any beneficial
ownership of these shares.
(11) Includes beneficial ownership of warrants exercisable for an aggregate of
66,667 shares of common stock.
(12) See Note 1 above and Notes 13 and 15 below.
(13) All 1,953 shares of series D preferred stock are beneficially owned by
Mark A. Willis, Michael T. Willis and James T. Harris, and are held
directly by Willis Group.
(14) All 1,000,000 shares of common stock are held directly by LIMIT LLC (d/b/a
ACMI). Mr. Prager is the president of LIMIT LLC (d/b/a ACMI) and owns a
10% membership interest therein.
(15) Includes options issued on March 7, 1999 under the Director Plan
exercisable for 1,667 shares of common stock to each of Messrs. Willis,
Bodian and Epley and Dr. Salazar.
Except as otherwise noted, each shareholder has sole voting and
dispositive power with respect to the shares of common stock held by it to be
voted at the Meeting. Except under limited circumstances, the holders of the
series A preferred stock, series C preferred stock, series D preferred stock and
series E preferred stock are not entitled to vote. For purposes of calculating
the beneficial ownership of each stockholder, it was assumed (in accordance with
the SEC's definition of "beneficial ownership") that such stockholder had
exercised all options or warrants, or converted any convertible securities, by
which such stockholder had the right, within 60 days following the Record Date,
to acquire shares of common stock. It was further assumed that in each case,
the exercise or conversion was based on a conversion or exercise price of $0.75
per share.
Under the terms of the Notes, the warrants held by Willis Group and
Genesee, and the series A and series D preferred stock, those securities are
convertible or exercisable by any holder only to the extent that the number of
shares of common stock issuable upon the
52
<PAGE>
conversion of those securities, together with the number of shares of common
stock owned by the holder and its affiliates (but not including shares of common
stock underlying unconverted and unexercised portions of those securities or
securities containing similar provisions) would not exceed 4.9% of the then
outstanding common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. Thus, the number of shares of
common stock set forth in the table for each of Willis Group, Genesee, MCM
Partners and Advantage Fund Limited exceeds the number of shares of common stock
that Willis Group, Genesee, MCM Partners and Advantage could own beneficially at
any given time through their ownership of the Notes, the warrants and the series
A and series D preferred stock. However, this limitation does not prevent any of
Willis Group, Genesee, MCM Partners or Advantage from converting and selling
some of its holdings and then converting more of its holdings. By doing this,
any of Willis Group, Genesee, MCM Partners or Advantage could sell more than
4.9% of the outstanding common stock of Equalnet while never holding more than
4.9% at any one time.
53
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
Equalnet's officers, directors and persons who own more than 10% of a registered
class of Equalnet's equity securities to file Form 3, Form 4 and Form 5 reports
of ownership and changes in ownership with the SEC. Officers, directors and
greater than 10% shareholders are required by the regulation to furnish Equalnet
with copies of all Section 16(a) reports they file.
Based solely on a review of reports on Forms 3 and 4 and amendments
thereto furnished to Equalnet during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, Equalnet believes that during the fiscal year ended June 30, 1998, all
officers, directors and greater than 10% shareholders complied with all filing
requirements applicable to them, except that Dean H. Fisher and James T. Harris
failed to file timely Form 5s. Messrs. Fisher and Harris completed and filed
delinquent Form 5s on October 13, 1998.
PROPOSALS FOR NEXT ANNUAL MEETING
Any proposals of Voting Shareholders intended to be presented at the
annual meeting of shareholders of Equalnet with respect to fiscal year 1999 must
be received by Equalnet at its principal executive offices, 1250 Wood Branch
Park Drive, Houston, Texas 77079, a reasonable period of time prior to the date
of that meeting, which is currently scheduled to occur in December 1999, to be
included in the proxy statement and form of proxy relating to that meeting.
OTHER MATTERS
The management of Equalnet knows of no other matters that may come
before the Meeting. However, if any matters other than those referred to above
should properly come before the Meeting, the persons named in the enclosed proxy
intend to vote such proxy in accordance with their best judgment.
CAUTION AS TO FORWARD-LOOKING STATEMENTS
This Proxy Statement includes forward-looking statements, including
without limitation,
. statements regarding Equalnet's financial position, business
strategy, products, products under development, markets, budgets and
plans and objectives of management for future operations; and
. statements preceded by, followed by or that include the words
"expects," "anticipates" or similar expressions.
For those statements, Equalnet claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. Although Equalnet believes that the expectations of such forward-
looking statements are reasonable, Equalnet cannot assure you that such
expectations will prove to have been correct. Important factors that
54
<PAGE>
could cause actual results to differ materially from Equalnet's expectations
("Cautionary Statements") are disclosed elsewhere in this Proxy Statement,
including, without limitation, in conjunction with the forward-looking
statements included in this Proxy Statement, and under the heading "Cautionary
Statements" in documents that are incorporated herein by reference. All
subsequent written and oral forward-looking statements attributable to Equalnet,
or persons on its behalf, are expressly qualified in their entirety by the
Cautionary Statements.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the SEC by Equalnet (File
No. 0-025842) are incorporated in this Proxy Statement by reference, and we are
sending copies of such documents to Voting Shareholders entitled to vote at the
Meeting together with this Proxy Statement:
(1) Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended
June 30, 1998, filed with the SEC on June 17, 1999.
(2) Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
1998, filed with the SEC on November 20, 1998.
(3) Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1998, filed with the SEC on February 19, 1999.
(4) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999,
filed with the SEC on May 24, 1999.
(5) Current Report on Form 8-K filed with the SEC on September 21, 1998.
(6) Current Report on Form 8-K filed with the SEC on February 5, 1999.
(7) Current Report on Form 8-K filed with the SEC on May 24, 1999.
(8) Current Report on Form 8-K filed with the SEC on June 1, 1999.
(9) Definitive Proxy Statement on Schedule 14A filed with the SEC on June 15,
1998.
55
<PAGE>
ANNEX A
PROPOSED AMENDMENT TO EQUALNET'S
ARTICLES OF INCORPORATION
We will file Articles of Amendment to Equalnet's Articles of
Incorporation amending such Articles of Incorporation, Section 2 of
which Articles of Amendment is as follows:
"2. Effective as of the close of business on the date of filing
of this amendment to the Articles of Incorporation (the "Effective
Time"), the filing of this amendment shall effect a reverse stock
split (the "Reverse Stock Split") pursuant to which each four (4)
shares of common stock of the corporation issued and outstanding,
shall be combined into one (1) validly issued, fully paid and
nonassessable share of common stock of the corporation. The number of
authorized shares, the number of shares of treasury stock and the par
value of the common stock shall not be affected by the Reverse Stock
Split. Each stock certificate that prior to the Effective Time
represented shares of common stock shall, following the Effective
Time, represent the number of shares into which the shares of common
stock represented by such certificate shall be combined. Fractional
shares that occur as a result of the foregoing shall be purchased by
the corporation based upon the closing price reported for the common
stock on the Nasdaq SmallCap Market on the date of filing of this
amendment."
<PAGE>
ANNEX B
EQUALNET COMMUNICATIONS CORP.
STATEMENT OF RESOLUTION OF BOARD OF DIRECTORS ESTABLISHING AND
DESIGNATING SERIES D CONVERTIBLE PREFERRED STOCK AND FIXING THE
RIGHTS AND PREFERENCES OF SUCH SERIES
----------------------------
TO THE SECRETARY OF STATE
OF THE STATE OF TEXAS:
Equalnet Communications Corp., pursuant to the provisions of Articles
2.13 and 2.19B of the Texas Business Corporation Act, submits the following
statement for the purpose of establishing and designating a series of shares and
fixing and determining the relative rights and preferences thereof:
1. The name of the Corporation is Equalnet Communications Corp.
2. The following is a true and correct copy of an extract from the
minutes of a meeting of the Board of Directors of the Corporation held on March
26, 1999, and includes a true and correct copy of certain resolutions duly
adopted thereat.
RESOLVED, that pursuant to authority vested in the Board of Directors
by the Articles of Incorporation of the Corporation, the Board of Directors does
hereby provide that the Statement of Resolution of Board of Directors
Establishing and Designating Series D Convertible Preferred Stock and Fixing the
Rights and Preferences of Such Series that was filed with the Secretary of State
of the State of Texas on March 25, 1999 is cancelled and deleted in its entirety
and shall be replaced with the following:
SERIES D CONVERTIBLE PREFERRED STOCK
SECTION 1. DEFINITIONS. As used herein, the following terms shall
have the following meanings:
"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the subject person; for purposes
of this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
<PAGE>
"Aggregated Person" means, with respect to any person, any person
whose beneficial ownership of shares of Common Stock would be aggregated with
the beneficial ownership of shares of Common Stock by such person for purposes
of Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder.
"AMEX" means the American Stock Exchange, Inc.
"Average Market Price" for any date means the arithmetic average of
the Market Price on each of the five Trading Days, whether or not consecutive,
during the applicable Measurement Period having the lowest Market Prices.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Ceiling Price" means $1.228 (subject to equitable adjustments from
time to time on terms reasonably acceptable to the Majority Holders for stock
splits, stock dividends, combinations, recapitalizations, reclassifications and
similar events occurring or with respect to which "ex-" trading commences on or
after the date of filing of this Statement of Resolution with the Secretary of
State of the State of Texas); provided, however, that, notwithstanding any other
provision hereof, the Ceiling Price applicable to a particular conversion shall
be subject to reduction as provided in Section 10(b)(6); provided further,
however, that if a Registration Event occurs, then, in addition to any other
right or remedy of any holder of shares of Series D Convertible Preferred Stock
thereafter the Ceiling Price shall be permanently reduced on each Computation
Date by an amount equal to two percent of the amount that the Ceiling Price
otherwise would have been without any reduction pursuant to this proviso (pro
rated in the case of any Computation Date which is less than 30 days after a
Registration Event occurs or less than 30 days after another Computation Date).
"Common Stock" means the Common Stock, $.01 par value, of the
Corporation.
"Computation Date" means, if a Registration Event occurs, any of (1)
the date which is 30 days after such Registration Event occurs, if any
Registration Event is continuing on such date, (2) each date which is 30 days
after a Computation Date, if any Registration Event is continuing on such date,
and (3) the date on which all Registration Events cease to continue.
"Conversion Agent" means American Stock Transfer & Trust Company, or
its duly appointed successor, as conversion agent for the Series D Convertible
Preferred Stock pursuant to the Transfer Agent Instruction.
"Conversion Amount" initially shall be equal to $1,000.00, subject to
adjustment as herein provided.
"Conversion Date" means, with respect to each conversion of shares of
Series D Convertible Preferred Stock pursuant to Section 10, the date on which
the Conversion Notice relating to such conversion is actually received by the
Conversion
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Agent, whether by mail, courier, personal service, telephone line facsimile
transmission or other means.
"Conversion Notice" means a written notice, duly signed by or on
behalf of a holder of shares of Series D Convertible Preferred Stock, stating
the number of shares of Series D Convertible Preferred Stock to be converted in
the form specified in the Exchange Agreements.
"Conversion Percentage" means 85%; provided, however, that,
notwithstanding any other provision hereof, if a Registration Event occurs, then
such percentage stated above shall be permanently reduced by two percentage
points on each Computation Date (pro rated in the case of any Computation Date
which is less than 30 days after a Registration Event occurs or less than 30
days after another Computation Date).
"Conversion Price" means the lesser of:
(1) the product of (a) the Average Market Price for such date times
(b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that the Conversion Price applicable to a
particular conversion shall be subject to reduction as provided in Section
10(b)(6);
provided, further, however, that as long as (x) the Common Stock is
listed or quoted on the Nasdaq, the Nasdaq Small Cap, the NYSE or the AMEX and
(y) the Corporation is in compliance in all material respects with its
obligations to the holders of the Series D Convertible Preferred Stock, the
Conversion Price shall be no less than $0.75.
"Conversion Rate" shall have the meaning provided in Section 10(a).
"Converted Market Price" means, for any share of Series D Convertible
Preferred Stock as of any date of determination, an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would, at
the time of such determination, be issuable on conversion in accordance with
Section 10(a) of one share of Series D Convertible Preferred Stock and any
accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears if a Conversion Notice were given by the holder of
such share of Series D Convertible Preferred Stock on the date of such
determination (determined without regard to any limitation on conversion based
on beneficial ownership contained in Section 10(a)) times (y) the arithmetic
average of the Market Price of the Common Stock for the five consecutive Trading
Days ending on the Trading Day prior to the date of such determination.
"Corporation Optional Redemption Notice" means a notice given by the
Corporation to the holders of shares of Series D Convertible Preferred Stock
pursuant to
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Section 9(a) which notice shall state (1) that the Corporation is exercising its
right to redeem all or a portion of the outstanding shares of Series D
Convertible Preferred Stock pursuant to Section 9(a), (2) the number of shares
of Series D Convertible Preferred Stock held by such holder which are to be
redeemed, (3) the Redemption Price per share of Series D Convertible Preferred
Stock to be redeemed or the formula for determining the same, determined in
accordance herewith, and (4) the applicable Redemption Date.
"Current Price" means with respect to any date the arithmetic average
of the Market Price of the Common Stock on the 30 consecutive Trading Days
commencing 45 Trading Days before such date.
"Dividend Shares" means shares of Series D Convertible Preferred Stock
issued as dividends on outstanding shares of Series D Convertible Preferred
Stock in accordance with Section 5(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agreements" means the several Note Purchase and Exchange
Agreements by and between the Corporation and the original holders of shares of
Series D Convertible Preferred Stock pursuant to which the shares of Series D
Convertible Preferred Stock were issued.
"Final Redemption Date" means the date of redemption of shares of
Series D Convertible Preferred Stock pursuant to Section 9(b), determined in
accordance therewith.
"Final Redemption Notice" means a notice given by the Corporation to
each holder of Series D Convertible Preferred Stock pursuant to Section 9(b),
which notice shall state (1) that the Corporation is exercising its right to
redeem all outstanding shares of Series D Convertible Preferred Stock pursuant
to Section 9(b), (2) the number of shares of Series D Convertible Preferred
Stock held by such holder which are to be redeemed, (3) the Final Redemption
Price per share of Series D Convertible Preferred Stock held by such holder
which are to be redeemed, determined in accordance herewith, and (4) the Final
Redemption Date.
"Final Redemption Price" on any date means an amount equal to the
product obtained by multiplying (a) the sum of (1) $1,000 plus (2) an amount
equal to the accrued but unpaid dividends on the share of Series D Convertible
Preferred Stock to be redeemed to the Final Redemption Date, plus (3) an amount
equal to the accrued and unpaid interest on dividends in arrears on such share
of Series D Convertible Preferred Stock to the Final Redemption Date (determined
as provided in Section 5) times (b) the Premium Percentage.
"Inconvertibility Notice" shall have the meaning provided in Section
7(a)(2).
"Issuance Date" means the first date of original issuance of any
shares of Series D Convertible Preferred Stock.
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"Junior Dividend Stock" means, collectively, the Common Stock and any
other class or series of capital stock of the Corporation ranking junior as to
dividends to the Series D Convertible Preferred Stock.
"Junior Liquidation Stock" means the Common Stock or any other class
or series of the Corporation's capital stock ranking junior as to liquidation
rights to the Series D Convertible Preferred Stock.
"Liquidation Preference" means, for each share of Series D Convertible
Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the
date of final distribution to such holders, (ii) accrued and unpaid interest on
dividends in arrears (computed in accordance with Section 5(a)) to the date of
such distribution, and (iii) $1,000.00.
"Majority Holders" means at any time the holders of shares of Series D
Preferred Stock which shares constitute a majority of the outstanding shares of
Series D Preferred Stock.
"Market Price" of the Common Stock on any date means the lowest sale
price (regular way) for one share of Common Stock on such date on the first
applicable among the following: (a) the national securities exchange on which
the shares of Common Stock are listed which constitutes the principal securities
market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the
principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap,
if the Nasdaq SmallCap constitutes the principal securities market for the
Common Stock on such date, in any such case as reported by Bloomberg, L.P.;
provided, however, that if during any Measurement Period or other period during
which the Market Price is being determined:
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price for each day in such Measurement Period or such other period which
day is prior to the earlier of (1) the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins shall be reduced by multiplying the
Market Price (determined without regard to this proviso) for each such day
in such Measurement Period or such other period by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the earlier of (1) the record date
fixed for such determination and (2) the date on which ex-dividend trading
in the Common Stock with respect to such dividend or distribution begins
and the denominator of which shall be the sum of such number of shares and
the total number of shares constituting such dividend or other
distribution;
(ii) The Corporation shall issue rights or warrants to all holders of
its outstanding shares of Common Stock, or fix a record date for such
issuance, which rights or warrants entitle such holders (for a period
expiring within
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forty-five (45) days after the date fixed for the determination of
stockholders entitled to receive such rights or warrants) to subscribe for
or purchase shares of Common Stock at a price per share less than the
Market Price (determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is prior to the end
of such 45-day period, then the Market Price for each such day shall be
reduced so that the same shall equal the price determined by multiplying
the Market Price (determined without regard to this proviso) by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the record date fixed for the
determination of stockholders entitled to receive such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Market Price, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the close of business on such record date plus the total
number of additional shares of Common Stock so offered for subscription or
purchase. In determining whether any rights or warrants entitle the holders
to subscribe for or purchase shares of Common Stock at less than the Market
Price (determined without regard to this proviso), and in determining the
aggregate offering price of such shares of Common Stock, there shall be
taken into account any consideration received for such rights or warrants,
the value of such consideration, if other than cash, to be determined in
good faith by a resolution of the Board of Directors of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Market Price
each trade (regular way) on for each day in such Measurement Period or such
other period which day is prior to the earlier of (1) the date on which
such combination becomes effective and (2) the date on which trading in the
Common Stock on a basis which gives effect to such combination begins,
shall be proportionately increased;
(iv) The Corporation shall, by dividend or otherwise, distribute to
all holders of its Common Stock shares of any class of capital stock of the
Corporation (other than any dividends or distributions to which clause (i)
of this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or warrants referred
to in clause (ii) of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for each day in such Measurement
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Period or such other period which day is prior to the earlier of (1) the
record date for such distribution and (2) the date on which ex-dividend
trading in the Common Stock with respect to such distribution begins shall
be reduced so that the same shall be equal to the price determined by
multiplying the Market Price (determined without regard to this proviso) by
a fraction, the numerator of which shall be the Market Price (determined
without regard to this proviso) for such date less the fair market value
(as determined in good faith by resolution of the Board of Directors of the
Corporation) on such date of the portion of the Securities so distributed
or to be distributed applicable to one share of Common Stock and the
denominator of which shall be the Market Price (determined without regard
to this proviso) for such date; provided, however, that in the event the
then fair market value (as so determined) of the portion of the Securities
so distributed applicable to one share of Common Stock is equal to or
greater than the Market Price (determined without regard to this clause
(iv) of this proviso) for any such Trading Day, in lieu of the foregoing
adjustment, adequate provision shall be made so that the holders of shares
of Series D Preferred Stock shall have the right to receive upon conversion
of the shares of Series D Preferred Stock the amount of Securities the
holders of shares of Series D Preferred Stock would have received had the
holders of shares of Series D Preferred Stock converted the shares of
Series D Preferred Stock immediately prior to the record date for such
distribution. If the Board of Directors of the Corporation determines the
fair market value of any distribution for purposes of this clause (iv) by
reference to the actual or when issued trading market for any securities
comprising all or part of such distribution, it must in doing so consider
the prices in such market on the same day for which an adjustment in the
Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this proviso,
any dividend or distribution to which this clause (iv) is applicable that
also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which clause (i) or (ii) of this
proviso applies (or both), shall be deemed instead to be (1) a dividend or
distribution of the evidences of indebtedness, assets, shares of capital
stock, rights or warrants other than such shares of Common Stock or rights
or warrants to which clause (i) or (ii) of this proviso applies (and any
Market Price reduction required by this clause (iv) with respect to such
dividend or distribution shall then be made) immediately followed by (2) a
dividend or distribution of such shares of Common Stock or such rights or
warrants (and any further Market Price reduction required by clauses (i)
and (ii) of this proviso with respect to such dividend or distribution
shall then be made), except that any shares of Common Stock included in
such dividend or distribution shall not be deemed "outstanding at the close
of business on the date fixed for such determination" within the meaning of
clause (i) of this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash
in (or fix any record date for any such distribution), or (y) repurchase or
reacquire shares of its Common Stock (other than an Option Share Surrender)
for, in either case, an aggregate amount that, combined with (1) the
aggregate amount of any
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<PAGE>
other such distributions to all holders of its Common Stock made
exclusively in cash after the Issuance Date and within the 12 months
preceding the date of payment of such distribution, and in respect of which
no adjustment pursuant to this clause (v) has been made, (2) the aggregate
amount of any cash plus the fair market value (as determined in good faith
by a resolution of the Board of Directors of the Corporation) of
consideration paid in respect of any repurchase or other reacquisition by
the Corporation or any subsidiary of the Corporation of any shares of
Common Stock (other than an Option Share Surrender) made after the Issuance
Date and within the 12 months preceding the date of payment of such
distribution or making of such repurchase or reacquisition, as the case may
be, and in respect of which no adjustment pursuant to this clause (v) has
been made, and (3) the aggregate of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration payable in respect of any Tender Offer by the
Corporation or any of its subsidiaries for all or any portion of the Common
Stock concluded within the 12 months preceding the date of payment of such
distribution or completion of such repurchase or reacquisition, as the case
may be, and in respect of which no adjustment pursuant to clause (vi) of
this proviso has been made (such aggregate amount combined with the amounts
in clauses (1), (2) and (3) above being the "Combined Amount"), exceeds 10%
of the product of the Market Price (determined without regard to this
proviso) for any day in such Measurement Period or such other period which
day is prior to the earlier of (A) the record date with respect to such
distribution and (B) the date on which ex-dividend trading in the Common
Stock with respect to such distribution begins or the date of such
repurchase or reacquisition, as the case may be, times the number of shares
of Common Stock outstanding on such date, then, and in each such case, the
Market Price for each such day shall be reduced so that the same shall
equal the price determined by multiplying the Market Price (determined
without regard to this proviso) for such day by a fraction (i) the
numerator of which shall be equal to the Market Price (determined without
regard to this proviso) for such day less an amount equal to the quotient
of (x) the excess of such Combined Amount over such 10% and (y) the number
of shares of Common Stock outstanding on such day and (ii) the denominator
of which shall be equal to the Market Price (determined without regard to
this proviso) for such day; provided, however, that in the event the
portion of the cash so distributed or paid for the repurchase or
reacquisition of shares (determined per share based on the number of shares
of Common Stock outstanding) applicable to one share of Common Stock is
equal to or greater than the Market Price (determined without regard to
this clause (v) of this proviso) of the Common Stock for any such day, then
in lieu of the foregoing adjustment with respect to such day, adequate
provision shall be made so that the holders of shares of Series D Preferred
Stock shall have the right to receive upon conversion of shares of Series D
Preferred Stock the amount of cash the holders of shares of Series D
Preferred Stock would have received had the holders of shares of Series D
Preferred Stock converted shares of Series D Preferred Stock immediately
prior to the record date for such distribution or the payment date of such
repurchase, as applicable; or
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(vi) A Tender Offer made by the Corporation or any of its subsidiaries
for all or any portion of the Common Stock shall expire and such Tender
Offer (as amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined in good
faith by resolution of the Board of Directors of the Corporation) that
combined together with (1) the aggregate of the cash plus the fair market
value (as determined in good faith by a resolution of the Board of
Directors of the Corporation), as of the expiration of such Tender Offer,
of consideration payable in respect of any other Tender Offers, by the
Corporation or any of its subsidiaries for all or any portion of the Common
Stock expiring within the 12 months preceding the expiration of such Tender
Offer and in respect of which no adjustment pursuant to this clause (vi)
has been made, (2) the aggregate amount of any cash plus the fair market
value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration paid in respect of any
repurchase or other reacquisition by the Corporation or any subsidiary of
the Corporation of any shares of Common Stock (other than an Option Share
Surrender) made after the Issuance Date and within the 12 months preceding
the expiration of such Tender Offer and in respect of which no adjustment
pursuant to clause (v) of this proviso has been made, and (3) the aggregate
amount of any distributions to all holders of Common Stock made exclusively
in cash within 12 months preceding the expiration of such Tender Offer and
in respect of which no adjustment pursuant to clause (v) of this proviso
has been made, exceeds 10% of the product of the Market Price (determined
without regard to this proviso) for any day in such period times the number
of shares of Common Stock outstanding on such day, then, and in each such
case, the Market Price for such day shall be reduced so that the same shall
equal the price determined by multiplying the Market Price (determined
without regard to this proviso) for such day by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding on such
day multiplied by the Market Price (determined without regard to this
proviso) for such day and the denominator of which shall be the sum of (x)
the fair market value (determined as aforesaid) of the aggregate
consideration payable to stockholders based on the acceptance (up to any
maximum specified in the terms of the Tender Offer) of all shares validly
tendered and not withdrawn as of the last time tenders could have been made
pursuant to such Tender Offer (the "Expiration Time") (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) on such day times the Market Price
(determined without regard to this proviso) of the Common Stock on the
Trading Day next succeeding the Expiration Time. If the application of
this clause (vi) to any Tender Offer would result in an increase in the
Market Price (determined without regard to this proviso) for any trade, no
adjustment shall be made for such Tender Offer under this clause (vi) for
such day.
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"Maximum Share Amount" means 1,932,562 shares, (such amount to be
subject to equitable adjustment from time to time on terms reasonably acceptable
to the Majority Holders for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring or
with respect to which "ex-" trading commences after the date of filing this
Statement of Resolution with the Secretary of State of the State of Texas), of
Common Stock, or such greater number as permitted by the rules of the Nasdaq;
provided, however, that if for purposes of Rule 4460(i) of the Nasdaq (or any
successor or replacement provision of any stock exchange or stock market on
which the Common Stock is listed or traded) the (x) the issuance of the Notes
and the issuance of shares of Common Stock upon conversion thereof or (y) the
issuance of the common stock purchase warrants issued in connection with the
issuance of the Notes and the issuance of shares of Common Stock upon exercise
thereof is not required to be integrated with the issuance of the shares of
Series D Convertible Preferred Stock and the issuance of shares of Common Stock
upon conversion thereof, then in each such case the "Maximum Share Amount" shall
mean such greater number as equals the maximum number of shares of Common Stock
permitted by the rules of the Nasdaq (determined by pro rata allocation of any
increase thereof among the shares of Series D Convertible Preferred Stock based
on the number of shares of Series D Convertible Preferred Stock originally
represented by each certificate therefor) (such amount to be subject to
equitable adjustment in terms reasonably acceptable to the Majority Holders from
time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date of filing of this Statement of Resolution with the Secretary of State
of the State of Texas).
"Measurement Period" means, with respect to any date, the period of 25
consecutive Trading Days ending on the Trading Day prior to such date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"NYSE" means the New York Stock Exchange, Inc.
"Option Share Surrender" means the surrender of shares of Common Stock
to the Corporation in payment of the exercise price or tax obligations incurred
in connection with the exercise of a stock option granted by the Corporation to
any of its employees, directors or consultants.
"Optional Redemption Event" means the occurrence on or before August
31, 2001 of any one of the following events:
(1) For so long as the Common Stock is listed for trading on the
Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX, for any period of five
consecutive Trading Days there shall be no reported sale price of the
Common Stock on the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX;
(2) The inability for 45 or more days (whether or not consecutive) of
any holder of shares of Series D Convertible Preferred Stock to sell shares
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of Common Stock issued or issuable on conversion of shares of Series D
Convertible Preferred Stock pursuant to the Registration Statement for any
reason on each of such 45 days;
(3) The Corporation shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of shares of
Series D Convertible Preferred Stock as and when required by Section 10 or
shall default in the timely performance of its obligations under Section
12(d)(7) or (B) the Corporation shall fail or default in the timely
performance of any material obligation (other than as specifically set
forth elsewhere in this definition) to a holder of shares of Series D
Convertible Preferred Stock under the terms of this Statement of Resolution
or under the Registration Rights Agreements or any other agreement or
document entered into in connection with the issuance of shares of Series D
Convertible Preferred Stock, as such instruments may be amended from time
to time and such failure or default shall continue for ten business days
after notice thereof from any holder of shares of Series D Convertible
Preferred Stock to the Corporation;
(4) Any consolidation or merger of the Corporation with or into
another entity (other than a merger or consolidation of a subsidiary of the
Corporation into the Corporation or a wholly-owned subsidiary of the
Corporation) where the shareholders of the Corporation immediately prior to
such transaction do not collectively own at least 51% of the outstanding
voting securities of the surviving corporation of such consolidation or
merger immediately following such transaction or the common stock of such
surviving corporation is not listed for trading on the NYSE, the AMEX, the
Nasdaq or the Nasdaq SmallCap or any sale or other transfer of all or
substantially all of the assets of the Corporation; or
(5) The taking of any action, including any amendment to the
Corporation's Articles of Incorporation, without the consent of the
Majority Holders which materially and adversely affects the rights of any
holder of shares of Series D Convertible Preferred Stock.
"Optional Redemption Notice" means a notice from a holder of shares of
Series D Convertible Preferred Stock to the Corporation which states (1) that
the holder delivering such notice is thereby requiring the Corporation to redeem
shares of Series D Convertible Preferred Stock pursuant to Section 11, (2) in
general terms the Optional Redemption Event giving rise to such redemption, and
(3) the number of shares of Series D Convertible Preferred Stock held by such
holder which are to be redeemed.
"Optional Redemption Price" means the Premium Price on the applicable
redemption date.
"Parity Dividend Stock" means any class or series or the Corporation's
capital stock ranking, as to dividends, on a parity with the Series D
Convertible Preferred Stock.
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"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series D Convertible Preferred Stock.
