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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999 COMMISSION FILE NUMBER 0-025842
EQUALNET COMMUNICATIONS CORP.
A TEXAS IRS EMPLOYER
CORPORATION No. 76-0457803
1250 WOOD BRANCH PARK DRIVE
HOUSTON, TEXAS 77079
Telephone Number 281/529-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock (common stock) held by
non-affiliates of registrant as of September 24, 1999 $4,068,665
Number of shares of registrant's common stock outstanding
as of September 24, 1999 28,313,922
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Item Page
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TABLE OF CONTENTS
PART I
1. BUSINESS.............................................................. 1
2. PROPERTIES............................................................ 8
3. LEGAL PROCEEDINGS..................................................... 8
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 10
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................. 10
6. SELECTED FINANCIAL DATA.............................................. 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 13
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 21
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 21
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................. 21
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 21
11. EXECUTIVE COMPENSATION............................................... 23
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 24
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 28
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..... 32
ALL DEFINED TERMS UNDER RULE 4-10(A) OR REGULATION S-X SHALL HAVE THEIR
STATUTORILY PRESCRIBED MEANINGS WHEN USED IN THIS REPORT.
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PART I
ITEM 1. BUSINESS
GENERAL
EqualNet Communications Corp. (the "Company"), incorporated in the state of
Texas on January 20, 1995 (previously known as EqualNet Holding Corp.), is a
holding company currently comprising three wholly-owned operating subsidiaries,
EqualNet Corporation ("EqualNet"), a long-distance telephone company providing
services to generally smaller commercial and residential accounts nationwide,
Netco Acquisition Corp., ("Netco") the owner of nine telecommunications switches
located in major U.S. cities, and USC Telecom, Inc. ("USC Telecom") formed in
the first quarter of fiscal 1999 to acquire the assets purchased from SA
Telecommunications, Inc. ("SA Telecom") (see "SA Telecom Acquisition").
The Company began fiscal 1998 as a switchless reseller of long distance
services through EqualNet. During the third quarter of fiscal 1998 the Company
purchased nine telecommunications switches and became a switch-based reseller
with leased line facilities (see "Industry Background, Structure and
Competition"). The Company utilizes AT&T Corp. ("AT&T") through its arrangement
with an AT&T reseller, Frontier Communications, Qwest Communications and MCI
WorldCom Inc. ("MCI WorldCom") to provide transmission of its customers'
traffic.
EqualNet and EqualNet Wholesale Services, Inc. ("Wholesale") a non-
operating wholly-owned subsidiary of EqualNet, filed voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") on September 10, 1998 (the "Petition Date") in the United
States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy
Court"), Houston, Texas. On October 2, 1998, Wholesale filed its motion to
convert its bankruptcy proceeding from a Chapter 11 reorganization to a Chapter
7 liquidation, which motion was subsequently granted. The cases were conducted
in such court as Cases No. 98-39561-H5-11 and 98-39560-H4-11. Pursuant to
Sections 1107 and 1108 of the Bankruptcy Code, EqualNet managed its assets and
operated its business as a debtor-in-possession, pending the confirmation of its
reorganization plan. This reorganization plan was confirmed on April 28, 1999
and consummated on May 28, 1999. At the time of its bankruptcy filing, EqualNet
reported total assets of $20.7 million and total liabilities of $57.6 million.
The largest individual creditor of EqualNet as of the bankruptcy filing date was
the Company, which was owed approximately $33.0 million at the time of
EqualNet's bankruptcy filing. In conjunction with the confirmation and
consummation of the reorganization plan, certain debts were reduced resulting in
an extraordinary gain of approximately $10.0 million.
The Company markets its services primarily to residential and small
business customers with monthly long-distance bills of less than $500. For the
year ended June 30, 1999, the monthly long-distance bill of the Company's
average customer was approximately $37.00. As of June 30, 1999, the Company had
over 59,000 long-distance customers. The Company is one of the several hundred
"tier three" long distance service providers. See "Industry Background
Structure and Competition."
The Company's revenues increased to $32.4 million in fiscal year ended June
30, 1999, as compared to $24.9 million for the fiscal year ended June 30, 1998.
Revenues for the fiscal year ended June 30, 1997 were $46.6 million. Pretax
losses (before extraordinary items) for the years ended June 30, 1999, 1998, and
1997 were $27.8 million, $17.9 million, and $12.6 million, respectively.
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During fiscal year 1998, the Company continued to experience financial and
operational difficulties. During the second half of fiscal 1998 the Company
focused on transitioning from being a switchless reseller to becoming a national
switch-based carrier by purchasing nine telecommunications switches ("Switches")
on March 6, 1998. During the process of connecting network facilities to the
Switches in the latter-half of fiscal year 1998 and continuing into 1999, the
Company realized it lacked adequate capital to support a national switched
approach.
In October, 1998, the Company began to disconnect its Switches in order to
reduce fixed costs in areas in which the Company had little or no long-distance
traffic which simultaneously allowed the Company to reconfigure its circuits to
increase its margins in areas where the Company had concentrations of traffic.
The Company has adopted a geographic focus around six of its switch sites:
Houston, Dallas, Miami, Los Angeles, Chicago, and New York. In addition to
providing dedicated service to key accounts, the Company has entered into
wholesale agreements, such as partitioning or leasing contracts, to turn its
other Switches into revenue-generating assets.
During fiscal year 1999, the Company made several acquisitions which had an
aggregate positive impact on both cash flow and earnings. In January 1999, the
Company purchased approximately 80,000 residential long distance customers in a
foreclosure sale. In July 1998, the Company acquired the customer base and
certain assets of a switch-based long-distance telecommunications carrier
serving customers primarily in Texas and California.
INDUSTRY BACKGROUND, STRUCTURE AND COMPETITION
According to industry data, AT&T, together with MCI WorldCom and Sprint
constitute what generally is regarded as the first tier in the long distance
market. The second tier, generally defined as comprising companies generating
between $500 million and $2 billion in annual long distance revenue, such as
Frontier Corporation ("Frontier"), Cable & Wireless Communications, Inc. and
Qwest Communications, are believed to account for less than 5% of the more than
$80 billion long-distance market cumulatively. The remaining market share is
held by several hundred smaller companies, known as third-tier carriers. Recent
legislative and regulatory activity is designed to foster a telecommunications
industry that encourages greater competition among providers of long-distance
and local telecommunications services, as well as data and network services.
Many first- and second-tier companies, most notably AT&T, Sprint, MCI
WorldCom and Frontier, have been providing long-distance products for resale for
a number of years to capture incremental traffic volume. In 1991, EqualNet
entered into the first of its agreements with AT&T to resell long distance
service over AT&T's network. In 1994, EqualNet entered into an agreement with
Sprint to resell long distance over Sprint's network. In 1996, EqualNet
replaced its direct contractual relationship with Sprint with its arrangement
with a third-party reseller to continue service to EqualNet's customers over
Sprint's network. In 1998, Equalnet entered into a contract with MCI WorldCom
to resell long distnce over MCI WorldCom's network. In 1999, EqualNet entered
into an agreements with Frontier and Qwest to resell long distance over their
networks.
Besides gross revenue, another significant distinction between long-
distance companies involves whether they maintain their own facilities.
Facilities-based companies own or lease transmission facilities, such as fiber
optic cable or digital microwave equipment. Profitability for facilities-based
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carriers is highly dependent upon their ability to manage complex networking and
transmission costs. Substantially all of the first- and second-tier long
distance companies are facilities-based carriers and generally offer service
nationwide. Facilities-based carriers in the third-tier of the market generally
have facilities in a focused geographic area or lease facilities from first- or
second-tier carriers. Profitability for non-facilities based carriers is based
primarily on their ability to generate and retain sufficient revenue volume to
negotiate attractive pricing with one or more facilities-based carriers.
Pricing in such contracts typically is correlated inversely to minimum revenue
or volume commitment levels and term.
Another distinction among long-distance companies is that of switch-based
versus switchless carriers. Switch-based carriers have one or more switches,
which are computers directing telecommunications traffic in accordance with
programmed instructions. All of the facilities-based carriers are switch-based
carriers, as are many non-facilities-based companies. Switchless carriers
depend on one or more facilities-based carriers to provide both transmission
capacity and switch facilities. In addition, switchless resellers enjoy the
benefit of offering their service on a nationwide basis, assuming their
underlying carrier has a nationwide network. An "underlying carrier" is the
carrier that owns and is responsible for the management of the facilities needed
to transmit a customer's long-distance telephone call. Through fiscal 1997,
EqualNet was a switchless reseller. During the third quarter of fiscal 1998,
Netco acquired the Switches and associated network assets for approximately
$13.2 million. EqualNet entered into an agreement with Netco to provide for
operation of the Switches and build out of network facilities in exchange for
the right to carry traffic over the network and as a result became a switch-
based carrier.
The multi-billion dollar local telecommunications industry is dominated by
the regional Bell operating companies ("RBOC"s) and GTE Communications
Corporation ("GTE"). The RBOCs and GTE have the authority to provide interLATA
(geographic areas created by the AT&T divestiture known as local access
transport areas) long-distance service outside their service regions. The
Telecommunications Act of 1996 (the "Act") established procedures whereby the
RBOCs can apply for authority to provide interLATA long-distance service inside
their respective service region. Similarly, certain of the requirements
governing GTE's provision of in-region long-distance service were removed by the
Act. The nature of competition in the telecommunications industry is expected
to change significantly as legislative, regulatory and judicial activities
progress. As barriers are removed for the RBOCs to provide long distance
services inside their geographic areas, and as telecommunications mergers and
consolidations occur, the Company would expect an increase in competition for
long-distance services which could result in the further loss of market share,
more price competition and/or a further decrease in operating margins. The
Company expects additional industry wide downward price pressure as the RBOCs
begin to compete more aggressively in the long distance market.
The Company's ability to compete and grow is subject to changing industry
conditions. Legislation and the resulting regulatory and judicial action have
had a significant impact on the current industry environment. These changes are
expected to continue to alter the nature and degree of competition in both the
local and long-distance segments of the industry and could directly impact the
Company's future growth opportunities.
Competitive factors in the long distance industry affecting the Company's
market share include brand recognition, pricing, customer service, network
quality, value-added services and regulatory and judicial developments. Non-
facilities-based carriers typically receive rates from underlying carriers in
inverse correlation with the amount of traffic that they can commit to the
underlying carrier; the larger the commitment, the lower the cost of service.
Subject to contract restrictions and customer brand loyalty, resellers may
competitively bid their traffic among various national long-distance carriers to
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lower their cost of service. Non-facilities-based switchless carriers devote
their resources entirely to marketing, operations and customer service, leaving
the costs of network maintenance and management to the underlying carrier.
Conversely, facilities-based carriers concentrate on maximizing network
efficiency. In order to operate efficiently, facilities based carriers require
concentrations of their customer traffic where they have facilities to attempt
to maximize their network utilization and reduce the effective cost per minute.
Additional pricing pressure may come from the introduction of new technologies,
such as Internet telephony, which utilizes voice communications at a cost below
that of traditional switched long distance services. Reductions in prices
charged by competitors could have a material adverse effect on the Company.
The relationship between resellers and the major underlying carriers is
predicated primarily upon the pricing strategies of the first-tier companies,
which has resulted historically in higher rates for the small business customer
when compared to the rates paid by larger commercial customers. Small business
customers typically are not able to make the volume commitments necessary to
negotiate reduced rates under individualized contracts. The higher rates result
from the higher cost of credit, collection, billing and customer service per
revenue dollar associated with small billing level long-distance customers. By
committing to large volumes of traffic, the reseller is guaranteeing traffic to
the underlying carrier. The underlying carrier is also relieved of the
administrative burden of qualifying and servicing large numbers of relatively
small accounts. The successful reseller efficiently markets the long-distance
services, processes orders, verifies credit and provides customer service to
these large numbers of small accounts.
The telecommunications marketplace is marked by a high rate of customer
attrition. The Company's competitors engage in national advertising campaigns,
telemarketing programs, and offer cash payments and other incentives to the
Company's end users, who are not obligated to purchase any minimum usage amount
and can discontinue service, without penalty, at any time. There can be no
assurance the Company can replenish its customer base, and failure to do so
could have a material adverse effect on the Company.
The Company believes the rapid evolution of the communications industry
presents an opportunity for consolidation of third-tier companies in general,
and resellers and smaller, regionally focused switch based carriers, in
particular. Many of these companies are undercapitalized and may have
difficulty providing their services profitably, especially given the level of
price competition among carriers has continued to increase. By growing through
consolidation, the Company believes it can (i) generate increased margins by
securing better pricing from underlying carriers because of increased volume
commitments, (ii) justify the installation of switches in geographic areas with
concentrations of long distance traffic, and (iii) achieve economies of scale in
overhead allocation. The ability to obtain such increased margins, the ability
to concentrate customer traffic of the Company, and the economies of scale in
overhead allocation are not certain and cannot be precisely predicted.
BRITTAN COMMUNICATIONS INTERNATIONAL
On January 27, 1999, the Company purchased approximately 80,000 residential
long distance customers of Brittan Communications International Corporation
("BCI") in a foreclosure sale for approximately $1.8 million, including the
assumption of a $1.7 million term loan, and the issuance of 300,000 warrants to
a third-party valued at $75,000. The warrants entitle the holder to purchase
300,000 shares of Common Stock at $1.33 per share during a five-year period.
The term loan is reduced by 80% of the excess of the fair market value of the
Company's common stock at the exercise date over the $1.33 exercise price.
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SA TELECOM ACQUISITION
On January 21, 1998, the Company signed an agreement with SA
Telecommunications, Inc. ("SA Telecom") a switch-based, long-distance
telecommunications carrier serving customers primarily in Texas and California
to acquire certain assets and customer bases in exchange for a combination of
shares of stock, cash and assumption of certain liabilities. The transaction
was subject to certain conditions, including approval of the bankruptcy court
supervising the reorganization of SA Telecom under Chapter 11 of the United
States Bankruptcy Code. On March 9, 1998, the Company won approval from the
bankruptcy court. The purchase of SA Telecom was approved by the Company's
shareholders on June 30, 1998 for approximately $3.5 million in cash and
approximately $5.4 million of Series C Preferred Stock and the assumption of
approximately $4.0 million in debt. The Company's newly formed wholly-owned
subsidiary, USC Telecom, Inc. (USC Telecom"), acquired the SA Telecom assets on
July 22, 1998. Prior to the closing of this transaction, the Company and SA
Telecom entered into a management agreement pursuant to which the Company
managed the operations of SA Telecom from April 1, 1998 until the close of the
transaction whereby the Company was responsible for any losses from SA Telecom's
operations on or after April 1, 1998.
ACMI ACQUISITION
In January 1999, the Company acquired substantially all of the assets of
Limit LLC; doing business as ACMI ("ACMI") a network marketing company with
approximately 2,500 independent agents. In connection with this transaction, the
Company issued 1 million shares of its common stock and assumed a note payable
of $1 million. Subsequent to year-end, the parties of this transaction agreed to
modify the transaction whereby the Company would return the $1 million note
payable to the Sellers and, in consideration for the issued shares of the
Company's common stock, would acquire assets primarily consisting of the
independent agent contracts, debit card platform, and other associated assets.
PRODUCTS AND SUPPLIERS
MCI WorldCom, Frontier, AT&T, and Qwest were the principal underlying
providers of outbound and inbound long-distance services during fiscal year 1999
through multiple contracts. The Company believes its diversity of carrier
contracts provides further flexibility and alternatives for the Company in the
event it is not able to continue to contract with any of its current underlying
carriers. For example, one carrier may offer the lowest international rates to
one country while another offers the lowest rate to a different country. Under
the terms of the Company's contracts with its various carriers, the Company is
able to choose which services and in what volume the Company wishes to obtain
the services from each carrier. This flexibility enables the Company to minimize
its costs for such services by purchasing those services from the carrier
offering the Company the best rates at a given time.
In October 1998, EqualNet rejected, during its bankruptcy proceedings, its
contract with AT&T. AT&T had historically provided the majority of EqualNet's
underlying outbound and inbound long-distance services under a long-term
contract. Rather than negotiate a new contract with AT&T, which contained
certain minimum obligations through April 2000, EqualNet chose to acquire
services on a wholesale basis from another AT&T reseller.
CUSTOMER SERVICE AND CUSTOMER MANAGEMENT SYSTEM
The Company's operating subsidiaries' customer service function seeks to
develop long-term customer relationships by providing accurate billing
information and processing customer requests in a timely and efficient manner.
The responsibilities of the operations department include billing,
"provisioning" or processing orders with the underlying carriers, and supporting
independent marketing agents. The operations department receives orders from
independent marketing agents and from the sales department of EqualNet and USC
Telecom and then processes the orders for entry into the appropriate
subsidiary's database. Operations personnel interface with the underlying
carriers and billing companies for processing and procedural matters.
During the third quarter of fiscal year 1998 and continuing through the
fourth quarter of fiscal year 1999, the Company experienced billing difficulties
converting to various customer management and
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information systems with billing capabilities. The initial conversion coincided
with the management of the SA Telecom customer base and the migration to a
switch-based environment which resulted in (a) considerable billing errors, (b)
billing delays, and (c) customer attrition. The Company believes its new cost
rating, billing, and customer care system has dramatically improved rating speed
and billing accuracy.
CUSTOMERS AND MARKETING
Customers
The Company markets its long-distance services primarily to residential and
small business customers with monthly long-distance bills of less than $500. For
the year ended June 30, 1999, the monthly long-distance phone bill for an
average EqualNet customer was approximately $37. The Company does not have long
term contracts with its customers, but receives authorization from new customers
in connection with their order for service. In July, 1998, USC Telecom acquired
certain customers from SA Telecommunications. In January, 1999, USC Telecom and
EqualNet acquired certain customers formerly serviced by BCI at a foreclosure
sale conducted by one of BCI's secured creditors.
The former BCI customers are more geographically diversified and comprise
primarily small residential customers. The former SA Telecom customers are
primarily located in southern California and Texas and comprised mainly smaller
commercial users, similar to the customer base of EqualNet, but also include
some larger, dedicated service customers whose average monthly usage is larger
than the average EqualNet customer's usage. The average usage for the USC
Telecom customers located primarily in California historically has been $178 per
month and the average usage for the USC Telecom customers located primarily in
Texas historically has been $73 per month.
Marketing
Historically, EqualNet has relied on independent marketing agents to market
its long-distance products. In the bankruptcy proceedings, EqualNet rejected the
marketing contracts for virtually all of its sales agents. Consequently, many of
these agents may no longer be willing to continue to market for EqualNet under
new contractual arrangements. None of these former agents have executed new
agreements with EqualNet to continue as independent marketing agents. The
Company is currently evaluating several proposals for the resumption of an agent
program in order to increase its customer base.
REGULATION
The Company's provisioning of communications services is subject to
government regulation. The Federal Communications Commission ("FCC") regulates
interstate and international telecommunications, while each state regulates
telecommunications services originating and terminating within the same state.
Changes in existing regulations could have a material adverse effect on the
Company.
The Company's marketing services, and its current and past direct marketing
efforts require compliance with relevant federal and state regulations governing
the sale of telecommunications services. The FCC and some states have rules
that prohibit switching a customer from one long distance carrier to another
without the customer's consent and specify how that consent can be obtained and
must be verified. Most states also have consumer protection laws further
defining the framework within which the Company's marketing activities must be
conducted. While directed at curbing abusive marketing practices, unless
carefully designed and enforced, such rules can have the incidental effect of
entrenching incumbent carriers and hindering the growth of new competitors, such
as the Company.
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Restrictions on the marketing of telecommunications services are becoming
stricter in the wake of widespread consumer complaints throughout the industry
and "slamming" (the unauthorized conversion of a customer's pre-selected
telecommunications carrier) and "cramming" (the unauthorized provision of and
billing for additional telecommunications services). The Telecommunications Act
of 1996 strengthened penalties against slamming, and the FCC has issued rules
tightening federal requirements on the verification of orders for
telecommunications services and establishing additional financial penalties for
slamming. In addition, many states have been active in restricting marketing
through new legislation and regulation, as well as through enhanced enforcement
activities. The constraints of federal and state regulation, as well as
increased FCC and state enforcement attention, could limit the scope and the
success of the Company's marketing efforts and subject them to enforcement
action.
Allegedly to combat slamming, many local exchange carriers have initiated
"PIC freeze" programs that, once selected by the customer, require a customer
seeking to change long distance carriers to contact the local carrier directly
instead of having the long distance carrier contact the local carrier on the
customer's behalf. Many local carriers have imposed burdensome requirements on
customers seeking to lift PIC freezes and change carriers, and thereby make it
difficult for customers to switch to the Company's long distance service.
Statutes and regulations designed to protect consumer privacy also may have
the incidental effect of hindering the growth of telecommunications carriers
such as the Company. The FCC has released rules severely restricting the use of
"customer proprietary network information" (information a carrier obtains about
its customers through their use of the carrier's services). These rules may
make it more difficult for the Company to market additional telecommunications
services (such as local and wireless), as well as other services and products,
to its existing customers, if and when the Company begins to offer such services
and products.
The FCC requires the Company and other providers of telecommunications
services to contribute to the Universal Service Fund ("USF"), which helps to
subsidize the provision of local telecommunications services and other services
to low-income consumers, schools, libraries, health care providers, and rural
and insular areas that are costly to serve. The Company's contributions to the
universal service fund could increase over time, and some of the Company's
potential competitors (such as providers of Internet telephony) are not
currently, and in the future may not be, required to contribute to the USF.
Beginning in the third quarter of fiscal year 1998, the Company began to be
assessed both universal service charges and Primary Interexchange Carrier
Charges ("PIC-C charges"). Although the funding of universal service and access
charges are not new, the manner in which the Company is having to pay for these
items is new. Although the Company, and not its underlying carriers, is now
primarily responsible for the payment of these charges, EqualNet has not
experienced a lowering of its cost of service from its underlying carriers in an
amount equal to the increased amounts of the assessments it has to pay for
universal service and access charges. To the extent the Company does not receive
a lowering of its cost of service from its underlying carriers equal in amount
to its increased cost of business by virtue of these assessments, its operating
margins are diminished. The Company is attempting to recoup at least a portion
of the increase of these assessments by passing these charges through, where
permitted, to its end user customers. In such circumstances, although the per-
minute rates charged to the end user customers are not increased, the effect is
an increase to the Company's customers in their cost of obtaining service.
