<PAGE>
As filed with the Securities and Exchange Commission on April __, 1999
Registration No. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_______________________
EQUALNET COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 76-0457803
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
EQUALNET COMMUNICATIONS CORP. MITCHELL H. BODIAN, PRESIDENT Copy to:
HOUSTON, TEXAS 77079 EQUALNET COMMUNICATIONS CORP. W. ROBERT SHEARER
1250 WOOD BRANCH PARK DRIVE 1250 WOOD BRANCH PARK DRIVE WEIL, GOTSHAL & MANGES LLP
(281) 529-4600 HOUSTON, TEXAS 77079 700 LOUISIANA, SUITE 1600
(Address, including zip code, and (281) 529-4600 HOUSTON, TEXAS 77002
telephone number, including area (Name, address, including zip code, (713) 546-5275
code, of Registrant's principal and telephone number, including area
executive offices) code, of agent for service)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, please
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Title of each class of Amount to be Proposed maximum offering Proposed maximum aggregate Amount of
securities to be registered registered price per share (2) offering price (2) registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share.............................. 23,723,963 shares (1) $0.6406 $15,197,571 $4,225
===================================================================================================================================
</TABLE>
(1) Such 23,723,963 shares comprise 3,988,620 issued and outstanding shares, an
aggregate of 1,260,232 shares that are issuable upon the exercise of four
outstanding warrants, an aggregate of 4,108,042 shares that are issuable
upon the conversion of certain notes, an aggregate of 11,367,069 shares
that are issuable upon the conversion of preferred stock, an aggregate of
1,500,000 shares that are reserved for issuance upon the conversion of
notes or preferred stock issuable as interest or dividends on outstanding
notes or preferred stock, and an aggregate of 1,500,000 shares that are
issuable pursuant to an agreement in connection with an acquisition of
certain assets by a subsidiary of the Registrant. Pursuant to Rule 416
under the Securities Act of 1933, as amended, this Registration Statement
also relates to an indeterminate number of additional shares of Common
Stock that may be issuable upon exercise of such outstanding warrants or
conversion of such notes or preferred stock to prevent dilution resulting
from stock splits, stock dividends and similar transactions.
(2) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457 under the Securities Act,
based on the average of the high and low sales prices for the Registrant's
Common Stock on March 26, 1999, as reported on the Nasdaq National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated April 1, 1999
23,723,963
EQUALNET COMMUNICATIONS CORP.
Common Stock
_____________________________
<TABLE>
<S> <C>
This is an offering of shares of our common We will not receive any of the proceeds
stock. Selling shareholders identified in from the offering. If the selling
the prospectus are offering all of the shares shareholders exercise the warrants, we
to be sold in the offering. The offered will receive proceeds from those
shares consist of: warrants.
. issued and outstanding shares, The selling shareholders may sell any or
all of the shares of common stock at
. shares issuable upon the exercise of market prices prevailing at the time of
warrants, sale, at prices related to prevailing
market prices, at negotiated prices or
. shares issuable upon the conversion of at fixed prices.
notes and preferred stock, and
Our common stock is listed on the Nasdaq
. shares issuable under an agreement through National Market under the symbol "ENET."
which one of our wholly owned subsidiaries
will acquire another company's assets in
exchange for shares of our common stock.
</TABLE>
_____________________________
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 1.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this Prospectus. Any representation to the contrary is
a criminal offense.
----------------------
April __, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
----
RISK FACTORS........................................... 1
ABOUT EQUALNET COMMUNICATIONS CORP..................... 12
USE OF PROCEEDS........................................ 12
SELLING SHAREHOLDERS................................... 13
PLAN OF DISTRIBUTION................................... 19
FORWARD-LOOKING STATEMENTS............................. 21
WHERE YOU CAN FIND MORE INFORMATION.................... 21
LEGAL MATTERS.......................................... 22
EXPERTS................................................ 23
i
<PAGE>
RISK FACTORS
The shares offered are speculative and involve a high degree of risk. You
should consider carefully the following risk factors, as well as the other
matters in this prospectus, in deciding whether to purchase common stock.
We recorded losses We recorded net losses of $8.4 million,
during our three most $15.0 million and $17.9 million for the
recent fiscal years and years ended June 30, 1996, 1997 and
the most recent six 1998, respectively. We recorded a net
month period, and we loss of $8.0 million for the six months
will likely continue to ended December 31, 1998. We cannot
record losses in the assure you that our financial results
near future. will improve or that we will become
profitable in future periods. In the
future, we will have to generate
significantly higher revenues while
reducing operating expenses to continue
our operations. Because of our losses,
we have relied heavily on third-party
sources of capital to fund operating
expenses. We cannot assure you that we
will be able to continue to obtain
capital from third parties in
sufficient amounts to continue our
operations.
Our auditors' have qualified Our independent auditors have qualified
their opinion regarding our their report on our most recent audited
consolidated financial consolidated financial statements to
statements. reflect that EqualNet Corporation's
bankruptcy filing, our losses from
operations and related circumstances
raise substantial doubt about our
ability to continue as a going concern.
The financial statements do not include
any adjustments to reflect the possible
future effects that may result from the
outcome of this uncertainty.
Defaults by us under material We are in default under several
agreements could result in material agreements to which we are a
the loss of services and the party. Many of the other parties to
payment of penalties. those agreements have filed lawsuits
against us for breaches of contract.
If we do not cure those defaults or
settle those lawsuits on favorable
terms, the other parties to those
agreements may cease providing services
or impose financial penalties, if
applicable, under the relevant
agreement. The loss of services or the
payment of penalties could have a
material adverse effect on our
financial condition and results of
operations. We cannot assure you that
we will be able to cure those defaults
or settle those lawsuits on favorable
terms.
1
<PAGE>
One of our principal EqualNet Corporation, one of our
operating subsidiaries, principal operating subsidiaries, filed
EqualNet Corporation, filed for Chapter 11 protection on September
for bankruptcy in September 10, 1998. EqualNet Corporation intends
1998. to reorganize its business, stabilize
its operations and improve its balance
sheet under bankruptcy protection.
However, if EqualNet Corporation is not
able to
. negotiate new carrier agreements,
. improve the efficiency of its
operations,
. increase cash flow,
. retain a substantial portion of its
customer base, and
. obtain the approval by its creditors
of a plan of reorganization,
EqualNet Corporation may be forced into
liquidation. EqualNet Corporation
generated substantially all of our
revenues during fiscal year 1998 and
currently generates approximately 55%
of our revenues. The liquidation of
EqualNet Corporation could have a
material adverse effect on our
financial condition and results of
operations.
There are several risks We intend to grow by acquiring other
related to our acquisition telecommunication services providers
program, including the risk (or the customer accounts owned by
that our issuance of common those providers) and other
stock in acquisitions might complementary businesses. We expect
be highly dilutive. these acquisitions to enable us to
receive greater volume discounts on the
rates we pay to our underlying
carriers, although we cannot assure you
that we will receive those discounts.
We expect to compete with other
potential acquirors, many of whom will
be larger and have greater financial
resources than us, for these
acquisition candidates. This
competition will likely limit the
number of acquisition opportunities and
increase acquisition prices, or
increase the dilution our shareholders
will experience to the extent
acquisitions are paid for with our
equity securities.