"Premium Percentage" means 115%.
"Premium Price" means, for any share of Series D Convertible Preferred
Stock as of any date of determination, the product obtained by multiplying (a)
the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but
unpaid dividends on such share of Series D Convertible Preferred Stock to the
date of determination, plus (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 5) to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of shares of Series D
Convertible Preferred Stock pursuant to Section 9(a) determined in accordance
therewith.
"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; and
(2) the Converted Market Price on the applicable Redemption Date;
provided, however, that if in connection with any determination of the
Redemption Price the amount specified in clause (y) of the definition of
the term Converted Market Price is greater than 200% of the Ceiling Price
on the date as of which such amount is determined, then for purposes of
computing the Redemption Price in such instance, the amount otherwise
specified in clause (y) of the definition of the term Converted Market
Price shall be reduced by 20% of the amount by which (A) the amount
otherwise specified in clause (y) of the definition of the term Converted
Market Price exceeds (B) the Ceiling Price on the date as of which such
amount is determined.
"Registration Event" shall mean (1) the Registration Statement is not
effective within 105 days of the Issuance Date, if the Registration Statement is
on Form S-3, or 120 days after the Issuance Date, if the Registration Statement
is on Form S-1, (2) the Company fails to file the Registration Statement with
the SEC within 60 days after the Issuance Date, (3) the Company fails to submit
a request for acceleration of the effective date of the Registration Statement
in accordance with Section 3(a) of the Registration Rights Agreement, (4) the
Registration Statement shall cease to be available for use by any holder of
shares of Series D Convertible Preferred Stock who is named therein as a selling
stockholder for any reason (including, without limitation, by reason of an SEC
stop order, a material misstatement or omission in the Registration Statement or
the information contained in the Registration Statement having become outdated);
provided, however, that no Registration Event pursuant to this clause (4) shall
be deemed to occur prior to the SEC Effective Date, (5) the Common Stock is not
listed for trading on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq
SmallCap, or (6) a holder of shares of Series D Preferred Stock having become
unable to convert any shares of Series D Preferred Stock in accordance with
Section 10(a) for any reason (other than by reason
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of the 4.9% limitation on beneficial ownership set forth therein or a redemption
or repurchase thereof).
"Registration Rights Agreements" means the several Registration Rights
Agreements entered into between the Corporation and the original holders of the
shares of Series D Convertible Preferred Stock, as amended or modified from time
to time in accordance with their respective terms.
"Registration Statement" means the Registration Statement required to
be filed by the Corporation with the SEC pursuant to Section 2(a) of the
Registration Rights Agreements.
"SEC" means the United States Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is
first declared effective by the SEC.
"Senior Dividend Stock" means any class or series of capital stock of
the Corporation ranking senior as to dividends to the Series D Convertible
Preferred Stock.
"Senior Liquidation Stock" means any class or series of capital stock
of the Corporation ranking senior as to liquidation rights to the Series D
Convertible Preferred Stock.
"Series D Convertible Preferred Stock" means the Series D Convertible
Preferred Stock, $.01 par value, of the Corporation.
"Share Limitation Redemption Date" shall mean each date on which the
Corporation is required to redeem shares of Series D Convertible Preferred Stock
as provided in Section 7(a).
"Share Limitation Redemption Price" means the Premium Price on the
applicable Share Limitation Redemption Date.
"Stockholder Approval" shall mean the approval by a majority of the
votes cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Corporation (duly convened at which a quorum
was present), or a written consent of holders of shares of Common Stock entitled
to such number of votes given without a meeting, of the issuance by the
Corporation of 20% or more of the Common Stock of the Corporation outstanding on
the Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series D Convertible Preferred Stock, as and
to the extent required under Rule 4460(i) of the Nasdaq as in effect from time
to time or any successor provision.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the
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principal securities market for the Common Stock is open for general trading of
securities.
"Transfer Agent Instruction" means the Transfer Agent Instruction from
the Corporation to the Conversion Agent for the benefit of the holders from time
to time of shares of Series D Convertible Preferred Stock, provided for in the
Exchange Agreements.
SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series D Convertible Preferred Stock", and the number of
shares constituting the Series D Convertible Preferred Stock shall be 6,500, and
shall not be subject to increase. Of the authorized shares of Series D
Convertible Preferred Stock, 1,500 shares may be issued only as dividends on the
outstanding shares of Series D Convertible Preferred Stock.
SECTION 3. SERIES D PREFERRED STOCK CAPITAL. The amount to be
represented in the Series D Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series D Convertible
Preferred Stock shall be the greater of (i) the Premium Price and (ii) the
Converted Market Price. The Corporation shall take such action as may be
required to maintain the amount required by this Section 3 to be represented in
stated capital for the Series D Convertible Preferred Stock capital not less
frequently than monthly.
SECTION 4. RANK. All Series D Convertible Preferred Stock shall rank
(i) senior to the Common Stock, now or hereafter issued, as to payment of
dividends and distribution of assets upon liquidation, dissolution, or winding
up of the Corporation, whether voluntary or involuntary, (ii) junior to the
Series A Convertible Preferred Stock, Series B Senior Convertible Preferred
Stock and Series C Convertible Preferred Stock of the Corporation, both as to
payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary
and (iii) senior to any additional series of the class of Preferred Stock which
series the Board of Directors may from time to time authorize and any additional
class of preferred stock (or series of preferred stock of such class) which the
Board of Directors or the stockholders may from time to time authorize in
accordance herewith.
SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of
Series D Convertible Preferred Stock shall be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $60.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series D Convertible Preferred Stock and shall be payable
quarterly on February 15, May 15, August 15, and November 15 of each year
commencing November 15, 1998 (except that if any such date is a Saturday,
Sunday, or legal holiday, then such dividend shall be payable on the next
succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of
record as they appear on the stock books of the Corporation on such record
dates, not more than 20 nor less than 10 days preceding the payment dates for
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such dividends, as shall be fixed by the Board. Dividends on the Series D
Convertible Preferred Stock shall be paid in cash or, subject to the limitations
in Section 5(b) hereof, Dividend Shares or any combination of cash and Dividend
Shares, at the option of the Corporation as hereinafter provided. The amount of
the dividends payable per share of Series D Convertible Preferred Stock for each
quarterly dividend period shall be computed by dividing the annual dividend
amount by four. The amount of dividends payable for the initial dividend period
and any period shorter than a full quarterly dividend period shall be computed
on the basis of a 360-day year of twelve 30-day months. Dividends not paid on a
payment date, whether or not such dividends have been declared, will bear
interest at the rate of 14% per annum until paid (or such lesser rate as shall
be the maximum rate allowable by applicable law). No dividends or other
distributions, other than the dividends payable solely in shares of any Junior
Dividend Stock, shall be paid or set apart for payment on any shares of Junior
Dividend Stock, and no purchase, redemption, or other acquisition shall be made
by the Corporation of any shares of Junior Dividend Stock (except for Option
Share Surrenders), unless and until all accrued and unpaid dividends on the
Series D Convertible Preferred Stock and interest on dividends in arrears at the
rate specified herein shall have been paid or declared and set apart for
payment.
If at any time any dividend on any Senior Dividend Stock shall be in
arrears, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series D Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any Parity
Dividend Stock for any period unless all accrued but unpaid dividends (and
interest on dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series D Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series D Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series D Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series D
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series D Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series D
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 5 shall not
be deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
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(b) If the Corporation elects in the exercise of its sole discretion
to issue Dividend Shares in payment of dividends on the Series D Convertible
Preferred Stock in respect of any dividend payment date, the Corporation shall
issue and deliver, or cause to be issued and delivered, by the third Trading Day
after such dividend payment date to each holder of shares of Series D
Convertible Preferred Stock a certificate representing the number of whole
Dividend Shares arrived at by dividing (x) the total amount of cash dividends
such holder would be entitled to receive if the aggregate dividends on the
Series D Convertible Preferred Stock held by such holder which are being paid in
Dividend Shares were being paid in cash by (y) $1,000.00; provided, however,
that if certificates representing Dividend Shares are issued and delivered to
holders of Series D Convertible Preferred Stock subsequent to the third Trading
Day after a dividend payment date, the amount so divided into such total amount
of cash dividends will be reduced by $10.00 for each Trading Day after the third
Trading Day following such dividend payment date to the date of delivery of
Dividend Shares. No fractional Dividend Shares shall be issued in payment of
dividends. In lieu thereof, the Corporation shall pay cash in an amount equal
to the balance of such dividend which is not paid in Dividend Shares. The
Corporation shall not exercise its right to issue Dividend Shares in payment of
dividends on Series D Convertible Preferred Stock if:
(i) the number of shares of Series D Convertible Preferred Stock at
the time authorized, unissued and unreserved for all purposes, or held in
the Corporation's treasury, is insufficient to permit the conversion of
such Dividend Shares into shares of Common Stock;
(ii) the issuance or delivery of Dividend Shares as a dividend payment
or the issuance of shares of Common Stock upon conversion of such Dividend
Shares by the holder thereof would require registration with or approval of
any governmental authority under any law or regulation, and such
registration or approval has not been effected or obtained or is not in
effect or the Registration Statement is unavailable for use by such holder
for the resale of such shares of Common Stock; provided, however, that this
limitation shall not be deemed to be applicable at any time prior to the
date which is 105 days after the Issuance Date, if the Registration
Statement is on Form S-3, or 120 days after the Issuance Date, if the
Registration Statement is on Form S-1, if this limitation otherwise would
be applicable solely because the Registration Statement shall not yet have
been declared effective, so long as the Corporation shall be in compliance
in all material respects with its obligations under the Registration Rights
Agreements;
(iii) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock
is then listed; or have not been approved for quotation if the Common Stock
is traded in the over-the-counter market;
(iv) the number of shares of Common Stock registered pursuant to
Section 2(a) of the Registration Rights Agreements for resale upon issuance
upon conversion of Dividend Shares shall be sufficient (after taking into
account the
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number of shares of Common Stock issued or issuable upon conversion of
Dividend Shares theretofore issued) to prevent the resale pursuant to the
Registration Statement of the shares of Common Stock issuable upon
conversion of such Dividend Shares;
(v) the shares of Common Stock issuable upon conversion of such
Dividend Shares (A) cannot be sold or transferred without restriction by
unaffiliated holders who receive such Dividend Shares or (B) are no longer
listed on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; or
(vi) an Optional Redemption Event shall have occurred and any holder
of shares of Series D Convertible Preferred Stock shall have exercised
optional redemption rights under Section 11 by reason of such Optional
Redemption Event and the Corporation shall not have paid the Optional
Redemption Price to each holder.
Dividend Shares issued in payment of dividends on Series D Convertible
Preferred Stock pursuant to this Section and shares of Common Stock issuable
upon conversion of such Dividend Shares shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of the
Corporation; the issuance and delivery thereof is hereby authorized; and the
delivery will be, and for all purposes shall be deemed to be, payment in full of
the cumulative dividends to which holders are entitled on the applicable
dividend payment date.
(c) Neither the Corporation nor any subsidiary of the Corporation
shall redeem, repurchase or otherwise acquire in any one transaction or series
of related transactions any shares of Common Stock, Junior Dividend Stock or
Junior Liquidation Stock if the number of shares so repurchased, redeemed or
otherwise acquired in such transaction or series of related transactions
(excluding any Option Share Surrender) is more than either (x) 5.0% of the
number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation
Stock, as the case may be, outstanding immediately prior to such transaction or
series of related transactions or (y) 1% of the number of shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be,
outstanding immediately prior to such transaction or series of related
transactions if such transaction or series of related transactions is with any
one person or group of affiliated persons, unless the Corporation or such
subsidiary offers to purchase for cash from each holder of shares of Series D
Convertible Preferred Stock at the time of such redemption, repurchase or
acquisition the same percentage of such holder's shares of Series D Convertible
Preferred Stock as the percentage of the number of outstanding shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to
be so redeemed, repurchased or acquired at a purchase price per share of Series
D Convertible Preferred Stock equal to the greater of (i) the Premium Price in
effect on the date of purchase pursuant to this Section 5(c) and (ii) the
Converted Market Price on the date of purchase pursuant to this Section 5(c);
provided, however, that if in connection with any determination of the purchase
price payable pursuant to this Section 5(c) the amount specified in clause (y)
of the definition of the term Converted Market Price is greater than 200% of the
Ceiling Price on the date as of which such amount is
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determined, then for purposes of computing the purchase price payable pursuant
to this Section 5(c) in such instance, the amount otherwise specified in clause
(y) of the definition of the term Converted Market Price shall be reduced by 20%
of the amount by which (A) the amount otherwise specified in clause (y) of the
definition of the term Converted Market Price exceeds (B) the Ceiling Price on
the date as of which such amount is determined.
(d) Neither the Corporation nor any subsidiary of the Corporation
shall (1) make any Tender Offer for outstanding shares of Common Stock, unless
the Corporation contemporaneously therewith makes an offer, or (2) enter into an
agreement regarding a Tender Offer for outstanding shares of Common Stock by any
person other than the Corporation or any subsidiary of the Corporation, unless
such person agrees with the Corporation to make an offer, in either such case to
each holder of outstanding shares of Series D Convertible Preferred Stock to
purchase for cash at the time of purchase in such Tender Offer the same
percentage of shares of Series D Convertible Preferred Stock held by such holder
as the percentage of outstanding shares of Common Stock offered to be purchased
in such Tender Offer at a price per share of Series D Convertible Preferred
Stock equal to the greater of (i) the Premium Price in effect on the date of
purchase pursuant to this Section 5(d) and (ii) the Converted Market Price on
the date of purchase pursuant to this Section 5(d).
SECTION 6. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series D Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series D Convertible
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; provided, however, that such rights shall accrue to the
holders of Series D Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preference of the holders
of Senior Liquidation Stock are fully met. After the liquidation preferences of
the Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series D Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
Liquidation Preference of the shares of Series D Convertible Preferred Stock and
the liquidation preference of the shares of Parity Liquidation Stock, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation. Neither a consolidation or merger of
the Corporation with another corporation nor a sale or transfer of all or part
of the Corporation's assets for cash, securities, or other property in and of
itself will be considered a liquidation, dissolution or winding up of the
Corporation.
SECTION 7. MANDATORY REDEMPTION.
(a) MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1)
Notwithstanding any other provision herein, unless the Stockholder Approval
shall
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have been obtained from the stockholders of the Corporation or waived by
the Nasdaq, so long as the Common Stock is listed on the Nasdaq, the Nasdaq
SmallCap, the NYSE or the AMEX, the Corporation shall not be required to issue
upon conversion of shares of Series D Convertible Preferred Stock pursuant to
Section 10 more than the Maximum Share Amount. The Maximum Share Amount shall
be allocated among the shares of Series D Convertible Preferred Stock at the
time of initial issuance thereof pro rata based on the initial issuance of 5,000
shares of Series D Convertible Preferred Stock. Each certificate for shares of
Series D Convertible Preferred Stock initially issued shall bear a notation as
to the number of shares constituting the portion of the Maximum Share Amount
allocated to the shares of Series D Convertible Preferred Stock represented by
such certificate for purposes of conversion thereof. The Corporation shall
maintain records which show the number of shares of Series D Convertible
Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on
the shares of Series D Convertible Preferred Stock represented by each
certificate, which records shall be controlling in the absence of manifest
error. Each such additional share of Series D Convertible Preferred Stock shall
be allocated a portion of the Maximum Share Amount allocated to the shares of
Series D Convertible Preferred Stock in respect of which such additional shares
of Series D Convertible Preferred Stock are issued as a dividend and the
certificate for such additional shares of Series D Convertible Preferred Stock
shall bear a notation as to the certificate number of the share of Series D
Convertible Preferred Stock in respect of which such additional share of Series
D Convertible Preferred Stock is issued as a dividend. Upon surrender of any
certificate for shares of Series D Convertible Preferred Stock for transfer or
re-registration thereof (or, at the option of the holder, for conversion
pursuant to Section 10(a) of less than all of the shares of Series D Convertible
Preferred Stock represented thereby), the Corporation shall make a notation on
the new certificate issued upon such transfer or re-registration or evidencing
such unconverted shares, as the case may be, as to the remaining number of
shares of Common Stock from the Maximum Share Amount remaining available for
conversion of the shares of Series D Convertible Preferred Stock evidenced by
such new certificate. If any certificate for shares of Series D Convertible
Preferred Stock is surrendered for split-up into two or more certificates
representing an aggregate number of shares of Series D Convertible Preferred
Stock equal to the number of shares of Series D Convertible Preferred Stock
represented by the certificate so surrendered (as reduced by any contemporaneous
conversion of shares of Series D Convertible Preferred Stock represented by the
certificate so surrendered), each certificate issued on such split-up shall bear
a notation of the portion of the Maximum Share Amount allocated thereto
determined by pro rata allocation from among the remaining portion of the
Maximum Share Amount allocated to the certificate so surrendered. If any shares
of Series D Convertible Preferred Stock represented by a single certificate are
converted in full pursuant to Section 10, all of the portion of the Maximum
Share Amount allocated to such shares of Series D Convertible Preferred Stock
which remains unissued after such conversion shall be re-allocated pro rata to
the outstanding shares of Series D Convertible Preferred Stock held of record by
the holder of record at the close of business on the date of such conversion of
the shares of Series D Convertible Preferred Stock so converted, and if there
shall be no other shares of Series D Convertible Preferred Stock held of record
by such holder at the close of business on such date, then such portion of the
Maximum Share Amount shall be
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allocated pro rata among the shares of Series D Convertible Preferred Stock
outstanding on such date.
(2) The Corporation shall promptly, but in no event later than five
business days after the occurrence, give notice to each holder of shares of
Series D Convertible Preferred Stock (by telephone line facsimile transmission
at such number as such holder has specified in writing to the Corporation for
such purposes or, if such holder shall not have specified any such number, by
overnight courier or first class mail, postage prepaid, at such holder's address
as the same appears on the stock books of the Corporation) and any holder of
shares of Series D Convertible Preferred Stock may at any time after the
occurrence give notice to the Corporation, in either case, if at any time on or
after December 16, 1998 and on or prior to August 31, 2001 on any ten Trading
Days within any period of 20 consecutive Trading Days the Corporation would not
have been required to convert shares of Series D Convertible Preferred Stock of
such holder in accordance with Section 10(a) as a consequence of the limitations
set forth in Section 7(a)(1) had the shares of Series D Convertible Preferred
Stock held by such holder been converted in full into Common Stock on each such
day, determined without regard to the limitation, if any, on such holder
contained in the proviso to the second sentence of Section 10(a) (any such
notice, whether given by the Corporation or a holder, an "Inconvertibility
Notice"). If the Corporation shall have given or been required to give any
Inconvertibility Notice, or if a holder shall have given any Inconvertibility
Notice, then within ten Trading Days after such Inconvertibility Notice is given
or was required to be given, the holder receiving or giving, as the case may be,
such Inconvertibility Notice shall have the right by written notice to the
Corporation (which written notice may be contained in the Inconvertibility
Notice given by such holder) to direct the Corporation to redeem the portion of
such holder's outstanding shares of Series D Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series D
Convertible Preferred Stock) as shall not, on the business day prior to the date
of such redemption, be convertible into shares of Common Stock by reason of the
limitations set forth in Section 7(a)(1) (determined without regard to the
limitation, if any, on beneficial ownership of Common Stock by such holder
contained in the proviso to the second sentence of Section 10(a)), within ten
business days after such holder so directs the Corporation, at a price per share
equal to the Share Limitation Redemption Price. If a holder of shares of Series
D Convertible Preferred Stock directs the Corporation to redeem outstanding
shares of Series D Convertible Preferred Stock and, prior to the date the
Corporation is required to redeem such shares of Series D Convertible Preferred
Stock, the Corporation would have been able, within the limitations set forth in
Section 7(a)(1), to convert all of such holder's shares of Series D Convertible
Preferred Stock (determined without regard to the limitation, if any, on
beneficial ownership of shares of Common Stock by such holder contained in the
proviso to the second sentence of Section 10(a)) on any ten Trading Days within
any period of 15 consecutive Trading Days commencing after the period of 20
consecutive Trading Days which gave rise to the applicable Inconvertibility
Notice from the Corporation or such holder of shares of Series D Convertible
Preferred Stock, as the case may be, had such holder exercised its right to
convert all of such holder's shares of Series D Convertible Preferred Stock into
Common Stock on each of such ten Trading Days within such 15
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Trading Day period, then the Corporation shall not be required to redeem any
shares of Series D Convertible Preferred Stock by reason of such
Inconvertibility Notice.
(3) Notwithstanding the giving of any Inconvertibility Notice by the
Corporation to the holders of Series D Convertible Preferred Stock pursuant to
Section 7(a)(2) or the giving or the absence of any notice by the holders of the
Series D Convertible Preferred Stock in response thereto or any redemption of
shares of Series D Convertible Preferred Stock pursuant to Section 7(a)(2),
thereafter the provisions of Section 7(a)(2) shall continue to be applicable on
any occasion unless the Stockholder Approval shall have been obtained from the
stockholders of the Corporation or waived by the Nasdaq.
(4) On each Share Limitation Redemption Date (or such later date as a
holder of shares of Series D Convertible Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series D Convertible Preferred
Stock being redeemed pursuant to this Section 7(a)), the Corporation shall make
payment in immediately available funds of the applicable Share Limitation
Redemption Price to such holder of shares of Series D Convertible Preferred
Stock to be redeemed to or upon the order of such holder as specified by such
holder in writing to the Corporation at least one business day prior to such
Share Limitation Redemption Date. Upon redemption of less than all of the
shares of Series D Convertible Preferred Stock evidenced by a particular
certificate, promptly, but in no event later than three business days after
surrender of such certificate to the Corporation, the Corporation shall issue a
replacement certificate for the shares of Series D Convertible Preferred Stock
evidenced by such certificate which have not been redeemed. Only whole shares
of Series D Convertible Preferred Stock may be redeemed.
(b) NO OTHER MANDATORY REDEMPTION. The shares of Series D Convertible
Preferred Stock shall not be subject to mandatory redemption by the Corporation
except as provided in Section 7(a).
SECTION 8. NO SINKING FUND. The shares of Series D Convertible
Preferred Stock shall not be subject to the operation of a purchase, retirement
or sinking fund.
SECTION 9. OPTIONAL REDEMPTION.
(a) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall be
in compliance in all material respects with its obligations to the holders of
shares of Series D Convertible Preferred Stock (including, without limitation,
its obligations under the Exchange Agreement, the Registration Rights Agreements
and the provisions of this Statement of Resolution), (2) on the date the
Corporation Optional Redemption Notice is given and at all times until the
Redemption Date, the Registration Statement is effective and available for use
by each holder of shares of Series D Convertible Preferred Stock for the resale
of shares of Common Stock acquired by such holder upon conversion of all shares
of Series D Convertible Preferred Stock held by such holder and (3) no Optional
Redemption Event shall have occurred with respect to which, on the date a
Corporation
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Optional Redemption Notice is given or on the Redemption Date, any holder of
shares of Series D Convertible Preferred Stock shall have exercised optional
redemption rights under Section 11 by reason of such Optional Redemption Event
and the Corporation shall not have paid the Optional Redemption Price to such
holder, then the Corporation shall have the right, exercisable by giving a
Corporation Optional Redemption Notice not less than 30 days or more than 60
days prior to the Redemption Date to all holders of record of the shares of
Series D Convertible Preferred Stock, at any time to redeem all or from time to
time to redeem any part of the outstanding shares of Series D Convertible
Preferred Stock in accordance with this Section 9(a). If the Corporation shall
redeem less than all outstanding shares of Series D Convertible Preferred Stock,
such redemption shall be made as nearly as practical pro rata from all holders
of shares of Series D Convertible Preferred Stock. Any Corporation Optional
Redemption Notice under this Section 9(a) shall be given to the holders of
record of the shares of Series D Convertible Preferred Stock at their addresses
appearing on the records of the Corporation; provided, however, that any failure
or defect in the giving of such notice to any such holder shall not affect the
validity of notice to or the redemption of shares of Series D Convertible
Preferred Stock of any other holder. On the Redemption Date (or such later date
as a holder of shares of Series D Convertible Preferred Stock surrenders to the
Corporation the certificate(s) for shares of Series D Convertible Preferred
Stock to be redeemed pursuant to this Section 9(a)), the Corporation shall make
payment of the applicable Redemption Price to each holder of shares of Series D
Convertible Preferred Stock to be redeemed in immediately available funds to
such account as specified by such holder in writing to the Corporation at least
one business day prior to the Redemption Date. A holder of shares of Series D
Convertible Preferred Stock to be redeemed pursuant to this Section 9(a) shall
be entitled to convert such shares of Series D Convertible Preferred Stock in
accordance with Section 10(a) through the day prior to the Redemption Date and
(2) if the Corporation shall fail to pay the Redemption Price of any share of
Series D Convertible Preferred Stock when due, at any time after the due date
thereof until such date as the Corporation pays the Redemption Price of such
share of Series D Convertible Preferred Stock. No share of Series D Convertible
Preferred Stock as to which the holder exercises the right of conversion
pursuant to Section 10 or the optional redemption right pursuant to Section 11
may be redeemed by the Corporation pursuant to this Section 9(a) on or after the
date of exercise of such conversion right or optional redemption right, as the
case may be, regardless of whether the Corporation Optional Redemption Notice
shall have been given prior to, or on or after, the date of exercise of such
conversion right or optional redemption right, as the case may be.
(b) FINAL REDEMPTION. The Corporation shall have the right to redeem
all, but not less than all, outstanding shares of Series D Convertible Preferred
Stock at any time on or after the date which is 1,080 days after the Issuance
Date so long as (1) the Corporation shall be in compliance in all material
respects with its obligations to the holders of the Series D Convertible
Preferred Stock (including, without limitation, its obligations under the
Exchange Agreements, the Registration Rights Agreements and this Statement of
Resolution) and (2) no Optional Redemption Event shall have occurred with
respect to which on the date a Final Redemption Notice is to be given or on the
Final Redemption Date, any holder of shares of Series D Convertible Preferred
Stock shall have exercised optional redemption rights under Section 11 by reason
of such Optional
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Redemption Event and the Corporation shall not have paid the Optional Redemption
Price to such holder. In order to exercise its rights under this Section 9(b),
the Corporation shall give a Final Redemption Notice not less than 20 or more
than 40 Trading Days prior to the Final Redemption Date to all holders of record
of the shares of Series D Convertible Preferred Stock. Any Final Redemption
Notice shall be given to the holders of record of the shares of Series D
Convertible Preferred Stock by telephone line facsimile transmission to such
number as shown on the records of the Corporation for such purpose; provided,
however, that any failure or defect in the giving of such notice to any such
holder shall not affect the validity of notice to or the redemption of shares of
Series D Convertible Preferred Stock of any other holder. On the Final
Redemption Date (or such later date as a holder of shares of Series D
Convertible Preferred Stock surrenders to the Corporation the certificate(s) for
shares of Series D Convertible Preferred Stock to be redeemed pursuant to this
Section 9(b)), the Corporation shall make payment of the applicable Final
Redemption Price to each holder of shares of Series D Convertible Preferred
Stock to be redeemed in immediately available funds to such account as specified
by such holder in writing to the Corporation at least one business day prior to
the Final Redemption Date. A holder of shares of Series D Convertible Preferred
Stock to be redeemed pursuant to this Section 9(b) shall be entitled to convert
such shares of Series D Convertible Preferred Stock in accordance with Section
10 through the day prior to the Final Redemption Date and (2) if the Corporation
shall fail to pay the Final Redemption Price of any share of Series D
Convertible Preferred Stock when due, at any time after the due date thereof
until such date as the Corporation pays the Final Redemption Price of such share
of Series D Convertible Preferred Stock to such holder. No share of Series D
Convertible Preferred Stock as to which a holder exercises the right of
conversion pursuant to Section 10 or the optional redemption right pursuant to
Section 11 may be redeemed by the Corporation pursuant to this Section 9(b) on
or after the date of exercise of such conversion right or optional redemption
right, as the case may be, regardless of whether the Final Redemption Notice
shall have been given prior to, or on or after, the date of exercise of such
conversion right or optional redemption right, as the case may be. So long as
during the period from the Issuance Date through the date the Corporation pays
the Final Redemption Price the Corporation shall not have commenced a voluntary
case or other proceeding, and no person shall have commenced an involuntary case
or other proceeding against the Corporation, in any such case seeking
liquidation, reorganization or other relief with respect to the Corporation or
its debts under any bankruptcy, insolvency, receivership, moratorium, or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian, or other similar official of the Corporation or
any substantial part of the Corporation's property, the Corporation shall not
have consented to any such relief or to the appointment of or taking possession
by any such official in an involuntary case or other proceeding commenced
against it, and the Corporation shall not have made a general assignment for the
benefit of creditors, then the Corporation shall have the right, exercisable by
a statement to such effect in the Final Redemption Notice, to pay the Final
Redemption Price by the issuance to the holders of shares of Series D
Convertible Preferred Stock to be redeemed of shares of Common Stock, valued for
this purpose at the Conversion Price on the Final Redemption Date, in lieu of
payment of cash, so long as all shares of Common Stock to
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<PAGE>
be so issued would, if issued as dividends on shares of Series D Convertible
Preferred Stock, meet the criteria in clauses (i) through (vi) of Section 5(b).
(c) NO OTHER OPTIONAL REDEMPTION. The shares of Series D Convertible
Preferred Stock shall not be subject to redemption at the option of the
Corporation except as provided in Sections 9(a) and 9(b).
SECTION 10. CONVERSION.