The FCC imposes additional reporting, accounting, record-keeping and other
regulatory obligations on the Company. The Company must offer interstate
services under rates, terms and
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conditions that are just, reasonable and not unreasonably discriminatory. The
Company must file tariffs listing the rates, terms and conditions of the
Company's service, but the FCC has proposed to abolish some tariff filing
requirements and instead mandate the posting of similar information on the
Internet. Although the Company's tariffs, and the rates and charges they
specify, are subject to FCC review, they are presumed to be lawful and have
never been contested. The Company may be subject to forfeitures and other
penalties for allegedly violating the FCC's rules if contested.
The vast majority of the states require the Company to apply for
certification to provide intrastate telecommunications services, or at least to
register or to be found exempt from regulation, before commencing intrastate
service. The vast majority of states also require the Company to file and
maintain detailed tariffs listing its rates for intrastate service. Many
states also impose various reporting requirements and/or require prior approval
for transfers of control of certified carriers, corporate reorganizations,
acquisitions of telecommunications operations, assignments of carrier assets,
including subscriber bases, carrier stock offerings and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and the rules, regulations and
policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations.
EMPLOYEES
As of June 30, 1999, the Company employed approximately 100 persons. The
Company considers relations with its employees to be good.
Various members of management left the Company during fiscal 1999. Robert
H. Turner was removed by the Board of Directors as Chief Executive Officer of
the Company in July 1998. Bob Henson resigned as Chief Operating Officer in
July 1998. Maurie Daignean, who was appointed as the Company's Chief Operating
Officer in July 1998 resigned in August 1998 to pursue other opportunities.
David Kerr resigned as Interim Chief Financial Officer in February 1999.
ITEM 2. PROPERTIES
The Company leases approximately 32,000 square feet of general and
administrative office space in Houston, Texas, under leases with unaffiliated
third parties that expire in 2004. The Company's monthly rental obligation for
its facilities is approximately $29,000. During its bankruptcy proceeding,
the Company amended its lease to reduce the number of square feet of lease space
from 57,000 to 32,000, thereby reducing its monthly rental obligation from
approximately $54,000 to $29,000 per month. The Company also leases properties
in the cities in which its Switches have been installed.
ITEM 3. LEGAL PROCEEDINGS
On August 7, 1998, Robert H. Turner, the Company's former Chief Executive
Officer filed suit against the Company alleging an unspecified amount of damages
based upon an alleged breach of his employment contract and other claims.
Although the Company denies any wrongdoing or liability in the matter, and
intends to vigorously defend itself, settlement discussions have been held, and
this matter will most likely settle. The Company believes it has adequate
reserves for this matter.
On September 17, 1998, Comerica Leasing Corporation filed suit against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings. A
settlement agreement was entered into by the parties dismissing the
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earlier litigation and adding the Company as an obligor for the payment of the
settlement amounts. Pursuant to an agreement reached in the bankruptcy
proceedings of EqualNet Corporation, Comerica Leasing agreed to release the
Company from any liability under the settlement and underlying agreements in
exchange for payment of $265,000 plus the issuance of a warrant for the purchase
of up to 300,000 shares of Common Stock of the Company at an exercise price of
$1.50 per share for a period of five years from the date of the agreement.
On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and
William Stuart (collectively "Bluegate") filed suit against the Company and
Netco Acquisition LLC alleging damages for breach of contract and other alleged
claims. The matters originated with a letter of intent wherein the Company
proposed the purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by the parties.
Bluegate and certain of its shareholders had threatened to sue the Company in
the event the proposed transaction was not consummated substantially in
conformity with the terms set forth in the Letter of Intent. The damages
Bluegate alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in anticipation of the
integration of its operations with those of EqualNet. It is impossible to
determine with any degree of certainty what, if any, liability Equalnet or any
of its subsidiaries, may incur in this matter. The total amount of damages are
unspecified, but include a demand for a cash payment of $685,000, a sufficient
number of shares of Common Stock of the Company for the payment of $585,000, an
additional 525,000 shares of Common Stock, and other damages. The Company
denies any wrongdoing or liability in this matter and intends to defend itself
against all claims of the plaintiffs. This action is in the initial stage of
discovery and proceedings. Accordingly, at this time the Company is unable to
determine the amount of exposure, if any, under this action.
On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom and the Company for
operating losses for the period from April 1, 1998 - July 22, 1998, damages for
delayed or unbillable revenue, delivery of shares of the Company's Series C
Senior Preferred Stock, and other items. On December 28, 1998, the court signed
an order approving those claims in the amount of approximately $812,000. The
Company and USC Telecom disputed the monetary claims asserted by SA
Telecommunications in its demand and filed a notice of appeal of the court's
order in the proceedings.
On October 9, 1999, SA Telecommunications, Greyrock Business Credit, and
the Company presented an agreement to the SA Telecom bankruptcy court providing
for the settlement of the SA Telecommunications judgement and amounts owed to
Greyrock. The agreement calls for the payment of the remaining principal balance
of the promissory note to Greyrock, plus accrued but unpaid interest, by the
issuance of a number of shares of the Company's unregistered common stock valued
at the lesser of $0.28 per common share (as adjusted to account for any stock
split) or the market price of the unregistered common stock at the date
registration of the shares is effective. In addition, the agreement calls for
satisfaction of the remaining obligation to SA Telecommunications by the payment
of $150,000 cash plus the issuance of an amount of the Company's unregistered
common stock equal to approximately $660,000 valued at the lesser of $0.28 per
common share (as adjusted to account for any stock split) or the market price of
the unregistered common stock at the date registration of the shares is
effective. If the registration of these shares of the Company's common stock is
not effective as of October 31, 1999, the amount of the Company's common stock
to be issued will increase, over varying periods of time from November 1, 1999
to January 30, 2000, from 7.5% to 22.5% of the amount to be ultimately issued.
The Company has reserved the right to repurchase the shares of the Company's
common stock issued in settlement of these obligations prior to January 31,
2000. The Company believes it has adequate reserves recorded for this matter.
As a result of liquidity problems, on September 10, 1998, EqualNet filed
for protection under Chapter 11 of Title 11 of the United States Code, in case
number 98-39561-H5-11 in the United States District Court for the Southern
District of Texas and Wholesale filed for protection under Chapter 11 of Title
11 of the United States Code, in case number 98-39560-H4-11 in the United States
District Court for the Southern District of Texas. On October 2, 1998,
Wholesale filed a motion seeking to convert its Chapter 11 reorganization
proceeding to a Chapter 7 liquidation proceeding. Pursuant to Sections 1107 and
1108 of the Bankruptcy Code, EqualNet managed its assets and operated its
business as a debtor-in possession pending confirmation of its reorganization
plan, which plan was confirmed on April 28, 1999, and consummated on or about
May 28, 1999. The plan of reorganization provided for the restructuring of
amounts and repayment terms for secured and unsecured creditors. In conjunction
with the confirmation and consummation of the reorganization plan, certain debts
were reduced resulting in an extraordinary gain of approximately $10.0 million.
During 1997, EqualNet settled disputed claims with the attorneys general
from eleven states alleging violations of consumer protection statutes of those
states. The settlement amount, which was paid in March 1998, totaled $225,000
plus the issuance of certain customer credits and adjustments. The
9
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Company was either not included as a party or was dismissed as a party before
the entry of any final judgment in any of these proceedings.
From time to time the Company is involved in what it believes to be routine
litigation, or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On May 7, 1999, the Company's Common Stock was conditionally moved to the
Nasdaq National Market ("Nasdaq") Small Cap Market under the trading symbol
"ENETC;" prior to this date the Company's Common Stock was traded on the Nasdaq
under the symbol "ENET." Continued trading on The Nasdaq SmallCap Market is
dependent upon the Company's meeting certain conditions, including the
maintenance of the minimum bid price of $1 per share as required by both Nasdaq
and The Nasdaq SmallCap Market. The table below sets forth the high and low
sales prices of the Common Stock for the fiscal years 1999 and 1998, as reported
by Nasdaq. The quotations reflect inter-dealer prices, without retail mark-down
or commission and may not represent actual transactions.
Fiscal Year Ended June 30,
Price Range
------------------------------------
High Low
------------------ ----------------
1999
Fourth Quarter $ 1 7/32 $ 5/8
Third Quarter $ 1 1/2 $ 9/16
Second Quarter $ 1 1/4 $ 13/16
First Quarter $ 1 3/8 $ 9/32
1998
Fourth Quarter $ 3 $ 1 13/16
Third Quarter $ 2 31/32 $ 13/16
Second Quarter $ 2 1/8 $ 1 1/4
First Quarter $ 2 7/16 $ 7/8
On September 24, 1999, the last sales price per share of the Company's
Common Stock, as reported by Nasdaq, was $0.25.
On September 24, 1999, the Company's 28,313,822 shares of Common Stock
outstanding were held by approximately 2,900 shareholders of record.
The Company has never declared or paid a dividend on the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of
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<PAGE>
the Company. The Company does not expect to pay cash dividends in the
foreseeable future. The Company is prohibited from declaring dividends on the
Common Stock unless and until the Company has paid all accrued and outstanding
dividends on the Company's Preferred Stock. Furthermore, the Company's existing
credit facility contains restrictions relating to the payment of dividends and
other distributions. The Company intends to retain any future earnings to
finance the expansion and development of its business. The declaration and
payment in the future of any Common Stock cash dividends will be at the election
of the Company's Board of Directors and will depend upon the earnings, capital
requirements and financial position of the Company, existing or future loan
covenants, general economic conditions' and other pertinent factors.
The following sets forth required information regarding all securities sold
without registration (and not previously reported) during fiscal year 1999:
On August 19, 1998, the Company issued a warrant to purchase 22,500 shares of
Common Stock at a exercise price of $1.86 to Lance Hack in connection with a
severance agreement between Mr. Hack and the Company. Mr. Hack is a former
employee of the Company.
On September 4, 1998, the Company issued 3,700 shares in the aggregate of Series
D Preferred Stock and a warrant to purchase 666,232 shares of Common Stock at a
exercise price of $0.9006 in connection with the Note Issuance Transaction
described more fully in the Company's Form 10-Q for the quarter ended September
30, 1998.
On January 4, 1999, the Company issued 5,380 shares of Series C Preferred Stock,
convertible under certain circumstances to 53,580 shares of Common Stock, to SA
Telecommunications, Inc. in connection with the SA Telecommunications asset
purchase.
On January 27, 1999, the Company issued a warrant to purchase 594,000 shares of
Common Stock at a exercise price of $1.33 to RFC Capital Corp. in connection
with the purchase of the Brittan Communications International Corporation
assets.
On February 17, 1999, the Company issued 1,000,000 shares of Common Stock to
Limit, LLC as partial fulfillment of the Company's obligations under the Asset
Purchase Agreement.
On February 17, 1999, the Company issued 105,000 shares of Common Stock to Zane
D. Russell in connection with a finder's fee owed. Russell is a former Director
and Officer of the Company and played a material part in coordinating the ACMI
Asset Purchase.
On March 9, 1999, the Company issued a warrant to purchase 250,000 shares of
Common Stock at exercise prices ranging from $1.125 to $2.50 to Market Pathways
Financial Relations, Inc. in connection with services to be rendered to the
Company.
On March 24, 1999, the Company issued 100,000 shares of Common Stock to Michael
L. Hlinak in connection with a severance agreement between Mr. Hlinak and the
Company. Mr. Hlinak is a former Officer of the Company.
On March 24, 1999, the Company issued 320,000 shares of Common Stock to Vinson
& Elkins LP in connection with payment for legal services rendered.
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<PAGE>
On March 24, 1999, the Company issued 30,000 shares of Common Stock to Dr.
Ronald J. Salazar in connection with payment for independent contractor services
rendered. Dr. Salazar is a Director of the Company.
On March 24, 1999, the Company issued 136,296 shares of Common Stock in the
aggregate to the following individuals: 62,529 to Dr. Ronald J. Salazar, 19,
243 to John "Ike" Epley, 30,747 to Mark Willis, and 23,777 to Mitchell H.
Bodian. All four individuals are Directors of the Company. The issuances
reflect payments for Director services in stock in lieu of cash.
On April 14, 1999, the Company issued 759,000 shares of Common Stock and an
additional 150,000 warrant to purchase Common Stock at exercise prices varying
from $1.00 to $2.00 to the LaMonda Family Trust. In return, the LaMonda Family
Trust paid the Company $500,000 cash.
On May 28, 1999, the Company issued a warrant to purchase 300,000 shares of
Common Stock at an exercise price of $1.50 per share to Comerica Leasing in
connection with a settlement between Comerica and the Company.
On June 1, 1999, the Company issued a warrant to purchase 150,000 shares of
Common Stock at an exercise price of $0.68 per share to Brittan Communications
International Corporation in connection with a settlement between Brittan and
the Company.
On June 10, 1999, the Company issued 833,333 shares of Common Stock to Infinity
Investments in return for $500,000, issued 833,333 shares of Common Stock to IEO
Holdings in return for $500,000, issued 500,000 shares of Common Stock to James
Crane in return for $300,000, issued 1,250,000 shares of Common Stock to The
Willis Group, LLC in return for $750,000, issued 250,000 shares of Common Stock
to James Lineberger in return for $150,000, and issued 833,333 shares of Series
E Preferred Stock which converts to 833,333 shares of Common Stock at the
Company's sole option to MCM Partners in return for $500,000.
The Company issued each warrant referenced above without registration in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
from the audited consolidated financial statements of the Company for each of
the five years ended June 30, 1999. This information should be read in
connection with and is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
under Item 8 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
____________________________________________________________________________
1995 1996 1997 1998 1999
----------- ------------ ------------ ------------ ------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Sales $67,911,000 $ 78,355,000 $ 46,588,000 $ 24,877,000 $ 32,436,000
Cost of sales 54,655,000 61,807,000 34,481,000 21,992,000 30,528,000
Selling, general and 8,936,000 13,720,000 12,453,000 14,139,000 13,372,000
administrative expenses
Depreciation and amortization 1,356,000 5,934,000 6,000,000 4,735,000 10,559,000
Write down of assets ---- 6,882,000 4,400,000 1,134,000 3,070,000
----------- ------------ ------------ ------------ ------------
Operating income(loss) 2,964,000 (9,988,000) (10,746,000) (17,123,000) (25,093,000)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Other income (expense) (93,000) (1,089,000) (1,889,000) (820,000) (2,918,000)
----------- ------------ ------------ ------------ ------------
Income (loss) before federal 2,871,000 (11,077,000) (12,635,000) (17,943,000) (28,011,000)
income taxes and extraordinary
item
Provision (benefit) for federal income taxes 507,000 (2,660,000) 2,346,000 ---- ---
----------- ------------ ------------ ------------ ------------
Net income (loss) before extraordinary item $ 2,364,000 $ (8,417,000) $(14,981,000) $(17,943,000) (28,011,000)
----------- ------------ ------------ ------------ ------------
Extraordinary gain on forgiveness of debt $ ---- $ ---- $ ---- $ ---- $ 10,022,000
----------- ------------ ------------ ------------ ------------
Net Income (loss) $ 2,364,000 $ (8,417,000) $(14,981,000) $(17,943,000) $(17,989,000)
Net loss per share - basic and diluted $ (1.40) $ (2.46) $ (1.64) (1.11)
------------ ------------ ------------ ------------
Pro forma net income(1) $ 1,751,000
-----------
Pro forma net income per share $ 0.38
-----------
Weighted average number of shares(2) 4,618,043 6,017,332 6,096,932 10,943,630 19,936,124
----------- ------------ ------------ ------------ ------------
Cash dividends per share(3) $ 0.61 $ ---- $ ---- $ ---- $ ----
----------- ------------ ------------ ------------ ------------
Balance Sheet Data:
Cash and equivalents $ 3,527,000 $ 382,000 $ 828,000 $ 460,000 $ 266,000
Working capital (deficiency) 7,772,000 (3,161,000) (4,667,000) (13,560,000) (7,673,000)
Total assets 39,316,000 34,596,000 19,162,000 27,760,000 25,714,000
Total long-term debt and capital leases, net 1,143,000 45,000 ---- ---- 5,301,000
of current portion
Total shareholders' equity (deficit) 20,706,000 12,384,000 (1,689,000) 2,958,000 3,728,000
</TABLE>
_______________
(1) From July 1, 1992 to March 7, 1995, the Company had reported for federal
income tax purposes as an S corporation. Accordingly, all taxable earnings
of the Company during that time have been taxed directly to the
shareholders of the Company at their individual tax rates. A pro forma
adjustment to reflect federal and state income taxes as if the Company were
a C corporation is presented for the respective periods at an estimated
effective rate of 39%.
(2) Shares used to compute pro forma net income per share are based upon the
actual weighted-average shares outstanding giving retroactive effect to the
Company's reorganization which occurred March 8, 1995.
(3) Shares used to compute cash dividends per share are based upon 4,000,000
shares outstanding beginning in 1993 and for the remaining periods as a
result of the reorganization. On March 7, 1995, the Company declared a
final dividend of $0.53 per share to the shareholders of record on such
date. The dividend was paid on March 24, 1995, to the shareholders of
record on March 7, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of operations and financial condition of the
Company should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-K.
OVERVIEW
Because of the continued erosion of market share and continuing declines in
cash flow, one of the Company's wholly-owned subsidiaries, EqualNet Corporation
("EqualNet"), and EqualNet Wholesale Services, Inc. ("Wholesale"), a non-
operating wholly-owned subsidiary of EqualNet, filed voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") on September 10, 1998 (the "Petition Date") in the United
States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy
Court"), Houston, Texas. On October 2, 1998, Wholesale filed its motion to
convert its bankruptcy proceeding from a Chapter 11 reorganization to a Chapter
7 liquidation. Pursuant to Sections 1107 and 1108 of the Bankruptcy Code,
EqualNet managed
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<PAGE>
its assets and operated its business as a debtor-in-possession pending
confirmation of its reorganization plan, which plan was confirmed on April 28,
1999. The plan of reorganization provided for the restructuring of amounts and
repayment terms for secured and unsecured creditors. In conjunction with the
confirmation and consummation of the reorganization plan, certain debts were
reduced, resulting in an extraordinary gain of approximately $10.0 million. As
voting control of the Company's common stock remained the same as a result of
the confirmation of the plan of reorganization, fresh start accounting was not
used in accordance with AICPA Statement of Position 90-7.
During fiscal year ended June 30, 1999, the approximate number of billable
minutes increased to 146 million from 85 million minutes for the fiscal year
ended June 30, 1998. The approximate number of customers increased to 59,000 in
June 1999 as compared to 30,000 in June 1998. These increases are primarily
attributable to the BCI and SA Tel acquisitions during fiscal year 1999.
During the first three quarters of fiscal 1998, EqualNet's primary costs,
costs of sales, were variable and consisted of the underlying "wholesale" cost
of long-distance services from its underlying providers, commissions to
independent agents, and billing costs. During the fourth quarter of fiscal year
1998, EqualNet entered into an agreement with Netco to provide for operation of
Netco's nine switches ("switches") and build out of network facilities in
exchange for the right to carry traffic over the network. At this time,
EqualNet became a switch-based carrier with new fixed costs (primarily
maintenance and network management). As EqualNet did not have the customer
density to support the costs associated with the network facilities, EqualNet
incurred losses in fiscal years 1999 and 1998 which created even larger cash
flow deficits.
EqualNet historically acquired customer accounts from independent marketing
agents on an individual price per order basis, with some agents receiving an
initial payment to help defer the cost of acquiring the orders which would be
offset by future commissions earned (agent advances) and others receiving a
higher initial payment with no future commission owed (deferred acquisition
costs). This allowed EqualNet to use the agents as a vehicle to outsource
telemarketing activities.
The Company encountered significant operational problems as a result of the
attempted conversion from one billing system to another. This situation kept
EqualNet from being able to calculate and pay its marketing agents the
commissions due them on either a timely or regular basis. In addition, these
operational problems resulted in delays in provisioning new customer orders from
some of these agents, causing delays in generating revenues from these customers
and, in some instances, the loss of new customer orders. These delays also
adversely impacted revenues and cash flows for the Company. As a result, the
Company's and EqualNet's relationships with marketing agents deteriorated. See
Liquidity and Capital Resources.
The Company's selling, general and administrative costs are primarily the
costs of back office operations including billing, provisioning and customer
service. The Company also has devoted significant resources to the information
technology necessary to support customer service with the purchase of and
successful implementation of a new and effective information system.
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<PAGE>
REORGANIZATION OF EQUALNET CORPORATION
As mentioned previously, on September 10, 1998, EqualNet and Wholesale
filed for protection under Chapter 11 of the United States Bankruptcy Code. In
the initial bankruptcy filing, EqualNet reported total assets of $20.7 million
and total liabilities of $57.6 million. As of that date, the largest individual
creditor of EqualNet was the Company, which was owed approximately $33.0
million, representing approximately 57.2% of EqualNet's total recorded
liabilities. On October 2, 1998 Wholesale filed its motion to convert its
bankruptcy proceeding from a Chapter 11 reorganization to a Chapter 7
liquidation.
Although EqualNet's filing was a voluntary petition, it was in default on
its debt and was in arrears on most of its vendor payables. Other than the
Company, the largest creditor of EqualNet was AT&T, which was owed approximately
$9.0 million. EqualNet rejected its contract with AT&T in the bankruptcy
proceeding and entered into an agreement as to the amount of AT&T's claim for
pre-petition liabilities as being $5.8 million as well as the amount of its
administrative claim as being $0.3 million. Although it did not own them,
EqualNet was the entity operating the network of nine switches, and it had
incurred a substantial amount of additional indebtedness to vendors associated
with those operations.
EqualNet has reorganized its business under bankruptcy protection, and its
plan of reorganization was confirmed on April 28, 1999. The plan of
reorganization provided for the restructuring of amounts owed and repayment
terms for secured and unsecured creditors. In conjunction with the confirmation
and consummation of the reorganization plan, certain debts were reduced
resulting in an extraordinary gain of approximately $10.0 million. The
liabilities compromised by the confirmed plan were recorded at the present
values of the amounts to be paid.
CONSOLIDATED RESULTS OF OPERATIONS
For the year ended June 30, 1999, consolidated revenues increased
approximately $7.6 million, or 30.3% when compared to 1998. This increase is
primarily attributable to the company's acquisition of the SA Telecom customer
base in July of 1998 and the acquisition of the BCI customer base in January of
1999. The SA Telecom and BCI customer base acquisitions contributed $10.9
million and $7.2 million, respectively, of revenues in fiscal year 1999. The
consolidated net loss for the year ended June 30, 1999 increased by $0.1
million, or 0.2%. Included in the 1999 results was an extraordinary gain of
approximately $10.0 million due to the reduction of certain debts in connection
with the confirmation and consummation of EqualNet's reorganization plan.