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<PAGE>
The success of our acquisition strategy
will depend on whether we can identify,
acquire and manage additional
businesses profitably and integrate
acquired businesses into our
organization without substantial costs,
delays or other financial or
operational difficulties. As part of
this strategy, we must successfully
implement potential marketing and
cost-saving opportunities.
Acquisitions involve a number of
special risks, including:
. failure of the acquired business to
achieve expected results;
. our failure to retain customers or
accounts of acquired businesses;
. diversion of our management's
attention and resources;
. our failure to retain key personnel
of the acquired business; and
. risks associated with unanticipated
events or liabilities.
The occurrence of any of these events
or circumstances could have a material
adverse effect on our business,
financial condition and results of
operations. Finally, we cannot assure
you that we can obtain financing for
acquisitions on satisfactory terms.
We cannot predict the timing, size and
success of our acquisitions. We intend
to finance future acquisitions by using
shares of our common stock for all or a
substantial portion of the purchase
price to be paid. At the current price
levels of our common stock,
acquisitions could be highly dilutive.
Furthermore, if our common stock is
delisted by the Nasdaq National Market
or does not maintain a sufficient
market value, or if potential
acquisition candidates refuse to accept
common stock as part of the payment for
the sale of their businesses, we may
not be able to continue our acquisition
program. If we are unable to
3
<PAGE>
use our common stock to finance acquisitions,
our growth could be limited unless we are able
to borrow money on acceptable terms.
We are dependent on AT&T, We depend upon AT&T Corp.,
Sprint, Frontier and MCI-WorldCom, Frontier Communications
MCI-WorldCom, and the loss of the West, Inc. and Sprint
of their services would Communications Company, L.P. to provide
substantially impair our us with the telecommunications services
operations. that we resell to our customers and the
detailed information upon which we base
our customer billings. We do not
currently have contracts with AT&T,
MCI-WorldCom or Sprint. Instead, we
use our relationships with other
resellers such as US Republic
Communications, Inc., S4
Communications, Inc. and The Furst
Group, Inc., each of which supplies
partitions under its contract with the
underlying carrier. Our near-term
ability to expand our business
partially depends upon our ability to
maintain relationships with these
underlying and intermediary carriers.
If we lose any of these relationships,
it could have a material adverse effect
on our financial condition and results
of operations.
Our financial performance and The market price of our common stock
our acquisition program have has moved up or down dramatically in
made the price of our common response to variations in our quarterly
stock fluctuate and yearly operating results, general
significantly over time. trends in the long-distance industry,
changes in federal regulations
affecting us or the long-distance
industry, and other factors. For
example, during calendar year 1998, the
market price for the common stock as
reported by Nasdaq ranged from a high
of $3.00 per share to a low of $0.1875
per share.
We might be delisted by During the last four months of 1998, we
Nasdaq. received notices from Nasdaq indicating
that we did not meet Nasdaq's listing
requirements with respect to minimum
stock price, minimum net tangible asset
value and minimum value of public
float, and that our continued failure
to meet these minimum listing
requirements would result in Nasdaq
delisting our common stock.
We had a hearing with Nasdaq on
February 4, 1999 to review our ability
to continue to meet the minimum listing
requirements for Nasdaq. Nasdaq is
still considering whether we will be
able to meet their
4
<PAGE>
continued listing requirements. If Nasdaq
delists our common stock:
. there will be no established public
trading market for our common stock;
. we will most likely not be able to
use common stock in our acquisition
program;
. we will be in default under the
terms of some of our convertible debt
and convertible preferred stock; and
. we will most likely not be able to
raise the capital required to confirm
EqualNet Corporation's bankruptcy plan
of reorganization.
Because we have numerous As long as our outstanding options,
outstanding options, warrants and convertible securities
warrants and convertible remain unexercised or are not
securities, we may have converted, the terms under which we
difficulty obtaining capital could obtain additional capital may be
and your share value may be adversely affected. Moreover, the
significantly diluted. holders of these options, warrants and
convertible securities are likely to
exercise or convert them at a time when
we would, in all likelihood, be able to
obtain any needed capital by a new
offering of our securities on terms
more favorable than those provided by
these securities.
As of the date of this prospectus, we
have outstanding options and warrants
to purchase an aggregate of
approximately 3,524,899 shares of
common stock, 2,000 outstanding shares
of Series A Preferred Stock convertible
into 2,666,667 shares of common stock,
1,500 outstanding shares of Series B
Preferred Stock convertible into
1,500,000 shares of common stock,
206,707 outstanding shares of Series C
Preferred Stock convertible into
2,067,070 shares of common stock, 3,850
shares of Series D Preferred Stock
convertible into approximately
5,133,332 shares of common stock and 6%
Senior Secured Convertible Notes due
2001 convertible into an aggregate of
4,108,042 shares of common stock.
5
<PAGE>
Future resales of our Sales of substantial amounts of our
outstanding shares may common stock in the public market may
substantially diminish the hurt the common stock's market price.
market price of our common As of the date of this prospectus,
stock. including the shares covered by this
prospectus, in excess of 75% of the
shares of our common stock issuable
upon conversion of preferred stock or
convertible notes or upon exercise of
options or warrants, and substantially
all of our issued and outstanding
shares of common stock, are eligible
for sale under Rule 144 or have been
registered under the Securities Act for
resale by the holders. We are unable to
estimate the amount, timing or nature
of future sales of outstanding common
stock.
Our operations might not We currently must make minimum monthly
generate sufficient funds payments to Frontier for the
for us to fulfill our telecommunications services it provides
commitments to our carriers. to us. If we are unable to resell
long-distance service purchased from
Frontier in amounts that are at least
equal to our minimum payment
obligations to Frontier, we will have
to use revenues from other customers to
cover our operating costs under the
Frontier contract.
If any of our underlying carriers or
intermediate carriers are considered to
be utilities in EqualNet Corporation's
bankruptcy proceeding, they will be
entitled to adequate assurance of
payment for carrier services provided
to EqualNet Corporation after September
10, 1998, the bankruptcy filing date.
This may require us to make cash
deposits or advance payments in an
amount the court determines is
sufficient to provide these carriers
with adequate assurance of payment. If
we fail to provide these carriers with
adequate assurance of payment for
future services, they will have the
right to cease providing services.
Current sources of funds from
operations and working capital may not
be sufficient to provide the amount of
adequate assurance of payment required
by these carriers. We cannot assure
you that EqualNet Corporation could
secure funding for the amount of any
adequate assurance that may be required
of EqualNet Corporation.
6
<PAGE>
Most of the companies we Our industry is highly competitive. We
compete with have compete based upon brand recognition,
significantly greater pricing, customer service, network
resources than us. quality and value-added services.
AT&T, MCI-WorldCom and Sprint dominate
the long-distance segment of our
market. In addition to AT&T,
MCI-WorldCom and Sprint, we compete
with national and regional
long-distance carriers, and more
recently with regional Bell operating
companies.
The Telecommunications Act of 1996
permits these regional Bell operating
companies, which already provide local
telephone service in most markets, to
provide long distance services under
certain conditions. Although there are
currently restrictions that prohibit
these companies from providing
long-distance services in areas where
they furnish local service without
competition, we anticipate that in the
foreseeable future these carriers will
be able to provide long-distance
services both inside and outside their
local service areas. This increased
competition from regional Bell
operating companies, which typically
have broader customer bases and greater
financial resources than us, may have a
material adverse effect on our
financial condition and results of
operations.