(a) CONVERSION AT OPTION OF HOLDER. The holders of the Series D
Convertible Preferred Stock may at any time on or after the earlier of (x) the
SEC Effective Date and (y) the date which is 90 days after the Issuance Date
convert at any time all or from time to time any part of their shares of Series
D Convertible Preferred Stock into fully paid and nonassessable shares of Common
Stock and such other securities and property as herein provided. Each share of
Series D Convertible Preferred Stock may be converted at the office of the
Conversion Agent or at such other additional office or offices, if any, as the
Board of Directors may designate, into such number of fully paid and
nonassessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share) determined by dividing (x) the sum of (i) the
Conversion Amount, (ii) accrued but unpaid dividends to the applicable
Conversion Date on the share of Series D Convertible Preferred Stock being
converted, and (iii) accrued but unpaid interest on the dividends on the share
of Series D Convertible Preferred Stock being converted in arrears to the
applicable Conversion Date at the rate provided in Section 5 by (y) the
Conversion Price for such Conversion Date (the "Conversion Rate"); provided,
however, that in no event shall any holder of shares of Series D Convertible
Preferred Stock be entitled to convert any shares of Series D Convertible
Preferred Stock in excess of that number of shares of Series D Convertible
Preferred Stock upon conversion of which the sum of (1) the number of shares of
Common Stock beneficially owned by such holder and all Aggregated Persons of
such holder (other than shares of Common Stock deemed beneficially owned through
the ownership of unconverted shares of Series D Convertible Preferred Stock) and
(2) the number of shares of Common Stock issuable upon the conversion of the
number of shares of Series D Convertible Preferred Stock with respect to which
the determination in this proviso is being made, would result in beneficial
ownership by such holder and all Aggregated Persons of such holder of more than
4.9% of the outstanding shares of Common Stock. For purposes of the proviso to
the immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and Regulation 13D-G
thereunder, except as otherwise provided in clause (1) of the proviso to the
immediately preceding sentence.
(b) OTHER PROVISIONS. (1) Notwithstanding anything in this Section
10(b) to the contrary, no change in the Conversion Amount pursuant to this
Section 10(b) shall actually be made until the cumulative effect of the
adjustments called for by this Section 10(b) since the date of the last change
in the Conversion Amount would change the Conversion Amount by more than 1%.
However, once the cumulative effect would result in such a change, then the
Conversion Amount shall actually be changed to reflect all adjustments called
for by this Section 10(b) and not previously made.
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<PAGE>
Notwithstanding anything in this Section 10(b), no change in the Conversion
Amount shall be made that would result in the price at which a share of Series D
Convertible Preferred Stock is converted being less than the par value of the
Common Stock into which shares of Series D Convertible Preferred Stock are at
the time convertible.
(2) The holders of shares of Series D Convertible Preferred Stock at
the close of business on the record date for any dividend payment to holders of
Series D Convertible Preferred Stock shall be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such dividend
payment date; provided, however, that the holder of shares of Series D
Convertible Preferred Stock surrendered for conversion during the period between
the close of business on any record date for a dividend payment and the opening
of business on the corresponding dividend payment date must pay to the
Corporation, within five days after receipt by such holder, an amount equal to
the dividend payable on such shares on such dividend payment date if such
dividend is paid by the Corporation to such holder. A holder of shares of
Series D Convertible Preferred Stock on a record date for a dividend payment who
(or whose transferee) tenders any of such shares for conversion into shares of
Common Stock on or after such dividend payment date will receive the dividend
payable by the Corporation on such shares of Series D Convertible Preferred
Stock on such date, and the converting holder need not make any payment of the
amount of such dividend in connection with such conversion of shares of Series D
Convertible Preferred Stock. Except as provided above, no adjustment shall be
made in respect of cash dividends on Common Stock or Series D Convertible
Preferred Stock that may be accrued and unpaid at the date of surrender of
shares of Series D Convertible Preferred Stock.
(3) (A) The right of the holders of Series D Convertible Preferred
Stock to convert their shares shall be exercised by giving (which may be done by
telephone line facsimile transmission) a Conversion Notice to the Conversion
Agent. If a holder of Series D Convertible Preferred Stock elects to convert
any shares of Series D Convertible Preferred Stock in accordance with Section
10(a), such holder shall not be required to surrender the certificate(s)
representing such shares of Series D Convertible Preferred Stock to the
Corporation unless all of the shares of Series D Convertible Preferred Stock
represented thereby are so converted. Each holder of shares of Series D
Convertible Preferred Stock and the Corporation shall maintain records showing
the number of shares so converted and the dates of such conversions or shall use
such other method, satisfactory to such holder and the Corporation, so as to not
require physical surrender of such certificates upon each such conversion. In
the event of any dispute or discrepancy, such records of the Corporation shall
be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any shares of Series D Convertible Preferred
Stock evidenced by a particular certificate therefor are converted as aforesaid,
the holder of Series D Convertible Preferred Stock may not transfer the
certificate(s) representing such shares of Series D Convertible Preferred Stock
unless such holder first physically surrenders such certificate(s) to the
Corporation, whereupon the Corporation will forthwith issue and deliver upon the
order of such holder of shares of Series D Convertible Preferred Stock new
certificate(s) of like tenor, registered as such
25
<PAGE>
holder of shares of Series D Convertible Preferred Stock (upon payment by such
holder of shares of Series D Convertible Preferred Stock of any applicable
transfer taxes) may request, representing in the aggregate the remaining number
of shares of Series D Convertible Preferred Stock represented by such
certificate(s). Each holder of shares of Series D Convertible Preferred Stock,
by acceptance of a certificate for such shares, acknowledges and agrees that (1)
by reason of the provisions of this paragraph, following conversion of any
shares of Series D Convertible Preferred Stock represented by such certificate,
the number of shares of Series D Convertible Preferred Stock represented by such
certificate may be less than the number of shares stated on such certificate,
and (2) the Corporation may place a legend on the certificates for shares of
Series D Convertible Preferred Stock which refers to or describes the provisions
of this paragraph.
(B) The Corporation shall pay any transfer tax arising in connection
with any conversion of shares of Series D Convertible Preferred Stock except
that the Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery upon
conversion of shares of Common Stock or other securities or property in a name
other than that of the holder of the shares of the Series D Convertible
Preferred Stock being converted, and the Corporation shall not be required to
issue or deliver any such shares or other securities or property unless and
until the person or persons requesting the issuance thereof shall have paid to
the Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid. The number of
shares of Common Stock to be issued upon each conversion of shares of Series D
Convertible Preferred Stock shall be the number set forth in the applicable
Conversion Notice which number shall be conclusive absent manifest error. The
Corporation shall notify a holder who has given a Conversion Notice of any claim
of manifest error within one Trading Day after such holder gives such Conversion
Notice and no such claim of error shall limit or delay performance of the
Corporation's obligation to issue upon such conversion the number of shares of
Common Stock which are not in dispute. A Conversion Notice shall be deemed for
all purposes to be in proper form unless the Corporation notifies a holder of
shares of Series D Convertible Preferred Stock being converted within one
Trading Day after a Conversion Notice has been given (which notice shall specify
all defects in the Conversion Notice) and any Conversion Notice containing any
such defect shall nonetheless be effective on the date given if the converting
holder promptly undertakes to correct all such defects.
(4) The Corporation shall reserve from its authorized, unissued and
otherwise unreserved Common Stock free from preemptive and similar rights
5,933,332 shares (such amount to be subject to equitable adjustment from time to
time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, capital reorganizations and similar events relating to
the Common Stock occurring on or after the Issuance Date) to provide for the
issuance of Common Stock upon the conversion in full of the Series D Convertible
Preferred Stock, subject to reduction from time to time by the number of shares
of Common Stock issued on conversion of the Series D Convertible Preferred
Stock. The Corporation (and any successor corporation) shall take all action
necessary so that a number of shares of the authorized but unissued Common Stock
(or common stock in the case of any successor corporation) sufficient to
26
<PAGE>
provide for the conversion of the Series D Convertible Preferred Stock
outstanding upon the basis hereinbefore provided are at all times reserved by
the Corporation (or any successor corporation), free from preemptive rights, for
such conversion, subject to the provisions of the next succeeding paragraph. If
the Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the Series D Convertible Preferred Stock shall be convertible as
herein provided, the Corporation shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of shares of
Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Series D Convertible Preferred Stock on the new
basis. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all of the outstanding
shares of Series D Convertible Preferred Stock, the Corporation promptly shall
seek, and use its best efforts to obtain and complete, such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(5) In case of any consolidation or merger of the Corporation with any
other corporation (other than a wholly-owned subsidiary of the Corporation) in
which the Corporation is not the surviving corporation, or in case of any sale
or transfer of all or substantially all of the assets of the Corporation, or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series D Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series D
Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series D Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger, sale,
transfer, or share exchange and on a basis which preserves the economic benefits
of the conversion rights of the holders of shares of Series D Convertible
Preferred Stock on a basis as nearly as practical as such rights exist hereunder
prior thereto. If, in connection with any such consolidation, merger, sale,
transfer, or share exchange, each holder of shares of Common Stock is entitled
to elect to receive securities, cash, or other assets upon completion of such
transaction, the Corporation shall provide or cause to be provided to each
holder of Series D Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series D Convertible Preferred
Stock held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
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<PAGE>
(6) If a holder shall have given a Conversion Notice for shares of
Series D Convertible Preferred Stock, the Corporation shall issue and deliver to
such person certificates for the Common Stock issuable upon such conversion
within three Trading Days after such Conversion Notice is given and the person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the right to receive the Common
Stock or other securities, cash, or other assets as herein provided. If a
holder shall have given a Conversion Notice as provided herein, the
Corporation's obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of any action or inaction by
the converting holder to enforce the same, any waiver or consent with respect to
any provision thereof, the recovery of any judgment against any person or any
action to enforce the same, any failure or delay in the enforcement of any other
obligation of the Corporation to such holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by such
holder or any other person of any obligation to the Corporation or any violation
or alleged violation of law by such holder or any other person, and irrespective
of any other circumstance which might otherwise limit such obligation of the
Corporation to the holder in connection with such conversion. If the
Corporation fails to issue and deliver the certificates for the Common Stock to
the holder converting shares of Series D Convertible Preferred Stock pursuant to
the first sentence of this paragraph as and when required to do so, in addition
to any other liabilities the Corporation may have hereunder and under applicable
law (1) the Corporation shall pay or reimburse such holder on demand for all
out-of-pocket expenses including, without limitation, reasonable fees and
expenses of legal counsel incurred by such holder as a result of such failure,
(2) the Conversion Percentage used to determine the Conversion Price applicable
to such conversion shall be reduced by one percentage point from the Conversion
Percentage otherwise used to calculate the Conversion Price applicable to such
conversion or, if such conversion is based on the Ceiling Price, the Ceiling
Price used to determine the Conversion Price applicable to such conversion shall
be reduced by one percentage point from the amount that the Conversion Price
otherwise would have been without reduction pursuant hereto, in either such
case, for each Trading Day after such third Trading Day until such shares of
Common Stock are delivered to such holder and (3) such holder may by written
notice (which may be given by mail, courier, personal service or telephone line
facsimile transmission) or oral notice (promptly confirmed in writing) given at
any time prior to delivery to such holder of the certificates for the shares of
Common Stock issuable upon such conversion of shares of Series D Convertible
Preferred Stock, rescind such conversion, whereupon such holder shall have the
right to convert such shares of Series D Convertible Preferred Stock thereafter
in accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series D Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock to purchase fractional shares of Common Stock which
would otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the Corporation shall
pay in cash an amount equal to the product of (i) the arithmetic average of the
Market Price of one share of Common Stock on the three consecutive Trading Days
ending on the Trading Day immediately preceding the Conversion Date times (ii)
such fraction of a share.
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(8) The Conversion Amount shall be adjusted from time to time under
certain circumstances, subject to the provisions of Section 10(b)(1), as
follows:
(i) In case the Corporation shall issue rights or warrants on a pro
rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on the record date referred to below at a
price per share less than the Current Price for such record date, then in each
such case the Conversion Amount in effect on such record date shall be adjusted
in accordance with the formula
C\\1\\ = C x O + N
-----
O + N x P
-----
M
where
C\\1\\ = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock issuable pursuant
to the exercise of such rights or warrants.
P = the offering price per share of the additional shares (which
amount shall include amounts received by the Corporation in
respect of the issuance and the exercise of such rights or
warrants).
M = the Current Price per share of Common Stock on the record date.
Such adjustment shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights
or warrants. If any or all such rights or warrants are not so issued or
expire or terminate before being exercised, the Conversion Amount then in
effect shall be readjusted appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
C\\1\\ = Cx M
-----
M - F
where
C\\1\\ = the adjusted Conversion Amount
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<PAGE>
C = the current Conversion Amount
M = the Current Price per share of Common Stock on the record date
mentioned below.
F = the aggregate amount of such cash dividend and/or the fair market
value on the record date of the assets or securities to be
distributed divided by the number of shares of Common Stock
outstanding on the record date. The Board of Directors shall
determine such fair market value, which determination shall be
conclusive.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series D Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
Section 10(b)(5), the holder of any Series D Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive
securities, cash, or assets other than Common Stock, the number or amount of
such securities or property so receivable upon conversion shall be subject to
adjustment from time to time in a manner and on terms nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
subparagraphs (i) to (iii) above.
(9) Except as otherwise provided above in this Section 10, no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein provided,
the Corporation shall send to each holder and each transfer agent, if any, for
the Series D Convertible Preferred Stock and the transfer agent for the Common
Stock, a statement signed by the Chairman of the Board, the President, or any
Vice President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 10, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation.
Whenever the Conversion Amount is adjusted, the Corporation will give notice by
mail to the holders of record of Series D Convertible Preferred Stock, which
notice shall be made within 15 days after the effective date of such adjustment
and shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.
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(11) Whenever the Corporation shall propose to take any of the actions
specified in Section 10(b)(5) or in subparagraphs (i) or (ii) of Section
10(b)(8) which would result in any adjustment in the Conversion Amount under
this Section 10(b), the Corporation shall cause a notice to be mailed at least
20 days prior to the date on which the books of the Corporation will close or on
which a record will be taken for such action, to the holders of record of the
outstanding Series D Convertible Preferred Stock on the date of such notice.
Such notice shall specify the action proposed to be taken by the Corporation and
the date as of which holders of record of the Common Stock shall participate in
any such actions or be entitled to exchange their Common Stock for securities or
other property, as the case may be. Failure by the Corporation to mail the
notice or any defect in such notice shall not affect the validity of the
transaction.
SECTION 11. REDEMPTION AT OPTION OF HOLDERS.
(a) REDEMPTION RIGHT. If an Optional Redemption Event occurs, then,
in addition to any other right or remedy of any holder of shares of Series D
Convertible Preferred Stock, each holder of shares of Series D Convertible
Preferred Stock shall have the right, at such holder's option, to require the
Corporation to redeem all of such holder's shares of Series D Convertible
Preferred Stock, or any portion thereof, on the date that is 10 business days
after the date such holder gives the Corporation an Optional Redemption Notice
with respect to such Optional Redemption Event at any time while any of such
holder's shares of Series D Convertible Preferred Stock are outstanding, at a
price equal to the Optional Redemption Price.
(b) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS, ETC.
(1) On or before the fifth business day after the occurrence of an Optional
Redemption Event, the Corporation shall give to each holder of outstanding
shares of Series D Convertible Preferred Stock a notice of the occurrence of
such Optional Redemption Event and of the redemption right set forth herein
arising as a result thereof. Such notice from the Corporation shall set forth:
(i) the date by which the optional redemption right must be exercised,
and
(ii) a description of the procedure (set forth below) which each such
holder must follow to exercise such holder's optional redemption right.
No failure of the Corporation to give such notice or defect therein
shall limit the right of any holder of shares of Series D Convertible
Preferred Stock to exercise the optional redemption right or affect the
validity of the proceedings for the redemption of such holder's shares of
Series D Convertible Preferred Stock.
(2) To exercise its optional redemption right, each holder of
outstanding shares of Series D Convertible Preferred Stock shall deliver to the
Corporation on or before the thirtieth day after the notice required by Section
11(b)(1) is given to such holder (or if no such notice has been given by the
Corporation to such holder, within forty days after such holder first learns of
such Optional Redemption
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<PAGE>
Event) an Optional Redemption Notice to the Corporation. An Optional Redemption
Notice may be revoked by such holder giving such Optional Redemption Notice by
giving notice of such revocation to the Corporation at any time prior to the
time the Corporation pays the Optional Redemption Price to such holder.
(3) If a holder of shares of Series D Convertible Preferred Stock
shall have given an Optional Redemption Notice, on the date which is three
business days after the date such Optional Redemption Notice is given (or such
later date as such holder surrenders such holder's certificates for the shares
of Series D Convertible Preferred Stock redeemed) the Corporation shall make
payment in immediately available funds of the applicable Optional Redemption
Price to such account as specified by such holder in writing to the Corporation
at least one business day prior to the applicable redemption date.
(c) OTHER. (1) In connection with a redemption pursuant to this
Section 11 of less than all of the shares of Series D Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three Trading Days after surrender of such certificate to the Corporation,
the Corporation shall issue and deliver to such holder a replacement certificate
for the shares of Series D Convertible Preferred Stock evidenced by such
certificate which have not been redeemed.
(2) An Optional Redemption Notice given by a holder of shares of
Series D Convertible Preferred Stock shall be deemed for all purposes to be in
proper form unless the Corporation notifies such holder in writing within three
business days after such Optional Redemption Notice has been given (which notice
shall specify all defects in such Optional Redemption Notice), and any Optional
Redemption Notice containing any such defect shall nonetheless be effective on
the date given if such holder promptly undertakes to correct all such defects.
No such claim of error shall limit or delay performance of the Corporation's
obligation to redeem all shares of Series D Convertible Preferred Stock not in
dispute whether or not such holder makes such undertaking.
SECTION 12. VOTING RIGHTS; CERTAIN RESTRICTIONS.
(a) VOTING RIGHTS. Except as otherwise required by law or expressly
provided herein, shares of Series D Convertible Preferred Stock shall not be
entitled to vote on any matter.
(b) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote or
consent of the holders of a majority of the outstanding shares of the Series D
Convertible Preferred Stock, voting separately as a class, will be required for
(1) any amendment, alteration, or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Articles of Incorporation if the amendment,
alteration, or repeal materially and adversely affects the powers, preferences,
or special rights of the Series D Convertible Preferred Stock, or (2) the
creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock;
provided, however, that any increase in the authorized Preferred Stock of the
Corporation or the creation and issuance of any stock which is
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<PAGE>
both Junior Dividend Stock and Junior Liquidation Stock shall not be deemed to
affect materially and adversely such powers, preferences, or special rights and
any such increase or creation and issuance may be made without any such vote by
the holders of Series D Convertible Preferred Stock except as otherwise required
by law.
(c) REPURCHASES OF SERIES D CONVERTIBLE PREFERRED STOCK. The
Corporation shall not repurchase or otherwise acquire any shares of Series D
Convertible Preferred Stock (other than pursuant to Sections 7(a), 9(a), 9(b) or
11) unless the Corporation offers to repurchase or otherwise acquire
simultaneously a pro rata portion of each holder's shares of Series D
Convertible Preferred Stock for cash at the same price per share.
(d) OTHER. So long as any shares of Series D Convertible Preferred
Stock are outstanding:
(1) PAYMENT OF OBLIGATIONS. The Corporation will pay and discharge,
and will cause each subsidiary of the Corporation to pay and discharge, when due
all their respective obligations and liabilities which are material to the
Corporation and its subsidiaries taken as a whole, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
(2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will
keep, and will cause each subsidiary of the Corporation to keep, all material
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary of
the Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance, including but not limited to, product liability insurance, in
such amounts and covering such risks as is reasonably adequate for the conduct
of their businesses and the value of their properties.
(3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Corporation
will continue, and will cause each subsidiary of the Corporation to continue, to
engage in business of the same general type as conducted by the Corporation and
its operating subsidiaries at the time this Statement of Resolution filed with
the Secretary of State of the State of Texas, and will preserve, renew and keep
in full force and effect, and will cause each subsidiary of the Corporation to
preserve, renew and keep in full force and effect, their respective corporate
existence and their respective material rights, privileges and franchises
necessary or desirable in the normal conduct of business.
(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause
each subsidiary of the Corporation to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate
33
<PAGE>
proceedings or (ii) where non-compliance therewith could not reasonably be
expected to have a material adverse effect on the business, condition (financial
or otherwise), operations, performance, properties or prospects of the
Corporation and its subsidiaries, taken as a whole.
(5) INVESTMENT COMPANY ACT. The Corporation will not be or become an
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended, or any successor provision.
(6) TRANSACTIONS WITH AFFILIATES. The Corporation will not, and will
not permit any subsidiary of the Corporation, directly or indirectly, to pay any
funds to or for the account of, make any investment (whether by acquisition of
stock or indebtedness, by loan, advance, transfer of property, guarantee or
other agreement to pay, purchase or service, directly or indirectly, any
indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of
any assets, tangible or intangible, to, or participate in, or effect any
transaction in connection with, any joint enterprise or other joint arrangement
with, any Affiliate of the Corporation, except, on terms to the Corporation or
such subsidiary no less favorable than terms that could be obtained by the
Corporation or such subsidiary from a person that is not an Affiliate of the
Corporation, as determined in good faith by the Board of Directors.
(7) COMPLIANCE. The Corporation shall (a) use its commercially
reasonable best efforts to obtain knowledge of any failure or default by the
Corporation in the timely performance of any material obligation to the holders
of the Series D Convertible Preferred Stock under the terms of this Statement of
Resolution, the Exchange Agreements, the Registration Rights Agreement, the
Transfer Agent Instruction or any other document or instrument executed and
delivered by the Corporation in connection herewith or therewith and (b) shall
notify the holders of the Series D Convertible Preferred Stock promptly, but in
no event later than three Business Days after the Corporation first learns of
any such failure or default.
SECTION 13. OUTSTANDING SHARES. For purposes of this Statement of
Resolution, all shares of Series D Convertible Preferred Stock shall be deemed
outstanding except (i) from the applicable Conversion Date, each share of Series
D Convertible Preferred Stock converted into Common Stock, unless the
Corporation shall default in its obligation to issue and deliver shares of
Common Stock upon such conversion as and when required by Section 10; (ii) from
the date of registration of transfer, all shares of Series D Convertible
Preferred Stock held of record by the Corporation or any subsidiary or Affiliate
of the Corporation (other than any original holder of shares of Series D
Convertible Preferred Stock) and (iii) from the applicable Redemption Date,
Share Limitation Redemption Date, Final Redemption Date or date of redemption
pursuant to Section 11, all shares of Series D Convertible Preferred Stock which
are redeemed or repurchased, so long as in each case the Redemption Price, the
Share Limitation Redemption Price, the Final Redemption Price, the Optional
Redemption Price or other repurchase price, as the case may be, of such shares
of
34
<PAGE>
Series D Convertible Preferred Stock shall have been paid by the Corporation
as and when due hereunder.
SECTION 14. MISCELLANEOUS.
(a) NOTICES. Any notices required or permitted to be given under the
terms of this Statement of Resolution shall be in writing and shall be sent by
mail or delivered personally (which shall include telephone line facsimile
transmission) or by courier and shall be deemed given five days after being
placed in the mail, if mailed, or upon receipt, if delivered personally or by
courier (a) in the case of the Corporation, addressed to the Corporation at 1250
Wood Branch Park Drive, Houston, Texas, 77079, Attention: Chief Executive
Officer (telephone line facsimile transmission number (281) 529-4650), or, in
the case of any holder of shares of Series D Convertible Preferred Stock, at
such holder's address or telephone line facsimile transmission number shown on
the stock books maintained by the Corporation with respect to the Series D
Convertible Preferred Stock or such other address as the Corporation shall have
provided by notice to the holders of shares of Series D Convertible Preferred
Stock in accordance with this Section or any holder of shares of Series D
Convertible Preferred Stock shall have provided to the Corporation in accordance
with this Section.
(b) REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series D
Convertible Preferred Stock and (1) in the case of loss, theft or destruction,
of indemnity from the record holder of the certificate for such shares of Series
D Convertible Preferred Stock reasonably satisfactory in form to the Corporation
(and without the requirement to post any bond or other security) or (2) in the
case of mutilation, upon surrender and cancellation of the certificate for such
shares of Series D Convertible Preferred Stock, the Corporation will execute and
deliver to such holder a new certificate for such shares of Series D Convertible
Preferred Stock without charge to such holder.
(c) OVERDUE AMOUNTS. Except as otherwise specifically provided in
Section 5 with respect to dividends in arrears on the Series D Convertible
Preferred Stock, whenever any amount which is due to any holder of shares of
Series D Convertible Preferred Stock is not paid to such holder when due, such
amount shall bear interest at the rate of 14% per annum ( or such other rate as
shall be the maximum rate allowable by applicable law) until paid in full.
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<PAGE>
IN WITNESS WHEREOF, Equalnet Communications Corp. has caused this
certificate to be signed by Mitchell H. Bodian, its Chief Executive Officer, as
of the 17th day of June, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
--------------------------------
Mitchell H. Bodian
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Annex I
NOTICE OF CONVERSION
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
EQUALNET COMMUNICATIONS CORP.
TO: American Stock Transfer & Trust Company,
as Transfer Agent and Registrar
6201 Fifteenth Avenue
Third Floor
Brooklyn, New York 11219
Attention: Mr. Barry Rosenthal
Facsimile No.: (718) 259-1144
(1) Pursuant to the terms of the Series D Convertible Preferred Stock
(the "Preferred Stock") of Equalnet Communications Corp., a Texas corporation
(the "Company"), the undersigned hereby elects to convert ________________
shares of the Preferred Stock together with accrued and unpaid dividends thereon
in the amount of $_______________ and interest on dividends in arrears in the
amount of $________________ into shares of Common Stock, $.01 par value (the
"Common Stock"), of the Company, or such other securities into which the
Preferred Stock is currently convertible. Capitalized terms used in this Notice
and not otherwise defined herein have the respective meanings provided in the
Statement of Resolution of the Board of Directors Establishing and Designating
Series D Convertible Preferred Stock and Fixing the Rights and Preferences of
Such Series (the "Statement of Resolution").
(2) Please issue a certificate or certificates for ________________
shares of Common Stock or other securities into which such number of shares of
Preferred Stock is convertible in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
____________________ ______________________
Name Name
____________________ ______________________
Address Address
____________________ ______________________
SS or Tax ID Number SS or Tax ID Number
(3) The Conversion Date is __________________________________. Check
and complete one of the following:
<PAGE>
The undersigned elects to convert based on the Average
Market Price of the Common Stock. The Market Price of the Common
Stock on each of the five Trading Days (whether or not consecutive)
during the 25 consecutive Trading Days preceding the Conversion Date
having the lowest Market Prices, and the arithmetic average thereof
are as follows:
Date Market Price
- ---- ------------
- ------------------ ------------------------
- ------------------ ------------------------
- ------------------ ------------------------
- ------------------ ------------------------
- ------------------ ------------------------
Arithmetic Average: $_______________
OR
The undersigned elects to convert based on the Ceiling Price
of the Common Stock of $__________ applicable to conversions of
Preferred Stock.
(4) If the shares of Common Stock issuable upon conversion of the
Preferred Stock have not been registered for resale under the Securities Act of
1933, as amended (the "Act"), and this Notice is submitted prior to the date
which is two years after the Issuance Date, the undersigned represents and
warrants that (i) the shares of Common Stock not so registered are being
acquired for the account of the undersigned for investment, and not with a view
to, or for resale in connection with, the public distribution thereof other than
pursuant to registration under the Act, and that the undersigned has no present
intention of distributing or reselling the shares of Common Stock not so
registered other than pursuant to registration under the Act and (ii) the
undersigned is an "accredited investor" as defined in Regulation D under the
Act. The undersigned further agrees that (A) the shares of Common Stock not so
registered shall not be sold or transferred unless either (i) they first shall
have been registered under the Act and applicable state securities laws or (ii)
the Company first shall have been furnished with an opinion of legal counsel
reasonably satisfactory to the Company to the effect that such sale or transfer
is exempt from the registration requirements of the Act and (B) the Company may
place a legend on the certificate(s) for the shares of Common
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<PAGE>
Stock not so registered to that effect and place a stop-transfer restriction in
its records relating to the shares of Common Stock not so registered.
Date _________________________
____________________________________
Signature of Holder (Must be signed
exactly as name appears on the Preferred
Stock Certificate.)
3
<PAGE>
ANNEX C
September 3, 1998
The Independent Committee of the Board of Directors
EqualNet Communications Corp.
1250 Wood Branch Park Dr.
Houston, TX 77079
Attention: Mr. John Isaac "Ike" Epley, Chairman
RE: EQUALNET COMMUNICATIONS CORPORATION -- SENIOR CONVERTIBLE NOTES FAIRNESS
OPINION.
Dear Mr. Epley:
G. A. Herrera & Co. (herein referred to as "GAH") has been engaged by the
Independent Committee of the Board of Directors of EqualNet Communications Corp.
(herein referred to as the "Independent Committee") to evaluate the fairness,
from a financial standpoint, of a proposed convertible debt offering (herein
referred to as the "Offering") to the holders of the outstanding common stock,
par value $0.01 per share (herein referred to as the "Common Stock") of EqualNet
Communications Corp. (herein referred to as "EqualNet" or the "Company").
Enclosed is our report summarizing the analysis and conclusions developed from
our review and evaluation of the documents, agreements, financial statements and
other information provided as part of our engagement.
The purpose of this engagement was to assist management of the Company, its
Board of Directors and the Independent Committee in (i) evaluating, analyzing
and reviewing the terms of the proposed Offering, (ii) evaluating the merits of
the Offering in light of the Company's current financial position and (iii)
attesting as to fairness of the Offering to the holders of Common Stock. This
report is not and should not be used as a solvency opinion. The use of this
report is specifically limited by the terms and conditions expressed herein, and
to the purposes described herewith.