Excluding this extraordinary gain, the consolidated net loss for the fiscal year
ended June 30, 1999 increased approximately $10.1 million, or 56.1%, primarily a
result of the writedowns of customer acquisition costs ($1.8 million) trade
accounts receivable ($7.1 million), as well as an increase in accounting, legal,
and other professional fees associated with EqualNet's bankruptcy proceedings of
$0.5 million.
For the year ended June 30, 1998, consolidated revenues decreased
approximately $21.7 million, or 46.6%, when compared to 1997. This decrease was
primarily attributable to a decrease in the number of customer accounts and a
corresponding decrease in billable minutes. This decrease in the number of
customers was directly attributable to the Company's problems associated with
the conversion of a new customer care and billing system, as well as the
marketing efforts of the Company's competitors.
15
<PAGE>
Cost of sales for the year ended June 30, 1999 increased approximately
$8.5 million, or 38.8% when compared to 1998. This increase was primarily due
to the increase in sales volumes associated with the acquisitions of the SA Tel
and BCI customer bases in fiscal year 1999, as well as an increase to bad debt
expense. Bad debt expense increased $4.8 million, or 286.1%, when compared to
fiscal year 1998 due to problems primarily associated with the Company's
previous billing software system: customers routinely received many of their
invoices several months late and were subsequently unwilling to pay amounts due.
Cost of sales for the year ended June 30, 1998 decreased $12.5 million, or
36.2%, when compared to 1997. This decrease was primarily due to a decrease in
the Company's total sales as a result of the customer attrition mentioned above.
1998 amounts also included $3.4 million of costs associated in connection with
the implementation of the Company's switches, which were not incurred in fiscal
year 1997.
Selling, general, and administrative expenses for the year ended June 30,
1999 decreased $0.8 million, or 5.4%, when compared to 1998. This decrease was
primarily attributable to decreases directly attributable to decreases in the
Company's infrastructure during the year when compared to 1998: until the
fourth quarter of fiscal year 1998, the Company's infrastructure was better-
suited for a much larger company. This decrease was offset by increases in
accounting, legal, and other professional fees associated with EqualNet's
bankruptcy proceedings of $0.5 million.
Selling, general, and administrative expenses for the year ended June 30,
1998, increased approximately $1.7 million, or 13.5% when compared to 1997.
This increase was primarily attributable to the Company's infrastructure being
in excess of what was required to maintain the Company's level of operations.
Depreciation and amortization increased approximately $5.8 million, or
122.9% for the year ended June 30, 1999 when compared to 1998. This increase is
primarily attributable to the amortization of the customer acquisition costs of
the 1999 acquisitions of the SA Tel and BCI customer bases ($4.5 million), and a
full year of depreciation associated with the Company's switches ($2.8 million)
which were acquired in the fourth quarter of fiscal year 1998.
Depreciation and amortization for the year ended June 30, 1998 decreased
$1.3 million, or 21.0%, as compared to 1997. This decrease was primarily
attributable to the decreased carrying value of purchased customer accounts; in
fiscal year 1997, the Company recorded an approximate $4.4 million non-cash
charge to earnings to reduce the carrying value of purchased accounts to an
estimate of future discounted cash flows of the purchased accounts.
Other expenses increased $2.1 million, or 255.8% for the fiscal year ended
June 30, 1999 when compared to 1998, primarily as a result of increased interest
expense of $1.7 million. Other expenses decreased by $1.1 million, or 56.5%, in
fiscal year 1998 as compared to 1997 primarily due to payments of penalties,
settlement costs, and legal fees which were accrued in fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements, in addition to normal operating
expenses, are debt service, potential acquisitions, and sustaining capital
expenditures. To date, the external funds necessary to fund the Company's cash
requirements have been provided primarily from asset-based financing and third-
party sources of capital. The Company has a working capital credit facility
with RFC Capital
16
<PAGE>
Corporation ("RFC") whereby RFC purchases the Company's receivables and unbilled
call detail records and periodically remits back to the Company excess
collections over amounts funded less financing fees. The maximum allowable
amount of funding under the RFC credit facility is $10.0 million.
The Company's receivable purchase agreement at June 30, 1999 provides for a
funding base dependent upon the amount and aging of accounts receivable and
unbilled call detail records; RFC can cease funding of new receivables without
prior written notice at its option. Should RFC cease to provide financing in
accordance with its option, the Company would be forced to seek immediate
replacement of the facility to provide interim working capital; current sources
of funds from operations and working capital would be insufficient to provide
funds adequate to continue funding operations.
The Company expects to fund capital expenditures through additional
borrowings and equity transactions. Interest payments are expected to be paid
from cash flows from operating activities; debt principal payments will be met
through cash flows from operating activities and/or additional borrowings as
they become due or by the issuance of additional equity instruments.
Cash Used in Operating Activities
Net cash provided by operating activities was $3.9 million for 1999. This
amount was $1.0 million less than the $4.9 million used in operating activities
in 1998. This decrease in cash flow used in operating activities was primarily
the result of a increased net loss for the year and higher non-cash depreciation
and amortization charges, as well as an increased non-cash charge for writeoffs
of long term assets. The increased overall change in cash used in operating
activities was partially offset by lower cash inflows relative to net changes in
operating assets and liabilities. This decrease was primarily due to the non-
cash writeoff of customer accounts determined to be uncollectible during the
year in the amount of $7.1 million, as well as the relief of certain obligations
in connection with EqualNet's bankruptcy proceedings.
Cash Used in Investing Activities
Net cash used in investing activities was $1.2 million in 1999, compared to
$10.1 million in 1998. The decrease in funds utilized in investing activities
was primarily attributable to the purchase of the Company's Switches in 1998,
offset by the consideration paid in connection with the SA Telecom acquisition
in 1999.
Cash Provided by Financing Activites
Net cash provided by financing activities was $4.9 million in 1999,
compared to $14.6 million provided by financing activities in 1998. This
decrease is primarily due to 1998 non-recurring items such as the $9.4 million
issuance of the Company's common stock and warrants.
Debt Facilities
In connection with the SA Telecom acquisition, the Company assumed a note
payable of approximately $4.0 million. In August 1998, this note was paid off
through the proceeds of various new third-party loans and the proceeds of a new
note agreement in the amount of approximately $560,000. This new note agreement
bears interest at a rate of prime plus 2.5% and is secured by the assets of USC
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<PAGE>
Telecom. The principal balance of this new note was due on February 22, 1999.
The Company is currently in default of this note and the corresponding debt is
classified as debt in default as of June 30, 1999.
In September 1998, the Company executed a loan agreement in favor of the
Willis Group of approximately $0.2 million for certain advances made on behalf
of the Company. This note is secured by the assets of the Company and each of
its subsidiaries, bears interest at a rate of 11% per annum, and is due December
31, 1999.
On July 31, 1998, the Company issued two 6% Senior Secured Convertible
Notes due in 2001 (the "2001 notes") in the amount of $1.5 million each to the
Willis Group and an accredited investor. The 2001 Notes were convertible into a
variable number of shares of the Company's common stock and were issued with an
original issue discount of approximately $0.1 million for each note. The 2001
Notes accrued interest at an annual rate of 6% and interest payments were due
quarterly. The Company's obligations under the 2001 notes were secured by
certain collateral of the Company. In connection with the issuance of the 2001
Notes, the Company issued to each of the Willis Group and the accredited
investor warrants to purchase approximately 333,000 shares of the Company's
common stock at a purchase price of $0.90 per share; these warrants expire in
September 2003. Any holder of a 2001 note had the right to convert, in whole or
in part, into shares of the Company's common stock. The holders of the 2001
Notes agreed to convert these notes for Series F Preferred Stock.
Working Capital and Long Cash Cycle.
Customer billings for long distance services are generated from detailed
call records which are generally available from the carriers on a weekly basis
following the previous week's customer usage, and from the switches on a daily
basis following the day of customer usage. Customer invoices usually are
generated on a monthly basis for the direct-billed customers and weekly for the
LEC billed customers and are due upon receipt by the customer. However, the
Company historically collects a large portion of receivables after the scheduled
due date, resulting in an average cash cycle of in excess of 90 days. Since the
Company's underlying carriers typically have required payment within 35 days
following the month of usage, delays in receipt of customer payments have
resulted in significant working capital needs.
Management's Plans to Return to Profitability
The Company's management is continuing actions to strengthen the financial
position of the Company. New products are being developed to significantly
enhance sales and revenue, including (i) bundled minute long distance products
resembling cellular offerings, (ii) wholesale international rates for retail
customers (iii) prepaid debit-card, (iv) advertiser-sponsored long distance and
(v) the pursuit of acquisitions expected to be accretive to earnings. The
Company is also considering entering the wholesale international long distance
market, offering local service as a competitive local exchange carrier, and
offering internet access. Additionally, the Company is evaluating several
proposals for the resumption of an agent program in order to increase its
customer base, as well as negotiating with several third parties for possible
acquisitions to form strategic alliances in order to maximize the utilization of
the Switches.
The Company believes the new product offerings noted above are particularly
significant to increasing the Company's revenues and returning to profitability.
Furthermore, management believes the Company must increase its innovation and
not depend on competitive pricing alone in order to become more competitive in
the marketplace. Most of the new product offerings noted above are pricing
packages only and will not require a significant amount of capital. Any new
product offerings requiring technology advancements will most likely come from
strategic alliances or potential mergers. Financing for potential strategic
alliances or mergers is expected to come from the issuance of the Company's
common stock.
18
<PAGE>
In order to provide financing to support operations during the next twelve
months, the Company must also continue to increase revenue generated from its
existing resources. Specific actions to maximize revenue generated by the
switch network include (i) placing dedicated customers on the network via
connectivity to a local switch, (ii) port leasing of switch assets and (iii)
international product offerings accessed through the switches. In addition, the
Company is continuing to reduce its primary carrier costs for its existing
customer base. The Company continues to make improvements in its billing and
MIS systems to more accurately bill customers, maximize customer revenue and
ensure proper audit of vendor invoices related to the cost of service. The
Company has also recently implemented a cost reduction program, and continues to
refine these efforts, related to general, administrative, and overhead
expenditures. In addition to utilizing the Switches to provide transmission of
its customer traffic, the Company is focusing on offering bundled services to
its customers, mainly long-distance service, internet access, and local service.
Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek possible
strategic alliances and business combinations in order to more rapidly implement
its plans for increasing the service offerings or for reducing costs of the
Company. Management is attempting to balance the cash flows from operations to
meet current needs, and is continuously seeking additionally capital resources
to fund the expansion of service offerings of the Company. Should capital
resource requirements to achieve the management's plan to return to
profitability significantly exceed management's ability to meet those needs, the
Company's ability to return to profitability could be significantly delayed or
impaired.
SEASONALITY
The Company's long distance revenue is subject to seasonal variations.
Because much of the Company's revenue is generated by non-residential customers,
the Company traditionally experiences decreases in long-distance usage and
revenue in those periods with holidays. In past years the Company's long-
distance traffic, which is primarily non-residential, has declined slightly
during the quarter ending December 31 due to the November and December holiday
periods.
YEAR 2000
The Company recognizes the challenges associated with year 2000 issues ("Y2K")
and has undertaken a comprehensive review and testing of its computer systems to
identify Y2K-related issues associated with any items of software or hardware
used in its business operations. Most of the software systems used by the
Company are licensed from third-parties and are Y2K compliant or will be
upgraded to Y2K compliant releases before the end of calendar year 1999. This
issue has been addressed by the Company in multiple phases, including
assessment, remediation, testing, and implementation, and progress is being
monitored by the Company's senior management. All material systems, including
non-information technology systems which may house non-compliant, embedded
technology are being or have been evaluated.
In addition to addressing the Company's own systems, as described above, the
Company must assess the state of readiness of the systems of other entities with
which it does business. Failure by these third-
19
<PAGE>
parties to adequately resolve their Y2K issues could have a material adverse
effect on the Company's operations.
The Company believes its success on being Y2K compliant will not be conclusively
known until the year 2000 is actually reached. Although failure by one or more
of the Company's own systems could result in lost revenues and/or additional
expenses required to carry out manual processing of transactions, the Company
cannot predict the effect external forces could have on its business. Failures
by banking institutions, governmental entities, and others could have far-
reaching effects on the entire economy and the Company.
The Company's operations (including information technology and non-information
technology systems) are in varying states of readiness for compliance with Y2K
issues. The initial assessment, remediation, and testing phases have been
completed for substantially all of the Company's operations, and in most cases,
implementation activities have also been completed. The Company expects to
complete all phases of its Y2K program prior to December 31, 1999.
The Company believes it is not possible to determine with certainty all Y2K
problems affecting the Company have been identified or corrected. The number of
devices which could be affected and the interactions among theses devices are
simply too numerous. In addition, the Company cannot accurately predict how
many failures related to the Y2K problem will occur or the severity, duration,
or financial consequences of such failures. The Company has contingency plans
to define and address the worst-case scenario likely to be faced by the Company.
Expenses incurred by the Company related to assessing, remediating, and testing
its information technology systems, which were not material, have been expensed
as incurred and funded from operations. The Company does not anticipate the
cost to become fully Y2K compliant will be material.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This filing includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are identified as any statement which
does not relate strictly to historical or current facts. They may use such
words as "anticipate," "continue," "estimate," "expect," "may," "will," or other
similar words. These statements discuss future expectations or contain
projections. Specific factors which could cause actual results to differ from
those in the forward-looking statements include:
. Customer attrition rates in excess of those anticipated;
. Increased price competition for long distance services;
. Changes in governmental policy, regulation, and enforcement;
. The company's ability to integrate any acquired operations into its
existing operations;
. The Company's ability to successfully identify and close strategic
acquisitions and make cost-saving changes in operations;
. The condition of the capital and equity markets in the United States;
and
. Maintaining the Company's NASDAQ listing.
20
<PAGE>
The Company disclaims any obligations to update the above list or to announce
publicly the results of any revisions to any of the forward-looking statements
to reflect future events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk exposure related to changes in interest
rates on its borrowing and receivable sales facilities. These instruments carry
interest at a pre-agreed upon percentage point spread over the prime interest
rate or U.S. Treasury Rate Index. At June 30, 1999 and 1998, the Company had
$8.7 million and $5.8 million, respectively outstanding under its debt
facilities with variable interest rates. Based on these balances, an immediate
change of one percent in the interest rate would cause a change in interest
expense of approximately $87,000 and $58,000, or $0 and $0 per diluted share,
respectively, on an annual basis. The Company has two loans totaling
approximately $0.3 million with fixed interest rates of 11%. The interest rate
risk on these loans is not material to the Company or its operations. The
Company's objective in maintaining these variable rate borrowings is the
flexibility obtained regarding lower overall cost as compared with fixed-rate
borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
to be filed under this Item are presented on pages _____ through _____ of this
Annual Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and titles of the Company's
directors and executive officers as of October 13, 1999.
<TABLE>
<CAPTION>
Year Term As
Director Will
Name Age Position(s) Expire
_______________________________ _______ __________________________________ ______________
<S> <C> <C> <C>
Mark A. Willis 31 Chairman of the Board , Director 2000
Mitchell H. Bodian 48 President, Chief Executive Officer, 1999
Director
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
William D. Rhodes, Jr. 51 Chief Operating Officer
Michael P. Gallagher 32 Chief Financial Officer
John Isaac "Ike" Epley 32 Director 1999
Ronald J. Salazar 50 Director 1998
</TABLE>
Mark A. Willis has served as Chairman of the Board and a director of the
Company since March 1998. Mr. Willis founded the Willis Group, an investment
fund, in 1997 and serves as its President. The fund has made investments in
industries such as offshore oil platform equipment, geophysical services, oil
and gas production, telecommunications, and an aircraft parts supplier. Before
forming the Willis Group, Mr. Willis worked at Eagle USA Airfreight, an air
freight forwarder, for two and a half years, where he rose to the position of
Regional Sales and Marketing Manager. Before that, Mr. Willis served as a
marketing and sales representative for Talent Tree, a temporary help agency
providing primarily clerical and office staffing services.
Mitchell H. Bodian has served as President and Chief Executive Officer
since July 1998 and as a director of the Company since March 1998. Mr. Bodian
has been the Managing Director of Bodian Associates, an investment banking firm
providing financial advisory services to middle market companies, since 1990.
Bodian Associates specializes in providing merger and acquisition services to
niche telecommunications services providers. In October 1996, Mr. Bodian was
appointed as Chapter 11 Trustee for Conectco, a switchless reseller that sold
telephone debit cards and provided one plus telecommunications services, and
that filed for the protection under the United States bankruptcy laws in August
1996. Mr. Bodian has approximately twenty years of experience in management
consulting and investment banking with Kearney Management Consultants, Warburg
Paribas Becker and Merrill Lynch. Mr. Bodian holds an MBA from Stanford
Business School.
William D. Rhodes, Jr. has served as Chief Operating Officer since February
1999. Mr. Rhodes has over 13 years executive telecommunications management
experience including roles in domestic and international marketing, sales and
operations addressing global private networks, interexchange carrier ("IXC") and
competitive local exchange carrier ("CLEC") businesses. Mr. Rhodes has an MSEE
and BSEE from the University of Missouri at Columbia and has been involved in
state-of-the-art electronics, navigation, and communication projects throughout
his career.
Michael P. Gallagher has been an officer of the Company since September
1999. Prior to joining the Company, Mr. Gallagher spent the past eight years
with PricewaterhouseCoopers, an international accounting and business advisory
firm. A CPA, Mr. Gallagher received his MBA from Texas A&M University and his
BBA in Accounting from the University of Texas at Tyler.
John Isaac "Ike" Epley has served as a director of the Company since March
1998. Mr. Epley has been a Managing Director of Omni Ventures, L. L. C., a
venture capital and investment banking
22
<PAGE>
firm, since August 1995. He also has been a Managing Director of Omni
Securities, L. L. C. , a registered broker/dealer, since its inception in
November 1997. He is a registered Principal and General Securities
Representative. Mr. Epley served as Vice President of Alex Brown & Sons, an
investment banking firm in Houston, from January 1993 to 1995 where Mr. Epley
focused on institutional fixed income sales. His clients included large
multinational companies, financial institutions, insurance companies and money
management firms.
Ronald J. Salazar, Ph.D. has served as a director of the Company since
March 1998. Dr. Salazar received his Ph.D. in business administration from the
University of Texas in 1990 in the area of Strategic Management and Competitive
Strategy. Since 1995, Dr. Salazar has been a partner in the management
consulting firm of Palladian Analysis & Consulting, L. L. C. in Houston, Texas.
Prior to that Dr. Salazar was an assistant professor at the University of
Houston and Idaho State University since 1988 teaching management courses. Dr.
Salazar is married to Mr. Willis' aunt.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, the Company believes during the fiscal year ended June 30, 1999, all
officers, directors and greater than 10% shareholders complied with all filing
requirements applicable to them.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Equalnet's
officers, directors and persons who own more than 10% of a registered class of
Equalnet's equity securities to file Form 3, Form 4 and Form 5 reports of
ownership and changes in ownership with the SEC. Officers, directors and
greater than 10% shareholders are required by the regulation to furnish Equalnet
with copies of all Section 16(a) reports they file.
Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to Equalnet during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, Equalnet believes that during the fiscal year ended June 30, 1999, all
officers, directors and greater than 10% shareholders complied with all filing
requirements applicable to them, except that Dean H. Fisher and James T. Harris
failed to file timely Form 5s. Messrs. Fisher and Harris completed and filed
delinquent Form 5s on October 13, 1998.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION
Dr. Salazar and Mr. Epley, Directors for the Company, served on the
Compensation Committee.
SUMMARY COMPENSATION TABLE
The following table summarizes compensation information concerning the
Chief Executive Officer and each of the Company's most highly compensated
executive officers as to whom the total annual salary and bonus for the fiscal
year ended June 30, 1999 exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation
Name and Fiscal Salary Bonus Common Stock All Other
Principal Position Year Underlying Options Compensation(1)
<S> <C> <C> <C> <C> <C>
Mitchell H. Bodian 1999 $204,818 - - $ 338
Hal Turner 1998 $ 14,423 - - $3,076
former Chief Executive Officer 1997 $100,961
-
Dean H. Fisher 1998 129,800 - - 6,059
General Counsel 1997 129,000 - 35,000 3,451
1996 128,000 - - 6,097
</TABLE>
- ----------------------
23
<PAGE>
(1) Represents contributions in 1999 by the Company under the Company's 401(k)
Plan for Mr. Fisher of $5,037 and health insurance premiums paid in 1999 by
the Company for Messrs. Bodian and Fisher of $338 and $2,445, respectively.
Represents contributions in 1998 by the Company under the Company's 401(k)
Plan for Mr. Fisher of $3,894, and health insurance premiums paid in 1998
by the Company for Messrs. Turner, and Fisher of $3,076, and $2,165,
respectively. Represents contributions in 1997 by the Company under the
Company's 401(k) Plan for Mr. Fisher of $1,676, and health insurance
premiums paid in 1997 by the Company for Mr. Fisher of $1,775.
OPTION GRANTS IN FISCAL 1999
Equalnet did not grant options to any of the Named Executive Officers during
fiscal 1999. The following table sets forth information regarding the value of
unexercised warrants and options held by the Named Executive Officers. None of
the Named Executive Officers exercised any warrants or options in fiscal year
1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED WARRANTS AND IN THE MONEY WARRANTS AND
OPTIONS AT JUNE 30, 1998 OPTIONS AT JUNE 30, 1998 (1)
------------------------------------ ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dean H. Fisher 35,000 --- --- ---
---
---
</TABLE>
(1) The value of each unexercised in-the-money warrant or option is equal to
the difference between the closing price of the common stock on the NASDAQ
National Market on June 30, 1999 of $.6875 per share and the exercise price
of the warrant or option.