We believe that there are over 900
companies in the long-distance
telecommunications market, many of
which have substantially greater market
share and financial resources than we
do. To compete effectively with other
carriers, we must provide high quality
services at competitive prices. The
prices we receive from our underlying
and intermediate carriers generally
depend upon the amount of customer
traffic we can commit to those
carriers. Given our recent operational
problems, we may not be able to commit
enough customer traffic to our carriers
to enable us to maintain profitability,
and we may incur substantial penalties
because of our failure to meet our
commitments.
7
<PAGE>
Some telecommunications laws The Telecommunications Act of 1996 and
decrease our profit margin related orders issued by the Federal
in a manner that is Communications Commission shifted
disproportionate to the responsibility for the payment of
decrease experienced by our certain service and access charges from
competitors. underlying carriers such as AT&T,
Sprint, Frontier and MCI-WorldCom to
interexchange carriers such as EqualNet
Corporation. Although AT&T, Sprint,
Frontier and MCI-WorldCom no longer pay
for these service and access charges,
they have not reduced their rates
sufficiently to account for the
elimination of those charges. Thus we
pay only a slightly lower rate for the
access we purchase from AT&T, Sprint,
Frontier and MCI-WorldCom, but must now
cover the significantly increased costs
attributable to the service and access
charges, as well as preferred
interexchange carrier charges and
universal service fund charges at both
a federal and state level. These
increased costs and the administrative
costs of complying with the reporting
requirements referred to in the next
paragraph may reduce our profit margin
or increase the cost of service for our
customers. This decrease in profit
margin or the loss of business likely
to result from an increase in
customers' billing rates may have a
material adverse effect on our
financial condition and results of
operations.
The long-distance telecommunications
operations of EqualNet Corporation and
USC Telecom, Inc. are subject to
various federal and state laws and
regulations, including prior
certification, notification and
registration requirements. EqualNet
Corporation and USC Telecom must
generally obtain and maintain
certificates of public convenience and
necessity from regulatory authorities
in most states in which they offer
service. Any failure to maintain
proper certification in jurisdictions
in which either of these companies
provides a significant amount of
intrastate long-distance service could
have a material adverse effect on our
business.
We have had significant We converted to a new customer
problems with our billing management, billing and rating system
system. ("AMS") in March 1998. The conversion
was not successful because, among other
things, we acquired a new customer base
and attempted to migrate to a
switch-based environment at the same
time as the conversion. The failed
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conversion caused considerable billing
errors and delays. Additionally, there
were aspects of AMS that required
continuing support from the seller of
AMS. This reliance upon an outside
source for billing system
troubleshooting slowed the conversion
process. Since we converted to AMS in
March 1998, we have been unable to
generate reliable information
concerning our customer attrition rate
and other data necessary or desirable
for the operation of our business. We
are currently in the process of
installing, and have begun to use
portions of, CostGuard ENTERPRISE, an
industrial class rating, billing and
customer care system. We cannot assure
you that CostGuard will fully meet our
current and ongoing needs. If
CostGuard fails to provide the expected
results, we may need to invest in
alternative billing systems.
Converting to a new system could cause
billing errors and delays and could
disrupt our ability to provide
effective customer service.
We are not Year 2000 The Year 2000 problem is the result of
compliant. computer programs and other business
systems being written using two digits
rather than four to represent the year.
Many of our time-sensitive applications
and business systems and those of our
vendors and customers may recognize a
date using "00" as the year 1900 rather
than the year 2000, which could result
in system failure or a material
disruption of operations.
We recently began making the internal
preparations necessary to avoid
computer-related losses and work
stoppages as a result of the Year 2000
problem. While we cannot currently
predict the consequences of, including
the potential lost revenue that could
result from, the failure to be Year
2000 compliant, if not remedied before
the year 2000, such non-compliance will
have a material adverse effect on our
operations.
Furthermore, the underlying operating
system for our CostGuard ENTERPRISE
billing system is not currently Year
2000 compliant. We believe that future
updates to this operating system will
make the billing system Year 2000
compliant, but we cannot assure you
that such compliance will be achieved.
If this system does not achieve Year
2000 compliance,
9
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we may experience substantial difficulties in
billing and servicing our customers.
The manufacturer of the
telecommunications switches that we own
has represented that the switches are
Year 2000 compliant. However, we
cannot assure you that our vendors and
customers are or will be Year 2000
compliant. If a customer's phone
equipment is not Year 2000 compliant,
that customer may not be able to use
all of the capabilities of the phone
system; this inability to make full use
of the phone system could reduce our
revenues. In addition, if a customer
is not Year 2000 compliant, we cannot
provide that customer with billing
information in an electronic data
format through the CostGuard system.
The failure of our vendors and
customers to be Year 2000 compliant
could have a material adverse effect on
our financial condition and results of
operations.
We depend heavily on our We have a small internal sales force
agents. and obtain most of our new customers
from independent marketing agents. Our
near-term ability to expand our
business depends upon whether we can
maintain relationships with existing
agents and establish new relationships
with additional agents.
During fiscal year 1998 and the first
six months of fiscal year 1999, our
relationship with our independent
marketing agents deteriorated because
we failed to pay commissions on a
timely and regular basis. If we
continue to fail to pay commissions to
our agents on a timely and regular
basis, our existing agents may choose
not to provide us with new orders or we
may not be able to attract and
establish relationships with new
agents. In addition, the agents may
choose to solicit our customers to
transfer them to other long-distance
carriers. Those events could have a
material adverse effect on our
financial condition and results of
operations.
10
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Because of our financial We have lost many experienced and
problems and EqualNet valuable employees, including key
Corporation's Bankruptcy members of management, because of our
filing, we have lost and may continuing financial problems and
continue to lose valuable because of EqualNet Corporation's
employees. bankruptcy filing. We may experience
operational difficulties if we continue
to lose key employees or if we cannot
replace those employees with equally
qualified personnel.
11
<PAGE>
ABOUT EQUALNET COMMUNICATIONS CORP.
We are a long-distance telephone company with three principal operating
subsidiaries:
. USC Telecom, a long-distance telephone company that provides service to the
customer base acquired from SA Telecommunications, Inc. in July 1998;
. EqualNet Corporation, a long-distance telephone company that provides
services to generally smaller commercial and residential accounts nationwide;
and
. Netco Acquisition Corp., the owner of nine switches located in major U.S.
cities.
EqualNet Corporation, and EqualNet Wholesale Services, Inc., a non-
operating wholly owned subsidiary of EqualNet Corporation, filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code on
September 10, 1998. EqualNet Wholesale Services later converted its bankruptcy
proceeding from a Chapter 11 reorganization to a Chapter 7 liquidation.
EqualNet Corporation, as a debtor-in-possession under the bankruptcy laws,
expects to continue to manage and operate its assets and business pending the
confirmation of its reorganization plan. At the time of its bankruptcy filing,
EqualNet Corporation had total assets of $20.7 million and total liabilities of
approximately $57.6 million and owed us, its largest individual creditor,
approximately $33.0 million.