EqualNet is a telecommunications company providing a variety of in-bound and
out-bound long distance, internet, data and prepaid services to its customers on
a nationwide basis. The Company offers switched and dedicated long-distance
services via an array of distribution channels; dial-up, high-speed internet and
data services; pre-paid calling cards, premium and incentive phone cards, stored
value debit cards, "800 and 888" products and interactive voice response
services.
<PAGE>
EQUALNET COMMUNICATIONS CORP.
- --------------------------------------------------------------------------------
GAH is a Houston, Texas based private investment banking and consulting firm
that provides merger and acquisition advisory services, debt and equity
placements, valuations, litigation support and expert testimony services
specializing in value-added distributors and contractors serving the
telecommunications, food products, energy, health care and environmental
markets. As part of our investment banking business, GAH is continually involved
in the valuation of private and public businesses and securities in connection
with mergers, acquisitions, dispositions, dissolutions, private equity
transactions and valuations for tax, estate, corporate and other purposes. GAH's
active participation in the valuation field and specific telecommunications
industry expertise provides extensive knowledge with respect to valuation theory
and Internal Revenue Service (herein referred to as "IRS") rulings and
guidelines which are significant factors in the determination of fairness
opinions.
For purposes of this engagement and report, we utilized IRS Revenue Ruling
59-60, 1959-1 C.B. 237 as the primary basis in arriving at our opinion. This
methodology is widely utilized to determine the price at which property would
change hands between a willing buyer and a willing seller, when the former is
not under any compulsion to buy and the latter is not under any compulsion to
sell, both having reasonable knowledge of relevant facts. In arriving at our
opinion we considered available financial data as well as other relevant
business and industry factors including, the following:
. the nature and history of the business;
. the economic outlook in general and the current condition and prospect
for EqualNet's business;
. the total shareholders equity, liquidity and financial condition of
EqualNet;
. the historical and future earning capacity of EqualNet;
. the dividend paying capacity of EqualNet;
. EqualNet's goodwill or other intangible value;
. relevant sales of EqualNet stock and the economic impact of the subject
Offering; and
. the market price of public companies engaged in the same or similar lines
of business as EqualNet.
EqualNet has experienced significant operating and financial difficulties that
have negatively impacted its business. The Company has sustained material and
on-going losses primarily resulting from the erosion of its customer account
base, order activity and calling volumes. The Company has not been in compliance
with certain agreements
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G. A. HERRERA & CO. PAGE 2
2
<PAGE>
EQUALNET COMMUNICATIONS CORP.
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and was previously the subject of various proceedings alleging violations of
state consumer protection statutes. Accordingly, EqualNet has been, and is,
dependent on raising funds from private sources as a result of its inability to
generate funds from operations sufficient to satisfy its on-going operations.
These risks and conditions coupled with the Company's continuing losses and
dependence on raising additional funding pose a material concern with respect to
the future financial and operational performance of EqualNet.
The need to fund on-going operations has created an immediate financing
requirement. EqualNet is considering a $3,000,000 convertible debt transaction
(herein referred to as the "Notes") proposal from the Willis Group, L.L.C. and
Genesee funds. The Notes will be issued at a discount and the proceeds to the
Company will be $2,880,000. The 6% senior convertible Notes would be due 2001
pursuant to the Offering, and any Notes issued as payment of interest accrued on
such Notes may be converted, in whole or in part, by the holders of the Notes
into Common Stock at any time on or after the earlier of (i) the date a
registration statement is effective with the Securities Exchange Commission with
respect to the Common Stock issuable pursuant to the Offering and (ii) the date
90 days after the closing of the transactions contemplated by the Offering
(herein referred to as the "Closing").
The conversion price for each share of Common Stock (herein referred to as the
"Conversion Price") is the lesser of (1) 85% of the average of the lowest sale
price of the Common Stock as reported on NASDAQ for five days within a
twenty-five day period prior to the date of conversion (herein referred to as
the "Average Price") and (2) $0.9006 per share. In addition, the Note holders
will be entitled to a special payment in the event the assets of Netco
Acquisition Corp. (herein referred to as "Netco"), a wholly owned subsidiary of
the Company, are sold at a price exceeding Netco's secured debt and closing
costs. If the sale of Netco's assets occurs prior to redemption or conversion of
the Notes, the Note holders will receive 5% of the excess sales price over
Netco's secured debt plus closing costs.
In connection with the issuance of the Notes, the Company grants to each
investor a 5 year warrant to purchase, at the Conversion Price, a number of
shares of Common Stock equal to the quotient obtained by dividing (x) the
quotient obtained by dividing the amount invested by such investor by the
Average Price by (y) five. For a period of one year after the date of the
Closing, the Company may not sell or offer to sell any equity securities or
securities convertible into Common Stock at a price below the market price
unless the Company first gives the purchasers of the Notes the right to purchase
such securities from the Company at the price at which such securities were
offered to other investors.
A related transaction is contemplated in connection with the issuance of the
Notes. The Willis Group, L.L.C. and Advantage Funds will exchange in the
aggregate 3,000,000 shares of Common Stock currently owned by those entities for
3,750 shares of Series D Preferred Stock (herein referred to as "Series D
Preferred") of the Company. The par
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G. A. HERRERA & CO. PAGE 3
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EQUALNET COMMUNICATIONS CORP.
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value of each share of Series D Preferred is $1,000. The Company will receive an
exchange fee of $200,000. The Series D Preferred will not have priority over the
Company's Preferred Stock, which is currently outstanding. The Series D
Preferred will be convertible into Common Stock at a conversion price for each
share of Common Stock equal to the lessor of (1) 85% of the average of the
lowest sales price of the Common Stock as reported on NASDAQ for five days
within a twenty-five day period prior to the date of conversion and (2) $1.2281
per share.
The approaches and methodologies used in our work were limited as referenced
herein and did not comprise an examination in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the fair presentation of financial statements or other financial
information presented in accordance with generally accepted accounting
principles. We express no opinion and accept no responsibility for the accuracy
and completeness of the financial information or other data provided to us by
others. We assumed that the financial and other information provided to us was
accurate and complete, and we relied upon this information in performing our
valuation for purposes of this engagement.
In performing our work, we were provided with various information, including the
following:
. EqualNet's proxy statement dated June 15, 1998 for a special
meeting of the shareholders held June 30, 1998;
. EqualNet's proxy statement dated December 29, 1997 for the annual
meeting of the shareholders held January 27, 1998;
. EqualNet's 10-Q for the period ended March 31, 1998 and 10-K for
the fiscal year ended June 30, 1997.
. Draft notice of conversion, joint escrow instructions, note
purchase agreement and common stock warrant for the proposed
Offering; and
. EqualNet's marketing and other related literature.
The procedures employed in this engagement included such steps, we considered
necessary, including, but not limited to, the following:
. Discussions with EqualNet's management and personnel concerning
the past and future operations of the Company and an explanation
and clarification of data provided by management;
. An analysis of the financial condition of EqualNet inclusive of
the financial and operational issues set forth herein;
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G. A. HERRERA & CO. PAGE 4
4
<PAGE>
EQUALNET COMMUNICATIONS CORP.
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. A tour of EqualNet's offices located in Houston, Texas;
. An analysis of the condition and trends of the telecommunications
industry and the switched and dedicated market, including an
analysis of the competitive environment; and
. An analysis of other pertinent facts and data resulting in our
conclusion and opinion.
The summary of our procedures is intended solely to provide EqualNet and its
management with an overview of our approach. We have not made an independent
valuation or appraisal of the assets or liabilities of the Company and have not
been furnished with any such evaluation or appraisal. For purposes of this
engagement and report, we made no investigation of, and assumed no
responsibility for, the titles to, or any liens against, the assets of EqualNet
or the proposed Offering. Neither did we attempt to determine what the Offering
or the shares of EqualNet might have sold for in the public or private market or
account for the costs that might have been incurred if the Offering or shares of
the Company had been sold. We assumed there were no hidden or unexpected
conditions associated with EqualNet or the Offering that would adversely affect
the Offering or our opinion.
GAH was not asked to consider and accordingly our opinion and this report does
not address the relative merits of the proposed Offering as compared to other
alternative business strategies that might exist for the Company, or the effect
of any other transactions in which EqualNet might engage. We have not contacted
potential purchasers of the Offering and, therefore, our opinion does not
represent (1) that a market exists or (2) a price from a specific purchaser, for
the Offering. Furthermore, the price a willing buyer would pay a willing seller
for the Offering, neither being under any compulsion to buy nor sell, is
significantly influenced by industry, economic and market conditions, which may
vary from those present on the date of this report. Furthermore, the conditions
and circumstances prevailing at the date of this report will often vary from
future results and no reliance can be or has been provided thereon. This report
and the opinion contained herein does not constitute a recommendation (1) on
behalf of the Offering, (2) to any holder of Common Stock to vote in favor of
the Offering or (3) that the Offering is in the best interests of the Company.
None of the G. A. Herrera & Co. employees or partners who have worked on this
engagement have any known or contemplated interests in or with EqualNet, its
related parties or its affiliates. Further, the compensation for this valuation
engagement is neither based nor contingent upon the opinion provided. This
opinion may be produced in whole, but not in part, in the filings and statements
as required by applicable law; provided, that any excerpt from or reference to
this opinion or report must be approved by GAH in advance in writing. This
report stating the significant assumptions made, the methodologies employed, and
the conclusions reached are solely for the information of,
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G. A. HERRERA & CO. PAGE 5
5
<PAGE>
EQUALNET COMMUNICATIONS CORP.
- --------------------------------------------------------------------------------
and assistance to, the Independent Committee of EqualNet, and are not to be
referred to or distributed for any other purposes.
In accordance with the foregoing, and as further described herein, it is our
opinion that as of the date hereof, the terms and conditions of the proposed
Offering are fair to the holders of Common Stock from a financial standpoint.
If you have any questions, please call Gilbert A. Herrera at (713) 860-1431.
Sincerely,
G. A. Herrera & Co.
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G. A. HERRERA & CO. PAGE 6
6
<PAGE>
ANNEX D
EQUALNET COMMUNICATIONS CORP.
STATEMENT OF RESOLUTION OF BOARD OF DIRECTORS
ESTABLISHING AND DESIGNATING SERIES A CONVERTIBLE
PREFERRED STOCK AND FIXING THE RIGHTS AND PREFERENCES OF
SUCH SERIES
TO THE SECRETARY OF STATE
OF THE STATE OF TEXAS
Equalnet Communications Corp., pursuant to the provisions of Articles 2.13
and 2.19B of the Texas Business Corporation Act, submits the following statement
for the purpose of establishing and designating a series of shares and fixing
the rights and preferences thereof:
1. The name of the Corporation is Equalnet Communications Corp.
2. The following is a true and correct copy of an extract from
the minutes of a meeting of the Board of Directors of the Corporation held on
October 28, 1998, and includes a true and correct copy of certain resolutions
duly adopted thereat.
RESOLVED, that pursuant to authority vested in the Board of Directors by
the Articles of Incorporation of the Corporation, the Board of Directors does
hereby provide that the Statement of Resolution Establishing Series of Shares
(Series A Convertible Preferred) that was filed with the Secretary of State of
the State of Texas on March 5, 1998 is cancelled and deleted in its entirety and
shall be replaced with the following:
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK
SECTION 1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the subject person; for purposes
of this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
"Aggregated Person" means, with respect to any person, any person whose
beneficial ownership of shares of Common Stock would be aggregated with the
beneficial ownership of shares of Common Stock by such person for purposes of
Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder.
"Amendment Agreement" means the Amendment Agreement, dated as of July 31,
1998, by and between the Corporation and the original holder of Series A
Convertible Preferred Stock.
"AMEX" means the American Stock Exchange, Inc.
"Average Market Price" for any date means the arithmetic average of the
Market Price on each of the five Trading Days, whether or not consecutive,
during the applicable Measurement Period having the lowest Market Prices.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Ceiling Price" means $1.2281 (subject to equitable adjustments from time
to time on terms reasonably acceptable to the Majority Holders for stock splits,
stock dividends, combinations, recapitalizations, reclassifications and similar
events occurring or with respect to which "ex-" trading commences on or after
the date of filing of this Statement of Resolution with the Secretary of State
of the State of Texas); provided, however, that, notwithstanding any other
provision hereof, the Ceiling Price applicable to a particular conversion shall
be subject to reduction as provided in Section 10(b)(6); provided further,
however, that if a Registration Event occurs, then, in addition to any other
right or remedy of any holder of shares of Series A Convertible Preferred Stock
thereafter the Ceiling Price shall be permanently reduced on each Computation
Date by an amount equal to two percent of the amount that the Ceiling Price
otherwise would have been without any reduction pursuant to this proviso (pro
rated in the case of any Computation Date which is less than 30 days after a
Registration Event occurs or less than 30 days after another Computation Date).
2
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"Common Stock" means the Common Stock, $.01 par value, of the Corporation.
"Computation Date" means, if a Registration Event occurs, any of (1) the
date which is 30 days after such Registration Event occurs, if any Registration
Event is continuing on such date, (2) each date which is 30 days after a
Computation Date, if any Registration Event is continuing on such date, and (3)
the date on which all Registration Events cease to continue.
"Conversion Amount" initially shall be equal to $1,000.00, subject to
adjustment as herein provided.
"Conversion Date" means, with respect to each conversion of shares of
Series A Convertible Preferred Stock pursuant to Section 10, the date on which
the Conversion Notice relating to such conversion is actually received by the
Transfer Agent, whether by mail, courier, personal service, telephone line
facsimile transmission or other means.
"Conversion Notice" means a written notice, duly signed by or on behalf of
a holder of shares of Series A Convertible Preferred Stock, stating the number
of shares of Series A Convertible Preferred Stock to be converted in the form
attached hereto as ANNEX I or such other form as agreed to by the Majority
Holders.
"Conversion Percentage" means 85%; provided, however, that, notwithstanding
any other provision hereof, if a Registration Event occurs, then such percentage
stated above shall be permanently reduced by two percentage points on each
Computation Date (pro rated in the case of any Computation Date which is less
than 30 days after a Registration Event occurs or less than 30 days after
another Computation Date).
"Conversion Price" means the lesser of:
(1) the product of (a) the Average Market Price for such date times (b) the
applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that the Conversion Price applicable to a particular
conversion shall be subject to reduction as provided in Section 10(b)(6);
provided, further, however, that as long as (x) the Common Stock is listed or
quoted on the Nasdaq, the Nasdaq Small Cap, the NYSE or the AMEX and (y) the
Corporation is in compliance in all material respects with its obligations to
the holders of the Series A Convertible Preferred Stock, the Conversion Price
shall be no less than $0.75.
"Conversion Rate" shall have the meaning provided in Section 10(a).
3
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"Converted Market Price" means, for any share of Series A Convertible
Preferred Stock as of any date of determination, an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would, at
the time of such determination, be issuable on conversion in accordance with
Section 10(a) of one share of Series A Convertible Preferred Stock and any
accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears if a Conversion Notice were given by the holder of
such share of Series A Convertible Preferred Stock on the date of such
determination (determined without regard to any limitation on conversion based
on beneficial ownership contained in Section 10(a)) times (y) the arithmetic
average of the Market Price of the Common Stock for the five consecutive Trading
Days ending on the Trading Day prior to the date of such determination.
"Corporation Optional Redemption Notice" means a notice given by the
Corporation to the holders of shares of Series A Convertible Preferred Stock
pursuant to Section 9(a) which notice shall state (1) that the Corporation is
exercising its right to redeem all or a portion of the outstanding shares of
Series A Convertible Preferred Stock pursuant to Section 9(a), (2) the number of
shares of Series A Convertible Preferred Stock held by such holder which are to
be redeemed, (3) the Redemption Price per share of Series A Convertible
Preferred Stock to be redeemed or the formula for determining the same,
determined in accordance herewith, and (4) the applicable Redemption Date.
"Current Price" means with respect to any date the arithmetic average of
the Market Price of the Common Stock on the 30 consecutive Trading Days
commencing 45 Trading Days before such date.
"Dividend Shares" means shares of Series A Convertible Preferred Stock
issued as dividends on outstanding shares of Series A Convertible Preferred
Stock in accordance with Section 5(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agreements" means the several Note Purchase and Exchange
Agreements by and between the Corporation and the original holders of shares of
Series D Convertible Preferred Stock pursuant to which the shares of Series D
Convertible Preferred Stock were issued.
"Final Redemption Date" means the date of redemption of shares of Series A
Convertible Preferred Stock pursuant to Section 9(b), determined in accordance
therewith.
"Final Redemption Notice" means a notice given by the Corporation to each
holder of Series A Convertible Preferred Stock pursuant to Section 9(b), which
notice shall state (1) that the Corporation is exercising its right to redeem
all outstanding shares of Series A Convertible Preferred Stock pursuant to
Section 9(b), (2) the number of shares of Series A Convertible Preferred Stock
held by such holder which are to be redeemed, (3) the Final Redemption Price per
share of Series A Convertible Preferred
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Stock held by such holder which are to be redeemed, determined in accordance
herewith, and (4) the Final Redemption Date.
"Final Redemption Price" on any date means an amount equal to the product
obtained by multiplying (a) the sum of (1) $1,000 plus (2) an amount equal to
the accrued but unpaid dividends on the share of Series A Convertible Preferred
Stock to be redeemed to the Final Redemption Date, plus (3) an amount equal to
the accrued and unpaid interest on dividends in arrears on such share of Series
A Convertible Preferred Stock to the Final Redemption Date (determined as
provided in Section 5) times (b) the Premium Percentage.
"Inconvertibility Notice" shall have the meaning provided in Section
7(a)(2).
"Issuance Date" means the first date of original issuance of any shares of
Series D Convertible Preferred Stock.
"Junior Dividend Stock" means, collectively, the Common Stock and any other
class or series of capital stock of the Corporation ranking junior as to
dividends to the Series A Convertible Preferred Stock.
"Junior Liquidation Stock" means the Common Stock or any other class or
series of the Corporation's capital stock ranking junior as to liquidation
rights to the Series A Convertible Preferred Stock.
"Liquidation Preference" means, for each share of Series A Convertible
Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the
date of final distribution to such holders, (ii) accrued and unpaid interest on
dividends in arrears (computed in accordance with Section 5(a)) to the date of
such distribution, and (iii) $1,000.00.
"Majority Holders" means at any time the holders of shares of Series A
Preferred Stock which shares constitute a majority of the outstanding shares of
Series A Preferred Stock.
"Market Price" of the Common Stock on any date means the lowest sale price
(regular way) for one share of Common Stock on such date on the first applicable
among the following: (a) the national securities exchange on which the shares of
Common Stock are listed which constitutes the principal securities market for
the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the principal market
for the Common Stock on such date, or (c) the Nasdaq SmallCap, if the Nasdaq
SmallCap constitutes the principal securities market for the Common Stock on
such date, in any such case as reported by Bloomberg, L.P.; provided, however,
that if during any Measurement Period or other period during which the Market
Price is being determined:
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price for each day in such Measurement Period or such other period
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which day is prior to the earlier of (1) the date fixed for the determination
of stockholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect to
such dividend or distribution begins shall be reduced by multiplying the
Market Price (determined without regard to this proviso) for each such day in
such Measurement Period or such other period by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding at the close
of business on the earlier of (1) the record date fixed for such
determination and (2) the date on which ex-dividend trading in the Common
Stock with respect to such dividend or distribution begins and the
denominator of which shall be the sum of such number of shares and the total
number of shares constituting such dividend or other distribution;
(ii) The Corporation shall issue rights or warrants to all holders of its
outstanding shares of Common Stock, or fix a record date for such issuance,
which rights or warrants entitle such holders (for a period expiring within
forty-five (45) days after the date fixed for the determination of
stockholders entitled to receive such rights or warrants) to subscribe for or
purchase shares of Common Stock at a price per share less than the Market
Price (determined without regard to this proviso) for any day in such
Measurement Period or such other period which day is prior to the end of such
45-day period, then the Market Price for each such day shall be reduced so
that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
at the close of business on the record date fixed for the determination of
stockholders entitled to receive such rights or warrants plus the number of
shares which the aggregate offering price of the total number of shares so
offered would purchase at such Market Price, and the denominator of which
shall be the number of shares of Common Stock outstanding on the close of
business on such record date plus the total number of additional shares of
Common Stock so offered for subscription or purchase. In determining whether
any rights or warrants entitle the holders to subscribe for or purchase
shares of Common Stock at less than the Market Price (determined without
regard to this proviso), and in determining the aggregate offering price of
such shares of Common Stock, there shall be taken into account any
consideration received for such rights or warrants, the value of such
consideration, if other than cash, to be determined in good faith by a
resolution of the Board of Directors of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of
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shares of Common Stock, the Market Price each trade (regular way) on for each
day in such Measurement Period or such other period which day is prior to the
earlier of (1) the date on which such combination becomes effective and (2)
the date on which trading in the Common Stock on a basis which gives effect
to such combination begins, shall be proportionately increased;
(iv) The Corporation shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any class of capital stock of the
Corporation (other than any dividends or distributions to which clause (i) of
this proviso applies) or evidences of its indebtedness, cash or other assets
(including securities, but excluding any rights or warrants referred to in
clause (ii) of this proviso and dividends and distributions paid exclusively
in cash and excluding any capital stock, evidences of indebtedness, cash or
assets distributed upon a merger or consolidation) (the foregoing hereinafter
in this clause (iv) of this proviso called the "Securities"), or fix a record
date for any such distribution, then, in each such case, the Market Price for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the record date for such distribution and (2) the date
on which ex-dividend trading in the Common Stock with respect to such
distribution begins shall be reduced so that the same shall be equal to the
price determined by multiplying the Market Price (determined without regard
to this proviso) by a fraction, the numerator of which shall be the Market
Price (determined without regard to this proviso) for such date less the fair
market value (as determined in good faith by resolution of the Board of
Directors of the Corporation) on such date of the portion of the Securities
so distributed or to be distributed applicable to one share of Common Stock
and the denominator of which shall be the Market Price (determined without
regard to this proviso) for such date; provided, however, that in the event
the then fair market value (as so determined) of the portion of the
Securities so distributed applicable to one share of Common Stock is equal to
or greater than the Market Price (determined without regard to this clause
(iv) of this proviso) for any such Trading Day, in lieu of the foregoing
adjustment, adequate provision shall be made so that the holders of shares of
Series A Preferred Stock shall have the right to receive upon conversion of
the shares of Series A Preferred Stock the amount of Securities the holders
of shares of Series A Preferred Stock would have received had the holders of
shares of Series A Preferred Stock converted the shares of Series A Preferred
Stock immediately prior to the record date for such distribution. If the
Board of Directors of the Corporation determines the fair market value of any
distribution for purposes of this clause (iv) by reference to the actual or
when issued trading market for any securities comprising all or part of such
distribution, it must in doing so consider the prices in such market on the
same day for which an adjustment in the Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this proviso,
any dividend or distribution to which this clause (iv) is applicable that
also includes shares of Common Stock, or rights or warrants to subscribe for
or purchase shares of Common Stock to which clause (i) or (ii) of this
proviso applies (or both), shall be deemed instead to be (1) a dividend or
distribution of the evidences of
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indebtedness, assets, shares of capital stock, rights or warrants other than
such shares of Common Stock or rights or warrants to which clause (i) or (ii)
of this proviso applies (and any Market Price reduction required by this
clause (iv) with respect to such dividend or distribution shall then be made)
immediately followed by (2) a dividend or distribution of such shares of
Common Stock or such rights or warrants (and any further Market Price
reduction required by clauses (i) and (ii) of this proviso with respect to
such dividend or distribution shall then be made), except that any shares of
Common Stock included in such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for such
determination" within the meaning of clause (i) of this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash in
(or fix any record date for any such distribution), or (y) repurchase or
reacquire shares of its Common Stock (other than an Option Share Surrender)
for, in either case, an aggregate amount that, combined with (1) the
aggregate amount of any other such distributions to all holders of its Common
Stock made exclusively in cash after the Issuance Date and within the 12
months preceding the date of payment of such distribution, and in respect of
which no adjustment pursuant to this clause (v) has been made, (2) the
aggregate amount of any cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Corporation) of
consideration paid in respect of any repurchase or other reacquisition by the
Corporation or any subsidiary of the Corporation of any shares of Common
Stock (other than an Option Share Surrender) made after the Issuance Date and
within the 12 months preceding the date of payment of such distribution or
making of such repurchase or reacquisition, as the case may be, and in
respect of which no adjustment pursuant to this clause (v) has been made, and
(3) the aggregate of any cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Corporation) of
consideration payable in respect of any Tender Offer by the Corporation or
any of its subsidiaries for all or any portion of the Common Stock concluded
within the 12 months preceding the date of payment of such distribution or
completion of such repurchase or reacquisition, as the case may be, and in
respect of which no adjustment pursuant to clause (vi) of this proviso has
been made (such aggregate amount combined with the amounts in clauses (1),
(2) and (3) above being the "Combined Amount"), exceeds 10% of the product of
the Market Price (determined without regard to this proviso) for any day in
such Measurement Period or such other period which day is prior to the
earlier of (A) the record date with respect to such distribution and (B) the
date on which ex-dividend trading in the Common Stock with respect to such
distribution begins or the date of such repurchase or reacquisition, as the
case may be, times the number of shares of Common Stock outstanding on such
date, then, and in each such case, the Market Price for each such day shall
be reduced so that the same shall equal the price determined by multiplying
the Market Price (determined without regard to this proviso) for such day by
a fraction (i) the numerator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day less an amount equal
to the quotient of (x) the excess of such Combined Amount over
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such 10% and (y) the number of shares of Common Stock outstanding on such day
and (ii) the denominator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day; provided, however,
that in the event the portion of the cash so distributed or paid for the
repurchase or reacquisition of shares (determined per share based on the
number of shares of Common Stock outstanding) applicable to one share of
Common Stock is equal to or greater than the Market Price (determined without
regard to this clause (v) of this proviso) of the Common Stock for any such
day, then in lieu of the foregoing adjustment with respect to such day,
adequate provision shall be made so that the holders of shares of Series A
Preferred Stock shall have the right to receive upon conversion of shares of
Series A Preferred Stock the amount of cash the holders of shares of Series A
Preferred Stock would have received had the holders of shares of Series A
Preferred Stock converted shares of Series A Preferred Stock immediately
prior to the record date for such distribution or the payment date of such
repurchase, as applicable; or
(vi) A Tender Offer made by the Corporation or any of its subsidiaries for
all or any portion of the Common Stock shall expire and such Tender Offer (as
amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined in good
faith by resolution of the Board of Directors of the Corporation) that
combined together with (1) the aggregate of the cash plus the fair market
value (as determined in good faith by a resolution of the Board of Directors
of the Corporation), as of the expiration of such Tender Offer, of
consideration payable in respect of any other Tender Offers, by the
Corporation or any of its subsidiaries for all or any portion of the Common
Stock expiring within the 12 months preceding the expiration of such Tender
Offer and in respect of which no adjustment pursuant to this clause (vi) has
been made, (2) the aggregate amount of any cash plus the fair market value
(as determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration paid in respect of any repurchase or other
reacquisition by the Corporation or any subsidiary of the Corporation of any
shares of Common Stock (other than an Option Share Surrender) made after the
Issuance Date and within the 12 months preceding the expiration of such
Tender Offer and in respect of which no adjustment pursuant to clause (v) of
this proviso has been made, and (3) the aggregate amount of any distributions
to all holders of Common Stock made exclusively in cash within 12 months
preceding the expiration of such Tender Offer and in respect of which no
adjustment pursuant to clause (v) of this proviso has been made, exceeds 10%
of the product of the Market Price (determined without regard to this
proviso) for any day in such period times the number of shares of Common
Stock outstanding on such day, then, and in each such case, the Market Price
for such day shall be reduced so that the same shall equal the price
determined by multiplying the Market Price (determined without regard to this
proviso) for such day by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding on such day multiplied by the
Market Price (determined without regard to this
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proviso) for such day and the denominator of which shall be the sum of (x)
the fair market value (determined as aforesaid) of the aggregate
consideration payable to stockholders based on the acceptance (up to any
maximum specified in the terms of the Tender Offer) of all shares validly
tendered and not withdrawn as of the last time tenders could have been made
pursuant to such Tender Offer (the "Expiration Time") (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) on such day times the Market Price
(determined without regard to this proviso) of the Common Stock on the
Trading Day next succeeding the Expiration Time. If the application of this
clause (vi) to any Tender Offer would result in an increase in the Market
Price (determined without regard to this proviso) for any trade, no
adjustment shall be made for such Tender Offer under this clause (vi) for
such day.
"Maximum Share Amount" means 3,478,613 shares, (such amount to be subject
to equitable adjustment from time to time on terms reasonably acceptable to the
Majority Holders for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring or
with respect to which "ex-" trading commences after the date of filing this
Statement of Resolution with the Secretary of State of the State of Texas), of
Common Stock, or such greater number as permitted by the rules of the Nasdaq;
provided, however, that if for purposes of Rule 4460(i) of the Nasdaq (or any
successor or replacement provision of any stock exchange or stock market on
which the Common Stock is listed or traded) the (x) the issuance of the Notes
and the issuance of shares of Common Stock upon conversion thereof or (y) the
issuance of the common stock purchase warrants issued in connection with the
issuance of the Notes and the issuance of shares of Common Stock upon exercise
thereof is not required to be integrated with the issuance of the shares of
Series A Convertible Preferred Stock and the issuance of shares of Common Stock
upon conversion thereof, then in each such case the "Maximum Share Amount" shall
mean such greater number as equals the maximum number of shares of Common Stock
permitted by the rules of the Nasdaq (determined by pro rata allocation of any
increase thereof among the shares of Series A Convertible Preferred Stock based
on the number of shares of Series A Convertible Preferred Stock originally
represented by each certificate therefor) (such amount to be subject to
equitable adjustment in terms reasonably acceptable to the Majority Holders from
time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date of filing of this Statement of Resolution with the Secretary of State
of the State of Texas).