COMPENSATION OF DIRECTORS
Each non-employee director is paid $20,000 per year, plus $1,500 for each
meeting of the Board which he personally attends, $1,500 for each meeting of a
committee of the Board which he personally attends and $500 for each meeting in
which he participates by telephone. All non-employee directors of the Company
are reimbursed for ordinary and necessary expenses incurred in attending Board
or committee meetings. The Company has adopted the Director Plan, as amended in
May 1998, pursuant to which each non-employee director receives options to
purchase a number of shares of Common Stock equal to $60,000 divided by the
average of the highest and lowest price of the Common Stock the day before the
date of his election as a director ("Fair Market Value") and options to purchase
a number of shares of Common Stock equal to $30,000 divided by the Fair Market
Value of the Common Stock the day before each annual meeting of the Company's
shareholders for each year thereafter. These options have an exercise price
equal to the Fair Market Value of the Common Stock and the initial grants vest
over three years in 33-1/3% increments and the annual grants vest in six months
from the date of grant. Employee directors of the Company do not receive any
additional compensation from the Company for their services as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
24
<PAGE>
The following table sets forth information as of the Record Date (unless
indicated otherwise), with respect to the beneficial ownership of the common
stock and the series A, series B, series C, series D, series E and series F
preferred stock of Equalnet by (1) persons known to Equalnet to be the
beneficial owners of more than 5% of any class of capital stock of Equalnet, (2)
each director, director nominee and Named Executive Officer of Equalnet and (3)
all directors and executive officers of Equalnet as a group.
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
Common Stock Preferred Preferred Preferred Preferred Preferred
----------------------- ------------- ------------- ------------- ------------- -------------
Directors, Executive Officers Number of % of No. of % of No. of % of No. of % of No. of % of No. of % of
and 5.0% Shareholders Shares Class Shares Class Shares Class Shares Class Shares Class Shares Class
- ----------------------------- --------- ----- ------ ----- ------ ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael T. Willis 30,707,575(1) 60.2% - - - - - - - - - -
5005 Woodway,
Suite 350
Houston, Texas 77056
James T. Harris 30,507,575(1)(4) 60.4% - - - - - - - - - -
5005 Woodway,
Suite 350
Houston, Texas 77056
Willis Group, LLC 30,207,575(1) 59.8% - - - - - - - - - -
5005 Woodway,
Suite 350
Houston, Texas 77056
Mark A. Willis 30,270,736(1)(14) 59.9% - - - - - - - - - -
5005 Woodway,
Suite 350
Houston, Texas 77056
James R. Crane 4,070,000(2) 14.3% - - - - - - - - - -
15350 Vickery Drive
Houston, Texas 77032
MCM Partners 13,113,930(3) 31.7% 2,057 100% - - - - - - 833,333 100%
10500 NE 8th,
Suite 1920
Bellevue, Washington 98004
Genesee Fund Limited 9,801,773(5) 25.8% - - - - - - - - - -
Portfolio B
10500 NE 8th,
Suite 1920
Bellevue, Washington 98004
Advantage Fund Limited 11,855,336(6) 29.5% - - - - - - 1,982 50% - -
10500 NE 8th,
Suite 1920
Bellevue, Washington 98004
SA Telecommunications, Inc 2,157,990(7) 7.1% - - - - 215,799 100% - - - -
1600 Promenade
Center, 15th Floor
Richardson, Texas 75080
The Furst Group, Inc 1,822,500(8) 6.1% - - 3,000 100% - - - - - -
459 Oakshade Road
Shamong, New Jersey 08088
James D. Kaylor 1,822,500(8) 6.1% - - - - - - - - - -
916 P Street,
Suite 200
Lincoln, Nebraska 68508
John S. Streep 1,822,500(8) 6.1% - - - - - - - - - -
15841 Kilmarnock Drive
Ft. Myers, Florida 33912
Mitchell H. Bodian 49,221(1) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Robert H. Turner - - - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
R. Chadwick Paul, Jr. - - - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Zane Russell 1,152,556(4)(9) 4.1% - - - - - - - - - -
20607 Shadow Mill Court
Houston, Texas 77450
Dean H. Fisher 267,601(1) - - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
</TABLE>
<TABLE>
<CAPTION>
Series E
Preferred
-------------
Directors, Executive Officers No. of % of
and 5.0% Shareholders Shares Class
- ----------------------------- ------- -----
<S> <C> <C>
Michael T. Willis 1,586(13) 50%
5005 Woodway,
Suite 350
Houston, Texas 77056
James T. Harris 1,586(13) 50%
5005 Woodway,
Suite 350
Houston, Texas 77056
Willis Group, LLC 1,586(13) 50%
5005 Woodway,
Suite 350
Houston, Texas 77056
Mark A. Willis 1,586(13) 50%
5005 Woodway,
Suite 350
Houston, Texas 77056
James R. Crane - -
15350 Vickery Drive
Houston, Texas 77032
MCM Partners - -
10500 NE 8th,
Suite 1920
Bellevue, Washington 98004
Genesee Fund Limited 1,586 50%
Portfolio B
10500 NE 8th,
Suite 1920
Bellevue, Washington 98004
Advantage Fund Limited - -
10500 NE 8th,
Suite 1920
Bellevue, Washington 98004
SA Telecommunications, Inc - -
1600 Promenade
Center, 15th Floor
Richardson, Texas 75080
The Furst Group, Inc - -
459 Oakshade Road
Shamong, New Jersey 08088
James D. Kaylor - -
916 P Street,
Suite 200
Lincoln, Nebraska 68508
John S. Streep - -
15841 Kilmarnock Drive
Ft. Myers, Florida 33912
Mitchell H. Bodian - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Robert H. Turner - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
R. Chadwick Paul, Jr. - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Zane Russell - -
20607 Shadow Mill Court
Houston, Texas 77450
Dean H. Fisher - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
Common Stock Preferred Preferred Preferred Preferred Preferred
----------------------- ------------- ------------- ------------- ------------- -------------
Directors, Executive Officers Number of % of No. of % of No. of % of No. of % of No. of % of No. of % of
and 5.0% Shareholders Shares Class Shares Class Shares Class Shares Class Shares Class Shares Class
- ----------------------------- --------- ----- ------ ----- ------ ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael L. Hlinak 190,000(9) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
John Isaac "Ike" Epley 40,153(14) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Ronald J. Salazar, Ph.D. 156,725(14) * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
William D. Rhodes, Jr. - * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Michael P. Gallagher - * - - - - - - - - - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Current directors and 30,516,835(12) 60.4% - - - - - - 1,982(13) 50% - -
executive officers as a
group (6 persons)
</TABLE>
<TABLE>
<CAPTION>
Series F
Preferred
-------------
Directors, Executive Officers No. of % of
and 5.0% Shareholders Shares Class
- ----------------------------- ------- -----
<S> <C> <C>
Michael L. Hlinak - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
John Isaac "Ike" Epley - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Ronald J. Salazar, Ph.D. - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
William D. Rhodes, Jr. - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Michael P. Gallagher - -
1250 Wood Branch Park Dr.
Houston, Texas 77079
Current directors and 1,586(13) 50%
executive officers as a
group (6 persons)
</TABLE>
- ---------------------
* Less than 1%.
1. Includes warrants exercisable for an aggregate of 933,116 shares of common
stock, 1,982 shares of series D preferred stock convertible in the aggregate
into approximately 11,832,836 shares of common stock and series F preferred
stock convertible in the aggregate into approximately 9,468,657 shares of
common stock. Michael T. Willis holds directly a warrant for the purchase of
500,000 shares of common stock and James T. Harris holds 300,000 shares of
common stock directly as the result of a transfer from Willis Group. None of
such shares issuable pursuant to the terms of the warrants were outstanding
as of September 24, 1999. Information relating to ownership by Willis Group
and Messrs. Michael T. Willis, Mark A. Willis and James T. Harris is based
on Amendment No. 5 to Schedule 13D filed with the SEC on March 12, 1999.
Michael T. Willis and Mark A. Willis each own 48.5% of the membership
interest in Willis Group and Mr. Harris owns the remaining 3% membership
interest. Michael T. Willis is the Secretary of Willis Group, Mark A. Willis
is the President of Willis Group and Mr. Harris is the Treasurer of Willis
Group. According to the report, Willis Group has sole voting and dispositive
power with respect to all shares other than shares or warrants held directly
and Messrs. Michael T. Willis, Mark A. Willis and Harris have shared voting
and dispositive power with respect to all shares other than shares or
warrants held directly.
2. Includes a warrant exercisable for an aggregate of 170,000 shares of common
stock, none of which had been issued as of June 8, 1999. Information
relating to ownership by James R. Crane is based on reports on Schedule 13D
filed with the SEC on May 6, 1998.
3. Consists of 2,057 shares of series A preferred stock currently convertible
in the aggregate into approximately 12,280,597 shares of common stock and
833,333 shares of series E convertible preferred stock currently
exchangeable in the aggregate into 833,333 shares of common stock.
4. Excludes 5,000 shares of common stock issuable upon exercise of stock
options awarded under the Director Plan that are not exercisable within 60
days.
26
<PAGE>
5. Includes a warrant exercisable for an aggregate of 333,116 shares of common
stock and series F preferred stock convertible into an aggregate of
approximately 9,468,657 shares of common stock.
6. Includes 1,982 shares of series D preferred stock convertible in the
aggregate into approximately 11,832,836 shares of common stock.
7. Includes 215,799 shares of series C preferred stock convertible in the
aggregate into 2,157,990 shares of common stock.
8. Includes 3,000 shares of series B preferred stock convertible in the
aggregate into 1,500,000 shares of common stock. Information relating to
ownership by Furst Group, James D. Kaylor and John S. Streep is based on
management's information regarding the transactions. Messrs. Kaylor and
Streep each own 45% of the common stock of Furst Group. Mr. Kaylor is the
Chairman of the Board of Furst Group and Mr. Streep is the Chief Executive
Officer of Furst Group.
9. Includes a warrant exercisable for an aggregate of 90,000 shares of common
stock.
10. Includes options exercisable for an aggregate of 35,000 shares of common
stock. Excludes 40,000 shares of common stock held by trusts for the benefit
of Mr. Fisher's children. Mr. Fisher has disclaimed any beneficial ownership
of these shares.
11. Includes beneficial ownership of warrants exercisable for an aggregate of
66,667 shares of common stock.
12. See Note 1 above and Notes 13 and 14 below.
13. All 1,982 shares of series D preferred stock and all 1,586 shares of series
F preferred stock are beneficially owned by Mark A. Willis, Michael T.
Willis and James T. Harris, and are held directly by Willis Group.
14. Includes options issued on March 7, 1999 under the Director Plan
exercisable for 1,667 shares of common stock to each of Messrs. Willis,
Bodian and Epley and Dr. Salazar.
Except as otherwise noted, each shareholder has sole voting and dispositive
power with respect to the shares of common stock held by it to be voted at the
Meeting. Except under limited circumstances, the holders of the series A
preferred stock, series C preferred stock, series D preferred stock, series E
preferred stock and series F preferred stock are not entitled to vote. For
purposes of calculating the beneficial ownership of each stockholder, it was
assumed (in accordance with the SEC's definition of "beneficial ownership") that
such stockholder had exercised all options or warrants, or converted any
convertible securities, by which such stockholder had the right, within 60 days
following the Record Date, to acquire shares of common stock. It was further
assumed that in each case, the exercise or conversion was based on a conversion
or exercise price of $0.1675 per share.
Under the terms of the warrants held by Willis Group and Genesee, and the
series A, series D and series F preferred stock, those securities are
convertible or exercisable by any holder only to the
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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 Notes, the warrants and the series
A, series D and series F preferred stock. However, this limitation does not
prevent any of Willis Group, Genesee, MCM Partners or Advantage from converting
and selling some of its holdings and then converting more of its holdings. By
doing this, any of Willis Group, Genesee, MCM Partners or Advantage could sell
more than 4.9% of the outstanding common stock of Equalnet while never holding
more than 4.9% at any one time.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Equalnet's
officers, directors and persons who own more than 10% of a registered class of
Equalnet's equity securities to file Form 3, Form 4 and Form 5 reports of
ownership and changes in ownership with the SEC. Officers, directors and
greater than 10% shareholders are required by the regulation to furnish Equalnet
with copies of all Section 16(a) reports they file.
Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to Equalnet during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, Equalnet believes that during the fiscal year ended June 30, 1999, all
officers, directors and greater than 10% shareholders complied with all filing
requirements applicable to them, except that Dean H. Fisher and James T. Harris
failed to file timely Form 5s. Messrs. Fisher and Harris completed and filed
delinquent Form 5s on October 13, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 11, 1997, Equalnet issued to The Furst Group, Inc., a New
Jersey corporation ("Furst Group") and an accredited investor, a $3,000,000 note
bearing interest at the rate of 10% per year and maturing December 31, 1998 (the
"Furst Note") and a warrant for the purchase of up to 1,500,000 shares of common
stock at an exercise price of $2.00 per share (the "Furst Warrant"), together
with certain rights in the event of a change of control. On March 9, 1998,
Equalnet and Furst entered into an Exchange Agreement (the "Exchange Agreement")
pursuant to which Furst exchanged the Furst Note, the Furst Warrant and the
aforementioned rights for 3,000 shares of series B preferred stock and 322,000
shares of common stock (representing the accrued and unpaid interest on the
Furst Note). The Exchange Agreement enabled Equalnet to reduce its debt and
increase its tangible net worth while allowing Furst to maintain a liquidation
preference over the common stock with respect to its initial $3,000,000
investment.
The series B preferred stock consists of 3,000, shares all of which were
issued in connection with the Exchange Agreement. Each share of series B
preferred stock has a stated value of $1,000 and is entitled to receive
dividends only if, as and when the Board of Directors declares dividends on the
common stock. Each share of series B preferred stock is convertible initially
into 500 shares of common stock (for an aggregate of 1,500,000 shares), subject
to adjustment pursuant to certain anti-dilution provisions. Each share of
series B preferred stock automatically converts into common stock, based upon
the conversion rate then in effect, on December 31, 1999.
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If Equalnet were to be liquidated, the holders of the series B preferred
stock would be entitled to receive out of the assets of Equalnet $1,000 per
share before any distributions would be made to holders of common stock. Each
share of series B preferred stock generally entitles the holder thereof to one
vote on matters submitted to the holders of common stock for approval, with the
holders of common stock and series B preferred stock voting as a single class.
Holders of series B preferred stock will be entitled to vote as a class on
transactions involving an amendment or waiver of the rights of holders of series
B preferred or in the creation of a series of shares with liquidation rights
equal to or greater than the series B preferred stock.
On March 6, 1998, the shareholders of Equalnet approved certain
transactions detailed below:
On March 6, 1998, as a result of various transactions, Willis Group and its
affiliates gained control of the Board of Directors of Equalnet, having
nominated for shareholder approval four of the seven members of the Board.
Willis Group beneficially owns more than five percent of Equalnet's voting
securities. Mark A. Willis, the Chairman of the Board of Directors of
Equalnet, owns a 48.5% membership interest in Willis Group.
On October 1, 1997, Equalnet issued to Willis Group a $1,000,000
Convertible Secured Note, bearing interest at the rate of 12% per year and
maturing April 1, 1998 (the "October Note"), and a warrant for the purchase of
up to 200,000 shares of common stock at an exercise price of $1.00 per share,
subject to adjustment (the "October Warrant"). The October Warrant is
exercisable for five years. As of the date of issuance of the October Note
Equalnet recorded an interest charge of $150,000 to record the impact of the
debt being convertible at a discount to market. On March 5, 1998, the October
Note and accrued interest were exchanged for 1,050,000 shares of common stock.
Under the terms of several related agreements (the "Agreements") among
Equalnet, Willis Group and MCM Partners entered into on December 2, 1997,
Equalnet acquired nine telecommunications switches (the "Switches") from Willis
Group for aggregate consideration consisting of $5,850,000 in cash, 1,400,000
shares of common stock, and warrants to purchase an additional 400,000 shares of
common stock. Equalnet secured financing of $6,050,000 for the cash portion of
the consideration through an unaffiliated third party lender, which loan is
secured by the Switches, bears interest at an annual rate of 6.42% above an
index rate based on U.S. Treasury Notes (the loan interest rate currently is
12.1%) and is payable in 36 consecutive monthly payments. In addition, Equalnet
granted 500,000 warrants to Michael T. Willis, a member of Willis Group and
father of director Mark A. Willis, for guaranteeing a portion of this
financing.
Under the terms of the Agreements, Equalnet acquired Netco Acquisition
Corp. ("Netco"), a Delaware corporation, from Willis Group. Netco held certain
intangible rights and assets previously acquired by Willis Group and formerly
held by Total National Telecommunications. These assets consisted of intangible
rights to use certain software and codes necessary to operate the Switches.
Equalnet acquired Netco for aggregate consideration consisting of approximately
3,581,633 shares of common stock, 2,000 shares of series A preferred stock and
the issuance of approximately 4,000,000 shares of common stock for $1.00 per
share in cash. MCM Partners, the holder of all 2,030 currently issued and
outstanding shares of series A preferred stock, beneficially owns more than five
percent of Equalnet's voting securities. Mitchell H. Bodian, President, Co-
Chief Executive Officer, principal financial officer and a director of Equalnet,
has been a consultant, on a fee basis, for MCM Partners and its affiliates for
several years.
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On October 1, 1997, Bodian Associates ("Bodian"), an entity controlled by
Mitchell H. Bodian, President and Chief Executive Officer and a director of
Equalnet, entered into an investment advisory services agreement with Genesee.
Under the terms of the agreement, Bodian is to provide, among other things, the
following services to Genesee, Advantage Fund and their affiliates:
. assisting and advising Genesee in connection with pursuing and implementing
alternatives to maximize the value of the Genesee entities' investments in
Total World Telecommunications, Inc. ("TWTI"), a party to the transactions
approved at the March 5, 1998 annual meeting of the shareholders of Equalnet,
and Total National Telecom, Inc. ("TNT") (including analyzing, from a
financial perspective, alternatives available to the Genesee entities
throughout the bankruptcy proceedings of TNT, and in negotiating the letter of
intent with Willis Group and Equalnet for the creation of Netco Acquisition
LLC, an entity that acquired and transferred certain network assets to
Equalnet as described in the February 15, 1998 proxy statement related to, and
as approved at, the March 5, 1998 annual meeting of the shareholders of
Equalnet);
. assisting and advising the Genesee entities in connection with their
investment in Netco Acquisition LLC and with regard to their investment in
Equalnet or other alternatives with regard to the Genesee investment in Netco
Acquisition LLC;
. assisting Netco Acquisition LLC in maximizing the cash consideration to be
realized from the liquidation of the assets of Netco Acquisition LLC; and
. providing such opinions regarding the value, from a financial point of view,
of the investments of the Genesee entities in TNT and TWTI as may be
reasonably be requested by Genesee.
As compensation for these services, Bodian received or will receive:
. a non-refundable cash retainer of $100,000;
. a non-recourse loan to acquire, at the face amount of the investment by the
Genesee entities, an interest equal to 10% of the interest of the Genesee
entities in Equalnet, or, in the event the Equalnet investment by Genesee did
not "materialize", a similar sort of compensation arrangement to be negotiated
between Genesee and Bodian with regard to an alternate transaction;
. $10,000 per month on October 1, November 1, and December 1, 1997 for
assistance through December 31, 1997 in regard to the causes of action related
to the Genesee entities' investments in TNT and TWTI or such other services
related to TNT, TWTI or Netco Acquisition LLC as Genesee reasonably requested;
. a time based fee if Bodian's assistance is requested by Genesee after
December 31, 1997;
. certain additional compensation from Netco Acquisition LLC; and
. reimbursement, upon Bodian's request, for any of Bodian's out-of-pocket
expenses incurred in connection with any of the services.
Further, the Genesee entities agreed to use their best efforts to cause Equalnet
to retain the services of Bodian at market rates to be negotiated between Bodian
and Equalnet in connection with any extraordinary corporate transactions
contemplated by Equalnet and in connection with Equalnet's corporate development
activities generally.
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Under the terms of the original Statement of Resolution with respect to the
series A preferred stock, the series A preferred stock had very limited voting
rights, had a stated value of $1,000 per share and were entitled to receive
dividends at the rate of $80.00 per share per year, payable quarterly. Holders
of series A preferred stock had the right to convert their shares into common
stock at the rate of 1,000 shares of common stock per share of series A
preferred stock (or the stated value divided by $1.00), or an aggregate of
2,000,000 shares of common stock, subject to adjustment pursuant to certain
anti-dilution provisions. The series A preferred stock had a $1,000 per share
liquidation preference over Equalnet's common stock. Dividends when not paid
were cumulative and bore interest at a rate of 12.0% per year. Cumulative
dividends in arrears at June 30, 1998 were approximately $52,000, or $25.78 per
series A preferred stock share. Equalnet may not declare or pay dividends on
the common stock unless all accrued dividends on the series A preferred stock
have been paid. Under the original terms of the series A preferred stock,
Equalnet could redeem the outstanding shares of series A preferred stock at a
price of $1,000 per share (plus any accrued and unpaid dividends and any
interest thereon) if the market price of the common stock exceeded $5.00 per
share.
The terms of the series A preferred stock have been amended. See "Proposal
4: To Ratify the Amendment of the Statement of Resolution of the Board of
Directors With Respect to the Series A Preferred and To Approve the Issuance of
Common Stock Upon the Conversion of the Series A Preferred Pursuant to the Terms
of the Amended Series A Statement of Resolution."
During the quarter ended March 31, 1998, Equalnet obtained a cash flow
bridge loan of $400,000 from Netco Acquisition, LLC, an entity owned 50% by
Willis Group. This note was payable on March 31, 1998 and had an interest rate
of 10%. This note is secured by the accounts attributable to web page
customers. This note was renewed and extended by the execution of a Renewal and
Extension Promissory Note in the principal amount of $426,849.32 on December 31,
1998. The principal sum thereof, and interest at 10% thereon, must be paid on
or before July 31, 1999.
Willis Group received a finder's fee of $54,000 related to certain
financing transactions that closed during fiscal year 1998. Willis Group
entered into an agreement with Equalnet in April 1998 related to merger and
acquisition consulting services. The agreement requires Equalnet to pay Willis
Group $20,000 per month beginning in May 1998, and a success fee based on a
percentage of the purchase price of acquisitions closed by Equalnet.
On September 2, 1998, Equalnet executed a loan agreement in favor of Willis
Group in the amount of $241,106. The loan documents certain advances Willis
Group has made on Equalnet's behalf. This loan is secured by the assets of
Equalnet and its subsidiaries. The related note bore interest at a rate of 11%
per year and matured on January 31, 1999. This note was renewed and extended by
the execution of a Renewal and Extension Subordinated Promissory Note on January
31, 1999. The principal sum thereof, and interest at 11% thereon, must be paid
on or before July 31, 1999.