We purchase large volumes of long-distance telephone usage at volume
discounts using the networks of major carriers such as AT&T, Sprint, Frontier
and MCI-WorldCom, and resell long distance services to smaller-volume users of
these services. Our strategy is to compete as a regional reseller and as a
reseller of dedicated T-1 service, using the networks of AT&T, Sprint, Frontier
and MCI-WorldCom to transmit our customers' traffic. T-1 service is service
from a customer's premises directly to our switch that bypasses the local
carrier's facilities, thus replacing the customer's variable usage costs with a
lower fixed rate of service. We market our services primarily to small business
customers with monthly long-distance bills of less than $500. We use
independent marketing agents and an internal sales force to sell our services.
The independent marketing agents typically receive residual commissions based on
billed revenue. We intend to focus our business on offering bundled services to
our customers, including long-distance service and local service, as well as
internet access and web pages.
We were incorporated in Texas in January 1995 to acquire all of the
outstanding stock of EqualNet Corporation, which was incorporated in Texas in
1990. Our principal executive office is located at EqualNet Plaza, 1250 Wood
Branch Park Drive, Houston, Texas 77079, and our telephone number is
(281) 529-4600.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the offered shares
(the "Shares") by the selling shareholders. If the selling shareholders
exercise all of the warrants, we will receive estimated gross proceeds of
approximately $1,159,413, based upon an average exercise price of $0.92 per
share. We intend to use the proceeds from any exercise of the warrants for
general corporate purposes. However, the selling shareholders may choose not to
exercise the warrants.
12
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SELLING SHAREHOLDERS
The following table sets forth, as of March 26, 1999, (1) the name of each
selling shareholder, (2) the number of shares of common stock beneficially owned
by each selling shareholder before the offering (and the source of those
shares), (3) the number of those shares of common stock that may be offered
under this prospectus (regardless of whether those selling shareholders
presently intend to offer those Shares), including shares of common stock that
are not currently beneficially owned but that may become beneficially owned upon
the issuance of 6% Senior Secured Convertible Notes due 2001 or Series D
Convertible Preferred Stock issuable as interest or dividends on outstanding
notes or preferred stock, and (4) the number of shares of common stock that will
be beneficially owned by each selling shareholder after the completion of the
offering and sale of the Shares (assuming that all Shares are sold). The number
of shares of common stock beneficially owned by each selling shareholder before
the offering of the Shares is based on information furnished to us by that
selling shareholder or set forth in our securities ledgers.
<TABLE>
<CAPTION>
Number of Shares of Common
Number of Shares of Stock That Will Be
Common Stock Number of Shares of Beneficially Owned After the
Beneficially Owned Common Stock That May Be Completion of the Offering and
Name of Selling Before the Offering Offered Under This Sale of the Shares (assuming
Shareholder of the Shares(1) Prospectus all Shares are sold)
- ------------------------- ------------------------ -------------------------- -------------------------------
<S> <C> <C> <C>
Willis Group, LLC 12,276,769 (2) 7,703,803 4,572,966 (12)
Genesee Fund Limited 2,737,137 (3) 2,737,137 0
Portfolio B
Advantage Fund Limited 2,989,166 (4) 2,966,666 22,500
RFC Capital Corporation 594,000 (5) 594,000 0
MCM Partners 2,666,667 (6) 2,666,667 0
Limit LLC (d/b/a ACMI) 2,500,000 (7) 2,500,000 0
The Furst Group, Inc. 1,822,500 (8) 1,822,500 0
James T. Harris 12,576,769 (2) 300,000 4,572,966 (12)
Bernice Arceneaux 10,000 10,000 0
SA Telecommunications, Inc. 2,067,070 (9) 2,067,070 0
Michael L. Hlinak 190,000 (10) 100,000 90,000
Dean H. Fisher 267,602 (11) 226,120 41,482
Ronald J. Salazar 92,529 (13) 30,000 62,529
</TABLE>
(1) For purposes of calculating the beneficial ownership of each shareholder,
it was assumed (in accordance with the Securities and Exchange Commission's
definition of "beneficial ownership") that the shareholder had exercised
all options or warrants, or converted any convertible securities, by which
the shareholder had the right, within 60 days following March 15, 1999, to
acquire shares of common stock.
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<PAGE>
(2) Includes warrants exercisable for an aggregate of 933,116 shares of common
stock, 1,925 shares of Series D Convertible Preferred Stock convertible in
the aggregate into up to 2,566,666 shares of common stock and notes
convertible in the aggregate into up to 2,054,021 shares of common stock.
None of the shares referred to in the preceding sentence were outstanding
as of February 22, 1999. Also includes 750,000 shares of common stock that
may be issued upon the conversion of additional 6% Senior Secured
Convertible Notes due 2001 or Series D Convertible Preferred Stock issuable
as interest or dividends on outstanding notes or preferred stock. James T.
Harris holds 300,000 shares of common stock directly as a result of a
transfer from Willis Group, LLC. Mr. Harris is the treasurer of, and owns
a 5% membership interest in, Willis Group, LLC. Mr. Harris was a member of
our Board of Directors from March 1998 to October 1998. Information
relating to ownership by Willis Group, LLC and Mr. Harris is based on the
Amendment No. 5 to Schedule 13D filed with the SEC on March 12, 1999.
According to the report, Willis Group, LLC has sole voting and dispositive
power with respect to all shares other than shares or warrants held
directly by its members and Mr. Harris shares voting and dispositive power
with the other members of Willis Group, LLC with respect to all shares
other than shares held directly.
(3) Includes a warrant exercisable for an aggregate of 333,116 shares of common
stock and notes convertible into an aggregate of up to 2,054,021 shares of
common stock. Also includes 350,000 shares of common stock that may be
issued upon conversion of additional 6% Senior Secured Convertible Notes
due 2001 issuable as interest on outstanding notes.
(4) Includes 1,925 shares of Series D Convertible Preferred Stock convertible
in the aggregate into up to 2,566,666 shares of common stock. Also
includes 400,000 shares of common stock that may be issued upon conversion
of additional Series D Convertible Preferred Stock issuable as dividends on
outstanding preferred stock.
(5) Includes warrants exercisable for an aggregate of 594,000 shares of common
stock.
(6) Includes 2,000 shares of Series A Convertible Preferred Stock convertible
in the aggregate into 2,666,667 shares of common stock.
(7) Includes 1,500,000 shares of common stock to be issued pursuant to an
Amended and Restated Asset Purchase Agreement dated effective as of
November 6, 1998 among Equalnet, ACMI Acquisition Corp., LIMIT LLC (d/b/a
ACMI) and the members of LIMIT LLC (d/b/a ACMI).
(8) Includes 3,000 shares of Series B Senior Convertible Preferred Stock
convertible in the aggregate into approximately 1,500,000 shares of common
stock.
(9) Includes 206,707 shares of Series C Convertible Preferred Stock convertible
in the aggregate into 2,067,070 shares of common stock.
(10) Includes a warrant exercisable for an aggregate of 90,000 shares of Common
Stock. Mr. Hlinak held the offices of Executive Vice President, Chief
Financial Officer and Chief Operating Officer of Equalnet during the period
from 1995 to 1998 and was a director of Equalnet from January 1995 to June
1998.
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<PAGE>
(11) 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. Mr. Fisher is the General Counsel of Equalnet
and was the Senior Vice President and Secretary of Equalnet from January
1995 until February 1999.
(12) This amount will constitute beneficial ownership of 10% of our common stock
outstanding immediately after the sale of all of the Shares.