"Measurement Period" means, with respect to any date, the period of 25
consecutive Trading Days ending on the Trading Day prior to such date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"NYSE" means the New York Stock Exchange, Inc.
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"Option Share Surrender" means the surrender of shares of Common Stock to
the Corporation in payment of the exercise price or tax obligations incurred in
connection with the exercise of a stock option granted by the Corporation to any
of its employees, directors or consultants.
"Optional Redemption Event" means the occurrence on or before September 4,
2001 of any one of the following events:
(1) For so long as the Common Stock is listed for trading on the Nasdaq
SmallCap, the NYSE or the AMEX, for any period of five consecutive Trading
Days there shall be no reported sale price of the Common Stock on the Nasdaq,
the Nasdaq SmallCap, the NYSE or the AMEX;
(2) The inability for 45 or more days (whether or not consecutive) of any
holder of shares of Series A Convertible Preferred Stock to sell shares of
Common Stock issued or issuable on conversion of shares of Series A
Convertible Preferred Stock pursuant to the Registration Statement for any
reason on each of such 45 days;
(3) The Corporation shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of shares of
Series A Convertible Preferred Stock as and when required by Section 10 or
shall default in the timely performance of its obligations under Section
12(d)(7) or (B) the Corporation shall fail or default in the timely
performance of any material obligation (other than as specifically set forth
elsewhere in this definition) to a holder of shares of Series A Convertible
Preferred Stock under the terms of this Statement of Resolution or under the
Registration Rights Agreement or any other agreement or document entered into
in connection with the issuance of shares of Series A Convertible Preferred
Stock, as such instruments may be amended from time to time and such failure
or default shall continue for ten business days after notice thereof from any
holder of shares of Series A Convertible Preferred Stock to the Corporation;
(4) Any consolidation or merger of the Corporation with or into another
entity (other than a merger or consolidation of a subsidiary of the
Corporation into the Corporation or a wholly-owned subsidiary of the
Corporation) where the shareholders of the Corporation immediately prior to
such transaction do not collectively own at least 51% of the outstanding
voting securities of the surviving corporation of such consolidation or
merger immediately following such transaction or the common stock of such
surviving corporation is not listed for trading on the NYSE, the AMEX, the
Nasdaq or the Nasdaq SmallCap or any sale or other transfer of all or
substantially all of the assets of the Corporation; or
(5) The taking of any action, including any amendment to the Corporation's
Articles of Incorporation, without the consent of the Majority Holders
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which materially and adversely affects the rights of any holder of shares of
Series A Convertible Preferred Stock.
"Optional Redemption Notice" means a notice from a holder of shares of
Series A Convertible Preferred Stock to the Corporation which states (1) that
the holder delivering such notice is thereby requiring the Corporation to redeem
shares of Series A Convertible Preferred Stock pursuant to Section 11, (2) in
general terms the Optional Redemption Event giving rise to such redemption, and
(3) the number of shares of Series A Convertible Preferred Stock held by such
holder which are to be redeemed.
"Optional Redemption Price" means the Premium Price on the applicable
redemption date.
"Parity Dividend Stock" means any class or series or the Corporation's
capital stock ranking, as to dividends, on a parity with the Series A
Convertible Preferred Stock.
"Parity Liquidation Stock" means any class or series of the Corporation's
capital stock having parity as to liquidation rights with the Series A
Convertible Preferred Stock.
"Premium Percentage" means 115%.
"Premium Price" means, for any share of Series A Convertible Preferred
Stock as of any date of determination, the product obtained by multiplying (a)
the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but
unpaid dividends on such share of Series A Convertible Preferred Stock to the
date of determination, plus (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 5) to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of shares of Series A
Convertible Preferred Stock pursuant to Section 9(a) determined in accordance
therewith.
"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; and
(2) the Converted Market Price on the applicable Redemption Date; provided,
however, that if in connection with any determination of the Redemption Price
the amount specified in clause (y) of the definition of the term Converted
Market Price is greater than 200% of the Ceiling Price on the date as of
which such amount is determined, then for purposes of computing the
Redemption Price in such instance, the amount otherwise specified in clause
(y) of the definition of the term Converted Market Price shall be reduced by
20% of the amount by which (A) the amount otherwise specified in clause (y)
of the definition of the term Converted Market Price exceeds (B) the Ceiling
Price on the date as of which such amount is determined.
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"Registration Event" shall mean (1) the Registration Statement is not
effective within 105 days of the Issuance Date, if the Registration Statement is
on Form S-3, or 120 days after the Issuance Date, if the Registration Statement
is on Form S-1, (2) the Company fails to file the Registration Statement with
the SEC within 60 days after the Issuance Date, (3) the Registration Statement
shall cease to be available for use by any holder of shares of Series A
Convertible Preferred Stock who is named therein as a selling stockholder for
any reason (including, without limitation, by reason of an SEC stop order, a
material misstatement or omission in the Registration Statement or the
information contained in the Registration Statement having become outdated);
provided, however, that no Registration Event pursuant to this clause (3) shall
be deemed to occur prior to the SEC Effective Date, or (4) a holder of shares of
Series A Preferred Stock having become unable to convert any shares of Series A
Preferred Stock in accordance with Section 10(a) for any reason (other than by
reason of the 4.9% limitation on beneficial ownership set forth therein or a
redemption or repurchase thereof).
"Registration Rights Agreement" means the Registration Rights Agreement
entered into between the Corporation and the original holders of the shares of
Series A Convertible Preferred Stock, as amended or modified from time to time
in accordance with their respective terms.
"Registration Statement" means the Registration Statement required to be
filed by the Corporation with the SEC pursuant to Section 1 of the Registration
Rights Agreement.
"SEC" means the United States Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is first
declared effective by the SEC.
"Senior Dividend Stock" means any class or series of capital stock of the
Corporation ranking senior as to dividends to the Series A Convertible Preferred
Stock.
"Senior Liquidation Stock" means any class or series of capital stock of
the Corporation ranking senior as to liquidation rights to the Series A
Convertible Preferred Stock.
"Series A Convertible Preferred Stock" means the Series A Convertible
Preferred Stock, $.01 par value, of the Corporation.
"Series D Convertible Preferred Stock" means the Series D Convertible
Preferred Stock, $.01 par value, of the Corporation.
"Share Limitation Redemption Date" shall mean each date on which the
Corporation is required to redeem shares of Series A Convertible Preferred Stock
as provided in Section 7(a).
"Share Limitation Redemption Price" means the Premium Price on the
applicable Share Limitation Redemption Date.
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"Stockholder Approval" shall mean the approval by a majority of the votes
cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Corporation (duly convened at which a quorum
was present), or a written consent of holders of shares of Common Stock entitled
to such number of votes given without a meeting, of the issuance by the
Corporation of 20% or more of the Common Stock of the Corporation outstanding on
the Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series A Convertible Preferred Stock, as and
to the extent required under Rule 4460(i) of the Nasdaq as in effect from time
to time or any successor provision.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the principal securities market for the Common Stock is open for
general trading of securities.
"Transfer Agent" means American Stock Transfer & Trust Company, or its duly
appointed successor, as transfer agent for the Series A Convertible Preferred
Stock.
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SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Convertible Preferred Stock", and the number of shares
constituting the Series A Convertible Preferred Stock shall be 2,500, and shall
not be subject to increase.
SECTION 3. LIMITATION ON ISSUANCE. Of the authorized shares of Series A
Convertible Preferred Stock, 500 shares may be issued only as dividends on the
outstanding shares of Series A Convertible Preferred Stock.
SECTION 4. RANK. All Series A Convertible Preferred Stock shall rank (i)
senior to the Common Stock, Series C Convertible Preferred Stock and Series D
Convertible Preferred Stock of the Corporation now or hereafter issued, as to
payment of dividends and distribution of assets upon liquidation, dissolution,
or winding up of the Corporation, whether voluntary or involuntary, (ii) junior
to the Series B Senior Convertible Preferred Stock of the Corporation, both as
to payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary
and (iii) senior to any additional series of the class of Preferred Stock which
series the Board of Directors may from time to time authorize and any additional
class of preferred stock (or series of preferred stock of such class) which the
Board of Directors or the stockholders may from time to time authorize in
accordance herewith.
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SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series
A Convertible Preferred Stock shall be entitled to receive, when, as, and if
declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $60.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series A Convertible Preferred Stock and shall be payable
quarterly on February 15, May 15, August 15, and November 15 of each year
commencing November 15, 1998 (except that if any such date is a Saturday,
Sunday, or legal holiday, then such dividend shall be payable on the next
succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of
record as they appear on the stock books of the Corporation on such record
dates, not more than 20 nor less than 10 days preceding the payment dates for
such dividends, as shall be fixed by the Board. Dividends on the Series A
Convertible Preferred Stock shall be paid in cash or, subject to the limitations
in Section 5(b) hereof, Dividend Shares or any combination of cash and Dividend
Shares, at the option of the Corporation as hereinafter provided. The amount of
the dividends payable per share of Series A Convertible Preferred Stock for each
quarterly dividend period shall be computed by dividing the annual dividend
amount by four. The amount of dividends payable for the initial dividend period
and any period shorter than a full quarterly dividend period shall be computed
on the basis of a 360-day year of twelve 30-day months. Dividends not paid on a
payment date, whether or not such dividends have been declared, will bear
interest at the rate of 14% per annum until paid (or such lesser rate as shall
be the maximum rate allowable by applicable law). No dividends or other
distributions, other than the dividends payable solely in shares of any Junior
Dividend Stock, shall be paid or set apart for payment on any shares of Junior
Dividend Stock, and no purchase, redemption, or other acquisition shall be made
by the Corporation of any shares of Junior Dividend Stock (except for Option
Share Surrenders), unless and until all accrued and unpaid dividends on the
Series A Convertible Preferred Stock and interest on dividends in arrears at the
rate specified herein shall have been paid or declared and set apart for
payment.
If at any time any dividend on any Senior Dividend Stock shall be in
arrears, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series A Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any Parity
Dividend Stock for any period unless all accrued but unpaid dividends (and
interest on dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series A Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series A Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series A Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series A
Convertible Preferred
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Stock (and interest on dividends in arrears at the rate specified herein) and
the Parity Dividend Stock shall be paid or declared and set apart for payment
pro rata, so that the amount of dividends paid or declared and set apart for
payment per share on the Series A Convertible Preferred Stock and the Parity
Dividend Stock shall in all cases bear to each other the same ratio that accrued
and unpaid dividends per share on the shares of Series A Convertible Preferred
Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 5 shall not be
deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(b) If the Corporation elects in the exercise of its sole discretion to
issue Dividend Shares in payment of dividends on the Series A Convertible
Preferred Stock in respect of any dividend payment date, the Corporation shall
issue and deliver, or cause to be issued and delivered, by the third Trading Day
after such dividend payment date to each holder of shares of Series A
Convertible Preferred Stock a certificate representing the number of whole
Dividend Shares arrived at by dividing (x) the total amount of cash dividends
such holder would be entitled to receive if the aggregate dividends on the
Series A Convertible Preferred Stock held by such holder which are being paid in
Dividend Shares were being paid in cash by (y) $1,000.00; provided, however,
that if certificates representing Dividend Shares are issued and delivered to
holders of Series A Convertible Preferred Stock subsequent to the third Trading
Day after a dividend payment date, the amount so divided into such total amount
of cash dividends will be reduced by $10.00 for each Trading Day after the third
Trading Day following such dividend payment date to the date of delivery of
Dividend Shares. No fractional Dividend Shares shall be issued in payment of
dividends. In lieu thereof, the Corporation shall pay cash in an amount equal to
the balance of such dividend which is not paid in Dividend Shares. The
Corporation shall not exercise its right to issue Dividend Shares in payment of
dividends on Series A Convertible Preferred Stock if:
(ii) the number of shares of Series A Convertible Preferred Stock at
the time authorized, unissued and unreserved for all purposes, or held in
the Corporation's treasury, is insufficient to permit the conversion of
such Dividend Shares into shares of Common Stock;
(iii) the issuance or delivery of Dividend Shares as a dividend payment
or the issuance of shares of Common Stock upon conversion of such Dividend
Shares by the holder thereof would require registration with or approval of
any governmental authority under any law or regulation, and such
registration or approval has not been effected or obtained or is not in
effect or the Registration Statement is unavailable for use by such holder
for the resale of such shares of Common Stock; provided, however, that this
limitation shall not be deemed to be applicable at any time prior to the
date which is 105 days after the Issuance Date, if the Registration
Statement is on Form S-3, or 120 days after the Issuance Date, if the
Registration Statement is on Form S-1, if this limitation otherwise would
be applicable solely because the Registration Statement shall not yet have
been
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declared effective, so long as the Corporation shall be in compliance in
all material respects with its obligations under the Registration Rights
Agreement;
(iv) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock
is then listed; or have not been approved for quotation if the Common Stock
is traded in the over-the-counter market;
(v) the number of shares of Common Stock registered pursuant to
Section 1 of the Registration Rights Agreement for resale upon issuance
upon conversion of Dividend Shares shall be sufficient (after taking into
account the number of shares of Common Stock issued or issuable upon
conversion of Dividend Shares theretofore issued) to prevent the resale
pursuant to the Registration Statement of the shares of Common Stock
issuable upon conversion of such Dividend Shares;
(vi) the shares of Common Stock issuable upon conversion of such
Dividend Shares (A) cannot be sold or transferred without restriction by
unaffiliated holders who receive such Dividend Shares or (B) are no longer
listed on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; or
(vii) an Optional Redemption Event shall have occurred and any holder
of shares of Series A Convertible Preferred Stock shall have exercised
optional redemption rights under Section 11 by reason of such Optional
Redemption Event and the Corporation shall not have paid the Optional
Redemption Price to each holder.
Dividend Shares issued in payment of dividends on Series A Convertible
Preferred Stock pursuant to this Section and shares of Common Stock issuable
upon conversion of such Dividend Shares shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of the
Corporation; the issuance and delivery thereof is hereby authorized; and the
delivery will be, and for all purposes shall be deemed to be, payment in full of
the cumulative dividends to which holders are entitled on the applicable
dividend payment date.
(c) Neither the Corporation nor any subsidiary of the Corporation shall
redeem, repurchase or otherwise acquire in any one transaction or series of
related transactions any shares of Common Stock, Junior Dividend Stock or Junior
Liquidation Stock if the number of shares so repurchased, redeemed or otherwise
acquired in such transaction or series of related transactions (excluding any
Option Share Surrender) is more than either (x) 5.0% of the number of shares of
Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may
be, outstanding immediately prior to such transaction or series of related
transactions or (y) 1% of the number of shares of Common Stock, Junior Dividend
Stock or Junior Liquidation Stock, as the case may be, outstanding immediately
prior to such transaction or series of related transactions if such transaction
or series of related transactions is with any one person or group of affiliated
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persons, unless the Corporation or such subsidiary offers to purchase for cash
from each holder of shares of Series A Convertible Preferred Stock at the time
of such redemption, repurchase or acquisition the same percentage of such
holder's shares of Series A Convertible Preferred Stock as the percentage of the
number of outstanding shares of Common Stock, Junior Dividend Stock or Junior
Liquidation Stock, as the case may be, to be so redeemed, repurchased or
acquired at a purchase price per share of Series A Convertible Preferred Stock
equal to the greater of (i) the Premium Price in effect on the date of purchase
pursuant to this Section 5(c) and (ii) the Converted Market Price on the date of
purchase pursuant to this Section 5(c); provided, however, that if in connection
with any determination of the purchase price payable pursuant to this Section
5(c) the amount specified in clause (y) of the definition of the term Converted
Market Price is greater than 200% of the Ceiling Price on the date as of which
such amount is determined, then for purposes of computing the purchase price
payable pursuant to this Section 5(c) in such instance, the amount otherwise
specified in clause (y) of the definition of the term Converted Market Price
shall be reduced by 20% of the amount by which (A) the amount otherwise
specified in clause (y) of the definition of the term Converted Market Price
exceeds (B) the Ceiling Price on the date as of which such amount is determined.
(d) Neither the Corporation nor any subsidiary of the Corporation shall (1)
make any Tender Offer for outstanding shares of Common Stock, unless the
Corporation contemporaneously therewith makes an offer, or (2) enter into an
agreement regarding a Tender Offer for outstanding shares of Common Stock by any
person other than the Corporation or any subsidiary of the Corporation, unless
such person agrees with the Corporation to make an offer, in either such case to
each holder of outstanding shares of Series A Convertible Preferred Stock to
purchase for cash at the time of purchase in such Tender Offer the same
percentage of shares of Series A Convertible Preferred Stock held by such holder
as the percentage of outstanding shares of Common Stock offered to be purchased
in such Tender Offer at a price per share of Series A Convertible Preferred
Stock equal to the greater of (i) the Premium Price in effect on the date of
purchase pursuant to this Section 5(d) and (ii) the Converted Market Price on
the date of purchase pursuant to this Section 5(d).
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SECTION 6. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series A Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series A Convertible
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; provided, however, that such rights shall accrue to the
holders of Series A Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preference of the holders
of Senior Liquidation Stock are fully met. After the liquidation preferences of
the Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series A Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
Liquidation Preference of the shares of Series A Convertible Preferred Stock and
the liquidation preference of the shares of Parity Liquidation Stock, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation. Neither a consolidation or merger of
the Corporation with another corporation nor a sale or transfer of all or part
of the Corporation's assets for cash, securities, or other property in and of
itself will be considered a liquidation, dissolution or winding up of the
Corporation.
SECTION 7. MANDATORY REDEMPTION.
(a) MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1)
Notwithstanding any other provision herein, unless the Stockholder Approval
shall have been obtained from the stockholders of the Corporation or waived by
the Nasdaq, so long as the Common Stock is listed on the Nasdaq, the Nasdaq
SmallCap, the NYSE or the AMEX, the Corporation shall not be required to issue
upon conversion of shares of Series A Convertible Preferred Stock pursuant to
Section 10 more than the Maximum Share Amount. The Maximum Share Amount shall be
allocated among the shares of Series A Convertible Preferred Stock at the time
of initial issuance thereof pro rata based on the initial issuance of 2,000
shares of Series A Convertible Preferred Stock. Each certificate for shares of
Series A Convertible Preferred Stock initially issued shall bear a notation as
to the number of shares constituting the portion of the Maximum Share Amount
allocated to the shares of Series A Convertible Preferred Stock represented by
such certificate for purposes of conversion thereof. The Corporation shall
maintain records which show the number of shares of Series A Convertible
Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on
the shares of Series A Convertible Preferred Stock represented by each
certificate, which records shall be controlling in the absence of manifest
error. Each such additional share of Series A Convertible Preferred Stock shall
be allocated a portion of the Maximum Share Amount allocated to the shares of
Series A Convertible Preferred Stock in respect of which such additional shares
of Series A Convertible Preferred Stock are issued as a dividend and the
certificate for such additional shares of Series A Convertible Preferred Stock
shall bear a notation as to the certificate number of the share of Series A
Convertible Preferred Stock in respect of which such additional share of Series
A Convertible Preferred Stock is
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issued as a dividend. Upon surrender of any certificate for shares of Series A
Convertible Preferred Stock for transfer or re-registration thereof (or, at the
option of the holder, for conversion pursuant to Section 10(a) of less than all
of the shares of Series A Convertible Preferred Stock represented thereby), the
Corporation shall make a notation on the new certificate issued upon such
transfer or re-registration or evidencing such unconverted shares, as the case
may be, as to the remaining number of shares of Common Stock from the Maximum
Share Amount remaining available for conversion of the shares of Series A
Convertible Preferred Stock evidenced by such new certificate. If any
certificate for shares of Series A Convertible Preferred Stock is surrendered
for split-up into two or more certificates representing an aggregate number of
shares of Series A Convertible Preferred Stock equal to the number of shares of
Series A Convertible Preferred Stock represented by the certificate so
surrendered (as reduced by any contemporaneous conversion of shares of Series A
Convertible Preferred Stock represented by the certificate so surrendered), each
certificate issued on such split-up shall bear a notation of the portion of the
Maximum Share Amount allocated thereto determined by pro rata allocation from
among the remaining portion of the Maximum Share Amount allocated to the
certificate so surrendered. If any shares of Series A Convertible Preferred
Stock represented by a single certificate are converted in full pursuant to
Section 10, all of the portion of the Maximum Share Amount allocated to such
shares of Series A Convertible Preferred Stock which remains unissued after such
conversion shall be re-allocated pro rata to the outstanding shares of Series A
Convertible Preferred Stock held of record by the holder of record at the close
of business on the date of such conversion of the shares of Series A Convertible
Preferred Stock so converted, and if there shall be no other shares of Series A
Convertible Preferred Stock held of record by such holder at the close of
business on such date, then such portion of the Maximum Share Amount shall be
allocated pro rata among the shares of Series A Convertible Preferred Stock
outstanding on such date.
(2) The Corporation shall promptly, but in no event later than five
business days after the occurrence, give notice to each holder of shares of
Series A Convertible Preferred Stock (by telephone line facsimile transmission
at such number as such holder has specified in writing to the Corporation for
such purposes or, if such holder shall not have specified any such number, by
overnight courier or first class mail, postage prepaid, at such holder's address
as the same appears on the stock books of the Corporation) and any holder of
shares of Series A Convertible Preferred Stock may at any time after the
occurrence give notice to the Corporation, in either case, if at any time on or
after December 16, 1998 and on or prior to September 4, 2001 on any ten Trading
Days within any period of 20 consecutive Trading Days the Corporation would not
have been required to convert shares of Series A Convertible Preferred Stock of
such holder in accordance with Section 10(a) as a consequence of the limitations
set forth in Section 7(a)(1) had the shares of Series A Convertible Preferred
Stock held by such holder been converted in full into Common Stock on each such
day, determined without regard to the limitation, if any, on such holder
contained in the proviso to the second sentence of Section 10(a) (any such
notice, whether given by the Corporation or a holder, an "Inconvertibility
Notice"). If the Corporation shall have given or been required to give any
Inconvertibility Notice, or if a holder shall have given any Inconvertibility
Notice, then within ten Trading Days after such Inconvertibility Notice is given
or was required
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to be given, the holder receiving or giving, as the case may be, such
Inconvertibility Notice shall have the right by written notice to the
Corporation (which written notice may be contained in the Inconvertibility
Notice given by such holder) to direct the Corporation to redeem the portion of
such holder's outstanding shares of Series A Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series A
Convertible Preferred Stock) as shall not, on the business day prior to the date
of such redemption, be convertible into shares of Common Stock by reason of the
limitations set forth in Section 7(a)(1) (determined without regard to the
limitation, if any, on beneficial ownership of Common Stock by such holder
contained in the proviso to the second sentence of Section 10(a)), within ten
business days after such holder so directs the Corporation, at a price per share
equal to the Share Limitation Redemption Price. If a holder of shares of Series
A Convertible Preferred Stock directs the Corporation to redeem outstanding
shares of Series A Convertible Preferred Stock and, prior to the date the
Corporation is required to redeem such shares of Series A Convertible Preferred
Stock, the Corporation would have been able, within the limitations set forth in
Section 7(a)(1), to convert all of such holder's shares of Series A Convertible
Preferred Stock (determined without regard to the limitation, if any, on
beneficial ownership of shares of Common Stock by such holder contained in the
proviso to the second sentence of Section 10(a)) on any ten Trading Days within
any period of 15 consecutive Trading Days commencing after the period of 20
consecutive Trading Days which gave rise to the applicable Inconvertibility
Notice from the Corporation or such holder of shares of Series A Convertible
Preferred Stock, as the case may be, had such holder exercised its right to
convert all of such holder's shares of Series A Convertible Preferred Stock into
Common Stock on each of such ten Trading Days within such 15 Trading Day period,
then the Corporation shall not be required to redeem any shares of Series A
Convertible Preferred Stock by reason of such Inconvertibility Notice.
(3) Notwithstanding the giving of any Inconvertibility Notice by the
Corporation to the holders of Series A Convertible Preferred Stock pursuant to
Section 7(a)(2) or the giving or the absence of any notice by the holders of the
Series A Convertible Preferred Stock in response thereto or any redemption of
shares of Series A Convertible Preferred Stock pursuant to Section 7(a)(2),
thereafter the provisions of Section 7(a)(2) shall continue to be applicable on
any occasion unless the Stockholder Approval shall have been obtained from the
stockholders of the Corporation or waived by the Nasdaq.
(4) On each Share Limitation Redemption Date (or such later date as a
holder of shares of Series A Convertible Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series A Convertible Preferred
Stock being redeemed pursuant to this Section 7(a)), the Corporation shall make
payment in immediately available funds of the applicable Share Limitation
Redemption Price to such holder of shares of Series A Convertible Preferred
Stock to be redeemed to or upon the order of such holder as specified by such
holder in writing to the Corporation at least one business day prior to such
Share Limitation Redemption Date. Upon redemption of less than all of the shares
of Series A Convertible Preferred Stock evidenced by a particular certificate,
promptly, but in no event later than three business days after surrender of such
certificate to the Corporation, the Corporation shall issue a replacement
certificate for the
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shares of Series A Convertible Preferred Stock evidenced by such certificate
which have not been redeemed. Only whole shares of Series A Convertible
Preferred Stock may be redeemed.
(b) NO OTHER MANDATORY REDEMPTION. The shares of Series A Convertible
Preferred Stock shall not be subject to mandatory redemption by the Corporation
except as provided in Section 7(a).
SECTION 8. NO SINKING FUND. The shares of Series A Convertible Preferred
Stock shall not be subject to the operation of a purchase, retirement or sinking
fund.
SECTION 9. OPTIONAL REDEMPTION.
(a) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall be in
compliance in all material respects with its obligations to the holders of
shares of Series A Convertible Preferred Stock (including, without limitation,
its obligations under the Amendment Agreement, the Registration Rights Agreement
and the provisions of this Statement of Resolution), (2) on the date the
Corporation Optional Redemption Notice is given and at all times until the
Redemption Date, the Registration Statement is effective and available for use
by each holder of shares of Series A Convertible Preferred Stock for the resale
of shares of Common Stock acquired by such holder upon conversion of all shares
of Series A Convertible Preferred Stock held by such holder and (3) no Optional
Redemption Event shall have occurred with respect to which, on the date a
Corporation Optional Redemption Notice is given or on the Redemption Date, any
holder of shares of Series A Convertible Preferred Stock shall have exercised
optional redemption rights under Section 11 by reason of such Optional
Redemption Event and the Corporation shall not have paid the Optional Redemption
Price to such holder, then the Corporation shall have the right, exercisable by
giving a Corporation Optional Redemption Notice not less than 30 days or more
than 60 days prior to the Redemption Date to all holders of record of the shares
of Series A Convertible Preferred Stock, at any time to redeem all or from time
to time to redeem any part of the outstanding shares of Series A Convertible
Preferred Stock in accordance with this Section 9(a). If the Corporation shall
redeem less than all outstanding shares of Series A Convertible Preferred Stock,
such redemption shall be made as nearly as practical pro rata from all holders
of shares of Series A Convertible Preferred Stock. Any Corporation Optional
Redemption Notice under this Section 9(a) shall be given to the holders of
record of the shares of Series A Convertible Preferred Stock at their addresses
appearing on the records of the Corporation; provided, however, that any failure
or defect in the giving of such notice to any such holder shall not affect the
validity of notice to or the redemption of shares of Series A Convertible
Preferred Stock of any other holder. On the Redemption Date (or such later date
as a holder of shares of Series A Convertible Preferred Stock surrenders to the
Corporation the certificate(s) for shares of Series A Convertible Preferred
Stock to be redeemed pursuant to this Section 9(a)), the Corporation shall make
payment of the applicable Redemption Price to each holder of shares of Series A
Convertible Preferred Stock to be redeemed in immediately available funds to
such account as specified by such holder in writing to the Corporation at least
one business day prior to the Redemption Date. A
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holder of shares of Series A Convertible Preferred Stock to be redeemed pursuant
to this Section 9(a) shall be entitled to convert such shares of Series A
Convertible Preferred Stock in accordance with Section 10(a) through the day
prior to the Redemption Date and (2) if the Corporation shall fail to pay the
Redemption Price of any share of Series A Convertible Preferred Stock when due,
at any time after the due date thereof until such date as the Corporation pays
the Redemption Price of such share of Series A Convertible Preferred Stock. No
share of Series A Convertible Preferred Stock as to which the holder exercises
the right of conversion pursuant to Section 10 or the optional redemption right
pursuant to Section 11 may be redeemed by the Corporation pursuant to this
Section 9(a) on or after the date of exercise of such conversion right or
optional redemption right, as the case may be, regardless of whether the
Corporation Optional Redemption Notice shall have been given prior to, or on or
after, the date of exercise of such conversion right or optional redemption
right, as the case may be.