Equalnet pays Willis Group $12,500 per month for consulting services
performed by Mark Willis, Chairman of the Board of Equalnet, pursuant to an
Independent Contractor/Consulting Agreement entered into between Equalnet and
Willis Group on October 30, 1998.
The Plan of Reorganization empowers the trustee of the Unsecured Creditors'
Trust to select a director nominee to the board of directors. The trustee, in
the exercise of this authority, has selected Mr. Paul as such nominee. The Plan
provides generally for the establishment of the Unsecured Creditors' Trust and
payment to the trust by the plan proponents of $1.35 million plus 3,000,000
shares of common stock of Equalnet for the benefit of the unsecured creditors of
EqualNet Corporation. In addition, payments are to be made of administrative
claims of approximately $1.5 million.
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John Isaac "Ike" Epley, a member of Equalnet's Board of Directors, has been
performing consulting services for Equalnet from June 1998 through March 1999.
Mr. Epley has consulted on such matters as mergers, acquisitions, strategy and
corporate development for Equalnet. He has been paid $85,400 to date under this
arrangement, based upon annual compensation of $175,000. Mr. Epley will
continue to serve as a consultant to Equalnet on a month-to-month basis in the
future.
In February 1999, Equalnet entered into an Employment Agreement with
William D. Rhodes, Jr., Equalnet's Chief Operating Officer, pursuant to which
Equalnet is required to grant to Mr. Rhodes, under Equalnet's Employee Stock
Option and Restricted Stock Plan, options to purchase an aggregate of 500,000
shares of common stock at an exercise price of $1.00 per share. One-third of
the options vest on February 8, 2000, one-third vest on February 8, 2001 and
one-third vest on February 8, 2002.
In July 1999, Equalnet entered into an Employment Agreement with Michael P.
Gallagher, Equalnet's Chief Financial Officer, pursuant to which Equalnet is
required to grant to Mr. Gallagher, under Equalnet's Employee Stock Option and
Restricted Stock Plan, options to purchase an aggregate of 300,000 shares of
common stock at an exercise price of $0.56 per share for a term of five years.
One-third of the options vest on July 26, 2000, one-third vest on July 26, 2001
and one-third vest on July 25, 2002. Any unvested options vest immediately upon
a change of control of Equalnet or a termination of Mr. Gallagher's employment
by Equalnet without cause.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS............................. PAGE
Report of Independent Auditors...................... 54
Consolidated Balance Sheets as of June 30, 1999 and
1998............................................... 55
Consolidated Statements of Operations for the years
ended June 30, 1999, 1998 and 1997................ 57
Consolidated Statements of Shareholders' Equity
(Deficit) for the years ended June 30, 1999,
1998 and 1997...................................... 58
Consolidated Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997................. 60
Notes to Consolidated Financial Statements.......... 61
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2. FINANCIAL STATEMENT SCHEDULES
Schedule II
(B) REPORTS ON FORM 8-K:
Current report on Form 8-K, regarding the acquisition of the BCI customer base,
dated February 2, 1999 was disclosed under Item 5.
Current Report on Form 8-K, regarding the filing for protection under Chapter 11
of the Bankruptcy Code for EqualNet Corporation and Wholesale Services, Inc.,
dated September 21, 1998, was disclosed under Item 3.
(C) EXHIBITS:
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EXHIBIT
NO. DESCRIPTION
3.1 Articles of Incorporation of the Registrant (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).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1 (Registration No.
33-88742); filed on January 24, 1995).
4.1 $1,000,000 Note dated October 1, 1997, issued by the Company to the
Willis Group (incorporated by reference to Exhibit 4.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 12/31/97).
4.2 Loan and Security Agreement, dated March 6, 1998, between the Company
and Finova Capital Corporation (incorporated by reference to Exhibit
4.2 of the Company's Quarterly Report on Form 10-Q for the quarter
ended 3/31/98).
10.1 Lease Agreement dated June 28, 1994, between EqualNet and Caroline
Partners, Ltd., as amended by First Amendment dated August 15, 1994,
and Second Amendment dated September 8, 1994 (incorporated by reference
to Exhibit 10.6 to Registrant's Registration Statement on Form S-1
(Registration No. 33-88742) filed on January 24, 1995).
10.2 Financing agreement between Receivables Funding Corporation and
EqualNet Holding Corporation, dated June 18, 1997 (incorporated by
reference to Exhibit 10.17 to Amendment 2 to the Registrant's Annual
Report on Form 10-K for the year ended June 30, 1997, filed on October
28, 1997)
10.3 Carrier Agreement between AT & T and EqualNet Corporation, dated May
13, 1997 (certain confidential portions of this exhibit have been
omitted pursuant to a request for confidential treatment pursuant to
Rule 246-2 under the Securities Exchange Act of 1934, incorporated by
reference to Exhibit 10.18 to Amendment 2 to the Registrant's Annual
Report on Form 10-K for the year ended June 30, 1997, filed on October
28, 1997)
10.4 Subscription Agreement, dated as of July 1, 1997, among the Company and
Lexus Commercial Enterprises, Ltd. (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the
quarter ended 9/30/97).
10.5 Secured Promissory Note, dated as of July 1, 1997, made by Lexus
Commercial Enterprises, Ltd. in favor of the Company (incorporated by
reference to exhibit 10.2 of the Company's Quarterly Report on Form 10-
Q for the quarter ended 9/30/97).
10.6 Note and Warrant Purchase Agreement, dated October 1, 1997, by and
among the Company and the Willis Group, as amended February 12, 1998
(incorporated by reference to exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended 12/31/97).
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10.7 Switch Agreement, dated December 2, 1997, between the Company and the
Willis Group, as amended by the First Amendment dated December 19, 1997,
and Second Amendment dated February 12, 1998 (incorporated by reference to
exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended 12/31/97).
10.8 Agreement of Merger and Plan of Reorganization, dated December 2, 1997,
between the Company and EQ Acquisition Sub. Inc., Netco Acquisition, LLC
and Netco Acquisition Corp., as amended by the First Amendment dated
December 19, 1997, and Second Amendment dated February 12, 1998
(incorporated by reference to Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended 12/31/97).
10.9 Stock Purchase Agreement, dated December 2, 1997, by and among the Company
and the Willis Group, as amended by the First Amendment dated December
19, 1997, (incorporated by reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 12/31/97).
10.10 Exchange Agreement, dated March 6, 1998 between the Company and The Furst
Group, Inc. (incorporated by reference to Exhibit 10.5 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.11 Stock and Warrant Purchase Agreement dated March 26 1998, between the
Company and First Sterling Ventures Corp. and Frank Hevrdejs (incorporated
by reference to Exhibit 10.6 of the Company's Quarterly Report on
Form 10-Q for the quarter ended 3/31/98).
10.12 Stock Purchase Warrant dated March 26 1998, between the Company and First
Sterling Ventures Corp. (incorporated by reference to Exhibit 10.7 of the
Company's Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.13 Stock Purchase Warrant dated March 26 1998, between the Company and Frank
Hevrdejs (incorporated by reference to Exhibit 10.8 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.14 Stock and Warrant Purchase Agreement dated April 24, 1998, between the
Company and James R. Crane (incorporated by reference to Exhibit 10.9 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
3/31/98).
10.15 Registration Rights Agreement dated April 24, 1998, between the Company
and James R. Crane (incorporated by reference to Exhibit 10.10 of the
Company's Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.16 Warrant Agreement dated April 24, 1998, between the Company and James R.
Crane (incorporated by reference to Exhibit 10.11 of the Company's
Quarterly Report on Form 10-Q for the quarter ended 3/31/98).
10.17 Purchase Agreement dated January 15, 1998 between the Company and SA
Telecommunications, Inc. and Certain of its Subsidiaries as amended by
Amendment dated March 10, 1998 (incorporated by reference to Exhibit 10.12
of the Company's Quarterly Report on Form 10-Q for the quarter ended
3/31/98).
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10.18 Management Services Agreement dated March 12, 1998 between the Company
and SA Telecommunications, Inc. (incorporated by reference to exhibit
10.13 of the Company's Quarterly Report on Form 10-Q for the quarter ended
3/31/98).
10.19 *Secured Convertible Note, dated September 4, 1998, issued by the Company
to Genesee Fund Limited-Portfolio B.
10.20 *Secured Convertible Note, dated September 4, 1998, issued by the Company
to the Willis Group, LLC.
10.21 *Common Stock Purchase Warrant, dated September 4, 1998 between the
Company and Genesee Fund Limited-Portfolio B.
10.22 *Common Stock Purchase Warrant, dated September 4, 1998 between the
Company and the Willis Group, LLC.
10.23 *Note Purchase and Exchange Agreement, effective as of July 31, 1998,
between the Company and Advantage Fund Limited.
10.24 *Note Purchase and Exchange Agreement, effective as of July 31, 1998,
between the Company and the Willis Group, LLC.
10.25 *Form of 6% Senior Secured Convertible Note due 2001 (attached as Annex I
to Note Purchase and Exchange Agreements in Exhibits 10.23 and 10.24
above).
10.26 *Form of Series D Preferred documents of Board of Directors Establishing
and Designating Series D Convertible Preferred Stock and Fixing the
Rights and Preferences of such Series (attached as Annex II to Note
Purchase and Exchange Agreements in Exhibits 10.23 and 10.24 above).
10.27 *Form of Common Stock Purchase Warrant (attached as Annex III to Note
Purchase and Exchange Agreements in Exhibits 10.23 and 10.24 above).
10.28 *Form of Registration Rights Agreement (attached as Annex V to Note
Purchase and Exchange Agreements in Exhibits 10.23 and 10.24 above).
10.29 *Form of Notice of Conversion of Series D Preferred Stock of Equalnet
Communications Corp. (attached as Annex VII to Note Purchase and
Exchange Agreements in Exhibits 10.23 and 10.24 above).
10.30 *Form of Opinion of Counsel to be Delivered on Closing Date (attached as
Annex VIII to Note Purchase and Exchange Agreements in Exhibits 10.23
and 10.24 above).
10.31 *Form of Opinion of the Company's General Counsel (attached as Annex IX to
Note Purchase and Exchange Agreements in Exhibits 10.23 and 10.24 above).
10.32 *Form of Opinion in Connection with Security Agreement (attached as Annex
X to Note Purchase and Exchange Agreements in Exhibits 10.23 and 10.24
above).
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10.33 *Note Purchase Agreement, effective as of July 31, 1998 between the
Company and Genesee Fund Limited-Portfolio B.
10.34 *Form of 6% Senior Secured Convertible Note due 2001 (attached as Annex I
to Note Purchase Agreements in Exhibits 10.33 above).
10.35 *Form of Common Stock Purchase Warrant (attached as Annex II to Note
Purchase Agreements in Exhibits 10.33 above).
10.36 *Form of Registration Rights Agreement (attached as Annex IV to Note
Purchase Agreements in Exhibits 10.33 above).
10.37 *Form of Opinion of Counsel to be Delivered on Closing Date (attached as
Annex VI to Note Purchase Agreements in Exhibits 10.33 above).
10.38 *Form of Opinion of the Company's General Counsel (attached as Annex VII
to Note Purchase Agreements in Exhibits 10.33 above).
10.39 *Form of Opinion in Connection with Security Agreement (attached as Annex
X to Note Purchase Agreement in Exhibit 10.33 above).
10.40 *Letter Agreement regarding net proceeds interest dated September 4, 1998
between the Company, Netco, Genesee Fund Limited-Portfolio B and the
Willis Group, LLC.
10.41 *Master Purchase Agreement dated as of July 31, 1998 by and between the
Company, Genesee Fund Limited-Portfolio B, the Willis Group, LLC and
Advantage Fund Limited.
10.42 *Security Agreement dated as of July 31, 1998 by and among the Company,
USC Telecom, Netco, EqualNet, the Willis Group, LLC and Genesee Fund
Limited-Portfolio B.
10.43 *Assignment of Rights and Obligations Under Purchase Agreement, dated
July 21, 1998 between the Company and SA Telecom, making reference to
the Purchase Agreement in exhibit 10.18 above.
10.44 *Receivables Sales Agreement dated July 23, 1998 between USC Telecom and
RFC.
10.45 *Carrier Services Switchless Agreement, dated June 30, 1998 between
Frontier Communications of the West, Inc. and the Company, (certain
confidential portions of this exhibit have been omitted pursuant to a
request for confidential treatment pursuant to Rule 246-2 under the
Securities Exchange Act of 1934, incorporated by reference to Exhibit
10.52 to the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1998, filed on October 13, 1998).
10.46 *Stock Purchase Warrant dated October 1, 1997 from the Company to the
Willis Group, LLC.
10.47 *Stock Purchase Warrant dated as of December 2, 1997 between the Company
and Netco Acquisition, LLC.
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10.48 *Stock Purchase Warrant dated March 5, 1998 from the Company to the
Willis Group, LLC.
10.49 *Stock Purchase Warrant dated March 5, 1998 from the Company to Mike
Willis.
10.50 *Stock Purchase Warrant dated March 6, 1998 from the Company to J. C.
Bradford.
10.51 *Stock Purchase Warrant dated April 15, 1998 from the Company to
Mezzanine Telecom, Inc.
10.52 *Stock Purchase Warrant dated April 15, 1998 from the Company to John
Dalton.
10.53 *Stock Purchase Warrant dated April 15, 1998 from the Company to Zane
Russell.
10.54 *Stock Purchase Warrant dated April 15, 1998 from the Company to Michael
L. Hlinak.
10.55 *Stock Purchase Warrant dated June 27, 1998 from the Company to Pacific
Global Networks, Inc.
10.56 *Stock Purchase Warrant dated June 27, 1998 from the Company to Future
Telecom Networks, Inc.
10.57 *Stock Purchase Warrant dated July 23, 1998 from the Company to RFC
Capital Corporation.
10.58 *Stock Purchase Warrant dated August 19, 1998 from the Company to Lance
Hack.
10.59 *Stock Purchase Warrant dated September 10, 1998 from the Company to RFC
Capital Corporation.
10.60 *Registration Rights Agreement dated November 12, 1996 between the
Company and Creative Communications International, Inc.
10.61 Statement of Resolution of Board of Directors Establishing and Designating
Series F Convertible Preferred Stock and Fixing the Rights and Preferences
of such Series adopted by Board of Directors on May 24, 1999.
10.62 Statement of Resolution of Board of Directors Establishing and Designating
Series A Convertible Preferred Stock and Fixing the Rights and Preferences
of such Series adopted by Board of Directors on June 15, 1999.
10.63 Statement of Resolution of Board of Directors Establishing and Designating
Series D Convertible Preferred Stock and Fixing the Rights and Preferences
of such Series adopted by Board of Directors on June 15, 1999.
23.1 *Consent of Independent Auditors.
23.2 Consent of Independent Auditors (filed herewith).
27.1 Financial Data Schedule (filed herewith).
* -Incorporated by reference to the respective exhibit of the same number to
the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1998 filed on October 13, 1998.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................... 40
Consolidated Balance Sheets as of June 30, 1999 and 1998................................. 41
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997............................................................. 42
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended June 30, 1999, 1998 and 1997................................................. 43
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997... 45
Notes to Consolidated Financial Statements............................................... 46
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Equalnet Communications Corp.
We have audited the accompanying consolidated balance sheets of Equalnet
Communications Corp., and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. Our audit
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Equalnet
Communications Corp. and subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming Equalnet
Communications Corp. and subsidiaries will continue as a going concern. As more
fully described in Note 3, the Company has incurred recurring operating losses,
has a working capital deficiency, and debt in default. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Houston, Texas
October 13, 1999
40
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Sales $ 32,436,000 $ 24,877,000 $ 46,588,000
Cost of Sales 30,528,000 21,992,000 34,481,000
------------- ------------ ------------
Gross profit 1,908,000 2,885,000 12,107,000
------------- ------------ ------------
Selling, general, and administrative expenses 13,372,000 14,139,000 12,453,000
Depreciation and amortization 10,559,000 4,735,000 6,000,000
Write down of long-lived assets 3,070,000 1,134,000 4,400,000
------------- ------------ ------------
Operating loss (25,093,000) (17,123,000) (10,746,000)
------------- ------------ ------------
Other income (expense):
Interest, net (2,827,000) (1,109,000) (1,019,000)
Other (91,000) 289,000 (870,000)
------------- ------------ ------------
(2,918,000) (820,000) (1,889,000)
------------- ------------ ------------
Loss before income taxes and extraordinary item (28,011,000) (17,943,000) (12,635,000)
Provision for income taxes - - (2,346,000)
------------- ------------ ------------
Loss before extraordinary item (28,011,000) (17,943,000) (14,981,000)
Extraordinary gain on forgiveness of debt 10,022,000 - -
------------- ------------ ------------
Net loss $(17,989,000) $(17,943,000) $(14,981,000)
============ ============ ============
Preferred stock dividends and deemed
distributions $ 4,177,000 $ 52,000 $ -
Net loss applicable to common shareholders (22,166,000) (17,995,000) (14,981,000)
============ ============ ============
Net loss per share - basic and diluted (1.11) (1.64) (2.46)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
41
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 266,000 $ 460,000
Accounts receivable, net 7,873,000 5,839,000
Other receivables 472,000 1,596,000
Advance on acquisition purchase price - 3,014,000
Prepaid expenses and other 401,000 110,000
----------- -----------
Total current assets 9,012,000 11,019,000
----------- -----------
Property and equipment 20,801,000 20,212,000
Less accumulated depreciation and amortization (8,368,000) (4,838,000)
----------- -----------
Net property and equipment 12,433,000 15,374,000
----------- -----------
Customer acquisition costs, net 3,862,000 356,000
Other assets 407,000 1,011,000
----------- -----------
Total assets $25,714,000 $27,760,000
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 3,991,000 $10,480,000
Accrued liabilities 5,749,000 4,427,000
Current portion of long term debt - related party 322,000 -
Current portion of long term debt 2,726,000 1,183,000
Debt in default 558,000 5,753,000
Debt in default - related party - 400,000
Contractual obligations with regard to receivable
sales agreement 3,339,000 2,335,000
----------- -----------
Total current liabilities 16,685,000 24,578,000
----------- -----------
Deferred liabilities - 224,000
Long term debt 5,301,000 -
Commitments and contingencies - -
Preferred stock, $0.01 par value, 5,000,000 shares authorized: 16,153,000 5,000,000
Common stock, $0.01 par value. Authorized 50,000,000 shares;
issued and outstanding 28,437,983 and 28,029,281 and
21,793,517 and 21,393,070 shares as of June 30, 1999 and
1998, respectively 284,000 218,000
Treasury stock, at cost (232,000) (817,000)
Additional paid in capital 46,840,000 37,064,000
Stock warrants 3,019,000 1,763,000
Deferred compensation (20,000) (116,000)
Accumulated deficit 62,316,000 (40,154,000)
----------- -----------
Total shareholders' equity 3,728,000 2,958,000
----------- -----------
Total liabilities and shareholders' equity $25,714,000 $27,760,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
42
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Common Treasury Additional
Stock Stock Stock Paid-in-Capital Warrants
----------- -------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996 $ - $ 60,000 $ (105,000) $19,942,000 $ -
Common stock and warrants
issued in acquisition - 2,000 - 449,000 199,000
Stock warrants issued with debt - - - - 169,000
Deferred compensation amortization - - - - -
Net loss - - - - -
----------- -------- ----------- ----------- ----------
Balance, June 30, 1997 $ - $ 62,000 $ (105,000) $20,391,000 $ 368,000
Forfeiture of shares of stock
granted to key employees - - (12,000) (48,000) -
Common stock shares reacquired - - (700,000) - -
Proceeds from issuance of
common stock and warrants - 87,000 - 9,044,000 270,000
Issuance of warrants with debt - - - - 43,000
Conversion of convertible debt 3,000,000 14,000 - 1,528,000 -
Interest charge on convertible debt - - - 150,000 -
Preferred stock dividends - - - - -
Exchange of warrants for common stock - - - - (169,000)
Issuance of stock and warrants
for equipment 2,000,000 50,000 - 4,954,000 950,000
Warrants issued under severance agreement - - - - 301,000
Issuance of stock for note receivable - 5,000 - 1,045,000 -
Deferred compensation amortization - - - - -
Net loss - - - - -
----------- -------- ----------- ----------- ----------
Balance, June 30, 1998 $ 5,000,000 $218,000 $ (817,000) $37,064,000 $1,763,000
Forfeiture of shares of stock
granted to employees - - (11,000) (49,000) -
Exercise of common stock options - 1,000 - 56,000 -
Issuance of preferred stock 8,797,000 - - - -
Exchange of convertible debt for
preferred stock 1,889,000 (1,689,000)
Issuance of treasury stock to bankruptcy trust - - 2,285,000 529,000 -
Proceeds from issuance of
common stock and warrants - 44,000 - 2,500,000 155,000
Issuance of warrants with debt - - - - 479,000
Issuance of stock for director's fees - 1,000 - 67,000 -
Preferred stock dividends and beneficial
conversion 467,000 - - 3,582,000 -
Beneficial conversion on convertible debt - - - 450,000 -
Issuance of stock and warrants for acquisition - 11,000 - 1,716,000 74,000
Issuance of stock and warrants for
settlement of claim - 4,000 - 237,000 435,000
Issuance of stock and warrants
for services - 4,000 - 212,000 113,000
Relief of debt by significant shareholder - - - 427,000 -
Stock issued under severance agreement - 1,000 - 49,000 -
Deferred compensation amortization - - - - -
Net loss - - - - -
----------- -------- ----------- ----------- ----------
Balance, June 30, 1999 $16,153,000 $284,000 $ (232,000) $46,840,000 $3,019,000
=========== ======== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deferred Earnings
Compensation (Deficit) Total
--------------- ----------- ------------
<S> <C> <C> <C>
Balance, July 1, 1996 $(336,000) $ (7,178,000) $ 12,383,000
Common stock and warrants
issued in acquisition - - 650,000
Stock warrants issued with debt - - 169,000
Deferred compensation amortization 90,000 - 90,000
Net loss - (14,981,000) (14,981,000)
--------- ------------ ------------
Balance, June 30, 1997 $(246,000) $(22,159,000) $ (1,689,000)
Forfeiture of shares of stock
granted to key employees 60,000 - -
Common stock shares reacquired - - (700,000)
Proceeds from issuance of -
common stock and warrants - - 9,401,000
Issuance of warrants with debt - - 43,000
Conversion of convertible debt - - 4,542,000
Interest charge on convertible debt - - 150,000
Preferred stock dividends - (52,000) (52,000)
Exchange of warrants for common stock - - (169,000)
Issuance of stock and warrants
for equipment - - 7,954,000
Warrants issued under severance agreement - - 301,000
Issuance of stock for note receivable - - 1,050,000
Deferred compensation amortization 70,000 - 70,000
Net loss - (17,943,000) (17,943,000)
--------- ------------ ------------
Balance, June 30, 1998 $(116,000) $(40,154,000) $ 2,958,000
Forfeiture of shares of stock
granted to employees 60,000 - -
Exercise of common stock options - - 57,000
Issuance of preferred stock - - 8,997,000
Exchange of convertible debt for
preferred stock 200,000
Issuance of treasury stock to bankruptcy trust - - 2,814,000
Proceeds from issuance of
common stock and warrants - - 2,699,000
Issuance of warrants with debt - - 479,000
Preferred stock dividends and beneficial conversion - (4,173,000) (124,000)
Issuance of stock for directors fees - - 68,000
Issuance of stock and warrants for settlement
of claim - - 676,000
Relief of debt by significant shareholder - - 427,000
Beneficial conversion on convertible debt - - 450,000
Issuance of stock and warrants for acquisition - - 1,801,000
Issuance of stock and warrants
for services - - 329,000
Stock issued under severance agreement - - 50,000
Deferred compensation amortization 36,000 - 36,000
Net loss - (17,989,000) (17,989,000)
--------- ------------ ------------
Balance, June 30, 1999 $ (20,000) $ 62,316,000 $ 3,728,000
========= ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
43
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Loss from continuing operations $(17,989,000) $(17,943,000) $(14,981,000)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Extraordinary gain on forgiveness of debt (10,022,000) - -
Depreciation and amortization 10,559,000 4,735,000 6,000,000
Provision for bad debts 6,414,000 1,661,000 1,727,000
Deferred income taxes - - 2,228,000
Interest charge on convertible debt issued at discount 665,000 150,000 -
Warrants issued under severance agreements - 302,000 -
Write down of long-lived assets 3,070,000 1,135,000 4,400,000
Credit from carrier - - (1,200,000)
Working capital changes, net of non-cash transactions - - -
Accounts receivable (4,242,000) 1,549,000 3,597,000
Stock and warrants issued for services 195,000 - -
Stock issued for settlement of claim 676,000 - -
Compensation expense recognized for
common stock issuance 35,000 - -
Other receivables (7,000) 922,000 (1,766,000)
Prepaid expenses and other 97,000 (252,000) 1,468,000
Other assets 649,000 (655,000) (479,000)
Accounts payable and accrued liabilities 6,009,000 3,457,000 2,856,000
Other, net - 70,000 123,000
------------ ------------ ------------
Net cash provided by (used in) operating activities (3,891,000) (4,869,000) 3,973,000
------------ ------------ ------------
Investing activities:
Purchase of property and equipment (703,000) (6,835,000) (272,000)
Cash paid for acquisitions of business and assets (555,000) (3,295,000) (76,000)
Other, net 75,000 - 4,000
------------ ------------ ------------
Net cash used in investing activities (1,183,000) (10,130,000) (344,000)
------------ ------------ ------------
Financing activities:
Proceeds from long-term debt 2,822,000 7,800,000 3,000,000
Payments on long-term debt (5,204,000) (297,000) -
Repayments on revolving line of credit - (4,555,000) (6,099,000)
Net proceeds on contractual obligations with regard to - - -
receivables sales agreement 1,004,000 2,335,000 -
Proceeds from issuance of preferred stock 500,000 - -
Proceeds from convertible debt 2,800,000 - -
Proceeds from exchange of common stock for preferred stock 200,000 - -
Proceeds from issuance of common stock and warrants 2,758,000 9,400,000 -
Other, net - (52,000) (84,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,880,000 14,631,000 (3,183,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (194,000) (368,000) 446,000
Cash and cash equivalents, beginning of year 460,000 828,000 382,000
------------ ------------ ------------
Cash and cash equivalents, end of year $ 266,000 $ 460,000 $ 828,000
============ ============ ============
Cash paid during the year for interest $ 2,395,000 $ 843,000 $ 947,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
44
<PAGE>
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Equalnet Communications Corp., formerly Equalnet Holding Corp., (the "Company")
is a national long-distance telephone company. The Company is comprised of three
wholly-owned operating subsidiaries, EqualNet Corporation ("EqualNet"), a long-
distance telephone company providing services to generally small commercial and
residential accounts nationwide; USC Telecom, Inc. (""USC Telecom"), a long-
distance company formed in the first quarter of fiscal year 1999; and, Netco
Acquisition Corp. ("Netco"), the owner of nine telecommunications switches
located in major cities in the United States. The following significant
accounting policies are followed by the Company and its subsidiaries in the
preparation of its consolidated financial statements.