(13) Dr. Salazar is a member of the Board of Directors of Equalnet.
Under the terms of the 6% Senior Secured Convertible Notes due 2001, the
warrants held by Willis Group, LLC and Genesee Fund Limited-Portfolio B, and the
Series A and Series D Convertible 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 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 6% Senior Secured Convertible Notes due 2001, the warrants and
the Series A and Series D Convertible Preferred Stock.
The sources of the Shares acquired or to be acquired by the selling
shareholders are:
. up to 2,566,666 shares of common stock issuable by us to each of Advantage
and Willis Group upon the conversion of 1,925 shares of our Series D
Convertible Preferred Stock owned by each of Advantage and Willis Group;
. up to 2,054,021 shares of common stock issuable by us to each of Willis Group
and Genesee upon the conversion of $1,540,516 aggregate principal amount of
6% Senior Secured Convertible Notes due 2001 owned by each of Willis Group
and Genesee;
. up to 333,116 shares of common stock issuable by us to each of Willis Group
and Genesee upon the exercise of warrants owned by Willis Group and Genesee;
. up to 1,500,000 shares of common stock reserved for issuance upon the
conversion of 6% Senior Secured Convertible Notes due 2001 or Series D
Convertible Preferred Stock issued as interest or dividends on outstanding
notes or preferred stock;
. up to 594,000 shares of common stock issuable by us to RFC Capital
Corporation upon the exercise of two warrants owned by RFC;
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<PAGE>
. 1,000,000 shares of common stock held directly by LIMIT LLC (d/b/a ACMI) and
1,500,000 shares of common stock to be issued to LIMIT LLC (d/b/a/ ACMI)
pursuant to an Amended and Restated Asset Purchase Agreement among us, ACMI
Acquisition Corp., LIMIT LLC (d/b/a ACMI) and the members of LIMIT LLC (d/b/a
ACMI);
. 322,500 shares of common stock held directly by The Furst Group, Inc. and up
to 1,500,000 shares of common stock issuable by us to The Furst Group upon
the conversion of 3,000 shares of our Series B Senior Convertible Preferred
Stock owned by The Furst Group;
. 300,000 shares of common stock held directly by James Harris;
. 10,000 shares of common stock held directly by Bernice Arceneaux;
. 2,067,070 shares of common stock issuable by us to SA Telecommunications,
Inc. upon the conversion of 206,707 shares of our Series C Convertible
Preferred Stock owned by SA Telecommunications, Inc.;
. up to 2,666,667 shares of common stock issuable by us to MCM Partners upon
the conversion of 2,000 shares of our Series A Convertible Preferred Stock
owned by MCM Partners;
. 2,000,000 shares of common stock held directly by Willis Group;
. 100,000 shares of common stock held directly by Michael L. Hlinak;
. 226,120 shares of common stock held directly by Dean H. Fisher; and
. 30,000 shares of common stock held directly by Ronald J. Salazar.
On March 6, 1998 as a result of various transactions, Willis Group and its
affiliates gained control of our Board of Directors, having nominated for
shareholder approval four of the seven members of the Board. Willis Group
beneficially owns approximately 54% of our voting securities. Mark A. Willis,
the Chairman of our Board of Directors, owns a 47.5% membership interest in
Willis Group.
On October 1, 1997, we issued to Willis Group a $1,000,000 Convertible
Secured Note, bearing interest at the rate of 12% per year, 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 1, 1997 warrant is
exercisable for five years. As of the date of issuance of the October 1, 1997
note, we 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, Willis Group
exchanged the October 1, 1997 note and accrued interest for 1,050,000 shares of
our common stock.
Under the terms of several related agreements among us, Willis Group and MCM
Partners entered into on December 2, 1997, we acquired nine telecommunications
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. In addition, we granted warrants to
16
<PAGE>
purchase 500,000 shares of common stock to Michael T. Willis, a member of Willis
Group and father of director Mark A. Willis, for guaranteeing a portion of the
financing incurred to purchase the switches.
Under the terms of the December 2, 1997 agreements, we acquired Netco
Acquisition Corp. from the Willis Group. Netco Acquisition Corp. 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. We
acquired Netco Acquisition Corp. for aggregate consideration consisting of
approximately 3,581,633 shares of common stock, 2,000 shares of Series A
Convertible Preferred Stock and the issuance of approximately 4,000,000 shares
of common stock for $1.00 per share in cash.
During the quarter ended March 31, 1998, we obtained a cash flow bridge loan
of $400,000 from Netco Acquisition, LLC, an entity owned 50% by Willis Group.
This note is secured by the accounts attributable to web page customers.
Effective December 31, 1998, the maturity date of the note was extended from
March 31, 1998 to July 31, 1999 and the principal balance of the note was
increased by the amount of interest payable on the note.
We paid Willis Group 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 us in April 1998 related to merger and acquisition consulting
services. The agreement required us 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 that we close. To date, we have not made any payments to
Willis Group under these agreements.
During fiscal year 1998, Willis Group incurred approximately $140,000 in
out-of-pocket expenses on our behalf related to services provided by
consultants, travel expenses and other miscellaneous expenses. We issued a note
dated as of July 31, 1998 payable to Willis Group for these expenses.
On September 2, 1998, we 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 our behalf. This loan is secured by our assets, bears interest at a
rate of 11% per year and matures on July 31, 1999.
We also entered into other transactions with Willis Group under which Willis
Group received some of the notes, preferred stock and warrants upon the
conversion or exercise of which the Shares are issuable. The aggregate
consideration paid by Willis Group for the notes, preferred stock and warrants
was $1.5 million and 1,500,000 shares of our common stock.
We are a party to several financing arrangements with RFC Capital
Corporation under which RFC provides working capital to us, including debtor-in-
possession financing to EqualNet Corporation. Our obligations to RFC are
secured by our accounts receivable and substantially all of our other assets.
On March 6, 1998, we entered into an exchange agreement with The Furst
Group, an accredited investor and the holder of our $3.0 million subordinated
debt, under which The Furst Group exchanged the $3.0 million 10% subordinated
note due December 31, 1998 and warrants to purchase 1.5 million shares of common
stock for 3,000 shares of Series B Senior Convertible Preferred Stock and
322,500 shares of our common stock to satisfy the accrued interest due on the
note. Each share of the Series B
17
<PAGE>
Preferred has a stated value of $1,000 and is entitled to share with the common
stock in any dividends declared based upon the number of shares of common stock
the Series B Preferred is convertible into at the time that dividend is
declared. Each share of Series B Preferred is convertible initially into 500
shares of common stock subject to certain anti-dilution provisions. The Series B
Preferred has a $1,000 per share liquidation preference over our Series A
Convertible Preferred Stock and the common stock. Each share of Series B
Preferred also entitles the holder to one vote, voting as a single class with
the common stock, on matters submitted to our shareholders.
Effective March 1, 1998 we acquired substantially all of the assets of SA
Telecommunications, Inc. in exchange for:
. $3,477,500 in cash;
. our assumption of liabilities of approximately $4,000,000; and
. the issuance of 195,073 shares of our Series C Convertible Preferred Stock.
Equalnet terminated an executive employment agreement with Michael L. Hlinak
during the second half of fiscal year 1998. Equalnet is currently obligated to
make severance payments of $155,833 to Mr. Hlinak over an 11 month severance
period and is providing health insurance benefits to him during that period.