(b) FINAL REDEMPTION. The Corporation shall have the right to redeem all,
but not less than all, outstanding shares of Series A Convertible Preferred
Stock at any time on or after the date which is 1,080 days after the Issuance
Date so long as (1) the Corporation shall be in compliance in all material
respects with its obligations to the holders of the Series A Convertible
Preferred Stock (including, without limitation, its obligations under the
Amendment Agreement, the Registration Rights Agreement and this Statement of
Resolution) and (2) no Optional Redemption Event shall have occurred with
respect to which on the date a Final Redemption Notice is to be given or on the
Final Redemption Date, any holder of shares of Series A Convertible Preferred
Stock shall have exercised optional redemption rights under Section 11 by reason
of such Optional Redemption Event and the Corporation shall not have paid the
Optional Redemption Price to such holder. In order to exercise its rights under
this Section 9(b), the Corporation shall give a Final Redemption Notice not less
than 20 or more than 40 Trading Days prior to the Final Redemption Date to all
holders of record of the shares of Series A Convertible Preferred Stock. Any
Final Redemption Notice shall be given to the holders of record of the shares of
Series A Convertible Preferred Stock by telephone line facsimile transmission to
such number as shown on the records of the Corporation for such purpose;
provided, however, that any failure or defect in the giving of such notice to
any such holder shall not affect the validity of notice to or the redemption of
shares of Series A Convertible Preferred Stock of any other holder. On the Final
Redemption Date (or such later date as a holder of shares of Series A
Convertible Preferred Stock surrenders to the Corporation the certificate(s) for
shares of Series A Convertible Preferred Stock to be redeemed pursuant to this
Section 9(b)), the Corporation shall make payment of the applicable Final
Redemption Price to each holder of shares of Series A Convertible Preferred
Stock to be redeemed in immediately available funds to such account as specified
by such holder in writing to the Corporation at least one business day prior to
the Final Redemption Date. A holder of shares of Series A Convertible Preferred
Stock to be redeemed pursuant to this Section 9(b) shall be entitled to convert
such shares of Series A Convertible Preferred Stock in accordance with Section
10 through the day prior to the Final Redemption Date and (2) if the Corporation
shall fail to pay the Final Redemption Price of any share of Series A
Convertible Preferred Stock when due, at any time after the due date thereof
until such date as the Corporation pays the Final Redemption Price of such share
of Series A
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Convertible Preferred Stock to such holder. No share of Series A Convertible
Preferred Stock as to which a holder exercises the right of conversion pursuant
to Section 10 or the optional redemption right pursuant to Section 11 may be
redeemed by the Corporation pursuant to this Section 9(b) on or after the date
of exercise of such conversion right or optional redemption right, as the case
may be, regardless of whether the Final Redemption Notice shall have been given
prior to, or on or after, the date of exercise of such conversion right or
optional redemption right, as the case may be. So long as during the period from
the Issuance Date through the date the Corporation pays the Final Redemption
Price the Corporation shall not have commenced a voluntary case or other
proceeding, and no person shall have commenced an involuntary case or other
proceeding against the Corporation, in any such case seeking liquidation,
reorganization or other relief with respect to the Corporation or its debts
under any bankruptcy, insolvency, receivership, moratorium, or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of the Corporation or any
substantial part of the Corporation's property, the Corporation shall not have
consented to any such relief or to the appointment of or taking possession by
any such official in an involuntary case or other proceeding commenced against
it, and the Corporation shall not have made a general assignment for the benefit
of creditors, then the Corporation shall have the right, exercisable by a
statement to such effect in the Final Redemption Notice, to pay the Final
Redemption Price by the issuance to the holders of shares of Series A
Convertible Preferred Stock to be redeemed of shares of Common Stock, valued for
this purpose at the Conversion Price on the Final Redemption Date, in lieu of
payment of cash, so long as all shares of Common Stock to be so issued would, if
issued as dividends on shares of Series A Convertible Preferred Stock, meet the
criteria in clauses (i) through (vi) of Section 5(b).
(c) NO OTHER OPTIONAL REDEMPTION. The shares of Series A Convertible
Preferred Stock shall not be subject to redemption at the option of the
Corporation except as provided in Sections 9(a) and 9(b).
SECTION 10. CONVERSION.
(a) CONVERSION AT OPTION OF HOLDER. The holders of the Series A Convertible
Preferred Stock may at any time on or after the earlier of (x) the SEC Effective
Date and (y) the date which is 90 days after the Issuance Date convert at any
time all or from time to time any part of their shares of Series A Convertible
Preferred Stock into fully paid and nonassessable shares of Common Stock and
such other securities and property as herein provided. Each share of Series A
Convertible Preferred Stock may be converted at the office of the Transfer Agent
or at such other additional office or offices, if any, as the Board of Directors
may designate, into such number of fully paid and nonassessable shares of Common
Stock (calculated as to each conversion to the nearest 1/100th of a share)
determined by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued
but unpaid dividends to the applicable Conversion Date on the share of Series A
Convertible Preferred Stock being converted, and (iii) accrued but unpaid
interest on the dividends on the share of Series A Convertible Preferred Stock
being converted in arrears to the applicable Conversion Date at the rate
provided in Section 5 by (y) the Conversion Price for such Conversion Date (the
"Conversion Rate");
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provided, however, that in no event shall any holder of shares of Series A
Convertible Preferred Stock be entitled to convert any shares of Series A
Convertible Preferred Stock in excess of that number of shares of Series A
Convertible Preferred Stock upon conversion of which the sum of (1) the number
of shares of Common Stock beneficially owned by such holder and all Aggregated
Persons of such holder (other than shares of Common Stock deemed beneficially
owned through the ownership of unconverted shares of Series A Convertible
Preferred Stock) and (2) the number of shares of Common Stock issuable upon the
conversion of the number of shares of Series A Convertible Preferred Stock with
respect to which the determination in this proviso is being made, would result
in beneficial ownership by such holder and all Aggregated Persons of such holder
of more than 4.9% of the outstanding shares of Common Stock. For purposes of the
proviso to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act and Regulation
13D-G thereunder, except as otherwise provided in clause (1) of the proviso to
the immediately preceding sentence.
(b) OTHER PROVISIONS. (1) Notwithstanding anything in this Section 10(b) to
the contrary, no change in the Conversion Amount pursuant to this Section 10(b)
shall actually be made until the cumulative effect of the adjustments called for
by this Section 10(b) since the date of the last change in the Conversion Amount
would change the Conversion Amount by more than 1%. However, once the cumulative
effect would result in such a change, then the Conversion Amount shall actually
be changed to reflect all adjustments called for by this Section 10(b) and not
previously made. Notwithstanding anything in this Section 10(b), no change in
the Conversion Amount shall be made that would result in the price at which a
share of Series A Convertible Preferred Stock is converted being less than the
par value of the Common Stock into which shares of Series A Convertible
Preferred Stock are at the time convertible.
(2) The holders of shares of Series A Convertible Preferred Stock at the
close of business on the record date for any dividend payment to holders of
Series A Convertible Preferred Stock shall be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such dividend
payment date; provided, however, that the holder of shares of Series A
Convertible Preferred Stock surrendered for conversion during the period between
the close of business on any record date for a dividend payment and the opening
of business on the corresponding dividend payment date must pay to the
Corporation, within five days after receipt by such holder, an amount equal to
the dividend payable on such shares on such dividend payment date if such
dividend is paid by the Corporation to such holder. A holder of shares of Series
A Convertible Preferred Stock on a record date for a dividend payment who (or
whose transferee) tenders any of such shares for conversion into shares of
Common Stock on or after such dividend payment date will receive the dividend
payable by the Corporation on such shares of Series A Convertible Preferred
Stock on such date, and the converting holder need not make any payment of the
amount of such dividend in connection with such conversion of shares of Series A
Convertible Preferred Stock. Except as provided above, no adjustment shall be
made in respect of cash dividends on Common Stock or Series A Convertible
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<PAGE>
Preferred Stock that may be accrued and unpaid at the date of surrender of
shares of Series A Convertible Preferred Stock.
(3) (A) The right of the holders of Series A Convertible Preferred Stock to
convert their shares shall be exercised by giving (which may be done by
telephone line facsimile transmission) a Conversion Notice to the Transfer
Agent. If a holder of Series A Convertible Preferred Stock elects to convert any
shares of Series A Convertible Preferred Stock in accordance with Section 10(a),
such holder shall not be required to surrender the certificate(s) representing
such shares of Series A Convertible Preferred Stock to the Corporation unless
all of the shares of Series A Convertible Preferred Stock represented thereby
are so converted. Each holder of shares of Series A Convertible Preferred Stock
and the Corporation shall maintain records showing the number of shares so
converted and the dates of such conversions or shall use such other method,
satisfactory to such holder and the Corporation, so as to not require physical
surrender of such certificates upon each such conversion. In the event of any
dispute or discrepancy, such records of the Corporation shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any shares of Series A Convertible Preferred Stock evidenced by a particular
certificate therefor are converted as aforesaid, the holder of Series A
Convertible Preferred Stock may not transfer the certificate(s) representing
such shares of Series A Convertible Preferred Stock unless such holder first
physically surrenders such certificate(s) to the Corporation, whereupon the
Corporation will forthwith issue and deliver upon the order of such holder of
shares of Series A Convertible Preferred Stock new certificate(s) of like tenor,
registered as such holder of shares of Series A Convertible Preferred Stock
(upon payment by such holder of shares of Series A Convertible Preferred Stock
of any applicable transfer taxes) may request, representing in the aggregate the
remaining number of shares of Series A Convertible Preferred Stock represented
by such certificate(s). Each holder of shares of Series A Convertible Preferred
Stock, by acceptance of a certificate for such shares, acknowledges and agrees
that (1) by reason of the provisions of this paragraph, following conversion of
any shares of Series A Convertible Preferred Stock represented by such
certificate, the number of shares of Series A Convertible Preferred Stock
represented by such certificate may be less than the number of shares stated on
such certificate, and (2) the Corporation may place a legend on the certificates
for shares of Series A Convertible Preferred Stock which refers to or describes
the provisions of this paragraph.
(B) The Corporation shall pay any transfer tax arising in connection with
any conversion of shares of Series A Convertible Preferred Stock except that the
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery upon conversion of
shares of Common Stock or other securities or property in a name other than that
of the holder of the shares of the Series A Convertible Preferred Stock being
converted, and the Corporation shall not be required to issue or deliver any
such shares or other securities or property unless and until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid. The number of shares of Common Stock to
be issued upon each conversion of shares of Series A Convertible Preferred Stock
shall be the number set forth in the applicable Conversion Notice which
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<PAGE>
number shall be conclusive absent manifest error. The Corporation shall notify a
holder who has given a Conversion Notice of any claim of manifest error within
one Trading Day after such holder gives such Conversion Notice and no such claim
of error shall limit or delay performance of the Corporation's obligation to
issue upon such conversion the number of shares of Common Stock which are not in
dispute. A Conversion Notice shall be deemed for all purposes to be in proper
form unless the Corporation notifies a holder of shares of Series A Convertible
Preferred Stock being converted within one Trading Day after a Conversion Notice
has been given (which notice shall specify all defects in the Conversion Notice)
and any Conversion Notice containing any such defect shall nonetheless be
effective on the date given if the converting holder promptly undertakes to
correct all such defects. If the Corporation shall have notified the Transfer
Agent and such holder of any such manifest error, and the Corporation and such
holder do not agree as to a resolution of such manifest error on or before the
date of such notice by the Corporation of an error in such Conversion Notice,
the Corporation shall on the date such notice is given submit the dispute to
Ernst & Young LLP or another firm of independent public accountants of
recognized national standing (the "Auditors") for determination and shall
instruct the Auditors to resolve such dispute and to notify the Corporation, the
Transfer Agent and such holder within one Trading Day after such dispute is
submitted to the Auditors. Immediately after receipt of timely notice of the
Auditors' determination (but in any event within three Trading Days after the
applicable Conversion Notice is given to the Transfer Agent), the Transfer Agent
shall issue to the converting Holder any additional shares of Common Stock to
which such holder is entitled based on the determination of the Auditors. The
Transfer Agent is authorized and directed to rely on the Auditors'
determination. If the Auditors shall fail to notify the Transfer Agent of their
determination within three Trading Days after the applicable Conversion Notice
is given to the Transfer Agent, then the Transfer Agent shall, within three
Trading Days after receipt of the applicable Conversion Notice, issue to the
converting holder any additional shares of Common Stock to which such Holder is
entitled based on the applicable Conversion Notice.
(4) The Corporation shall reserve from its authorized, unissued and
otherwise unreserved Common Stock free from preemptive and similar rights
666,667 shares in addition to the 2,000,000 shares of Common Stock previously
reserved for issuance upon conversion of the Series A Convertible Preferred
Stock (such amount to be subject to equitable adjustment from time to time on
terms reasonably acceptable to the Holder for stock splits, stock dividends,
combinations, capital reorganizations and similar events relating to the Common
Stock occurring on or after the Issuance Date) to provide for the issuance of
Common Stock upon the conversion in full of the Series A Convertible Preferred
Stock, subject to reduction from time to time by the number of shares of Common
Stock issued on conversion of the Series A Convertible Stock. The Corporation
(and any successor corporation) shall take all action necessary so that a number
of shares of the authorized but unissued Common Stock (or common stock in the
case of any successor corporation) sufficient to provide for the conversion of
the Series A Convertible Preferred Stock outstanding upon the basis hereinbefore
provided are at all times reserved by the Corporation (or any successor
corporation), free from preemptive rights, for such conversion, subject to the
provisions of the next succeeding paragraph. If the Corporation shall issue any
securities or make any change in its capital structure
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<PAGE>
which would change the number of shares of Common Stock into which each share of
the Series A Convertible Preferred Stock shall be convertible as herein
provided, the Corporation shall at the same time also make proper provision so
that thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Series A Convertible Preferred Stock on the new basis. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all of the outstanding shares of Series A
Convertible Preferred Stock, the Corporation promptly shall seek, and use its
best efforts to obtain and complete, such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(5) In case of any consolidation or merger of the Corporation with any
other corporation (other than a wholly-owned subsidiary of the Corporation) in
which the Corporation is not the surviving corporation, or in case of any sale
or transfer of all or substantially all of the assets of the Corporation, or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series A Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series A
Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series A Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger, sale,
transfer, or share exchange and on a basis which preserves the economic benefits
of the conversion rights of the holders of shares of Series A Convertible
Preferred Stock on a basis as nearly as practical as such rights exist hereunder
prior thereto. If, in connection with any such consolidation, merger, sale,
transfer, or share exchange, each holder of shares of Common Stock is entitled
to elect to receive securities, cash, or other assets upon completion of such
transaction, the Corporation shall provide or cause to be provided to each
holder of Series A Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series A Convertible Preferred
Stock held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
(6) If a holder shall have given a Conversion Notice for shares of Series A
Convertible Preferred Stock, the Corporation shall issue and deliver to such
person certificates for the Common Stock issuable upon such conversion within
three Trading Days after such Conversion Notice is given and the person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the
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<PAGE>
right to receive the Common Stock or other securities, cash, or other assets as
herein provided. If a holder shall have given a Conversion Notice as provided
herein, the Corporation's obligation to issue and deliver the certificates for
Common Stock shall be absolute and unconditional, irrespective of any action or
inaction by the converting holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Corporation to such holder, or any
setoff, counterclaim, recoupment, limitation or termination, or any breach or
alleged breach by such holder or any other person of any obligation to the
Corporation or any violation or alleged violation of law by such holder or any
other person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Corporation to the holder in connection with such
conversion. If the Corporation fails to issue and deliver the certificates for
the Common Stock to the holder converting shares of Series A Convertible
Preferred Stock pursuant to the first sentence of this paragraph as and when
required to do so, in addition to any other liabilities the Corporation may have
hereunder and under applicable law (1) the Corporation shall pay or reimburse
such holder on demand for all out-of-pocket expenses including, without
limitation, reasonable fees and expenses of legal counsel incurred by such
holder as a result of such failure, (2) the Conversion Percentage used to
determine the Conversion Price applicable to such conversion shall be reduced by
one percentage point from the Conversion Percentage otherwise used to calculate
the Conversion Price applicable to such conversion or, if such conversion is
based on the Ceiling Price, the Ceiling Price used to determine the Conversion
Price applicable to such conversion shall be reduced by one percentage point
from the amount that the Conversion Price otherwise would have been without
reduction pursuant hereto, in either such case, for each Trading Day after such
third Trading Day until such shares of Common Stock are delivered to such holder
and (3) such holder may by written notice (which may be given by mail, courier,
personal service or telephone line facsimile transmission) or oral notice
(promptly confirmed in writing) given at any time prior to delivery to such
holder of the certificates for the shares of Common Stock issuable upon such
conversion of shares of Series A Convertible Preferred Stock, rescind such
conversion, whereupon such holder shall have the right to convert such shares of
Series A Convertible Preferred Stock thereafter in accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon conversion of
Series A Convertible Preferred Stock but, in lieu of any fraction of a share of
Common Stock to purchase fractional shares of Common Stock which would otherwise
be issuable in respect of the aggregate number of such shares surrendered for
conversion at one time by the same holder, the Corporation shall pay in cash an
amount equal to the product of (i) the arithmetic average of the Market Price of
one share of Common Stock on the three consecutive Trading Days ending on the
Trading Day immediately preceding the Conversion Date times (ii) such fraction
of a share.
(8) The Conversion Amount shall be adjusted from time to time under certain
circumstances, subject to the provisions of Section 10(b)(1), as follows:
(i) In case the Corporation shall issue rights or warrants on a pro rata
basis to all holders of the Common Stock entitling such holders to subscribe for
or
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<PAGE>
purchase Common Stock on the record date referred to below at a price per share
less than the Current Price for such record date, then in each such case the
Conversion Amount in effect on such record date shall be adjusted in accordance
with the formula
C\\1\\ = C x O + N
------
O + N x P
-----
M
where
C\\1\\ = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock issuable pursuant
to the exercise of such rights or warrants.
P = the offering price per share of the additional shares (which
amount shall include amounts received by the Corporation in
respect of the issuance and the exercise of such rights or
warrants).
M = the Current Price per share of Common Stock on the record date.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. If
any or all such rights or warrants are not so issued or expire or terminate
before being exercised, the Conversion Amount then in effect shall be readjusted
appropriately.
(ii) In case the Corporation shall, by dividend or otherwise, distribute to
all holders of its Junior Stock (as hereinafter defined) evidences of its
indebtedness or assets (including securities, but excluding any warrants or
subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
C\\1\\ = C x M
-----
M - F
where
C\\1\\ = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Price per share of Common Stock on the record date
mentioned below.
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F = the aggregate amount of such cash dividend and/or the fair
market value on the record date of the assets or securities to
be distributed divided by the number of shares of Common Stock
outstanding on the record date. The Board of Directors shall
determine such fair market value, which determination shall be
conclusive.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series A Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
Section 10(b)(5), the holder of any Series A Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive
securities, cash, or assets other than Common Stock, the number or amount of
such securities or property so receivable upon conversion shall be subject to
adjustment from time to time in a manner and on terms nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
subparagraphs (i) to (iii) above.
(9) Except as otherwise provided above in this Section 10, no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein provided,
the Corporation shall send to each holder and each transfer agent, if any, for
the Series A Convertible Preferred Stock and the transfer agent for the Common
Stock, a statement signed by the Chairman of the Board, the President, or any
Vice President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 10, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation. Whenever
the Conversion Amount is adjusted, the Corporation will give notice by mail to
the holders of record of Series A Convertible Preferred Stock, which notice
shall be made within 15 days after the effective date of such adjustment and
shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.
(11) Whenever the Corporation shall propose to take any of the
actions specified in Section 10(b)(5) or in subparagraphs (i) or (ii) of Section
10(b)(8) which would result in any adjustment in the Conversion Amount under
this Section 10(b), the Corporation shall cause a notice to be mailed at least
20 days prior to the date on which the books of the Corporation will close or on
which a record will be taken for such action,
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<PAGE>
to the holders of record of the outstanding Series A Convertible Preferred Stock
on the date of such notice. Such notice shall specify the action proposed to be
taken by the Corporation and the date as of which holders of record of the
Common Stock shall participate in any such actions or be entitled to exchange
their Common Stock for securities or other property, as the case may be. Failure
by the Corporation to mail the notice or any defect in such notice shall not
affect the validity of the transaction.
SECTION 11. REDEMPTION AT OPTION OF HOLDERS.
(a) REDEMPTION RIGHT. If an Optional Redemption Event occurs, then, in
addition to any other right or remedy of any holder of shares of Series A
Convertible Preferred Stock, each holder of shares of Series A Convertible
Preferred Stock shall have the right, at such holder's option, to require the
Corporation to redeem all of such holder's shares of Series A Convertible
Preferred Stock, or any portion thereof, on the date that is 10 business days
after the date such holder gives the Corporation an Optional Redemption Notice
with respect to such Optional Redemption Event at any time while any of such
holder's shares of Series A Convertible Preferred Stock are outstanding, at a
price equal to the Optional Redemption Price.
(b) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS, ETC. (1) On
or before the fifth business day after the occurrence of an Optional Redemption
Event, the Corporation shall give to each holder of outstanding shares of Series
A Convertible Preferred Stock a notice of the occurrence of such Optional
Redemption Event and of the redemption right set forth herein arising as a
result thereof. Such notice from the Corporation shall set forth:
(i) the date by which the optional redemption right must be exercised, and
(ii) a description of the procedure (set forth below) which each such
holder must follow to exercise such holder's optional redemption right.
No failure of the Corporation to give such notice or defect therein shall limit
the right of any holder of shares of Series A Convertible Preferred Stock to
exercise the optional redemption right or affect the validity of the proceedings
for the redemption of such holder's shares of Series A Convertible Preferred
Stock.
(2) To exercise its optional redemption right, each holder of outstanding
shares of Series A Convertible Preferred Stock shall deliver to the Corporation
on or before the thirtieth day after the notice required by Section 11(b)(1) is
given to such holder (or if no such notice has been given by the Corporation to
such holder, within forty days after such holder first learns of such Optional
Redemption Event) an Optional Redemption Notice to the Corporation. An Optional
Redemption Notice may be revoked by such holder giving such Optional Redemption
Notice by giving notice of such revocation to the Corporation at any time prior
to the time the Corporation pays the Optional Redemption Price to such holder.
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<PAGE>
(3) If a holder of shares of Series A Convertible Preferred Stock shall
have given an Optional Redemption Notice, on the date which is three business
days after the date such Optional Redemption Notice is given (or such later date
as such holder surrenders such holder's certificates for the shares of Series A
Convertible Preferred Stock redeemed) the Corporation shall make payment in
immediately available funds of the applicable Optional Redemption Price to such
account as specified by such holder in writing to the Corporation at least one
business day prior to the applicable redemption date.
(c) OTHER. (1) In connection with a redemption pursuant to this Section 11
of less than all of the shares of Series A Convertible Preferred Stock evidenced
by a particular certificate, promptly, but in no event later than three Trading
Days after surrender of such certificate to the Corporation, the Corporation
shall issue and deliver to such holder a replacement certificate for the shares
of Series A Convertible Preferred Stock evidenced by such certificate which have
not been redeemed.
(2) An Optional Redemption Notice given by a holder of shares of Series A
Convertible Preferred Stock shall be deemed for all purposes to be in proper
form unless the Corporation notifies such holder in writing within three
business days after such Optional Redemption Notice has been given (which notice
shall specify all defects in such Optional Redemption Notice), and any Optional
Redemption Notice containing any such defect shall nonetheless be effective on
the date given if such holder promptly undertakes to correct all such defects.
No such claim of error shall limit or delay performance of the Corporation's
obligation to redeem all shares of Series A Convertible Preferred Stock not in
dispute whether or not such holder makes such undertaking.
SECTION 12. VOTING RIGHTS; CERTAIN RESTRICTIONS.
(a) VOTING RIGHTS. Except as otherwise required by law or expressly
provided herein, shares of Series A Convertible Preferred Stock shall not be
entitled to vote on any matter.
(b) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote or
consent of the holders of a majority of the outstanding shares of the Series A
Convertible Preferred Stock, voting separately as a class, will be required for
(1) any amendment, alteration, or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Articles of Incorporation if the amendment,
alteration, or repeal materially and adversely affects the powers, preferences,
or special rights of the Series A Convertible Preferred Stock, or (2) the
creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock;
provided, however, that any increase in the authorized Preferred Stock of the
Corporation or the creation and issuance of any stock which is both Junior
Dividend Stock and Junior Liquidation Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights and any
such increase or creation and issuance may be made without any such vote by the
holders of Series A Convertible Preferred Stock except as otherwise required by
law.
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<PAGE>
(c) REPURCHASES OF SERIES A CONVERTIBLE PREFERRED STOCK. The Corporation
shall not repurchase or otherwise acquire any shares of Series A Convertible
Preferred Stock (other than pursuant to Sections 7(a), 9(a), 9(b) or 11) unless
the Corporation offers to repurchase or otherwise acquire simultaneously a pro
rata portion of each holder's shares of Series A Convertible Preferred Stock for
cash at the same price per share.
(d) OTHER. So long as any shares of Series A Convertible Preferred Stock
are outstanding:
(1) PAYMENT OF OBLIGATIONS. The Corporation will pay and discharge, and
will cause each subsidiary of the Corporation other than EqualNet Corporation
and EqualNet Wholesale Services, Inc., to the extent not required or permitted
to do so in connection with their respective bankruptcy proceedings, to pay and
discharge, when due all their respective obligations and liabilities which are
material to the Corporation and its subsidiaries taken as a whole, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings.
(2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will keep, and
will cause each subsidiary of the Corporation to keep, all material property
useful and necessary in its business in good working order and condition,
ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary of the
Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance, including but not limited to, product liability insurance, in
such amounts and covering such risks as is reasonably adequate for the conduct
of their businesses and the value of their properties.
(3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Corporation will
continue, and will cause each subsidiary of the Corporation other than EqualNet
Corporation and EqualNet Wholesale Services, Inc. to continue, to engage in
business of the same general type as conducted by the Corporation and its
operating subsidiaries at the time this Statement of Resolution is filed with
the Secretary of State of the State of Texas, and will preserve, renew and keep
in full force and effect, and will cause each subsidiary of the Corporation
other than EqualNet Corporation and EqualNet Wholesale Services, Inc., to the
extent not required or permitted to do so in connection with their respective
bankruptcy proceedings, to preserve, renew and keep in full force and effect,
their respective corporate existence and their respective material rights,
privileges and franchises necessary or desirable in the normal conduct of
business.
(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause each
subsidiary of the Corporation to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate
35
<PAGE>
proceedings or (ii) where non-compliance therewith could not reasonably be
expected to have a material adverse effect on the business, condition (financial
or otherwise), operations, performance, properties or prospects of the
Corporation and its subsidiaries, taken as a whole.
(5) INVESTMENT COMPANY ACT. The Corporation will not be or become an open-
end investment trust, unit investment trust or face-amount certificate company
that is or is required to be registered under Section 8 of the Investment
Company Act of 1940, as amended, or any successor provision.
(6) TRANSACTIONS WITH AFFILIATES. The Corporation will not, and will not
permit any subsidiary of the Corporation, directly or indirectly, to pay any
funds to or for the account of, make any investment (whether by acquisition of
stock or indebtedness, by loan, advance, transfer of property, guarantee or
other agreement to pay, purchase or service, directly or indirectly, any
indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of
any assets, tangible or intangible, to, or participate in, or effect any
transaction in connection with, any joint enterprise or other joint arrangement
with, any Affiliate of the Corporation, except, on terms to the Corporation or
such subsidiary no less favorable than terms that could be obtained by the
Corporation or such subsidiary from a person that is not an Affiliate of the
Corporation, as determined in good faith by the Board of Directors.
(7) COMPLIANCE. The Corporation shall (a) use its commercially reasonable
best efforts to obtain knowledge of any failure or default by the Corporation in
the timely performance of any material obligation to the holders of the Series A
Convertible Preferred Stock under the terms of this Statement of Resolution, the
Amendment Agreement, the Registration Rights Agreement or any other document or
instrument executed and delivered by the Corporation in connection herewith or
therewith and (b) shall notify the holders of the Series A Convertible Preferred
Stock promptly, but in no event later than three Business Days after the
Corporation first learns of any such failure or default.
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<PAGE>
SECTION 13. OUTSTANDING SHARES. For purposes of this Statement of
Resolution, all shares of Series A Convertible Preferred Stock shall be deemed
outstanding except (i) from the applicable Conversion Date, each share of Series
A Convertible Preferred Stock converted into Common Stock, unless the
Corporation shall default in its obligation to issue and deliver shares of
Common Stock upon such conversion as and when required by Section 10; (ii) from
the date of registration of transfer, all shares of Series A Convertible
Preferred Stock held of record by the Corporation or any subsidiary or Affiliate
of the Corporation (other than any original holder of shares of Series A
Convertible Preferred Stock) and (iii) from the applicable Redemption Date,
Share Limitation Redemption Date, Final Redemption Date or date of redemption
pursuant to Section 11, all shares of Series A Convertible Preferred Stock which
are redeemed or repurchased, so long as in each case the Redemption Price, the
Share Limitation Redemption Price, the Final Redemption Price, the Optional
Redemption Price or other repurchase price, as the case may be, of such shares
of Series A Convertible Preferred Stock shall have been paid by the Corporation
as and when due hereunder.
SECTION 14. MISCELLANEOUS.
(a) NOTICES. Any notices required or permitted to be given under the terms
of this Statement of Resolution shall be in writing and shall be sent by mail or
delivered personally (which shall include telephone line facsimile transmission)
or by courier and shall be deemed given five days after being placed in the
mail, if mailed, or upon receipt, if delivered personally or by courier (a) in
the case of the Corporation, addressed to the Corporation at 1250 Wood Branch
Park Drive, Houston, Texas, 77079, Attention: Chief Executive Officer (telephone
line facsimile transmission number (281) 529-4650), or, in the case of any
holder of shares of Series A Convertible Preferred Stock, at such holder's
address or telephone line facsimile transmission number shown on the stock books
maintained by the Corporation with respect to the Series A Convertible Preferred
Stock or such other address as the Corporation shall have provided by notice to
the holders of shares of Series A Convertible Preferred Stock in accordance with
this Section or any holder of shares of Series A Convertible Preferred Stock
shall have provided to the Corporation in accordance with this Section.
(b) REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series A
Convertible Preferred Stock and (1) in the case of loss, theft or destruction,
of indemnity from the record holder of the certificate for such shares of Series
A Convertible Preferred Stock reasonably satisfactory in form to the Corporation
(and without the requirement to post any bond or other security) or (2) in the
case of mutilation, upon surrender and cancellation of the certificate for such
shares of Series A Convertible Preferred Stock, the Corporation will execute and
deliver to such holder a new certificate for such shares of Series A Convertible
Preferred Stock without charge to such holder.