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of all majority-owned
and controlled subsidiaries of the Company. All significant intercompany
transactions and balances have been eliminated in consolidation.
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company's policy is to invest cash in highly liquid investments with
original maturities of three months or less. Accordingly, uninvested cash
balances are kept at minimum levels. Such investments are valued at cost, which
approximates market, and are classified as cash equivalents. The Company did not
hold any derivative financial instruments for the three years ended June 30,
1999.
Property and Equipment
Property and equipment are carried at original cost. Certain leases have been
capitalized and the leased assets have been included in property and equipment.
Additions of new equipment and major renewals and replacements of existing
equipment are capitalized. Repairs and minor replacements that do not materially
increase values or extend useful lives are expensed as incurred. The cost of
property and equipment sold or retired and the related depreciation and
amortization are removed from the accounts in the period of sale or disposition.
Depreciation of property and equipment is provided on the straight-line basis at
rates based upon the expected useful lives of the various classes of assets,
which range from four to ten years. Leasehold improvements are amortized over
the shorter of their useful lives or the term of the lease.
Revenue Recognition
The Company recognizes revenue in the month customers complete telephone calls.
Allowances are provided for estimated uncollectible usage. Collectibility is
reviewed regularly, and the allowance is adjusted as necessary. The balance of
this provision at June 30, 1999 and 1998 was $0.4 million and $1.0 million,
respectively.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable, and other
payables approximate fair value due to the short-term nature of those
instruments. With the exception of certain related-party debt, the carrying
value of the Company's long-term debt and contractual obligations regarding its
receivables sales agreement approximate fair value because the rate on such debt
is variable, based on the current market.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk are accounts receivable. The Company continuously evaluates the
credit worthiness of its customers' financial condition and generally does not
require collateral. The company's allowance for doubtful accounts is based on
current market conditions and management's expectations. Non-cash write-offs of
accounts receivable, net of recoveries, were $7.1 million, $2.0 million, and
$5.6 million in 1999, 1998, and 1997, respectively.
45
<PAGE>
Long-Lived Assets
Under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), the carrying value of long-lived assets
such as customer acquisition costs and property and equipment is evaluated using
undiscounted future cash flows when events or circumstances indicate the
carrying amount of an asset may not be recoverable. To the extent impairment is
indicated to exist, an impairment loss will be recognized under SFAS 121 based
on fair value.
The Company had non-cash write-downs of assets during the years ended June 30,
1999, 1998, and 1997 in the amounts of approximately $3.1 million, $1.1
million, and $4.4 million, respectively. Included in the non-cash write-downs
for 1999 and 1997 were approximately $1.8 million and $4.1 million,
respectively, to reduce the carrying value of customer acquisition costs; these
write-downs were primarily necessitated by greater than expected customer
attrition. Write-downs in 1998 included approximately $0.9 million related to a
previous software billing management program and approximately $0.2 million
associated with unrealizable goodwill.
Income Taxes
Income taxes are based on income reported for tax return purposes along with a
provision for deferred income taxes. Deferred income taxes are provided to
reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year end.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not a portion of the deferred tax
assets will not be realized in a future period. The estimates utilized in the
recognition of deferred tax assets are subject to revision in future periods
based on new facts or circumstances.
Customer Acquisition Costs
Customer acquisition costs represent the direct costs of an acquired billing
base of customer accounts and orders bought on an individual basis from certain
agents or telemarketers. These costs are amortized by applying the Company's
attrition rate associated with the acquired customers each month against the
unamortized balance of the previous month (declining balance method) over the
expected life of the customer base of five years or less, switching to the
straight-line method when the straight-line method results in greater
amortization. The attrition rate used to amortize customer attrition costs was
9.0% for fiscal years 1998 and 1997, and was 6.0% and 8.0% for two customer
bases acquired in fiscal year 1999. The attrition rate used by the Company in
amortizing customer acquisition costs is an estimate of the attrition rate of
the acquired customer bases, and actual attrition may differ from the estimates
used. Accumulated amortization at June 30, 1999 and 1998 was approximately $19.7
million and $13.1 million, respectively. The Company evaluates the attrition
rate of the acquired customer base each quarter and adjusts the attrition rate
as necessary. The Company periodically evaluates the unamortized balance of
customer acquisition costs to determine whether there has been any impairment
under SFAS 121.
Treasury Stock
The Company records its treasury stock at cost.
Change in Presentation
Certain prior-year financial statement items have been reclassified to conform
with the 1999 presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," ("SFAS 130") which establishes standards
for reporting and display of comprehensive income, its components, and
accumulated balances. Comprehensive income is generally defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires all items
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. The Company adopted SFAS 130 in
1998; as of June 30, 1999 there were no components of comprehensive income for
disclosure for any of the periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131") which establishes standards
for the way public companies report information about operating segments. SFAS
131 defines operating segments as components of a company about which separate
financial information is available
46
<PAGE>
which is evaluated regularly by management in deciding how to allocate resources
and in assessing performance. The Company adopted SFAS 131 in 1998. The
Company's sole operating segment is long distance sales and, as a result, there
are no separate required disclosures for any of the periods presented.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"), which requires companies to recognize all
derivative instruments as either assets or liabilities in the assessment of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company does not
have any derivative financial instruments.
NOTE 2 - BANKRUPTCY FILINGS
EqualNet Corporation ("EqualNet"), one of the Company's operating subsidiaries,
and EqualNet Wholesale Services, Inc. ("Wholesale"), a wholly-owned non-
operating subsidiary of EqualNet filed voluntary petitions for relief under
Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the "Bankruptcy
Code") on September 10, 1998 (the "Petition Date") in the United States
Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"),
Houston, Texas. On October 2, 1998, Wholesale filed its motion to convert its
bankruptcy proceeding from a Chapter 11 reorganization to a Chapter 7
liquidation. Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, EqualNet
managed its assets and operated its business as a debtor-in-possession
pending confirmation of its reorganization plan, which plan was confirmed on
April 28, 1999. The plan of reorganization provided for the restructuring of
amounts and repayment terms for secured and unsecured creditors. In conjunction
with the confirmation and consummation of the reorganization plan, certain debts
were reduced resulting in an extraordinary gain of approximately $10.0 million
($0.50 per share - basic and diluted). As voting control of the Company's common
stock remained the same as a result of the confirmation of the plan of
reorganization, fresh start accounting was not used in accordance with AICPA
Statement of Position 90-7.
NOTE 3 - LIQUIDITY AND WORKING CAPITAL DEFICIT
For the years ended June 30, 1999, 1998, and 1997, the Company reported pre-tax
net operating losses of $28.0 million, $17.9 million, and $12.6 million,
respectively, has a working capital deficiency and debt in default. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Increases in pre-tax net operating losses were attributable
to several internal and external factors. Continued provisioning challenges
through the second quarter of fiscal year 1999 led to delayed billing and
increased customer attrition. In addition, the Company attempted to convert to a
new customer management, billing, and rating system in late fiscal year 1998
which proved to be unsuccessful. Simultaneous with the Company's attempted
conversion and implementation to this customer management, billing, and rating
system the Company acquired a significant customer base; conversion problems
adversely affected the Company's cash collections and, to a greater extent, led
to increased customer attrition.
The Company's primary source of capital is provided by receivable sales
agreements with a third-party. Funding under these agreements are based on
specific accounts receivable eligibility requirements with the primary factor
being the collections history per account.
The Company's management is continuing actions to strengthen the financial
position of the Company. New products are being developed to significantly
enhance sales and revenue, including (i) bundled minute long distance products
resembling cellular offerings, (ii) wholesale international rates for retail
customers (iii) pre-paid debit-cards, (iv) advertiser-sponsored long distance
and (v) the pursuit of acquisitions expected to be accretive to earnings. The
Company is also considering entering the wholesale international long distance
market, offering local service as a competitive local exchange carrier, offering
internet access, and entering the wireless and paging markets. Additionally, the
Company is evaluating several proposals for the resumption of an agent program
in order to increase its customer base, as well as negotiating with several
third parties for possible acquisitions to form strategic alliances in order to
maximize the utilization of the Switches.
47
<PAGE>
The Company believes the new product offerings noted above are particularly
significant to increasing the Company's revenues and returning to profitability.
Furthermore, management believes the Company must increase its innovation and
not depend on competitive pricing alone in order to become more competitive in
the marketplace. Most of the new product offerings noted above are pricing
packages only and will not require a significant amount of capital. Any new
product offerings requiring technology advancements will most likely come from
strategic alliances or potential mergers. Financing for potential strategic
alliances or mergers is expected to come from the issuance of the Company's
common stock.
In order to provide financing to support operations during the next twelve
months, the Company must also continue to increase revenue generated from its
existing resources. Specific actions to maximize revenue generated by the switch
network include (i) placing dedicated customers on the network via connectivity
to a local switch, (ii) port leasing of switch assets and (iii) international
product offerings accessed through the switches. In addition, the Company is
continuing to reduce its primary carrier costs for its existing customer base.
The Company continues to make improvements in its billing and MIS systems to
more accurately bill customers, maximize customer revenue and ensure proper
audit of vendor invoices related to the cost of service. The Company has also
recently implemented a cost reduction program, and continues to refine these
efforts, related to general, administrative, and overhead expenditures. In
addition to utilizing the Switches to provide transmission of its customer
traffic, the Company is focusing on offering bundled services to its customers,
mainly long-distance service, internet access, local service, wireless and
paging.
Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek possible
strategic alliances and business combinations in order to more rapidly implement
its plans for increasing the service offerings or for reducing costs of the
Company. Management is attempting to balance the cash flows from operations to
meet current needs, and is continuously seeking additionally capital resources
to fund the expansion of service offerings of the Company. Should capital
resource requirements to achieve the management's plan to return to
profitability significantly exceed management's ability to meet those needs, the
Company's ability to return to profitability could be significantly delayed or
impaired.
NOTE 4 - PROPERTY AND EQUIPMENT
The cost of property and equipment is as follows:
1999 1998
---- ----
Telecommunications switches $13,390,000 $13,390,000
Computer equipment 4,955,000 4,435,000
Furniture and Fixtures 1,209,000 1,209,000
Leasehold improvements 1,247,000 1,178,000
----------- -----------
$20,801,000 $20,212,000
Accumulated depreciation and
amortization (8,368,000) (4,838,000)
----------- -----------
$12,433,000 $15,374,000
=========== ===========
During fiscal year 1999, the Company changed its strategy for realizing the
value of the switches from migrating the acquired customer base from SA Telecom
to the switches to a program of part partioning, dedicated service,
international retail and international wholesale. The implementation of this
strategy was hampered by the EqualNet's bankruptcy proceedings. Upon
consummation of EqualNet's plan of reorganization, the Company has been able to
achieve significant progress in implementing its strategy to realize the value
of the switches. Management has supported the carrying value of the switches
through a projected undiscounted cash flow analysis. However, it is reasonably
possible that the undiscounted cash flows may change in the near future
resulting in the need to write-down those assets to fair value.
NOTE 5 - ASSET PURCHASE AND ACQUISITIONS
Brittan Communications International Corporation
On January 27, 1999, the Company purchased approximately 80,000 residential long
distance customers of Brittan Communications International Corporation ("BCI")
from RFC in a foreclosure sale for approximately $1.8 million, including the
assumption of a $1.7 million term loan, and the issuance of 300,000 warrants to
RFC valued at $75,000. The warrants entitle the holder to purchase 300,000
shares of Common Stock at $1.33 per share during a five year period and were
valued using the Black Scholes model. The term loan is reduced by 80% of the
excess of the fair market value of the Company's common stock at the exercise
date over the $1.33 exercise price.
The acquired customer base has been recorded in customer acquisition costs and
is being amortized by applying the estimated attrition rate of the purchased
customer base of 8% per month against the unamortized balance of the previous
month
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(declining balance method) switching to the straight line method when the
straight line method results in greater amortization over an 18 month period.
SA Telecom
On January 21, 1998, the Company signed an agreement with SA Telecommunications,
Inc. ("SA Telecom"), a switch based, long distance telecommunications carrier
serving customers primarily in Texas and California to acquire certain assets
and customer bases in exchange for a combination of shares of stock, cash and
assumption of certain liabilities. The transaction was subject to certain
conditions, including approval of the bankruptcy court supervising the
reorganization of SA Telecom under Chapter 11 of the United States Bankruptcy
Code. On March 9, 1998, the Company won approval from the bankruptcy court. The
purchase of SA Telecom was approved by the Company's shareholders on June 30,
1998 for approximately $3.47 million in cash, approximately $5.4 million of
Series C Preferred Stock and the assumption of approximately $4 million in debt.
The Company's newly formed wholly owned subsidiary, USC Telecom, Inc. ("USC
Telecom"), acquired the SA Telecom assets on July 22, 1998. To facilitate the
purchase of the SA Telecom assets, the Company and SA Telecom entered into a
management agreement pursuant to which the Company managed the operations of SA
Telecom from April 1, 1998 until the close of the transaction whereby the
Company was responsible for any losses from SA Telecom's operations on or after
April 1, 1998.
The Company accounted for the SA Telecom acquisition using the purchase method
of accounting. Accordingly, the results of operations of the acquired business
is included in the Company's consolidated results of operations from the date of
acquisition. The Company booked an asset for customer acquisition costs of
approximately $8.7 million. This asset is being amortized by applying the
estimated attrition rate of the acquired customer base per month against the
unamortized balance of the previous month (declining balance method) switching
to the straight line method when the straight line method results in greater
amortization over a three-year period.
Assuming the above transaction occurred at the beginning of the year ended June
30, 1998, the summarized unaudited pro forma revenues, net loss, and allocation
of net loss per common share (basic and diluted) would have been $52.1, $(16.6),
and $(1.52), respectively. The pro forma operating results are not necessarily
indicative of future operating results nor of results that would have occurred
had the acquisitions been consummated as of fiscal year 1998.
AMCI
In January 1999, the Company acquired substantially all of the assets of Limit
LLC, doing business as ACMI ("ACMI"), a network marketing company with
approximately 2,500 independent agents. In connection with this transaction, the
Company issued 1 million shares of its common stock and assumed a note payable
of $1 million. Subsequent to year-end, the parties of this transaction agreed to
modify the transaction whereby the Company would return the $1 million note
payable to the Sellers and, in consideration for the issued shares of the
Company's common stock, would acquire assets primarily consisting of the
independent agent contracts, a debit card platform, and the associated assets.
The results of operations related to the ACMI acquisition do not have a material
effect on the operations of the Company and, as a result, pro forma information
is not presented.
NOTE 6 - RELATED PARTY TRANSACTIONS
Willis Group Transactions
On October 1, 1997, the Company issued to the Willis Group, LLC ("Willis Group")
a $1.0 million Convertible Secured Note, bearing interest at the rate of 12% per
year and maturing April 1, 1998, and a warrant for the purchase of up to 0.2
million shares of Common Stock at an exercise price of $1.00 per share, subject
to adjustment and exercisable for five years. The outstanding balance of this
note was convertible into a number of shares of Common Stock determined by
dividing the outstanding balance by the lesser of $1.00 or 85% of the market
price of the Common Stock. As of the date of issuance of the convertible debt
the Company recorded an interest charge of $0.15 million to record the impact of
the debt being convertible at a discount to market. On March 5, 1998, the Note
and accrued interest were exchanged for 1.05 million shares of the Company's
common stock.
On December 2, 1997, the Company entered into several related agreements, (as
amended, the "Agreements") involving the Willis Group and other third parties.
Collectively, these Agreements provided for a recapitalization of the Company
and for the Company to acquire certain telecommunications network assets and
switches (collectively the "Transactions"). On March 6, 1998 as a result of
various transactions the Willis Group gained control of the Board of Directors
of the Company, having nominated for shareholder approval four of the seven
members of the Board of Directors.
Under the terms of the Agreements, the Company acquired nine telecommunications
switches (the "Switches") from the Willis Group for $7.6 million, consisting of
$5.85 million in cash, 1.4 million shares of Common Stock, and warrants to
purchase up to 0.4 million shares of Common Stock at an exercise price of $1.00.
The Company secured financing of $6.05 million for the cash portion of the
consideration through an unaffiliated third party lender, whose loan is secured
by the Switches, bears interest at a rate per year of 6.42% above an index rate
based on U. S. Treasury Notes (12.1% as of June 30, 1998) and is payable in 36
consecutive monthly payments. An affiliate of the Company was granted a warrant
for the purchase of up to 0.5 million shares of Common Stock at an exercise
price of $1.00 per share for guaranteeing a portion of this financing.
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Under the terms of the Agreements, the Company acquired Netco Acquisition Corp.
("Netco"), a Delaware corporation controlled by the Willis Group, which held
certain intangible rights and assets previously acquired by the Willis Group.
These assets consisted of intangible rights to use certain software and codes
necessary to operate the Switches. The Company acquired Netco for $5.6 million,
including 3.58 million shares of the Company's common stock and 2,000 shares of
the Company's Series A Convertible Preferred Stock.
Under the terms of the Agreements, the Company also issued and sold to the
Willis Group 4.0 million shares of Common Stock at a price of $1.00 per share
for total aggregate consideration of $4.0 million in cash.
On March 26, 1998, the Company issued to a corporation and an individual, both
accredited investors, an aggregate of 1.33 million shares of the Company's
common stock and warrants to purchase an additional 0.67 million shares of the
Company's common stock for an aggregate of $2.0 million in cash. The Willis
Group was granted a $20,000 facilitation fee for these transactions.
On April 24, 1998, the Company entered into an agreement with an individual
investor to issue 3.4 million shares of the Company's common stock and warrants
for the purchase of 0.17 million shares of the Company's common stock in
exchange for $3.4 million. The Willis Group was granted a $34,000 facilitation
fee for this transaction.
During fiscal year 1998, the Willis Group incurred approximately $306,000 in out
of pocket expenses on behalf of the Company related to services provided by
consultants, travel expenses and other miscellaneous expenses. The Company
executed a note payable of approximately $306,000 to the Willis Group for these
expenses.