Additionally, Equalnet issued a warrant to Mr. Hlinak for the purchase of up to
90,000 shares of Common Stock at an exercise price of $2.00 per share. Equalnet
issued the Shares to be sold by Mr. Hlinak under this prospectus to Mr. Hlinak
in lieu of all severance payments payable to Mr. Hlinak.
The 30,000 shares of common stock being offered under this prospectus by
Ronald J. Salazar, a member of our Board of Directors, were issued to Dr.
Salazar in lieu of consulting fees payable to Dr. Salazar pursuant to a
consulting agreement between Equalnet and Dr. Salazar.
We have agreed with the selling shareholders to file with the SEC, under the
Securities Act of 1933, as amended, a Registration Statement on Form S-3, of
which this prospectus forms a part, with respect to the resale of the Shares,
and have agreed to prepare and file any amendments and supplements to the
registration statement as may be necessary to keep the registration statement
effective until the Shares are no longer required to be registered for the sale
of the Shares by the selling shareholders.
18
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders or their permitted transferees or pledgees may
offer and sell the Shares by and for their respective accounts. We will not
receive any of the proceeds from the sale of the Shares by the selling
shareholders. If the selling shareholders exercise the warrants, we will
receive proceeds from the sale of the warrants. See "Use of Proceeds."
The selling shareholders may offer and sell any or all of the Shares:
. in one or more transactions on the Nasdaq National Market;
. in the over-the-counter market;
. in one or more brokerage transactions; or
. in one or more privately negotiated transactions,
at market prices prevailing at the time of sale, at prices related to prevailing
market prices, at negotiated prices or at fixed prices. The selling
shareholders may offer and sell the Shares directly or through underwriters,
brokers, dealers or agents, who may receive discounts, concessions or
commissions from the selling shareholders or the purchasers of Shares for whom
those underwriters, brokers, dealers and agents may act as agent or to whom they
may sell as principal, or both.
As of the date of this prospectus, we are not aware of any agreement or
understanding between any broker or dealer and any selling shareholder regarding
the offering and sale of the Shares. The selling shareholders and any
underwriters, brokers, dealers or agents to or through whom sales of the Shares
are made under this prospectus may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with those sales. In that event,
any commissions or discounts or other compensation paid to those persons and any
profit on the resale of Shares originally purchased by them may be deemed to be
underwriting compensation under the Securities Act. The selling shareholders
will be responsible for all brokerage commissions and other amounts payable with
respect to any sale of Shares with respect to the selling shareholders and any
legal, accounting or other expenses incurred.
If required by the Securities Act, a selling shareholder will distribute a
prospectus supplement that will set forth:
. the number of Shares being offered under that supplement;
. the terms of the offering, including the names of the underwriters;
. any discounts, concessions, commissions and other items constituting
compensation to underwriters, brokers, dealers or agents;
. the public offering price of the Shares; and
. any discounts, concessions or commissions allowed or reallowed or paid by
underwriters to dealers.
19
<PAGE>
In order to comply with the securities laws of certain states, if
applicable, the selling shareholders will offer and sell the Shares in those
jurisdictions only through registered or licensed brokers or dealers. In
addition, the selling shareholders may not sell the Shares in certain states
unless the Shares have been registered or qualified for sale in those states or
an exemption from registration or qualification is available and complied with.
The selling shareholders may indemnify any underwriter, broker, dealer or
agent that participates in transactions involving sales of the Shares against
certain liabilities, including liabilities arising under the Securities Act.
The selling shareholders may offer and sell any or all of the Shares under
Rule 144 of the Securities Act rather than under this prospectus if the
requirements of Rule 144 are satisfied.
One or more of the selling shareholders may pledge or grant a security
interest in some of all of the Shares owned by them, and the pledgees or secured
parties will, upon foreclosure in the event of default, be deemed to be selling
shareholders under this prospectus. In addition, a selling shareholder may sell
short our common stock, and in those instances, this prospectus may be delivered
in connection with those short sales and the Shares offered under this
prospectus may be used to cover the short sales.
One or more of the selling shareholders may transfer their Shares to
lenders or others and each of those persons will be deemed to be a selling
shareholder for purposes of this prospectus. The number of selling
shareholders' Shares beneficially owned by those selling shareholders that so
transfer selling shareholders' Shares will decrease as and when they make the
transfer. The plan of distribution for selling shareholders' Shares sold will
otherwise remain unchanged, except that the transferees will be selling
shareholders under this prospectus.
A selling shareholder may enter into hedging transactions with broker-
dealers and the broker-dealers may engage in short sales of the common stock in
the course of hedging the position they assume with the selling shareholder,
including in connection with distributions of the common stock by those broker-
dealers. A selling shareholder may also enter into options or other
transactions with broker-dealers that involve the delivery of common stock to
the broker-dealers, who may then resell or otherwise transfer the common stock.
A selling shareholder may also loan or pledge the common stock to a broker-
dealer and the broker-dealer may sell the common stock so loaned or, upon a
default, may sell or otherwise transfer the pledged common stock.
Under applicable rules and regulations under the Exchange Act, any person
that distributes Shares may not bid for or purchase shares of common stock
during a period that commences one business day (five business days, if our
public float is less than $25 million or our average daily trading volume is
less than $100,000) before that person's participation in the distribution,
subject to exceptions for passive market making activities.
We are bearing all costs relating to the registration of the Shares other
than certain fees and expenses, if any, of the selling shareholders' counsel or
other advisors. Any commissions, discounts or other fees payable to brokers or
dealers in connection with any sale of the Shares will be borne by the selling
shareholders, the purchasers participating in that sale, or both. We and the
selling shareholders
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<PAGE>
each have agreed to indemnify the other against certain liabilities, including
liabilities arising under the Securities Act.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including:
. statements regarding our financial position, business strategy, markets,
budgets and plans and objectives of management for future operations; and
. other statements introduced by words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate" or "continue" and
similar expressions or variations.
We cannot assure you that the expectations reflected in the forward-looking
statements made in this prospectus will prove to be correct. There are
important factors that could cause actual results to differ materially from our
expectations and from any forward-looking statements made in this prospectus or
that are otherwise made by us or on our behalf. These factors include the risk
factors set forth in this prospectus and in our filings with the SEC. All
future written and oral forward-looking statements attributable to us or to
persons acting on our behalf are expressly qualified in their entirety by those
risk factors.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any report or document we file
at the public reference facilities that the SEC maintains at the SEC's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at 7 World Trade Center, 13th Floor, New York, New York
10048, and Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for more information on the operation
of the Public Reference Room. Our filings with the SEC are available from the
SEC's internet site located at http://www.sec.gov.
We have filed the registration statement with the SEC. This prospectus,
which is a part of the registration statement, does not contain all the
information set forth in, or annexed as schedules and exhibits to, the
registration statement, as permitted by the SEC's rules and regulations.
Statements made in this prospectus concerning the contents of any documents
referred to in this prospectus are not necessarily complete. For a more
complete description, we refer you to the complete copy of each document filed
with the SEC as an exhibit to the registration statement.
Our common stock is quoted on the Nasdaq National Market under the symbol
"ENET." You may inspect reports, proxy statements and other information about
us at the offices of the National Association of Securities Dealers, Inc., 1735
K Street, N.W., Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately
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with the SEC. The information incorporated by reference is deemed to be part of
this prospectus, except for any information superseded by information in this
prospectus. This prospectus incorporates by reference the documents set forth
below that we previously filed with the SEC. These documents contain important
information about us.