(c) OVERDUE AMOUNTS. Except as otherwise specifically provided in Section 5
with respect to dividends in arrears on the Series A Convertible Preferred
37
<PAGE>
Stock, whenever any amount which is due to any holder of shares of Series A
Convertible Preferred Stock is not paid to such holder when due, such amount
shall bear interest at the rate of 14% per annum ( or such other rate as shall
be the maximum rate allowable by applicable law) until paid in full.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment as of March __, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
------------------------------
Mitchell H. Bodian
President and Chief Executive Officer
38
<PAGE>
Annex I
to
Articles of
Amendment
NOTICE OF CONVERSION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
EQUALNET COMMUNICATIONS CORP.
TO: American Stock Transfer & Trust Company,
as Transfer Agent and Registrar
6201 Fifteenth Avenue
Third Floor
Brooklyn, New York 11219
Attention: Mr. Barry Rosenthal
Facsimile No.: (718) 259-1144
(1) Pursuant to the terms of the Series A Convertible Preferred Stock
(the "Preferred Stock") of Equalnet Communications Corp., a Texas corporation
(the "Company"), the undersigned hereby elects to convert ________________
shares of the Preferred Stock together with accrued and unpaid dividends thereon
in the amount of $_______________ and interest on dividends in arrears in the
amount of $________________ into shares of Common Stock, $.01 par value (the
"Common Stock"), of the Company, or such other securities into which the
Preferred Stock is currently convertible. Capitalized terms used in this Notice
and not otherwise defined herein have the respective meanings provided in the
Amended Statement of Resolution of the Board of Directors Establishing and
Designating Series A Convertible Preferred Stock and Fixing the Rights and
Preferences of Such Series (the "Amended Statement of Resolution").
(2) Please issue a certificate or certificates for ________________
shares of Common Stock or other securities into which such number of shares of
Preferred Stock is convertible in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
--------------------- ---------------------
Name Name
--------------------- ---------------------
Address Address
--------------------- ---------------------
SS or Tax ID Number SS or Tax ID Number
<PAGE>
(3) The Conversion Date is _______________________. Check and complete
one of the following:
The undersigned elects to convert based on the Average Market Price of
the Common Stock. The Market Price of the Common Stock on each of the five
Trading Days (whether or not consecutive) during the 25 consecutive Trading
Days preceding the Conversion Date having the lowest Market Prices, and the
arithmetic average thereof are as follows:
Date Market Price
---------- ------------------
---------- ------------------
---------- ------------------
---------- ------------------
---------- ------------------
Arithmetic Average: $
-----------
OR
The undersigned elects to convert based on the Ceiling Price of the
Common Stock of $__________ applicable to conversions of Preferred Stock.
(4) If the shares of Common Stock issuable upon conversion of the Preferred
Stock have not been registered for resale under the Securities Act of 1933, as
amended (the "Act"), and this Notice is submitted prior to the date which is two
years after the Issuance Date, the undersigned represents and warrants that (i)
the shares of Common Stock not so registered are being acquired for the account
of the undersigned for investment, and not with a view to, or for resale in
connection with, the public distribution thereof other than pursuant to
registration under the Act, and that the undersigned has no present intention of
distributing or reselling the shares of Common Stock not so registered other
than pursuant to registration under the Act and (ii) the undersigned is an
"accredited investor" as defined in Regulation D under the Act. The undersigned
further agrees that (A) the shares of Common Stock not so registered shall not
be sold or transferred unless either (i) they first shall have been registered
under the
2
<PAGE>
Act and applicable state securities laws or (ii) the Company first shall have
been furnished with an opinion of legal counsel reasonably satisfactory to the
Company to the effect that such sale or transfer is exempt from the registration
requirements of the Act and (B) the Company may place a legend on the
certificate(s) for the shares of Common Stock not so registered to that effect
and place a stop-transfer restriction in its records relating to the shares of
Common Stock not so registered.
Date _________________________ ____________________________________
Signature of Holder (Must
be signed exactly as name
appears on the Preferred
Stock Certificate.)
3
<PAGE>
ANNEX E
EQUALNET COMMUNICATIONS CORP.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following historical consolidated financial information of Equalnet has
been derived from its historical consolidated financial statements and should be
read in conjunction with the separate consolidated financial statements and the
notes thereto incorporated in this Proxy Statement by reference. The historical
information is not necessarily indicative of results to be expected after the
ACMI Acquisition is consummated. The selected historical consolidated financial
information for Equalnet corresponds to its annual reporting period, which is
the fiscal year ending June 30.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER 31, YEAR ENDED JUNE 30,
-------------------------- -----------------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales $ 16,010,585 $ 14,808,555 $ 24,876,242 $ 46,588,496 $ 78,354,858 $67,911,405 $35,397,331
Gross profit (1,338,748) 3,815,002 2,884,562 12,107,368 16,547,745 13,256,092 6,595,815
Operating income (loss) (12,628,749) (3,596,517) (17,123,855) (10,746,344) (9,988,379) 2,964,158 1,026,426
Interest expense (1,334,941) (785,454) (1,145,262) 1,022,284 679,745 526,733 140,743
Income (loss) before income
taxes (13,945,713) (4,275,380) (17,943,388) (12,635,233) (11,077,266) 2,871,302 1,769,342
Net income (loss) (14,088,371) (4,275,380) (17,943,388) (14,980,544) (8,417,413) 2,364,245 1,769,342
Earnings (loss) per common
share(1) (0.73) (0.68) (1.64) (2.46) (1.40) 0.38 0.27
Cash dividends per share -- -- -- -- -- 0.61 0.22
BALANCE SHEET DATA:
Working capital (deficit) (16,045,188) (10,232,053) (13,559,609) (4,667,109) (3,161,437) 7,772,366 230,448
Total assets 32,019,879 12,667,760 27,760,447 19,162,160 34,595,832 39,315,569 9,044,595
Long-term debt and capital
leases, net of current portion 9,140,331 0 0 0 45,000 1,142,640 512,914
Shareholders' equity (deficit) (4,414,085) (5,386,177) 2,957,782 (1,688,539) 12,383,998 20,705,724 1,350,698
Book value per share (1.00) (0.10)
Income (loss) per share from
continuing operations (0.73) (1.64)
Pro forma book value per share
after giving effect to
the ACMI Acquisition (0.72) 0.03
Pro forma income (loss) per share
from continuing operations
after giving effect to
the ACMI Acquisition (0.67) (1.42)
</TABLE>
<PAGE>
ANNEX F
LIMIT L.L.C.
D/B/A ACMI
UNAUDITED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current Assets
Cash and Cash Equivalents $ 17,005
Accounts Receivable-Non Trade 203,356
Inventory-Materials and Debit Cards 349,346
Due From Consultants 31,998
----------
Total Current Assets 601,705
Fixed Assets
Furniture, Equipment and Switch 513,767
Less: Accumulated Depreciation (191,194)
----------
Net Fixed Assets 322,573
Other Assets
Purchased Goodwill Net of Amortization 386,371
Total Assets $1,310,649
==========
LIABILITIES AND CAPITAL
Current Liabilities --
Long Term Liabilities
Note Payable Purchase 1,000,000
Members' Equity
Members' Equity 310,649
----------
Total Liabilities and Members' Equity $1,310,649
==========
1
<PAGE>
LIMIT L.L.C.
D/B/A ACMI
UNAUDITED INCOME STATEMENTS
Period From
Inception (March 31,
Year Ended 1997) to
December 31, 1998 December 31, 1997
----------------- -----------------
Revenues
Commissions $ 133,649 $ 194,606
Telecard Sales 806,192 749,627
Hospitality 17,722 31,878
Travel Packs 83,205 9,668
Income Consultants 45,250 56,558
Other Income 8,283 240,880
---------- ----------
Total Revenue 1,094,301 1,283,013
Direct Expenses
Commissions Paid One Plus 43,003 70,912
Commissions Paid Telecards 68,294 97,482
Other Commissions Paid 11,282 17,085
Promotion Bonuses 97,041 91,128
Travel Packs 43,041 10,561
Printing Costs 69,383 69,813
Network Cost 116,255 115,394
---------- ----------
Total Direct Expenses 448,299 472,374
---------- ----------
Gross Profit 646,002 810,638
Other Expenses
Advertising 553 602
Bad Debt Expense 22,397 17,584
Bank Charges 11,172 12,568
Computer Support 3,727 1,350
Contract Labor 8,026 12,739
Dues and Subscriptions 9,705 9,228
Entertainment Expense 2,190 8,318
Equipment Rental 18,717 18,440
Insurance 22,318 23,148
Legal and Professional 5,900 4,631
Maintenance and Repairs 22,000 16,542
Meeting and Seminars 6,288 9,342
Office Supplies and Expense 11,103 10,162
Other Taxes 992 1,077
Payroll Expenses 83,131 134,014
Payroll Taxes 28,455 50,807
Postage and Shipping 12,743 20,252
Rent 67,680 61,741
Telephone 59,948 32,311
Travel 22,978 40,488
Utilities 11,686 11,343
---------- ----------
Total Other Expenses 431,709 493,678
---------- ----------
Net Income Before Interest and Depreciation 214,294 316,961
Interest 42,000 114,300
Depreciation 100,000 118,000
---------- ----------
Net Income $ 72,294 $ 84,661
========== ==========
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion contains forward-looking statements regarding
ACMI and its operations within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on the current plans and
expectations of ACMI and involve risks and uncertainties that could cause actual
future activities and results of operations to be materially different from
those set forth in the forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
financial information expressed as a percentage of revenues.
Period from
Inception (March
Year Ended 31, 1997) to
December 31, 1998 December 31, 1997
----------------- --------------------
Revenues..................... 100.0% 100.0%
Direct expenses.............. 41.1 36.8
Gross profit................. 58.9 63.2
Other expenses............... 39.5 37.7
Net income before interest
and depreciation............ 19.5 24.8
Net income................... 6.6 6.6
Year Ended December 31, 1998 Compared to Period From Inception
(March 31, 1997) to December 31, 1997
Revenues. Revenues decreased by $188,712, or 14.7%, from $1,283,013 in
the nine months ended December 31, 1997 to $1,094,301 in the year ended December
31,1998. The decrease in total revenues was primarily attributable to decreases
in revenues from commissions, telecard sales and other income. Commissions
decreased because of ACMI's shift away from 1+ business in late 1997 and early
1998, which was caused by ACMI's inability to control provisioning, billing and
customer service. Equalnet's acquisition of ACMI enables ACMI to reenter this
market. Other revenues decreased because of ACMI's decision to discontinue
sales of its "Virtual Personal Assistant" product.
Direct Expenses. As a percentage of revenues, direct expenses increased
from 36.8% for the nine months ended December 31, 1997 to 41.1% for the year
ended December 31, 1998. This percentage increase was primarily the result of
increased network costs that are expected to decrease because of the ACMI
Acquisition.
Other Expenses. As a percentage of revenues, other expenses increased
from 37.7% for the nine months ended December 31, 1997 to 39.5% for the year
ended December 31, 1998.
3
<PAGE>
This percentage increase was primarily the result of reduced gross revenues and
fixed overhead costs. Actual other expenses decreased by approximately $62,800.
Net Income Before Interest and Depreciation. For the reasons described
above, as a percentage of revenues, net income before interest and depreciation
decreased from 24.8% for the nine months ended December 31, 1997 to 19.5% for
the year ended December 31, 1998. We expect net income to increase as a
percentage of revenues because the ACMI Acquisition enables ACMI to sell 1+
service.
Net Income. As a percentage of revenues, net income did not vary from
the nine months ended December 31, 1997 to the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
ACMI's principal source of capital is its $1,000,000 note with a bank
lender. The note is currently being restructured to provide for amortization
over a three year period. The management of ACMI is not aware of any trends,
events or uncertainties that are reasonably likely to have a material impact on
ACMI's short-term or long-term liquidity.
4
<PAGE>
ANNEX G
EQUALNET COMMUNICATIONS CORP
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
Equalnet e.Volve Pro Forma Pro Forma
As of As of Purchase Reorganization
March 31, 1999 February 28, 1999 Combined Adjustments Adjustments Pro Forma
-------------- ----------------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 744,414 $ 313,648 $ 1,058,062 $ - $ 2,200,000 (E) $ 2,408,062
500,000 (F)
(1,350,000)(G)
Restricted cash - 1,089,683 1,089,683 1,089,683
Accounts receivable, net 13,235,942 976,878 14,212,820 14,212,820
Due from agents 337,120 - 337,120 337,120
Prepaid expenses and other 442,771 536,629 979,400 327,000 (K) 1,306,400
----------- ----------- ------------- ----------- ----------- -----------
Total current assets 14,760,247 2,916,838 17,677,085 - 1,677,000 19,354,085
Property and equipment, gross 21,249,124 6,516,561 27,765,685 27,765,685
Accumulated depreciation and
amortization (7,590,123) (907,845) (8,497,968) (8,497,968)
----------- ----------- ------------- ----------- ----------- -----------
13,659,001 5,608,716 19,267,717 - - 19,267,717
Goodwill - - - 23,700,000(A) 23,700,000
Customer acquisition costs, net 5,408,189 - 5,408,189 2,000,000(B) 7,408,189
Marketing agent contracts, net 1,835,342 - 1,835,342 1,835,342
Mexico VAT refund receivable - 1,945,149 1,945,149 1,945,149
Other assets 763,854 66,798 830,652 830,652
----------- ----------- ------------- ----------- ----------- -----------
Total assets $36,426,633 $10,537,501 $ 46,964,134 $25,700,000 $ 1,677,000 $74,341,134
=========== =========== ============= =========== =========== ===========
Liabilities and shareholders'
equity
Current liabilities - not
subject to compromise -
post petition
Payable to providers
of long distance services $ 1,155,335 $ - $ 1,155,335 $ - $ - $ 1,155,335
Accounts payable 4,827,511 - 4,827,511 4,827,511
Accrued expenses 2,351,788 - 2,351,788 2,351,788
Accrued sales taxes 985,437 - 985,437 985,437
Debt in default 6,092,553 - 6,092,553 6,092,553
Contractual obligations with
regard to receivable sales
agreement 3,783,071 - 3,783,071 3,783,071
Notes Payable 1,624,183 - 1,624,183 1,624,183
----------- ----------- ------------- ----------- ----------- -----------
Total current liabilities not
subject to compromise
- post petition 20,819,878 - 20,819,878 - - 20,819,878
Current liabilities - not
subject to compromise -
pre petition
Accrued sales tax 287,902 - 287,902 287,902
Contractual obligations with
regard to receivable sales
agreement 2,010,072 - 2,010,072 2,010,072
Notes payable 400,000 - 400,000 400,000
----------- ----------- ------------- ----------- ----------- -----------
Total current liabilities not
subject to compromise -
pre petition 2,697,974 - 2,697,974 - - 2,697,974
Current liabilities subject
to compromise 15,216,266 - 15,216,266 (1,350,000) (G) -
(3,281,250) (H)
(10,585,016) (J)
Current portion of long term debt - 250,000 250,000 250,000
Current portion of capital leases - 348,395 348,395 348,395
Accounts payable - 3,013,466 3,013,466 3,013,466
Accrued liabilities - 148,011 148,011 148,011
Customer deposits - 861,122 861,122 861,122
Other current liabilities - 788,555 788,555 788,555
----------- ----------- ------------- ----------- ----------- -----------
Total current liabilities 38,734,118 5,409,549 44,143,667 - (15,216,266) 28,927,401
</TABLE>
<PAGE>
EQUALNET COMMUNICATIONS CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
Equalnet e.Volve Pro Forma Pro Forma
As of As of Purchase Reorganization
March 31, 1999 February 28, 1999 Combined Adjustments Adjustments Pro Forma
-------------- ----------------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Debentures and notes payable,
less current portion 2,172,436 6,990,000 9,162,436 9,162,436
Capital lease obligations, less
current portion - 2,866,916 2,866,916 2,866,916
Convertible debt 2,559,812 - 2,559,812 (2,559,812)(I) -
Shareholders' equity (deficit)
Preferred stock, Series A 2,000,000 - 2,000,000 2,000,000
Preferred stock, Series B 3,000,000 - 3,000,000 3,000,000
Preferred stock, Series C 5,826,446 - 5,826,446 5,826,446
Preferred stock, Series D 2,002,235 - 2,002,235 2,002,235
Preferred stock, Series E - - - 500,000 (F) 500,000
Preferred stock, Series F - - - 2,559,812 (I) 2,559,812
Common stock 235,582 479,354 714,936 207,774 (C) 36,667 (E) 989,377
30,000 (H)
Treasury stock (2,522,644) - (2,522,644) (2,522,644)
Additional paid in capital 39,613,597 - 39,613,597 25,492,226 (C) 2,163,333 (E) 70,520,406
(59,873,344)(D) 3,251,250 (H)
Stock warrants 2,698,810 - 2,698,810 327,000 (K) 3,025,810
Deferred compensation (20,415) - (20,415) (20,415)
Retained deficit (59,873,344) (5,208,318) (65,081,662) 59,873,344 (D) 10,585,016 (J) 5,376,698
----------- ----------- ------------- ----------- ----------- -----------
Total shareholders, equity
(deficit) (7,039,733) (4,728,964) (11,768,697) 25,700,000 19,453,078 33,384,381
----------- ----------- ------------- ----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit) $36,426,633 $10,537,501 $ 46,964,134 $25,700,000 $ 1,677,000 $74,341,134
=========== =========== ============= =========== =========== ===========
</TABLE>
2
<PAGE>
EQUALNET COMMUNICATIONS CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------
Equalnet e.Volve
for the Nine for the Nine
Months Ended Months Ended Pro Forma
March 31, 1999 February 28, 1999 Combined Purchase Adjustments Pro Forma
-------------- ----------------- -------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
Sales $ 25,356,218 $ 18,465,697 $ 43,821,915 $ - $ 43,821,915
Cost of sales 24,809,039 14,720,520 39,529,559 39,529,559
-------------- ------------ ------------ ------------ ------------
Gross profit 547,179 3,745,177 4,292,356 4,292,356
Selling, general and
administrative expenses 8,488,203 4,208,993 12,697,196 12,697,196
Depreciation and amortization 8,867,608 8,867,608 1,185,000 (A) 11,196,748
1,144,140 (B)
-------------- ------------ ------------ ------------ ------------
Operating loss (16,808,632)# (463,816) (17,272,448) (2,329,140) (19,601,588)
Other income (expense)
Interest and dividend income 877 37,631 38,508 38,508
Interest expense (1,984,766) (407,160) (2,391,926) (2,391,926)
Other income (expense) (37,165) (4,284) (41,449) (41,449)
-------------- ------------ ------------ ------------ ------------
(2,021,054) (373,813) (2,394,867) (2,394,867)
Loss before federal income taxes
and reorganization costs (18,829,686)# (837,629) (19,667,315) (2,329,140) (21,996,455)
Provision (benefit) for federal
income taxes - - - -
-------------- ------------ ------------ ------------ ------------
Loss before reorganization costs (18,829,686)# (837,629) (19,667,315) (2,329,140) (21,996,455)
Reorganization costs (376,658) - (376,658) - (376,658)
-------------- ------------ ------------ ------------ ------------
Net loss $ (19,206,344)# $ (837,629) $(20,043,973) $ (2,329,140) $(22,373,113)
Preferred stock dividends (513,669) - (513,669) - (513,669)
-------------- ------------ ------------ ------------ ------------
Net loss available to common
shareholders $ (19,720,013) $ (837,629) $(20,557,642) $ (2,329,140) $(22,886,782)
============== ============ ============ ============ ============
Net loss per share - basic and
diluted $(1.02) $(0.26)
====== ======
</TABLE>
3
<PAGE>
EQUALNET COMMUNICATIONS CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------------------------
Equalnet e.Volve
for the Year for the Year SA Telecom for the
Ended Ended 12 Months Ended Pro Forma
June 30, 1998 May 31, 1998 June 30, 1998 Purchase Adjustments Pro Forma
-------------- ----------------- ----------------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
Sales $ 24,876,242 $ 2,067,604 $ 28,357,365 $ - $ 55,301,211
Cost of sales 21,991,680 1,823,644 24,877,337 48,692,661
-------------- ----------- ------------ ------------ ------------
Gross profit 2,884,562 243,960 3,480,028 6,608,550
Selling, general and
administrative expenses 14,139,010 3,040,519 24,105,524 41,084,538
Depreciation and amortization 4,734,741 - 3,118,137 1,580,000(A) 13,245,776
1,355,049(B)
2,257,333(L)
Aborted acquisition expense - 792,612 - 792,612
Bad debt expense related to
related party receivable - 31,585 - 31,585
Writedown of assets 1,134,666 420,000 32,984,316 (32,984,316)(M) 1,554,666
-------------- ----------- ------------ ------------ ------------
Operating loss (17,123,855) (4,040,756) (56,727,949) 30,049,267 (47,843,293)
Other income (expense)
Interest income 37,006 6,461 248 43,715
Interest expense (1,145,262) (100,432) (5,355,065) 4,894,666(N) (1,706,093)
Other income (expense) 288,723 (2,377) 31,293 317,639
Adjustment to reduce
liabilities to estimated
liquidation value of assets - - 63,044,181 (63,044,181)(M) -
-------------- ----------- ------------ ------------ ------------
(819,533) (96,348) 57,720,657 (58,149,515) (1,344,739)
Loss before federal income
taxes (17,943,388) (4,137,104) 992,708 (28,100,248) (49,188,032)
Provision (benefit) for
federal income taxes - - - -
-------------- ----------- ------------ ------------ ------------
Net (loss) Income $ (17,943,388) $(4,137,104) $ 922,708 $(28,100,248) $(49,188,032)
Preferred stock dividends 52,000 - 410,820 393,106 (N) 855,926
-------------- ----------- ------------ ------------ ------------
Net (loss) income available
to common shareholders $ (17,995,388) $(4,137,104) $ 581,888 $(28,493,354) $(50,043,958)
============== =========== ============ ============ ============
Net loss per share - basic and
diluted $ (1.64) $ (0.63)
============== ============
</TABLE>
4
<PAGE>
EQUALNET COMMUNICATIONS CORP
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated balance sheet presents the financial
position of the Registrant assuming the reverse merger with e.Volve Technology
Group, Inc. ("e.Volve") (formerly Orix Global Communications, Inc.) and EqualNet
Corporation's Plan of Reorganization (collectively the "Transactions") were
consummated as of March 31, 1999. The unaudited pro forma consolidated
statements of operations for the nine months ended March 31, 1999 and the year
ended June 30, 1998 assume the Transactions were consummated on July 1, 1997.
The unaudited pro forma consolidated statement of operations for the year ended
June 30, 1998 also assumes the acquisition of SA Telecom was consummated on July
1, 1997. The pro forma consolidated statements of operations for the nine months
ended March 31, 1999 and the year ended June 30, 1998 include the operations of
e.Volve for the nine months ended February 28, 1999 and the period from June 26,
1996 (inception) to May 31, 1998, respectively. The statements were prepared
taking into consideration certain equity transactions that occurred related to
the consummation of Equalnet Corporation's Plan of Reorganization.
The unaudited pro forma consolidated balance sheet and statement of operations
were prepared by the Company in accordance with generally accepted accounting
principles. All calculations have been made based upon certain assumptions and
adjustments described in these notes.
The allocation of the purchase price relating to the Plan of Merger with e.Volve
and the Registrant, which may be subject to certain adjustments as the
Registrant finalizes the allocation of the purchase price in accordance with
generally accepted accounting principles, is included in the unaudited pro forma
consolidated financial statements. The purchase price has been allocated based
upon the estimated fair value of the assets acquired and liabilities assumed.
The excess of the purchase price over the estimated fair value of the net assets
acquired at the acquisition date has been recorded as customer acquisition costs
and goodwill.
Certain amounts from the e.Volve and SA Telecom historical financial statements
have been reclassified to conform with the basis of presentation used by the
Registrant in preparing its consolidated financial statements.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical consolidated financial statements of the
Registrant. The Registrant's historical consolidated financial statements are
included in its Annual Report on Form 10-K for the fiscal year ended June 30,
1998, and Quarterly Reports on Form 10-Q for the quarters ended September 30,
1998, December 31, 1998 and March 31, 1999.
The unaudited pro forma consolidated financial statements do no purport to be
indicative of the financial position of the Registrant or the results of
operations that might have occurred had the acquisitions been concluded on July
1, 1997, nor are they necessarily indicative of future results.
5
<PAGE>
2. PRO FORMA ADJUSTMENTS
Adjustments have been made to the accompanying unaudited pro forma consolidated
balance sheet as of March 31, 1999 and the unaudited pro forma consolidated
statements of operations for the year ended June 30, 1998 and the nine months
ended March 31, 1999 to reflect the following:
(A) Excess of estimated purchase price over net assets acquired and related
amortization over the period assuming a 15 year life.
(B) To record value of acquired customer base and related amortization assuming
amortization recorded by applying the estimated attrition rate (9%) each
month against the unamortized balance of the previous month (declining
balance method) over a five year period, switching to the straight line
method when the straight line method results in greater amortization.
(C) To increase par value of common stock for the issuance of 68,712,820 shares
of Equalnet common stock( $.01 par) valued to the shareholders of e.Volve
in accordance with the Plan of Merger between the Registrant and e.Volve.
(D) To close Equalnet's retained deficit to paid in capital
(E) Receipt of $2.2 million for the purchase of 3,667,667 shares of the
Registrant's Common Stock.
(F) Receipt of $.5 million for the purchase of 833,333 shares of the
Registrant's Series E Preferred Stock with a liquidation preference of
$5.00 per share.
(G) Payment of $1.35 million to the Trustee of the Creditors Committee for the
outstanding obligations under the Plan of Reorganization.
(H) Issuance of 3,000,000 shares of the Company's Common Stock to the Trustee
of the Creditors Committee for outstanding obligations under Equalnet
Corporation's Plan of Reorganization.
(I) Conversion of approximately $2.6 million of convertible debt into the
Registrant's Series F Preferred Stock. The Series F Preferred Stock
receives a 6% dividend payable in kind.
(J) Balance of outstanding debt that was relieved through the Plan of
Reorganization. This number is subject to adjustment depending on the
outcome of certain claim objections.
(K) Issuance of 300,000 warrants to Comerica Leasing for settlement of claims
against the Registrant and EqualNet Corporation. The value of such warrants
was determined using the Black-Scholes model.
(L) Record additional amortization expense in connection with recorded acquired
customer base of SA Telecom which will be amortized by applying the
Company's attrition rate associated with the acquired customers (estimated
to be 6%) each month against the
6
<PAGE>
unamortized balance of the previous month (declining balance method) over a
five-year period, switching to the straight line method when the straight
line method results in greater amortization. The adjustment is net of the
amount of depreciation and amortization expense related to fixed assets and
goodwill not being acquired.
(M) To remove the write down of assets and adjustment to reduce liabilities
associated with assets not being purchased and liabilities not being
assumed.
(N) To eliminate interest expense associated with debt not being assumed, net
of interest expense on additional $1.0 million of Greyrock debt being
assumed.
(O) Record preferred dividend requirements for Series C Preferred.
7
<PAGE>
E.VOLVE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEET
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
<TABLE>
<CAPTION>
FEBRUARY 28, 1999 MAY 31, 1998
------------------------- --------------------
<S> <C> <C>
CURRENT LIABILITIES
Current Portion Long Term Debt $ 250,000 $ 250,000
Current Portion of Capital Leases 348,395 334,603
Accounts Payable 3,013,466 2,503,014
Accrued Liabilities 148,011 128,533
Loan From Shareholders --- 164,000
Deferred Income --- 200,000
Customer Deposits 861,122 ---
Other Current Liabilities 788,555 ---
----------- -----------
Total Current Liabilities 5,409,549 3,580,150
LONG-TERM LIABILITIES
Debentures & Long Term Notes Less Current Portion 6,990,000 2,447,610
Capital Lease Obligations Less Current Portion 2,866,916 476,848
----------- -----------
Total Long-Term Liabilities 9,856,916 2,924,458
STOCKHOLDERS' EQUITY (DEFICIT)
Capital Contributions 479,354 479,330
Accumulated Deficit Prior (4,370,689) ---
Accumulated Deficit - Current Year (837,629) (4,370,689)
----------- -----------
Total Stockholders' Equity (Deficit) (4,728,964) (3,891,359)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) $10,537,501 $ 2,613,249
=========== ===========
</TABLE>
2
<PAGE>
E.VOLVE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The Quarter For The Nine
Ending Months Ending
February 28, 1999 February 28, 1999
----------------- -----------------
<S> <C> <C>
REVENUE $8,696,336 $18,465,697
COST OF REVENUE 6,603,882 14,720,521
---------- -----------
Gross Profit (Loss) 2,092,454 3,745,176
GENERAL & ADMINISTRATIVE EXPENSES
General & Administrative Expenses 1,279,081 3,398,235
Professional Fees 289,755 810,757
---------- -----------
Operating Income (Loss) 523,618 (463,816)
----------
OTHER INCOME (EXPENSE)
Interest & Dividend Income 14,073 37,631
Interest (Expense) (165,332) (407,160)
Other Income (Expense) 5,929 (4,284)
---------- -----------
Total Other Income (Expense) (145,330) (373,813)
NET INCOME (LOSS) $ 378,288 $ (837,629)
========== ===========
</TABLE>
3
<PAGE>
E.VOLVE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The Quarter For The Nine
Ending Months Ending
February 28, 1999 February 28, 1999
------------------------ ------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $ 378,288 $ (837,629)
Adjustments To Reconcile Net Income (Loss) to Cash
Used In Operating Activities:
Depreciation 252,668 693,566
(Gain) Loss On Sale Of Equipment --- 6,155
(Gain) Loss On Sale Of Investments 816 2,815
Increase (Decrease) In:
Accounts Receivable (524,699) (972,626)
Employee Advances (2,430) 73,803
Prepaid Expenses 5,738 (20,299)
Other Current Assets (437,791) (439,028)
Deposits --- 35
Mexico VAT Refundable, Receivable (876,545) (1,945,149)
Other Assets (1,340) 11,099
(Increase) Decrease In:
Accounts Payable 594,120 750,339
Accrued Liabilities (159,137) 19,478
Customer Deposits 13,105 861,122
Other Current Liabilities 200,000 788,555
Deferred Income --- (200,000)
---------- -----------
Net Cash Provided (Used) By Operating Activities (557,207) (1,355,370)
---------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
(Purchase) Of Equipment (351,329) (1,309,100)
(Purchase) Sale Of Investments 83,364 225,641
---------- -----------
Net Cash Provided (Used) By Investing Activities (267,965) (1,083,459)
---------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Long Term Borrowing 390,000 4,542,414
Capital Leases Payments (120,978) (553,892)
Proceeds From (Repayment Of) Loan From Shareholders (43,238) (164,000)
---------- -----------
Net Cash Provided (Used) By Operating Activities 225,784 3,824,522
---------- -----------
Net Increase (Decrease) In Cash (599,388) 1,385,693
Cash At Beginning Of The Period 2,002,719 17,638
---------- -----------
Cash At End Of The Period $1,403,331 $ 1,403,331
========== ===========
</TABLE>
4
<PAGE>
E.VOLVE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements included herein have been
prepared by the management of e.Volve Technology Group, Inc.