Other Related Party Transactions
In March 1999 the Company issued 136,296 shares of its Common Stock to certain
Directors of the Company in satisfaction of amounts owed for unpaid Director
fees. A director of the Company was also issued 30,000 shares of the Company's
Common Stock for satisfaction of services rendered.
On January 21, 1999, the Company closed a transaction where a director of the
Company, at the time of the closing of the transaction, was paid 105,000 shares
of Common Stock as a fee for his role in completing the transaction.
Ronald J. Salazar, a director of the Company, was paid $20,000 for consulting
services in fiscal year 1998. James T. Harris, a former Director of the Company,
was paid approximately $87,000 for consulting services during fiscal year 1998.
Effective April 1, 1998, the Company entered into a severance agreement with
Michael L. Hlinak, former Chief Financial Officer, Chief Operating Officer and
Director of the Company. In connection with this severance agreement, the
Company issued Mr. Hlinak 100,000 shares of the Company's common stock and paid
health insurance benefits to Mr. Hlinak during the severance period.
Additionally, the Company issued to Mr. Hlinak a warrant for the purchase of up
to 90,000 shares of Common Stock at an exercise price of $2.00.
Effective April 1, 1998, the Company entered into a severance agreement with
Zane Russell, former Chief Executive Officer and Director of the Company, which
required the Company to pay Mr. Russell severance payments through January 31,
1999 at an annualized rate of $87,500 and forgive and cancel a $75,000 note
payable by Mr. Russell to the Company. Additionally, the Company issued to Mr.
Russell a warrant for the purchase of up to 90,000 shares of Common Stock at an
exercise price of $2.00.
Michael T. Willis, a member of the Willis Group, personally guaranteed $3.0
million of the Company's $6.05 million note payable to Finova Capital
Corporation. In connection with this transaction, Mr. Willis received warrants
to acquire 500,000 shares of Common Stock.
Equalnet pays Willis Group $12,500 per month for consulting services
performed by Mark Willis, Chairman of the Board of Equalnet, pursuant to an
Independent Contractor/Consulting Agreement entered into between Equalnet and
Willis Group on October 30, 1998.
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NOTE 7 - CAPITAL STOCK
Series A Preferred Stock
During fiscal year 1998 the Company issued 2,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") valued at $2,000,000 and had 2,030 and
2,000 shares of Series A Preferred with a stated value of $1,000 per share
outstanding at June 30, 1999 and 1998, respectively. Series A Preferred
dividends are cumulative at the rate of $60.00 per year, payable quarterly in
either cash or additional shares of Series A Preferred. The Series A Preferred
resolution has been amended effective October 28, 1998 to include conversion
features such that the Series A Preferred is convertable at a discounted price.
A deemed distribution approximating $7,838,000 was recorded during fiscal year
ended June 30, 1999. Per the amended resolutions, the Holders of Series A have
the right to convert their shares into the Company's common stock based upon a
formula which, subject to the Company's continued listing on a national
exchange, will not be less than $0.75 per share of common stock adjusted 31 days
(and adjusted again every six months afterwards) after shareholder approval of
the Company's proposed reverse stock split to 75% of the average closing price
of the Company's common stock for the five previous trading days; the proposed
reverse stock split has been submitted for shareholder approval in the Company's
1999 Annual Shareholder Meeting proxy statement. Should the Company be delisted
from all national exchanges, the conversion floor is removed and the conversion
formula of 85% of the Average Market Price (as defined by the Series A Preferred
Stock Designation) has no lower conversion price per share limit. The Series A
Preferred has a $1,000 liquidation preference plus accrued and unpaid dividends
over the Company's common stock. The Company is prohibited from declaring or
paying dividends on its common stock unless all accrued dividends on the Series
A Preferred have been paid. The Series A preferred is redeemable at a rate of
$1,000 per share at the option of the holder when certain events, which are in
control of the Company, occur such as the Company's inability to convert
preferred shares into common shares. Series A preferred ranks senior to the
Company's other series of preferred stock in liquidation preference. Dividend
payments for the Series A Preferred was waived by the holders through February
22, 1999. The Company issued 30 shares of Series A Preferred as payment of
dividends during the year ended June 30, 1999.
Series B Preferred Stock
During fiscal year 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred") valued at $3,000,000 and had 3,000 shares
of Series B Preferred with a stated value of $1,000 per share outstanding at
June 30, 1999 and 1998. Series B Preferred has no redemption features. Holders
of Series B Preferred are entitled to share with holders of the Company's common
stock in any common stock dividends declared based upon the number of shares of
the Company's common stock the Series B Preferred is convertible into at the
time such a dividend is declared; Series B Preferred dividends are non-
cumulative. Each share of Series B Preferred is convertible into 500 shares of
the Company's common stock subject to certain anti-dilution provisions, and has
a $1,000 per share liquidation preference over the Series A Preferred and the
Company's common stock. Each share of Series B preferred entitles the holder
thereof to one vote, voting as a single class with common stock, on matters
submitted to the shareholders of the Company. No dividends were paid on Series B
Preferred during fiscal year 1999. Series B Preferred is junior to Series A
Preferred in liquidation preference.
Series C Preferred Stock
On July 22, 1998 the Company had 211,946 shares of Series C Senior Convertible
Preferred Stock ("Series C Preferred") outstanding at June 30, 1999. Each share
of Series C Preferred is non-voting and is convertible, at the holder's option,
into ten shares of the Company's common stock, and has a liquidation preference
of $27.50 per share (plus any accrued but unpaid dividends) of Series C
Preferred. Holders of Series C Preferred are entitled to receive dividends at
the rate of $2.00 per year, payable quarterly in either cash or additional
shares of Series C Preferred. The Company issued 196,553 shares of Series C
Preferred valued at approximately $5,405,000 in July 1998 in connection with an
acquisition and issued 5,358 shares of Series C Preferred valued at
approximately $147,000 in January 1999 as additional purchase consideration.
Additionally, the Company issued 10,035 shares of Series C Preferred in fiscal
year 1999 as payment of dividends, which represents all dividends payable for
the year ended June 30, 1999. Series C Preferred is redeemable after July 22,
1999, at the Company's option at a rate of approximately $28.19 per share of
Series C Preferred if the Company's common stock is trading above $3.44 per
share on quoted national exchanges. Series C Preferred is junior in liquidation
preference to Series A Preferred and Series B Preferred.
Series D Preferred Stock
On September 4, 1998 the Company issued 3,750 shares of Series D Senior
Convertible Preferred Stock ("Series D") valued at approximately $1,889,000 and
had 3,906 shares of Series D Senior Convertible Preferred Stock ("Series D
Preferred") outstanding at June 30, 1999. Holders of Series D Preferred are
entitled to receive cumulative dividends at the rate of $60.00 per year, payable
in cash or additional shares of the Series D Preferred. The holders of Series D
Preferred have the right to convert Series D Preferred at a discounted price. A
deemed distribution approximating $986,000 was recorded during fiscal year ended
June 30, 1999. Specifically, the holders of Series D Preferred have the right to
convert their shares of Series D Preferred into shares of the Company's common
stock based upon a formula which, subject to the Company's continued listing on
a national exchange, will not be less than $0.75 per share of the Company's
common stock adjusted 31 days (and again every six months afterwards) after
shareholder approval of the Company's proposed reverse stock split to 75% of the
average closing price of the Company's common stock for the five previous
trading days; the proposed reverse stock split has been submitted for
shareholder approval in the Company's 1999 Annual Shareholder Meeting proxy
statement. Should the Company be delisted from all national exchanges, the
conversion floor is removed and the conversion formula of 85% of the Average
Market Price (as defined by the Series D Preferred Stock Designation) has no
lower conversion price per share limit. The Series D Preferred has a liquidation
preference of $1,000 per share plus accrued and unpaid dividends. The Company
issued 156 shares of Series D preferred in fiscal year 1999 as payment of
dividends. Series D Preferred is non-voting and is redeemable at a rate of
$1,000 per share at the option of the holder when certain events occur such as
the Company's inability to convert preferred shares into common shares. Series D
Preferred is junior in liquidation preference to Series A Preferred, Series B
Preferred, and Series C Preferred.
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Series E Preferred Stock
On May 25, 1999 the Company issued 833,333 shares of Series E Senior Convertible
Preferred Stock ("Series E Preferred") valued at $500,000 and had 833,333 shares
of Series E Preferred outstanding at June 30, 1999. Holder of Series E
preferred are not entitled to receive dividends. The Series E Preferred are
convertible on a 1:1 ratio into shares of the Company's common stock at the
Company's option, is not redeemable at the option of the holder, and is non-
voting. The Company is obligated to redeem the Series E Preferred shares on a
1:1 ratio into shares of the Company's common stock on December 31, 1999. Series
E Preferred is junior in liquidation preference to Series A Preferred, Series B
Preferred, Series C Preferred, and Series D Preferred.
Series F Preferred Stock
On June 15, 1999, the Company issued 3,142 shares of Series F Senior Convertible
Preferred Stock ("Series F Preferred") valued at approximately $2,747,000 and
had 3,142 shares of Series F Preferred outstanding at June 30, 1999. Holders of
Series F Preferred are entitled to receive cumulative dividends at the rate of
$60.00 per year, payable in cash or additional shares of Series F Preferred
based upon a formula which, subject to certain conditions, will not be less than
$0.75 per share of common stock. The Series F Preferred has a liquidation
preference of $1,000 per share plus accrued and unpaid dividends. Holders of
Series F Preferred are entitled to receive cumulative dividends at the rate of
$60.00 per year, payable in cash or additional shares of the Series D Preferred.
The holders of Series F Preferred have the right to convert Series F Preferred
at a discounted price. A deemed distributions approximating $595,000 was
recorded during fiscal year ended June 30, 1999 and as deemed distribution
approximating $880,000 will be recorded in the first quarter of fiscal year
2000. Specifically, the holders of Series F Preferred have the right to convert
their shares of Series D Preferred into shares of the Company's common stock
based upon a formula which, subject to the Company's continued listing on a
National Exchange, will not be less than $0.75 per share of the Company's common
stock adjusted 31 days (and again every six months afterwards) after shareholder
approval of the Company's proposed reverse stock split to 75% of the average
closing price of the Company's common stock for the five previous trading days;
the proposed reverse stock split has been submitted for shareholder approval in
the Company's 1999 Annual Shareholder Meeting proxy statement. Should the
Company be delisted from all national exchanges, the conversion floor is removed
and the conversion formula of 85% of the Average Market Price (as defined by the
Series F Preferred Stock Designation) has no lower conversion price per share
limit. Series F Preferred is senior in liquidation preference to Series E
Preferred.
Stock Purchase Plan
During 1995, the Company adopted the EqualNet Holding Corp. Employee Stock
Purchase Plan (the Stock Purchase Plan) in which substantially all employees are
eligible to participate. The Stock Purchase Plan provides eligible employees of
the Company and its subsidiaries an opportunity to purchase shares of Common
Stock through after-tax payroll deductions. The Company will match contributions
in an amount equal to 15% of each participant's contribution. The Stock Purchase
Plan is administered by an independent administrator which purchases shares of
Common Stock on the open market with the amounts contributed by the participants
and the matching contributions made by the Company. The Stock Purchase Plan was
implemented during fiscal year 1996 and the Company contributed approximately
$1,000, $20,000, and $14,000 on behalf of employees toward the purchase of
Company stock during the years ended June 30, 1999, 1998, and 1997,
respectively.
Stock Option and Restricted Stock Plan
During 1995, the Company adopted the EqualNet Holding Corp. Stock Option and
Restricted Stock Plan (the 1995 Plan). The 1995 Plan is designed to provide
certain full-time key employees, including officers and directors of the
Company, with additional incentives to promote the success of the Company's
business and to enhance the ability to attract and retain the services of
qualified persons. The 1995 Plan is administered by a committee of no less than
two persons (the Committee) appointed by the Board of Directors. Committee
members cannot be employees of the Company and must not have been eligible to
participate under the 1995 Plan for a period of at least one year prior to being
appointed to the Committee. Under the 1995 Plan, the Committee may grant
restricted stock awards or options to purchase up to an aggregate of 800,000
shares of Common Stock. In June 1998, the Plan was amended to increase the
aggregate number of shares for grant to 4.0 million. The exercise price of an
option granted pursuant to the 1995 Plan is determined by the Committee on the
date the option is granted. In the case of a grant to an employee who owns ten
percent or more of the outstanding shares of Common Stock (a 10% Shareholder),
the exercise price of each option under the 1995 Plan may not be less than 110%
of the fair market value of the Common Stock on the date of the grant. No option
may be granted under the 1995 Plan with a term of more than ten years. In the
case of a 10% Shareholder, no option may be granted with a term of more than
five years. Options under the 1995 Plan are considered non-incentive stock
options when the aggregate fair market value of the stock with respect to which
the options are exercisable for the first time by the option holder in any
calendar year, under the 1995 Plan or any other incentive stock option plan of
the Company, exceeds $100,000. Under the 1995 Plan, the Committee may issue
shares of restricted stock to employees for no payment by the employee or for a
payment below the fair market value on the date of grant. The restricted stock
is subject to certain restrictions described in the 1995 Plan, with no
restrictions continuing for more than five years from the date of the award. The
1995 Plan may be amended by the Board of Directors without any requirement of
shareholder approval, except as required by Rule 16b-3 under the Securities
Exchange Act of 1934 and the incentive option rules of the Internal Revenue Code
of 1986. The Company has granted 63,638 restricted stock awards for shares of
Common Stock to certain key employees, none of whom is a director or executive
officer of the Company as of June 30, 1999. These employees will not be required
to make any payment for these restricted stock awards, which vest over five
years in 20% increments. Restrictions on transfer and forfeiture provisions upon
termination of employment will apply
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to the restricted stock covered by the awards for a period of five years, after
which time the restrictions will lapse and the stock will be owned by the
employees free of further restrictions under the 1995 Plan. During each of
fiscal years 1999 and 1998, 5,454 shares of the Company's common stock were
received into treasury stock resulting from the forfeiture of restricted stock
awards.
Non-Employee Director Stock Option Plan
The shareholders approved on November 28, 1995, the adoption of the Non-Employee
Director Stock Option Plan (the "Director Option Plan"). The Director Option
Plan is designed to attract and retain the services of experienced and
knowledgeable non-employee directors of the Company and to provide an incentive
for such directors to increase their proprietary interest in the Company and in
the Company's long-term success and progress. The Director Option Plan is
administered by the Board of Directors. The Company has adopted the Director
Plan, as amended in May 1998, pursuant to which each non-employee director
receives options to purchase a number of shares of Common Stock equal to $60,000
divided by the average of the highest and lowest price of the Common Stock the
day before the date of his election as a director ("Fair Market Value") and
options to purchase a number of shares of Common Stock equal to $30,000 divided
by the Fair Market Value of the Common Stock the day before each annual meeting
of the Company's shareholders for each year thereafter. These options have an
exercise price equal to the Fair Market Value of the Common Stock and the
initial grants vest over three years in 33-1/3% increments and the annual grants
vest in six months from the date of grant, assuming continued service on the
Board of Directors. Employee directors of the Company do not receive any
additional compensation from the Company for their services as directors. Each
stock option granted to a non-employee director will have a ten-year term. All
options granted under the Director Option Plan are non-qualified stock options
and may not be repriced. No awards may be granted under the Director Option Plan
after May 8, 2005, or such earlier date as determined by the Board of Directors.
The Director Option Plan may be amended by the Board of Directors without any
requirement of shareholder approval, except as required by Rule 16b-3 under the
Securities Exchange Act of 1934 and the incentive stock option provisions of the
Internal Revenue Code of 1986, and except that no amendment may be made more
than once every six months that would change the amount, price or timing of
grants under the Director Option Plan.
There are currently two non-employee directors eligible to participate in the
Director Option Plan. As of June 30, 1999, options to purchase 20,000 shares of
the Company's common stock at an exercise price of $1.875 were outstanding.
The changes in stock options outstanding for the Company's plans for 1999, 1998,
and 1997 were as follows:
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------ ----------------
Outstanding at July 1, 1996 11,000 $16.74
Granted 538,000 $ 3.31
Exercised - $ -
Forfeited (23,000) $ 3.87
---------
Outstanding at June 30, 1997 526,000 $ 3.57
Granted 20,000 $ 1.88
Exercised - $ -
Forfeited (366,000) $ 3.36
---------
Outstanding at June 30, 1998 180,000 $ 3.79
Granted 2,135,000 $ 0.50
Exercised (128,000) $ 0.41
Forfeited (414,000) $ 1.32
---------
Outstanding at June 30, 1999 1,773,000 $ 0.65
---------
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Vested stock options as of June 30, 1999, 1998, and 1997 are as follows:
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------ ----------------
June 30, 1999 243,000 $ 1.12
June 30, 1998 95,000 3.93
June 30, 1997 3,000 16.93
The weighted average fair value of options granted during the years ended June
30, 1999, 1998, and 1997 was $0.33, $1.84, and $2.73, respectively. Exercise
prices for options outstanding as of June 30, 1999 ranged from $0.25 to $4.25
and the weighted average remaining contractual life of those options was
approximately 9.4 years.
As allowed under Statement of Financial Accounting Standard ("SFAS") No., 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB
Opinion 25 and related interpretations in accounting for its stock option plan.
Accordingly, compensation expense is not recognized for stock options unless the
options were granted at an exercise price lower than market on the grant date.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for fiscal
years 1999, 1998, and 1997: risk-free interest rate of 6%; no dividend yield;
volatility factors of the expected market price of the Company's common stock of
2.1 in 1999, 1.4 in 1998, and 2.3 in 1997; and, a weighted-average expected life
of the option of 9 years. Using estimates calculated by this option pricing
model, pro forma net loss, basic earnings per share, and diluted earnings per
share would have been $(18.3), $(.92), and $(.92), respectively, for the year
ended June 30, 1999. For the year ended June 30, 1998, pro forma net loss, basic
loss per share and diluted loss per share would have been $(18,078,000),
$(1.65), and $(1.65), respectively. For the year ended June 30, 1997, pro forma
net loss, basic loss per share and diluted loss per share would have been
$(15,583,000), $(2.56), and $(2.56), respectively.
401(k) Plan
The Company sponsors a 401(k) Plan which is open to all employees over the age
of 21. Generally, an employee must complete six consecutive months of employment
for eligibility. The 401(k) Plan gives the Company the option to determine the
amount they will contribute each year. Contributions made to the 401(k) Plan by
the Company were approximately $10,000, $43,000, and $63,000 for the years
ended June 30, 1999, 19998, and 1997, respectively.
Warrants
The following presents warrants outstanding to purchase shares of the Company's
common stock as of June 30, 1999. Each warrant may be used to purchase one share
of common stock.
EXERCISE
WARRANTS PRICE EXERCISE PRICE
-------- -------- --------------
294,000 $0.55 September 1998-July 2003
150,000 0.68 June 1999-June 2004
666,232 0.90 September 1998-September 2000
1,320,000 1.00 October 1997-April 2003
83,333 1.13 March 1999-February 2004
300,000 1.33 January 1999-January 2004
400,000 1.50 March 1998-May 2004
230,000 2.00 April 1998-April 2003
83,334 2.50 August 1999-February 2004
100,000 7.50 January 1998-November 2001
Warrants issued in connection with debt has been valued using the Black-Scholes
model and have been recorded as debt origination costs or debt discount and are
being amortized over the term of the related debt. Warrants issued for services
performed have been valued using the Black-Scholes model and have been expensed.
54
<PAGE>
NOTE 8 - TAXES
For fiscal years 1999 and 1998, the Company recorded no benefit for income taxes
due to a valuation allowance being established for the entire operating loss and
other deferred tax assets. The provision for income taxes for the fiscal year
ended June 30, 1997 is as follows:
FEDERAL STATE TOTAL
------- ----- -----
Current $ 29,000 $ 88,000 $ 117,000
Deferred 1,953,000 276,000 2,229,000
---------- -------- ----------
$1,982,000 $364,000 $2,346,000
========== ======== ==========
Deferred income tax provisions or benefits result from temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements which will result in differences between income for tax
purposes and income for financial statement purposes in future years.
Significant components of the Company's deferred tax assets and liabilities at
June 30 are as follows:
1999 1998
---- ----
Deferred tax liabilities:
Other, net $ - $ (75,000)
------------ ------------
Total deferred tax liabilities - (75,000)
Deferred tax assets:
Amortization of acquisition costs 5,611,000 4,568,000
Write-off of goodwill 310,000 336,000
Bad debt allowance 155,000 401,000
Accrued liabilities 705,000 265,000
Net operating loss carryforward 15,597,000 9,735,000
Other 188,000 365,000
------------ ------------
Total deferred tax assets 22,566,000 15,670,000
Valuation allowance (22,566,000) (15,670,000
------------ ------------
Net deferred tax assets $ - $ -
============ ============
The Company recorded a valuation allowance amounting to the entire net deferred
tax asset balance at June 30, 1999 and 1998 as it is more likely than not the
deferred tax asset is unrealizable. The Company has net operating loss
carryforwards ("NOL") of approximately $38.3 million at June 30, 1999 which is
available to offset future taxable income which expire in 2012 through 2017. The
Company experienced a change of control in March 1998 which restricts the
ability to utilize approximately $15.0 million of the NOL. During 1999, the
Company recognized an extraordinary gain of approximately $10.0 million
following the consummation of EqualNet's plan of reorganization. This
extraordinary gain resulted in a direct reduction of NOL's generated in prior-
years. A portion of the NOL's generated prior to the change of control were
reduced due to this extraordinary gain.
55
<PAGE>
The reasons for the differences between the amount of tax expense (benefit)
provided and the amount of tax expense (benefit) computed by applying the
statutory Federal income tax rate to income before taxes for the years 1999,
1998, and 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
1999 1998 1997
------------------ ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rates $(6,116,000) 34.0% $(6,101,000) 34.0% $(4,296,000) 28.7%
Increase (decrease) in taxes
resulting from:
State income tax benefit (863,000) 4.8% (861,000) 4.8% (519,000) 3.5%
Valuation allowances 6,896,000 -38.3% 6,950,000 -38.7% 7,097,000 -47.4%
Other (83,000) -0.5% 12,000 -0.1% 63,000 -0.4%
----------- ----- ----------- ----- ----------- -----
$ - 0.0% $ - 0.0% $ 2,345,000 -15.7%
----------- ----- ----------- ----- ----------- -----
</TABLE>
No income tax payments were made during fiscal years 1999 and 1998. Taxes paid
during fiscal year 1997 totaled approximately $88,000.