The following documents filed by us with the SEC are incorporated by
reference into this prospectus:
. our Annual Report on Form 10-K for the fiscal year ended June 30, 1998, filed
with the SEC on October 13, 1998;
. our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
1998, filed with the SEC on November 20, 1998;
. our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1998, filed with the SEC on February 19, 1998;
. our Current Report on Form 8-K filed with the SEC on September 21, 1998;
. our Current Report on Form 8-K filed with the SEC on February 5, 1999; and
. the description of our common stock contained in a Registration Statement on
Form 8-A filed with the SEC on February 2, 1995 (Registration No. 1-5725),
including any amendment or report filed with the SEC for the purpose of
updating the description.
We also incorporate by reference all of our future filings under Section 13(a),
13(c), 14 or 15(d) of the Exchange Act.
Any statement or information contained in this prospectus or in any
document all or part of which is incorporated or deemed to be incorporated by
reference in this prospectus will be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement or information
contained in this prospectus or in any other document filed after this
prospectus that also is or is deemed to be incorporated by reference in this
prospectus modifies or supersedes that statement or information. Any statement
or information so modified or superseded will not be deemed, except as so
modified or superseded, to be a part of this prospectus.
We will provide, upon written or oral request, a free copy of any or all of
the documents incorporated in this prospectus by reference (other than certain
exhibits to those documents) to any person to whom this prospectus is delivered.
Please direct your requests for copies to Dean H. Fisher, Corporate Counsel,
Equalnet Communications Corp., 1250 Wood Branch Park Drive, Houston, Texas
77079, telephone number (281) 529-4600.
LEGAL MATTERS
Weil, Gotshal & Manges LLP, Houston, Texas, will pass upon the validity of
the Shares for us.
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EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K for
the year ended June 30, 1998 as set forth in their report (which contains an
explanatory paragraph describing conditions that raise substantial doubt as to
our ability to continue as a going concern as described in Notes 2 and 4 to the
consolidated financial statements), which is incorporated by reference in this
prospectus. Our consolidated financial statements and schedule are incorporated
by reference in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission Registration Fee....... $ 4,225
Accounting fees and expenses.............................. 10,000
Legal fees and expenses................................... 40,000
Miscellaneous............................................. 5,000
-------
Total................................................ $59,225
=======
All fees and expenses listed above, other than the Commission
Registration Fee, are estimates. The Company will pay the fees and expenses
listed above.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Bylaws provides for mandatory indemnification to at least
the extent specifically allowed by Article 2.021 of the Texas Business
Corporation Act (the "TBCA").
Pursuant to Article 2.021 of the TBCA, the Company generally has the power
to indemnify its current and former directors, officers, employees and agents
against expenses and liabilities incurred by them in connection with any suit to
which they were, are, or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
which they reasonably believed to be in, or, under certain circumstances, not
opposed to, the best interest of the Company, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful.
However, the Company will not indemnify such person if they are adjudged to be
liable to the Company unless the court determines that indemnification is
appropriate, in which case indemnification is limited to reasonable expenses
actually incurred by that person in connection with the proceeding. The Company
can also purchase and maintain insurance for such persons.
The Company's Articles of Incorporation provide that a director shall not
be liable to the Company or its shareholders for monetary damages for acts or
omissions in the director's capacity as a director, except (i) for breaches of
the director's duty of loyalty to the Company or its shareholders, (ii) for acts
or omissions not in good faith that constitute a breach of duty of the director
to the Company or for acts and omissions involving intentional misconduct or
known violations of law, (iii) for transactions in which the director received
an improper personal benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office, or (iv) for acts or omissions
for which the liability of the director is expressly provided by an applicable
statute. The Articles of Incorporation further provide that neither amendment
nor repeal of such provision shall eliminate or reduce the effect of such
provision in respect of any matter occurring, or any cause of action, suit or
claim that, but for such provision, would accrue or arise, prior to such
amendment or repeal.
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The above discussion of the Company's Articles of Incorporation and Bylaws
and Article 2.021 of the TBCA is not intended to be exhaustive and is qualified
in its entirety by such documents and statute.
ITEM 16. EXHIBITS.
Exhibit
No. Description
- -------- -----------
4.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-88742; filed on February 13, 1995).
4.2* Statement of Resolution of Board of Directors Establishing and
Designating Series A Convertible Preferred Stock and Fixing the
Rights and Preferences of such Series.
4.3 Statement of Resolution Establishing Series of Shares (Series B
Senior Convertible Preferred) (incorporated by reference to
Annex G to the Company's Schedule 14A filed with the Commission
on June 15, 1998).
4.4 Statement of Resolution Establishing Series of Shares (Series C
Convertible Preferred Stock) (incorporated by reference to Annex
A to the Company's Schedule 14A filed with the Commission on
June 15, 1998).
4.5* Statement of Resolution of Board of Directors Establishing and
Designating Series D Convertible Preferred Stock and Fixing the
Rights and Preferences of such Series.
4.6 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Registration Statement on Form S-1
(Registration No. 33-88742), filed with the Commission on
January 24, 1995).
5.1* Opinion of Weil, Gotshal & Manges LLP, counsel for the
Registrant.
23.1 Consent of Weil, Gotshal & Manges LLP (contained in Exhibit 5.1).
23.2* Consent of Ernst & Young LLP.
24.1 Power of Attorney (set forth on the signature page to the
Registration Statement)
*Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to
include any material information with
II-2
<PAGE>
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information
in the Registration Statement;
(b) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company under the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Houston, State of Texas, on March 30, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
------------------------
Mitchell H. Bodian, President and Chief
Executive Officer
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Mitchell H. Bodian and Dean H. Fisher, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place and stead, and in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Commission, and hereby grants
to such attorneys-in-fact and agents, and each of them, full power to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or his or their substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
/s/ Mitchell H. Bodian President, Chief Executive Officer March 30, 1999
- ---------------------------------- and Director (Principal executive
Mitchell H. Bodian officer and Principal financial
officer)
/s/ Mark A. Willis Chairman of the Board of Directors March 30, 1999
- ----------------------------------
Mark A. Willis
/s/ John Isaac "Ike" Eply Director March 30, 1999
- ----------------------------------
John Isaac "Ike" Epley
/s/ Ronald J. Salazar, Ph.D. Director March 30, 1999
- ----------------------------------
Ronald J. Salazar, Ph.D.
</TABLE>
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit Description
No.
- ----------- -------------------------------------------------------------------
4.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-88742; filed on February 13, 1995).
4.2* Statement of Resolution of Board of Directors Establishing and
Designating Series A Convertible Preferred Stock and Fixing the
Rights and Preferences of such Series.
4.3 Statement of Resolution Establishing Series of Shares (Series B
Senior Convertible Preferred) (incorporated by reference to
Annex G to the Company's Schedule 14A filed with the Commission
on June 15, 1998).
4.4 Statement of Resolution Establishing Series of Shares (Series C
Convertible Preferred Stock) (incorporated by reference to Annex
A to the Company's Schedule 14A filed with the Commission on
June 15, 1998).