("e.Volve"), formerly known as ORIX Global Communications, Inc.,
without audit. Certain information and note disclosures normally
included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In
the opinion of the management of e.Volve, all adjustments considered
necessary for fair presentation of the consolidated financial
statements have been included and were of a normal recurring nature,
and the accompanying unaudited consolidated financial statements
present fairly the financial position of the Company as February 28,
1999, and the results of operations and cash flows for the three
months and nine months ended February 28, 1999.
It is suggested that these unaudited consolidated financial statements
be read in conjunction with e.Volve's audited consolidated financial
statements and notes for the periods June 26, 1996 (inception) to May
31, 1997 and June 1, 1997 to May 31, 1998. The interim results are not
necessarily indicative of the results for the full year.
NOTE 2 - FINANCINGS:
During the nine months ended February 28, 1999, e.Volve raised $8.0
million to finance its operations and to fund its capital
expenditures. On June 11, 1998, the Articles of Incorporation were
amended to increase the number of authorized shares of common stock to
100,000 and a new stockholders agreement was entered into with the
termination of the original agreement entered into in September 1996.
Also, on June 11, 1998, e.Volve entered into a Securities Purchase
Agreement whereby e.Volve would sell 2,400 shares of common stock at
$0.01 per share and e.Volve would assume certain liabilities incurred
by the purchaser from the aborted acquisition of Touch Tone America.
This gave the purchaser a 66.67% ownership in the Company.
As part of the above Securities Purchase Agreement, a Debenture
Agreement in the total amount of $6.0 million was entered into with
the purchaser. These funds were used to finance the acquisition of
equipment and fund working capital. On August 19, 1998, e.Volve
entered into a debenture agreement for an additional $850,000. These
funds were deposited into a certificate of deposit account at a bank
to secure a letter of credit with a vendor.
On February 9, 1999, e.Volve entered into another debenture agreement
for $390,000 to fund working capital requirements.
5
<PAGE>
Subsequent to February 28, 1999, e.Volve borrowed an additional
$800,000 to fund equipment purchases and working capital needs.
$500,000 was repaid in April 1999.
NOTE 3 - LONG-TERM DEBT AND CAPITAL LEASES:
As of February 28, 1999, e.Volve had obligations of $10.5 million
including $7.2 million of debentures and $3.2 million of capital
leases used to finance the purchase of equipment. The debentures have
coupons of 8% and had amortization schedules calling for repayment
between April 1999 and June 2000. The equipment leases are secured by
the equipment they financed and have terms of 36 months and lease
rates of 10%.
Subsequent to February 28, 1999, e.Volve borrowed an additional
$800,000 and entered into additional capital leases amounting to
$354,000 on similar terms.
NOTE 4 - MEXICAN VAT REFUND RECEIVABLE:
e.Volve's primary business is the delivery of voice data over an ATM
network between the United States and Mexico. e.Volve and its Mexican
subsidiary have historically paid a 15% value added tax (VAT) on the
services they purchase in Mexico. e.Volve, however, has received a
letter from Hacienda, the Mexican tax authority, stating that e.Volve
is not required to pay VAT on goods or services its utilizes in the
provision of its international services. As a result, management
informed its primary vendor in Mexico of this tax letter and,
subsequent to February 28, 1999, e.Volve received a credit against
payables from the vendor in the amount of $506,426. In addition,
management has determined that the VAT e.Volve's subsidiary has paid
will be refunded. e.Volve's subsidiary will continue to pay VAT,
however, management has been informed by Hacienda that the amounts
will be refund within 60 days of being paid.
As of February 28, 1999, e.Volve had capitalized Mexican VAT payments
of $1.9 million (including the $506,426 credit mentioned above).
NOTE 5 - CONCENTRATION OF RISK:
During the nine months ended February 28, 1999, e.Volve had sales to
three primary customers that represented in excess of 94.9% of its
revenue. One of these customers represented 53.0% of revenues. No
amounts were due from these customers at February 28, 1999. e.Volve's
customers typically pay weekly in advance.
6
<PAGE>
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Useful
February 28, 1999 Lives
------------------ -----------
Network equipment $5,092,010 5 Years
Electronic equipment 709,997 5 Years
Computer hardware 283,945 5 Years
Leasehold improvements 206,326 5 Years
Computer software 135,152 5 Years
Office equipment and furniture 89,131 7 Years
Total property and equipment 6,516,561
Less: accumulated depreciation (907,845)
----------
Property and equipment, net $5,608,716
==========
7
<PAGE>
ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE PERIOD FROM
JUNE 26, 1996 (INCEPTION)
TO MAY 31, 1997 AND
FOR THE YEAR ENDED
MAY 31, 1998
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.................................................... 1
BALANCE SHEET - May 31, 1998.................................................... 2
STATEMENT OF OPERATIONS - For the Year Ended May 31, 1998
and For the Period from June 26, 1996 (inception) to May 31, 1997............. 3
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - For the Period from
June 26, 1996 (inception) to May 31, 1997 and For the Year Ended May 31, 1998. 4
STATEMENT OF CASH FLOWS - For the Year Ended May 31, 1998 and
For the Period from June 26, 1996 (inception) to May 31, 1997................. 5
NOTES TO FINANCIAL STATEMENTS................................................... 6
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
ORIX Global Communications, Inc.
We have audited the accompanying consolidated balance sheet of ORIX Global
Communications, Inc. and subsidiaries (the Company) as of May 31, 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year ended May 31, 1998 and for the period from June 26,
1996 (inception) to May 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ORIX Global
Communications, Inc. and subsidiaries as of May 31, 1998, and the results of
their operations and their cash flows for the year ended May 31, 1998 and for
the period from June 26, 1996 (inception) to May 31, 1997, in conformity with
generally accepted accounting principles.
Orange, California
November 20, 1998
Hein & Associates LLP
1
<PAGE>
ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1998
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 17,638
Accounts receivable 4,252
Short-term investments 254,455
Other current assets 15,791
-----------
Total current assets 292,136
PROPERTY AND EQUIPMENT, net 2,284,972
DEPOSITS 36,141
-----------
TOTAL ASSETS $ 2,613,249
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Current portion of long-term liabilities $ 250,000
Current portion of capital lease obligations 334,603
Note payable - related party 164,000
Accounts payable 2,503,014
Deferred income 200,000
Accrued liabilities 128,533
-----------
Total current liabilities 3,580,150
LONG-TERM DEBT, less current portion 2,447,610
CAPITAL LEASE OBLIGATIONS, less current portion 476,848
-----------
Total liabilities 6,504,608
-----------
COMMITMENTS (Notes 11 and 14)
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 2,500 shares authorized, 1,200 shares issued and 479,330
outstanding
Accumulated deficit (4,370,689)
-----------
Total stockholders' deficit (3,891,359)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,613,249
===========
</TABLE>
See accompanying notes to these consolidated financial statements.
2
<PAGE>
ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
For the Year from June 26,
Ended 1996 (Inception)
May 31, 1998 to May 31, 1997
----------------- -----------------
<S> <C> <C>
REVENUES $ 2,067,604 $ 882,702
COST OF REVENUES 1,823,644 547,273
----------- ----------
Gross profit 243,960 335,429
----------- ----------
OPERATING EXPENSES
Selling, general and
administrative expenses 3,040,519 389,632
Impairment of asset 420,000 -
Aborted acquisition expense 792,612 -
Bad debt expense related to
related party receivable 31,585 176,138
----------- ----------
Total operating expenses 4,284,716 565,770
----------- ----------
LOSS FROM OPERATIONS (4,040,756) (230,341)
----------- ----------
OTHER INCOME (EXPENSE):
Interest income 6,461 -
Interest expense (100,432) (3,244)
Other expense (2,377) -
----------- ----------
Total other income (expense) (96,348) (3,244)
----------- ----------
NET LOSS $(4,137,104) $ (233,585)
=========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
3
<PAGE>
ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JUNE 26, 1966 (INCEPTION) TO MAY 31, 1997 AND
FOR THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Common stock issued 1,000 $ 100 $ - $ 100
Issuance of stock for fixed assets
contributed at historical cost 200 429,230 - 429,230
Compensation contributed - 50,000 - 50,000
Net loss - - (233,585) (233,585)
----- -------- ----------- -----------
BALANCE, May 31, 1997 1,200 479,330 (233,585) 245,745
Net loss - - (4,137,104) (4,137,104)
----- -------- ----------- -----------
BALANCE, May 31, 1998 1,200 $479,330 $(4,370,689) $(3,891,359)
===== ======== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
4
<PAGE>
ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year For the Period from
Ended June 26, 1996 (Inception)
May 31, 1998 to May 31, 1997
------------- --------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,137,104) $(233,585)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 200,515 26,284
Impairment of asset 420,000 -
Aborted acquisition expense 792,612
Bad debt expense 196,810 -
Compensation contributed - 50,000
Write-off of related party receivable 31,585 233,125
Changes in operating assets and liabilities
Accounts receivable 33,915 (38,167)
Deferred costs 17,767 -
Other current assets (15,791) -
Deposits (22,642) (13,499)
Accounts payable 2,207,150 295,864
Accrued liabilities 52,505 76,028
Deferred income 200,000 -
Due from related party - (233,125)
Equipment for resale - (17,767)
----------- ---------
Net cash provided by (used in) operating activities (22,678) 145,158
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (254,455) -
Acquisition of business (420,000) -
Loans made to third parties (1,021,007) -
Purchase of property and equipment (1,174,282) (95,741)
Loan to related party - (47,200)
----------- ---------
Net cash used in investing activities (2,869,744) (142,941)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,697,610 -
Proceeds from note payable - related party 164,000 -
Repayment of loan to related party 47,200 -
Payments on capital lease obligation (1,067) -
Sale of common stock - 100
----------- ---------
Net cash provided by financing activities 2,907,743 100
NET INCREASE IN CASH 15,321 2,317
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,317 -
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,638 $ 2,317
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 534 $ 3,244
=========== =========
Income taxes - $ -
=========== =========
Non-cash investing and financing transactions:
Capital lease obligation incurred for the purchase of equipment $ 812,518 $
Issuance of 200 shares of common stock in exchange for equipment and furniture $ $ 429,230
</TABLE>
See accompanying notes to these consolidated financial statements.
5
<PAGE>
ORIX GLOBAL COMMUNICATIONS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
ORIX Global Communications, Inc. (the Company) was incorporated in the
state of Nevada on June 26, 1996. The Company operates in the
telecommunication industry where they provide line services for the
transmitting of voice and data communications to Mexico and other parts of
the world. The corporate offices are located in Las Vegas, Nevada.
In February 1998, the Company formed a new entity Latin Gate De Mexico,
S.A. De C.V. (Latin Gate) to manage and maintain equipment owned by the
Company that is located in Mexico. Latin Gate has also been established to
facilitate in the establishing of telecommunication services for commercial
use in Mexico. The operations of Latin Gate have been included in the
consolidated financial statements since the date of formation.
In January 1998, the Company acquired UCI Teleport, Inc. (UCI), a Florida
Corporation (see Note 4). As of May 31, 1998, there has been no operating
activity in this subsidiary.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and all of its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Statement of Cash Flows - For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Investments - All investments with a maturity greater than three months are
accounted for under Financial Accounting Standards Board (FASB) Statement
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company determines the appropriate classification at time
of purchase. Securities are classified as held-to-maturity when the Company
has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at cost, adjusted for amortization
of premiums and discounts to maturity.
Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the cost of long-lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow is required.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets. The cost of normal
maintenance and repairs is charged to operating expense as
1
<PAGE>
incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation is removed from the accounts, and any
gains or losses are reflected in current operations.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statements and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
Revenue Recognition - Revenues are recognized upon use of lines by
customers. The line usage is monitored and the customers are billed
according to the minutes used. A contract is entered into establishing the
price to be charged for the minutes used.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company's consolidated financial statements are based upon a number of
significant estimates, including the allowance for doubtful accounts,
technological obsolescence of fixed assets, the estimated useful lives
selected for property and equipment and the realizability of deferred tax
assets. Due to the uncertainties inherent in the estimation process, it is
at least reasonably possible that these estimates will be further revised
in the near term and such revisions could be material.
Concentrations of Credit Risk - Credit Risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk
(whether on or off balance sheet) that arise from financial instruments
exist for groups of customers or groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly effected by changes in economic or
other conditions. In accordance with FASB Statement No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," the credit risk
amounts shown in Note 13, do not take into account the value of any
collateral or security.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under FASB Statement No. 107, "Disclosures about Fair
Value of Financial Instruments," are determined at discrete points in time
based on relevant market information. These estimates involve uncertainties
and cannot be determined with precision. The fair value of cash is based
on its demand value, which is equal to its carrying value. The fair value
of short-term investments was based on quoted market prices. The fair
values of long-term debt were based on borrowing rates that are available
2
<PAGE>
to the Company for loans with similar terms, collateral, and maturity. The
estimated fair values of notes payable approximate their carrying values.
3. BASIS OF PRESENTATION:
As shown in the accompanying financial statements, the Company has reported
a net loss of $4,137,104 for the year ended May 31, 1998, which includes
write-offs related to aborted acquisitions of $792,612 and impairment in
the value of assets of $420,000. The Company also has an accumulated
deficit of $3,891,359, and a working capital deficit of $3,288,014.
During the year and subsequent to May 31, 1998, the Company took steps to
mitigate the losses and enhance its future viability. The Company entered
into a long-term debt agreement to pay-off old outstanding payables (see
Notes 7 and 14). This enabled the Company to get the financing necessary
to obtain equipment for the termination points (see Notes 8 and 14), which
has resulted in the selling of additional line time to customers. The
Company has also taken steps to reduce overhead costs. Management believes
that these actions will allow the Company to continue in operations through
May 31, 1999.
4. ABORTED ACQUISITION AND IMPAIRMENT OF ASSET:
On January 13, 1998, the Company entered into a Stock Purchase and
Redemption Agreement with United Petroleum Corporation and Infinity
Investors Limited to acquire UCI. The Company acquired all of UCI's issued
and outstanding shares of common stock for $420,000. The transaction was
accounted for as a purchase. The only asset UCI had was an agreement to
purchase property including all tangible and intangible items associated
with the property. An amount of $150,000 was paid as a deposit on the
purchase price stated in the agreement. As of May 31, 1998, management has
determined that the Company will not complete the terms of the agreement.
The Company has therefore written off the full amount paid, $420,000, as an
impairment in the value of the asset at May 31, 1998.
On August 11, 1997, the Company entered into an Agreement and Plan of
Reorganization with Touch Tone America, Inc., a California Corporation,
("Touch Tone"). During the negotiation period, the Company paid
approximately $792,612 worth of expenses on behalf of Touch Tone. In May
1998, the Company terminated the agreement for merger and wrote off the
amount as uncollectible.
5. INVESTMENTS:
At May 31, 1998, the Company held investments in marketable securities
which were classified as held-to-maturity. Securities classified as held-
to-maturity at May 31, 1998 consisted of a security with a maturity date
within one year, and are classified as short-term investments as a part of
current assets. This security is stated at amortized cost plus accrued
interest.
The held-to-maturity securities at May 31, 1998 include the following:
3
<PAGE>
Amortized Cost Fair Value
--------------- ------------
U.S. Treasury Note, face value of $250,810 $249,143
$250,000, interest at 5.00%, due
February 15, 1999
Accrued interest 3,645
--------
Net Book Value - Held-to-Maturity
Securities $254,455
========
The amount of gross unrealized loss for the year ended May 31, 1998 was
$1,667.
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
May 31, 1998 Useful Lives
-------------- -----------------
Network equipment $1,079,173 5 years
Electronic equipment 797,843 5 years
Computer hardware 243,115 5 years
Leasehold improvements 182,308 5 years
Computer software 130,152 5 years
Office equipment and furniture 79,180 7 years
----------
Total property and equipment 2,511,771
Less accumulated depreciation (226,799)
----------
Property and equipment, net $2,284,972
==========
Depreciation expense for property and equipment charged to operations for
the year ended May 31, 1998 and the period ended May 31, 1997 was $200,515
and $26,284, respectively.
7. LONG-TERM DEBT:
At May 31, 1998, long-term debt consisted of a payable to a third party in
the amount of $2,697,610. The loan calls for monthly payments of interest
only at 8% until January 1999. At that time, the Company will be required
to make monthly principal payments of $50,000 plus interest. The loan
expires June 2000 and is collateralized by all current and future assets of
the Company. At May 31, 1998, the Company was in default of certain
covenants. The Company has obtained a waiver of these defaults.
Future minimum payments are as follows:
4
<PAGE>
Year Ended May 31,
------------------
1999 $ 250,000
2000 2,447,610
----------
$2,697,610
==========
On June 11, 1998, the Company entered into an agreement with the third
party whereby it could borrow up to $6,000,000 under the terms stated
above. Also, the Company sold to this entity 2,400 shares of its common
stock at a price of $0.01 per share, making the entity a majority
shareholder. See Note 14.
8. CAPITAL LEASE OBLIGATION:
During the year-ended May 31, 1998, the Company entered into leases for
equipment under agreements classified as capital leases. The cost of the
equipment related to the leases is $812,518 and accumulated amortization
amounts to $21,273 at May 31, 1998.
Following is a schedule of future minimum lease payments under capital
leases at May 31, 1998:
<TABLE>
<CAPTION>
Year Ending May 31,
-------------------
<S> <C>
1999 $397,109
2000 244,329
2001 237,925
2002 53,140
--------
Total future minimum lease payments 932,503
Less amount representing interest (121,052)
Present value of net minimum lease payments 811,451
Less current portion (334,603)
--------
$476,848
========
</TABLE>
9. NOTE PAYABLE-RELATED PARTY:
Note payable-related party consisted of amounts loaned to the Company by a
shareholder and president of the Company. The total amount outstanding of
$164,000 does not bear interest and is due on demand.
5
<PAGE>
10. INCOME TAXES:
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
May 31, 1998
---------------------
Deferred tax assets (liabilities):
Current
Deferred revenue $ 61,700
Net operating loss carryforwards 1,445,800
-----------
Total current 1,507,500
Long-term
Depreciation (69,300)
-----------
Total gross deferred
tax assets 1,438,200
Less valuation allowance (1,438,200)
-----------
Net deferred tax assets $ ---
===========
The Company had net operating loss carryforwards of approximately
$4,252,500 at May 31, 1998. The net operating loss carryforwards expire
beginning in 2012.
The benefit of the net operating losses to offset future taxable income is
subject to limitation relating to a 50% change in ownership, subsequent to
May 31, 1998, due to various stock transactions.
11. COMMITMENTS:
Letter of Credit - The Company has opened irrevocable letters of credit
with one of its banks aggregating $96,500 at May 31, 1998.
Leases - The Company leases its backbone circuits under noncancellable
operating leases expiring through September 1998 and calling for monthly
rental expense of $227,011. The Company leases its corporate headquarters
in Las Vegas, Nevada under a noncancellable operating lease expiring in
2000. The Company expanded its regional offices to include Overland Park,
Kansas where there is a seven year lease expiring January 2005. Latin Gate
leases office space under a five year lease commitment expiring November
2002. The Company leases vehicles and certain equipment under
noncancellable operating leases which expire June 1999 through February
2001.
6
<PAGE>
Future minimum lease payments under operating lease are as follows:
Year Ending May 31,
-------------------
1999 $2,989,814
2000 742,082
2001 256,059
2002 132,615
2003 116,136
Thereafter 110,168
----------
$4,346,874
==========
Total rent expense was $304,083 and $58,870 for the year ended May 31, 1998
and the period ended May 31, 1997, respectively.
12. RELATED PARTY TRANSACTIONS:
During the period ended May 31, 1998, the Company paid expenses on behalf
of an entity owned by a shareholder and president of the Company. A
receivable totaling approximately $6,030 at May 31, 1998 is included in
other current assets.
During the period ended May 31, 1998, the Company paid expenses on behalf
of an entity owned by a shareholder of the Company. A receivable totaling
approximately $31,600 was written off as uncollectible at year-end and is
included in bad debt expense related to related party receivable.
During the period ended May 31, 1997, the Company paid expenses for and
received funds from an entity owned by a shareholder and president of the
Company. A receivable totaling approximately $176,000 at May 31, 1997 was
written off as uncollectible at year-end and is included in bad debt
expense related to related party receivable. Common expenses of the
Companies are allocated based upon actual usage.
Also, see notes 7 and 9.
13. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER RISKS
AND UNCERTAINTIES:
During the period ended May 31, 1998, the Company had sales to two
customers in the amount of $1,951,546 (94.4% of revenue). No amounts were
due from these customers at May 31, 1998. The Company operates primarily
in the telecommunications industry. Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable.
14. SUBSEQUENT EVENTS:
On June 11, 1998, the Articles of Incorporation were amended to increase
the number of authorized shares of common to 100,000 and a new stockholders
agreement was entered into with the termination of the original agreement
entered into in September 1996. The
7
<PAGE>
new stockholders agreement states that there will be a five member board of
directors, all stock is considered to be restricted, and current
stockholders have a first right of refusal at current fair market value for
any stock sold by other stockholders.
Also, on June 11, 1998, the Company entered into a Securities Purchase
Agreement whereby the Company would sell 2,400 shares of stock at $.01 per
share and the Company would assume certain liabilities incurred by the
purchaser from the acquisition of Touch Tone America (see Note 4). This
would give the purchaser a 66.67% ownership in the Company.
As part of the above Securities Purchase Agreement, a Debenture Agreement
in the total amount of $6,000,000 was entered into with the purchaser. The
total liability assumed, discussed above, has been accrued and is showing
as long-term debt at May 31, 1998. (See note 7.) On August 19, 1998,
another debenture agreement was entered into in the amount of $850,000.
Interest accrues at 8% and shall be paid beginning August 31, 1998.
Principal payments of $50,000 plus interest shall be paid starting January
31, 1999. If this new debenture is not paid in full by January 10, 1999 it
can be converted into shares of the Company's common stock at a rate of 20
shares per $50,000 outstanding or a total of 340 shares. The $850,000 was
deposited into a certificate of deposit account at a bank to secure a
letter of credit with a vendor.
On July 2, 1998, the Company entered into a capital lease agreement for
equipment with a total value of $6,490,633. The equipment is being
financed over 36 months at a 10% interest rate. The lease amount equals
the total equipment value plus taxes less the down payment (equal to 25%).
Part of the equipment related to the lease was received prior to May 31,
1998 and has been included in fixed assets and as a capital lease
obligation (see note 8).
On September 4, 1998, the Company entered into a one year operating lease
agreement for a facility in Kansas. The lease calls for monthly rental
payments of $2,700.
On September 9, 1998, the Company entered into a six month operating lease
agreement for furniture for the facility in Kansas. The lease calls for
monthly rental payments of $3,655.
8
<PAGE>
ANNEX H
e.VOLVE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ORIX GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
FEBRUARY 28,
1999 MAY 31, 1998
---------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 313,648 $ 17,638
Cash: Restricted 1,089,683 ---
Accounts Receivable 976,878 4,252
Short-Term Investments --- 254,455
Employee Advances 77,303 ---
Prepaid Expenses 20,300 ---
Other Current Assets 439,026 15,791
----------- ----------
Total Current Assets 2,916,838 292,136
PROPERTY & EQUIPMENT
Property & Equipment 6,516,561 2,511,771
Less: Accumulated Depreciation 907,845 226,799
----------- ----------
Total Property & Equipment 5,608,716 2,284,972
OTHER ASSETS
Deposits 36,105 36,141
Investments 26,000 ---
Mexico VAT Refund Receivable 1,945,149 ---
Other Assets 4,693 ---
----------- ----------
Total Other Assets 2,011,947 36,141
----------- ----------
TOTAL ASSETS $10,537,501 $2,613,249
=========== ==========
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PRELIMINARY COPY
Please mark your
vote as indicated
in this example [X]
<S> <C> <C>
1. APPROVAL OF THE AMENDMENT TO 2. RATIFICATION OF THE NOTE ISSUANCE 3. ELECTION OF DIRECTORS
EQUALNET'S ARTICLES OF INCORPORATION TRANSACTION
REGARDING A ONE-FOR-FOUR REVERSE STOCK NOMINEES: Mitchell H. Bodian, Nathan Isaac Prager,
SPLIT OF EQUALNET'S COMMON STOCK FOR AGAINST ABSTAIN R. Chadwick Paul, Jr. and Ronald J. Salazar
[ ] [ ] [ ]
FOR AGAINST ABSTAIN FOR all nominees WITHHOLD AUTHORITY
[ ] [ ] [ ] listed above to vote for the following
(except as marked nominees:
to the contrary) _______________________
_______________________
[ ] _______________________
_______________________
4. RATIFICATION OF THE AMENDMENT OF THE 5. RATIFICATION OF THE ACMI ACQUISITION 6. APPROVAL OF THE ISSUANCE OF WARRANTS
SERIES A STATEMENT OF RESOLUTION AND TO CERTAIN OFFICERS AND FORMER
APPROVAL OF THE ISSUANCE OF COMMON FOR AGAINST ABSTAIN OFFICERS OF EQUALNET TO PURCHASE
STOCK UPON CONVERSION OF THE SERIES A [ ] [ ] [ ] SHARES OF EQUALNET COMMON STOCK
PREFERRED PURSUANT TO THE TERMS OF
THE AMENDED SERIES A STATEMENT OF
RESOLUTION FOR AGAINST ABSTAIN
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
7. RATIFICATION OF THE APPOINTMENT OF 8. WITH DISCRETIONARY AUTHORITY AS Dated ___________________________, 1999
ERNST & YOUNG LLP AS THE COMPANY'S TO SUCH OTHER MATTERS AS
INDEPENDENT AUDITORS FOR FISCAL MAY PROPERLY COME BEFORE THE MEETING. _______________________________________
YEAR 1999 Signature
FOR AGAINST ABSTAIN _______________________________________
[ ] [ ] [ ] Signature
Note: Please sign exactly as name appears
hereon. Joint owners should each sign.
When signing as attorney, executor,
administrator, trustee, or guardian,
please give full title as such.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
P
R
O EQUALNET COMMUNICATIONS CORP.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
X FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
July __, 1999
Y
The undersigned hereby appoints Mitchell H. Bodian and Dean H. Fisher
jointly and severally, as proxies, with full power of substitution and with
discretionary authority, to vote all shares of Common Stock and, if applicable,
Series B Senior Convertible Preferred Stock that the undersigned is entitled to
vote at the Annual Meeting of Stockholders of Equalnet Communications Corp.
to be held on _____________, July __, 1999, at the Marriott Westside,
13210 Katy Freeway, Houston, Texas, at 10:00 a.m., or at any adjournment
thereof, hereby revoking any proxy heretofore given.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS INDICATED, THE SHARES WILL BE VOTED "FOR" THE APPROVAL OF AN
AMENDMENT TO EQUALNET'S ARTICLES OF INCORPORATION TO EFFECT A ONE-FOR-FOUR
REVERSE STOCK SPLIT OF EQUALNET'S COMMON STOCK, "FOR" THE RATIFICATION OF
CERTAIN TRANSACTIONS EQUALNET ENTERED INTO IN SEPTEMBER 1998, "FOR" THE ELECTION
OF FOUR DIRECTORS, "FOR" THE RATIFICATION OF THE AMENDMENT OF THE SERIES A
STATEMENT OF RESOLUTION AND THE APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON
CONVERSION OF THE SERIES A PREFERRED PURSUANT TO THE TERMS OF THE AMENDED SERIES
A STATEMENT OF RESOLUTION, "FOR" THE RATIFICATION OF THE ACQUISITION OF CERTAIN
ASSETS OF LIMIT LLC (d/b/a ACMI) BY A WHOLLY OWNED SUBSIDIARY OF EQUALNET, "FOR"
THE APPROVAL OF THE ISSUANCE OF WARRANTS TO CERTAIN OFFICERS AND FORMER OFFICERS
OF EQUALNET TO PURCHASE SHARES OF EQUALNET COMMON STOCK AND "FOR" THE
RATIFICATION OF THE BOARD OF DIRECTORS' APPOINTMENT OF INDEPENDENT AUDITORS FOR
EQUALNET AND ITS SUBSIDIARIES FOR FISCAL YEAR 1999, WITH DISCRETIONARY AUTHORITY
AS TO SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. EACH OF THE
PROPOSALS SET FORTH ABOVE IS BEING MADE BY EQUALNET.