4.5* Statement of Resolution of Board of Directors Establishing and
Designating Series D Convertible Preferred Stock and Fixing the
Rights and Preferences of such Series
4.6 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Registration Statement on Form S-1
(Registration No. 33-88742), filed with the Commission on
January 24, 1995).
5.1* Opinion of Weil, Gotshal & Manges LLP, counsel for the
Registrant.
23.1 Consent of Weil, Gotshal & Manges LLP (contained in Exhibit 5.1).
23.2* Consent of Ernst & Young LLP.
24.1 Power of Attorney (set forth on the signature page to the
Registration Statement)
*Filed herewith.
<PAGE>
EXHIBIT 4.2
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
<PAGE>
"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
<PAGE>
"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
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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
8
<PAGE>
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
9
<PAGE>
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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<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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");
25
<PAGE>
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
26
<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
27
<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
28
<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
29
<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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<PAGE>
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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(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
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<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
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<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>
EXHIBIT 4.5
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
9, 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 September 1, 1998 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
2
<PAGE>
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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<PAGE>
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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<PAGE>
"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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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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<PAGE>
(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 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 Common Stock is not listed for trading on any of the NYSE, the
AMEX, the Nasdaq or the Nasdaq SmallCap;
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(3) 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
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;
(4) 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;
(5) 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;
(6) 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; or
(7) The Stockholder Approval shall not have been obtained on or before
the date which is 120 days after the Issuance Date.
"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.
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"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.
"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
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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 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
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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 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
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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 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
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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.
(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;
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(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 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
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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 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
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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 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
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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
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
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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 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
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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
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
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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
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
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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 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.
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(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 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
25
<PAGE>
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 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,
26
<PAGE>
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 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
27
<PAGE>
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 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
28
<PAGE>
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 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
29
<PAGE>
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.
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,
30
<PAGE>
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, 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.
31
<PAGE>
(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 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
32
<PAGE>
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 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.
33
<PAGE>
(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 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
34
<PAGE>
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 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 12th day of March, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
-----------------------
Mitchell H. Bodian
36
<PAGE>
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:
37
<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
38
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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.)
39
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EXHIBIT 5.1
March 30, 1999
Equalnet Communications Corp.
1250 Wood Branch Park Drive
Houston, Texas 77079
Gentlemen:
We have acted as counsel to Equalnet Communications Corp., a Texas
corporation (the "Company"), in connection with the preparation and filing by
the Company of a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended, relating to the
proposed offering of up to 23,723,963 shares (the "Shares") of the Company's
common stock, par value $.01 per share (the "Common Stock"), by certain
shareholders of the Company and by certain entities that have rights to acquire
shares of Common Stock from the Company. The Shares include (x) (1) 1,000,000
outstanding shares of Common Stock held by LIMIT LLC (d/b/a/ ACMI) ("ACMI") and
1,500,000 shares of Common Stock issuable by the Company pursuant to the terms
of an Amended and Restated Asset Purchase Agreement dated effective as of
November 6, 1998 (the "Acquisition Agreement") among ACMI Acquisition Corp., the
Company, ACMI and the members of ACMI, which Acquisition Agreement provides for
the acquisition of the business and assets of ACMI by a wholly owned subsidiary
of the Company in exchange for shares of Common Stock, and (2) 300,000, 10,000,
100,000, 226,120, 2,000,000 and 30,000 outstanding shares of Common Stock held
by James T. Harris, Bernice Arceneaux, Michael H. Hlinak, Dean H. Fisher, Willis
Group LLC and Ronald J. Salazar, respectively, and (y) shares of Common Stock
that are issuable by the Company upon (1) the conversion of (a) 2,000 shares of
Series A Convertible Preferred Stock of the Company (the "Series A Preferred"),
(b) 3,000 shares of Series B Senior Convertible Preferred Stock of the Company
(the "Series B Preferred"), (c) 206,707 shares of Series C Convertible Preferred
Stock of the Company, (d) $3,081,032 aggregate principal amount of 6% Senior
Secured Convertible Notes of the Company (the "Notes"), (e) 3,850 shares of
Series D Convertible Preferred Stock of the Company (the "Series D Preferred"),
and (f) additional 6% Senior Secured Convertible Notes of the Company issuable
as payment-in-kind interest on the Notes (the "Interest Notes") and additional
shares of Series D Convertible Preferred Stock of the Company issuable as
payment-in-kind dividends on the Series D Preferred (the "Dividend Shares"), and
(2) the exercise of certain warrants of the Company (the "Warrants") granting
the holders thereof rights to purchase, in the aggregate, 1,260,232 shares of
Common Stock.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the articles of incorporation of
the Company, the
<PAGE>
resolutions adopted by the Board of Directors of the Company authorizing the
issuance of the Shares, and such corporate records, agreements, documents and
other instruments, and such certificates or comparable documents of public
officials and of officers and representatives of the Company, and have made such
inquiries of such officers and representatives, as we have deemed relevant and
necessary as a basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to the original documents
of all documents submitted to us as certified, conformed or photostatic copies
and the authenticity of the originals of such latter documents. As to all
questions of fact material to these opinions that have not been independently
established, we have relied upon certificates or comparable documents of
officers and representatives of the Company.
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that:
1. The Company is a corporation validly existing and in good standing
under the laws of the State of Texas.
2. The Shares that are issued and outstanding on the date hereof (the
"Outstanding Shares") are duly authorized, validly issued, fully paid and
nonassessable.
3. The Shares other than the Outstanding Shares and the Shares
issuable upon conversion of Interest Notes or Dividend Shares have been duly
authorized and, when issued, delivered and paid for (a) pursuant to and in
accordance with the terms of the Acquisition Agreement or (b) upon the
conversion or exercise of, and in accordance with the terms of, the Notes, the
Series A, Series B, Series C and Series D Preferred and the Warrants, and
assuming that, at the time of issuance of any shares of Series D Preferred
issued as payment-in-kind dividends upon other shares of Series D Preferred, an
amount of surplus not less than the aggregate par value of such shares was
transferred to the Company's stated capital, such Shares will be validly issued,
fully paid and nonassessable.
4. Any Shares issued upon the conversion of Interest Notes or Dividend
Shares, when duly authorized pursuant to adoption by the Board of Directors of
the Company of one or more resolutions in form and content as required by
applicable law, and when issued, delivered and paid for (a) in accordance with
the terms of such resolution(s) and (b) upon the conversion of, and in
accordance with the terms of, the Interest Notes or the Dividend Shares, and
assuming that (i) in the case of Dividend Shares, at the time of issuance of any
Dividend Shares an amount of surplus not less than the aggregate par value of
such Dividend Shares was transferred to the Company's stated capital, and (ii)
the Company shall have sufficient authorized but unissued shares of Common Stock
to so issue such Shares, such Shares will be validly issued, fully paid and
nonassessable.
2
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The opinions expressed herein are limited to the corporate laws of the
State of Texas, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our Firm under the caption "Legal
Matters" in the prospectus contained therein.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
3
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
registration statement on Form S-3 and related prospectus of Equalnet
Communications Corp. for the registration of 23,693,963 shares of its common
stock and to the incorporation by reference therein of our report dated October
8, 1998, with respect to the consolidated financial statements and schedule of
Equalnet Communications Corp. included in its Annual Report on Form 10-K for the
year ended June 30, 1998, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Ernst & Young LLP
Houston, Texas
March 31, 1999