NOTE 9 - DEBT
Parent Company
In connection with the SA Telecom acquisition, the Company assumed a note
payable of approximately $4.0 million to Greyrock Business Credit ("Greyrock").
In August 1998, this note was paid off through the proceeds of various new
third-party loans and the proceeds of a new note agreement with Greyrock of
approximately $0.8 million. This new note agreement bears interest at a rate of
prime plus 2.5% and is secured by the assets of USC Telecom. The principal
balance of this new note was due on February 28, 1999. The Company is currently
in default of this note and the corresponding debt is classified as debt in
default as of June 30, 1999. At June 30, 1999, the Company had approximately
$0.6 million outstanding under this facility. Also, see Note 12 to the
consolidated financial statements.
In September 1998 and January 1999, the Company executed loan agreements in
favor of the Willis Group of approximately $0.2 million and $0.1 million,
respectively, for certain advances made on behalf of the Company. These notes
are secured by the assets of the Company and each of its subsidiaries, bear
interest at a rate of 11% per annum, and are due January 31, 2000. At June 30,
1999, the Company had approximately $0.3 million outstanding under these loans.
On July 31, 1998, the Company issued two 6% Senior Secured Convertible Notes due
in 2001 (the "2001 notes") in the amount of $1.5 million each to the Willis
Group and an accredited investor. The 2001 Notes are convertible into a variable
number of shares of the Company's common stock and were issued with an original
issue discount of approximately $0.1 million for each note. The 2001 Notes bear
interest at an annual rate of 6% and interest payments are due quarterly. The
Company's obligations under the 2001 notes are secured by the assets of the
Company. In connection with the issuance of the 2001 Notes, the Company issued
to each of the Willis Group and the accredited investor warrants to purchase
approximately 333,000 shares of the Company's common stock at a purchase price
of $0.90 per share; these warrants expire in September 2003. Any holder of a
2001 note may convert, in whole or in part, into shares of the Company's common
stock. The holders converted the 2001 Notes to Series F Preferred as of June 15,
1999.
Effective February 3, 1997, the Company executed an agreement with an accredited
investor whereby the accredited investor loaned the Company $3.0 million at an
annual interest rate of 10%, maturing on December 31, 1998. In connection with
this transaction, the Company issued stock warrants for an aggregate 1.5 million
shares of the Company's common stock at a purchase price of $2.00 per share. On
March 6, 1998, the Company entered into an exchange agreement with this
accredited investor, exchanging the $3.0 million note, accrued interest, and
warrants for 3,000 shares of the Company's Series B Senior Convertible Preferred
Stock.
On October 1, 1997, the Company issued to the Willis Group a $1.0 million
convertible secured note, bearing interest at the rate of 12% annually and
maturing on April 1, 1998, and a warrant for the purchase of up to 200,000
shares of the Company's common stock at an exercise price of $1.00 per share. On
March 5, 1998, this note and accrued interest was exchanged for approximately
1.05 million shares of the Company's common stock.
During the quarter ended March 31, 1998, the Company obtained a cash flow bridge
loan of $0.4 million from Netco Acquisition, LLC, an entity owned 50% by the
Willis Group. This note was payable on March 31, 1998. The relief of this loan
by Netco as of June 30, 1999 was considered and treated as a capital
contribution.
On July 23, 1998, the Company entered into a loan agreement, and amended on
September 8, 1998, with a third party and received approximately $1.5 million,
which was funded in two separate tranches: Tranche A in the amount of
approximately $0.8 million and Tranche B in the amount of approximately $0.7
million. Monthly principal and interest payments commenced in November 1998,
with the total balances due on June 30, 2000 and October 30, 2002 for Tranche A
and
56
<PAGE>
Tranche B, respectively. This note bears interest at the prime lending rate plus
5.5% and is secured by all of the Company's assets. In connection with this
loan, the Company granted to the lender warrants to purchase up to 294,000
shares of the Company's common stock at an exercise price equal to the average
closing price of the Company's common stock for the three trading days
immediately preceding September 8, 1998; these warrants expire in July 2003. The
Company used the proceeds of this loan to retire a portion of the SA Telecom
debt (see below). At June 30, 1999, the Company had approximately $1.4 million
outstanding under this loan. At June 30, 1999, the Company was in technical
default of this loan agreement, and obtained a waiver of this default from the
Lender through July 1, 1999.
EqualNet
EqualNet entered into a new arrangement with Receivables Funding Corp. ("RFC")
effective June 18, 1997 which is essentially a receivable purchase arrangement
which bases borrowing capacity on a percentage of EqualNet's outstanding
receivables up to a maximum allowable amount of $8.0 million and increased to
$10.0 million in July 1998 and allows for the lender to cease funding of new
receivables without prior written notice at the lenders option. The program fee
applied to the outstanding balance of net purchased receivables was prime plus
4.5% per annum but changed to prime plus 7% on September 17, 1998 (after Chapter
11 filing). As of June 30, 1999, the amount owed to RFC under this agreement is
$.9 million.
USC Telecom
In connection with the January 1999 BCI transaction, USC Telecom assumed a $1.5
million term loan payable. This term loan bears interest at the rate of prime
plus 4.5% and is due January 2001. At June 30, 1999, the amount owed under this
term loan was approximately $1.5 million. In addition, USC Telecom assumed an
accounts receivable purchase agreement with the holder of this term loan. The
maximum purchase commitment under this accounts receivable purchase price
agreement is $10 million with a program fee of 3.0%. At June 30, 1999, the
amount owed under this receivable purchase commitment was approximately $1.5
million. At June 30, 1999, the Company was in technical default of this loan
agreement and obtained a waiver of this default from the Lender through July 1,
1999.
In August 1998, USC Telecom entered into a receivables purchase agreement and
used the proceeds of the initial funding to pay of a portion of the debt assumed
in the SA Telecom acquisition. The maximum purchase commitment under this
facility is $4.0 million with a program fee of prime plus 2% - 4% per annum
(12.1% at June 30, 1999). At June 30, 1999, the amount owed under this
receivable purchase commitment was approximately $1.0 million.
Netco
In March 1998, Netco secured financing of approximately $6.1 million for the
cash portion of the consideration to purchase nine telecommunications switches
from the Willis Group, a related entity, through an unaffiliated third-party
lender. This loan bears interest at a rate of 6.04% above an index rate based on
the US Treasury rate (12.1% as of June 30, 1999) and is payable in 36
consecutive monthly payments. At June 30, 1999, the Company had approximately
$5.2 million outstanding under this loan. At June 30, 1999, Netco was in
technical default of this note agreement, and obtained a waiver of this default
from the lender through July 1, 1999. The principal amount outstanding as of
June 30, 1998 of approximately $5.8 million was classified as debt in default as
Netco did not pay its July 1998 monthly payment.
57
<PAGE>
NOTE 10 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE PER SHARE
NET LOSS COMMON SHARES AMOUNT
-------- ---------------- ---------
<S> <C> <C> <C>
Year Ended June 30, 1999:
Net loss $(17,989,000)
Dividends and deemed distribution
applicable to preferred stock $ 4,177,000
------------
Basic and diluted EPS-
Net loss applicable to common stock $(22,166,000) 19,936,000 $(1.11)
============ ========== ======
Year Ended June 30, 1998:
Net loss $(17,943,000)
Dividends applicable to preferred stock $ (52,000)
------------
Basic and diluted EPS-
Net loss applicable to common stock $(17,995,000) 10,944,000 $(1.64)
============ ========== ======
Year Ended June 30, 1997:
Net loss $(14,981,000)
Dividends applicable to preferred stock $ -
------------
Basic and diluted EPS-
Net loss applicable to common stock $(14,981,000) 6,097,000 $(2.46)
============ ========== ======
</TABLE>
The analysis above assumes there are no conversions of any securities during the
periods shown because there is a loss in each fiscal year and, as a result, the
effect of the conversion of any security would be anti-dilutive.
58
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments under
operating leases as of June 30, 1999:
YEAR ENDED
JUNE 30, AMOUNT
---------- ------
2000 $ 396,000
2001 365,000
2002 375,000
2003 375,000
2004 375,000
Thereafter -
----------
$1,886,000
----------
On August 7, 1998, Robert H. Turner, the Company's former Chief Executive
Officer filed suit against the Company alleging an unspecified amount of damages
based upon an alleged breach of his employment contract and other claims.
Although the Company denies any wrongdoing or liability in the matter, and
intends to vigorously defend itself in this action settlement discussions have
been held and this matter will most likely settle. The Company believes it has
adequate reserves for this matter.
On September 17, 1998, Comerica Leasing Corporation filed suit against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings. A
settlement agreement was entered into by the parties dismissing the earlier
litigation and adding the Company as an obligor for the payment of the
settlement amounts. Pursuant to an agreement reached in the bankruptcy
proceedings of EqualNet Corporation, Comerica Leasing agreed to release the
Company from any liability under the settlement and underlying agreements in
exchange for payment of $265,000 plus the issuance of a warrant for the purchase
of up to 300,000 shares of Common Stock of the Company at an exercise price of
$1.50 per share for a period of five years from the date of the agreement.
On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit against the Company and Netco
Acquisition LLC alleging damages for breach of contract and other alleged
claims. The matters originated with a letter of intent wherein the Company
proposed the purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by the parties.
Bluegate and certain of its shareholders had threatened to sue the Company in
the event the proposed transaction was not consummated substantially in
conformity with the terms set forth in the Letter of Intent. The damages
Bluegate alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in anticipation of the
integration of its operations with those of EqualNet. It is impossible to
determine with any degree of certainty what, if any, liability Equalnet or any
of its subsidiaries, may incur in this matter. The total amount of damages are
unspecified, but include a demand for a cash payment of $685,000, a sufficient
number of shares of Common Stock of the Company for the payment of $585,000, an
additional 525,000 shares of Common Stock, and other damages. The Company denies
any wrongdoing or liability in this matter and intends to vigorously defend
itself against all claims of the plaintiffs. This action is in the initial act
of discovery and proceedings. Accordingly, at this time the Company is unable to
determine the amount of expense, if any, under this action.
On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom and the Company for
operating losses for the period from April 1, 1998 - July 22, 1998, damages for
delayed or unbillable revenue, delivery of shares of the Company's Series C
Senior Preferred Stock, and other items. On December 28, 1998, the court signed
an order approving those claims in the amount of approximately $813,000. The
Company and USC Telecom disputed the monetary claims asserted by SA
Telecommunications in its demand and filed a notice of appeal of the
court's order in the proceedings. On October 9, 1999, SA Telecommunications,
Greyrock Business Credit, and the Company presented an agreement to the SA
Telecom bankruptcy court providing for the settlement of the SA
Telecommunications judgment and amounts owed to Greyrock. The agreement calls
for the payment of the remaining principal balance of the promissory note to
Greyrock, plus accrued but unpaid interest, by the issuance of a number of
shares of the Company's unregistered common stock valued at the lessor of $0.28
per common share (as adjusted to account for any stock split) or the market
price of the unregistered common stock at the date registration of the shares is
effective. In addition, the agreement calls for satisfaction of the remaining
obligation to SA Telecommunications by the payment of $150,000 cash plus the
issuance of an amount of the Company's unregistered common stock equal to
approximately $660,000 valued at the lesser of $0.28 per common share (as
adjusted to account for any stock split) or the market price of the unregistered
common stock at the date registration of the shares is effective. If the
registration of these shares of the Company's common stock is not effective as
of October 31, 1999, the amount of the Company's common stock to be issued will
increase, over varying periods of time from November 1, 1999 to January 30,
2000, from 7.5% to 22.5% of the amount to be ultimately issued. The Company has
reserved the right to repurchase the shares of the Company's common stock issued
in settlement of these obligations prior to January 31, 2000.
As a result of liquidity problems, on September 10, 1998, EqualNet filed for
protection under Chapter 11 of Title 11 of the United States Code, in case
number 98-39561-H5-11 in the United States District Court for the Southern
District of Texas and Wholesale filed for protection under Chapter 11 of Title
11 of the United States Code, in case number 98-39560-H4-11 in the United States
District Court for the Southern District of Texas. On October 2, 1998, Wholesale
filed a motion seeking to convert its Chapter 11 reorganization proceeding to a
Chapter 7 liquidation proceeding. Pursuant to Sections 1107 and 1108 of the
Bankruptcy Code, EqualNet managed its assets and operated its business as a
debtor-in possession pending
59
<PAGE>
confirmation of its reorganization plan, which plan was confirmed on April 28,
1999, and consummated on May 28, 1999. The plan of reorganization provided for
the restructuring of amounts and repayment terms for secured and unsecured
creditors. In conjunction with the confirmation and consummation of the
reorganization plan, certain debts were reduced resulting in an extraordinary
gain of approximately $10.0 million.
In connection with the consummation of the reorganization plan, the Company has
disputed certain administrative and priority claims totaling approximately $9.7
million. The Company has evaluated the claims and has accrued approximately
$830,000 based on management's best estimate of the Company's liability
associated with these claims. The Company continues to dispute the remaining
claims and is working with the claimants to resolve the differences. Any
settlement of these claims which is significantly greater than amounts accrued
could have a material adverse effect on the Company.
The reorganization plan required the Company to issue 3 million shares of its
Common Stock to the Unsecured Creditors' Trust (the Trust) for the benefit of
holders of unsecured claims who were non-insiders or affiliates of the Company.
The Trust may sell up to 375,000 shares of the Company's Common Stock during
each of the first four consecutive six month periods after the effective date of
the reorganization plan. Based upon the price and trading volume, the Company
may authorize the Trust to sell more than 375,000 shares of Common Stock during
any of the four six month periods. If the gross proceeds, prior to commission,
of the Trust's stock sales in any six month period are less than the average
price of $1 per share, then the Company shall pay the trust an amount of cash to
make up the difference between the actual sales price and $1 per share. At any
time during the four six month periods, but not thereafter, the Company may
elect to purchase for $1.50 per share, the entire balance of shares of Common
Stock held by the Trust. Since the effective date of the reorganization plan,
the Trust has sold shares of Common Stock for less than $1. The Company has
recorded a liability of $148,000 for its obligation under this agreement for
shares sold through June 30, 1999.
The reorganization also calls for the Company to issue additional shares of
Common Stock of the Company should the average closing price of the Company's
stock, during the 25 consecutive trading days preceeding the date that is two
years after the effective date of the reorganization be less than $1 per share
as defined Plan of Reorganization.
During 1997, EqualNet settled disputed claims with the attorneys general from
eleven states alleging violations of consumer protection statutes of those
states. The settlement amount, which was paid in March, 1998, totaled $225,000
plus the issuance of certain customer credits and adjustments. The Company was
either not included as a party or was dismissed as a party before the entry of
any final judgment in any of these proceedings.
From time to time the Company is involved in what it believes to be routine
litigation, or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.
NOTE 12 - SUBSEQUENT EVENT
On October 9, 1999, SA Telecommunications, Greyrock, and the Company presented
an agreement to the SA Telecom bankruptcy court providing for the settlement of
the SA Telecommunications judgment and amounts owed to Greyrock. The agreement
calls for the payment of the remaining principal balance of the promissory note
to Greyrock, plus accrued but unpaid interest, by the issuance of a number of
shares of the Company's unregistered common stock valued at the lessor of $0.28
per common share (as adjusted to account for any stock split) or the market
price of the unregistered common stock at the date registration of the shares is
effective. In addition, the agreement calls for satisfaction of the remaining
obligation to SA Telecommunications by the payment of $150,000 cash plus the
issuance of an amount of the Company's unregistered common stock equal to
approximately $660,000 valued at the lesser of $0.28 per common share (as
adjusted to account for any stock split) or the market price of the unregistered
common stock at the date registration of the shares is effective. If the
registration of these shares of the Company's common stock is not effective as
of October 31, 1999, the amount of the Company's common stock to be issued will
increase, over varying periods of time from November 1, 1999 to January 30,
2000, from 7.5% to 22.5% of the amount to be ultimately issued. The Company has
reserved the right to repurchase the shares of the Company's common stock issued
in settlement of these obligations prior to January 31, 2000.
60
<PAGE>
Equalnet Communications Corp.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Charged to Deductions End of
of Period Expenses other Accounts Describe(A) Period
--------- ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended June 30, 1999
Allowance for Doubtful Accounts $1,034 $6,414 $ 61 $7,109 $ 400
Fiscal Year Ended June 30, 1998
Allowance for Doubtful Accounts $1,451 $1,661 $ (112) $1,966 $1,034
Fiscal Year Ended June 30, 1997
Allowance for Doubtful Accounts $3,285 $1,727 $2,011(B) $5,572 $1,451
Allowance for Advances to Agents $1,000 $ - $ - $1,000 $ -
</TABLE>
(A) Uncollectible accounts written off, net of recoveries
(B) Provision for uncollectible accounts receivable taken against agent
commissions payable
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
Equalnet Communications Corp.
(Registrant)
by: /s/ Mitchell H. Bodian
--------------------------------------------------
Mitchell H. Bodian, President, Chief Executive
Officer, and Director
Dated: October 13, 1999
In accordance with the Securities and Exchange Act of 1934, this Annual Report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dated indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- --------------------------------------- --------------------
<S> <C> <C>
/s/ Mark A. Willis Chairman of the Board of Directors October 13, 1999
- ---------------------------------------
Mark A. Willis
President, Chief Executive Officer, October 13, 1999
/s/ Mitchell H. Bodian and Director
- ---------------------------------------
Mitchell H. Bodian
Chief Financial Officer, principal October 13, 1999
/s/ Michael P. Gallagher financial and accounting officer
- ---------------------------------------
Michael P. Gallagher October 13, 1999
/s/ John Isaac "Ike" Epley Director October 13, 1999
- ---------------------------------------
John Isaac "Ike" Epley
/s/ Ronald J. Salazar Director October 13, 1999
- ---------------------------------------
Ronald J. Salazar
</TABLE>
62
<PAGE>
EQUALNET COMMUNICATIONS CORP.
STATEMENT OF RESOLUTION OF BOARD OF
DIRECTORS ESTABLISHING AND DESIGNATING
SERIES F 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 the
21st day of May, 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 F Convertible Preferred Stock and Fixing the
Rights and Preferences of Such Series is as follows:
SERIES F 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
1
<PAGE>
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 F 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).
"Closing Bid Price" of the Common Stock on any date means the closing
bid price 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.
"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 F Convertible
Preferred Stock pursuant to the Transfer Agent Instruction.
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"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 F Convertible Preferred Stock pursuant to Section 10, the date on which
the Conversion Notice relating to such conversion is actually received by the
Conversion 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 F Convertible Preferred Stock, stating
the number of shares of Series F 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, for any Conversion Date, the lesser of:
(1) the product of (a) the Average Market Price for such Conversion
Date multiplied by (b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that so long as (x) the Common Stock is listed or
quoted on the Nasdaq, the Nasdaq SmallCap, the NYSE or the Amex and (y) the
Corporation is in compliance in all material respects with its obligations to
the holders of Series F Convertible Preferred Stock (including, without
limitation, its obligations under the Exchange Agreement, the Registration
Rights Agreements and the provisions of this Statement of Resolution), the
Conversion Price shall not be less than:
(a) from the Issuance Date to the Initial Reset Date, $0.75 (subject
to equitable adjustments on the Reverse Stock Split Date and from time to time
before or after the Reverse Stock Split Date 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 this
Statement of Resolution with the Secretary of the State of Texas);
(b) from the Initial Reset Date to the first Semi-Annual Reset Date,
the lesser of (1) the price determined in clause (a) or (2) 75% of the
arithmetic average of the closing Bid Price of the Common Stock for the five
Trading Day period immediately prior to the Initial Reset Date (subject to
equitable adjustments from time to time on terms reasonably acceptable to the
Majority Holders for stock splits, stock dividends,
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combinations, recapitalizations, reclassifications and similar events occurring
or with respect to which "ex-" trading commences on or after the Reverse Stock
Split Date); and
(c) on and after each Semi-Annual Reset Date, the lesser of (1) the
price determined in clause (a) or (2) 75% of the arithmetic average of the
closing Bid Price of the Common Stock for the five Trading Day period
immediately prior to the Semi-Annual Reset Date (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 Reverse Stock Split Date).
provided further, however, that the Conversion Price applicable to a
particular conversion shall be subject to reduction as provided in Section
10(b)(6).
"Conversion Rate" shall have the meaning provided in Section 10(a).
"Converted Market Price" means, for any share of Series F 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 F 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 F 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 F 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 F Convertible Preferred Stock pursuant to Section 9(a), (2) the number of
shares of Series F Convertible Preferred Stock held by such holder which are to
be redeemed, (3) the Redemption Price per share of Series F 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 F Convertible Preferred Stock
issued as dividends on outstanding shares of Series F Convertible Preferred
Stock in accordance with Section 5(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Exchange Agreements" means the several Note Purchase and Exchange
Agreements by and between the Corporation and the original holders of shares of
Series F Convertible Preferred Stock pursuant to which the shares of Series F
Convertible Preferred Stock were issued.
"Final Redemption Date" means the date of redemption of shares of
Series F 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 F 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 F Convertible Preferred Stock pursuant
to Section 9(b), (2) the number of shares of Series F Convertible Preferred
Stock held by such holder which are to be redeemed, (3) the Final Redemption
Price per share of Series F 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 F 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 F 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).
"Initial Reset Date" means the 31st Trading Day after the Reverse
Stock Split Date.
"Issuance Date" means the first date of original issuance of any
shares of Series F 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 F 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 F Convertible Preferred Stock.
"Liquidation Preference" means, for each share of Series F 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.
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"Majority Holders" means at any time the holders of shares of Series F
Preferred Stock which shares constitute a majority of the outstanding shares of
Series F 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 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
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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 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
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<PAGE>
made so that the holders of shares of Series F Preferred Stock shall have
the right to receive upon conversion of the shares of Series F Preferred
Stock the amount of Securities the holders of shares of Series F Preferred
Stock would have received had the holders of shares of Series F Preferred
Stock converted the shares of Series F 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 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
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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 F Preferred Stock shall have the right to
receive upon conversion of shares of Series F Preferred Stock the amount of
cash the holders of shares of Series F Preferred Stock would have received
had the holders of shares of Series F Preferred Stock converted shares of
Series F 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
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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.
"Maximum Share Amount" means 5,611,995 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 F 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
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(determined by pro rata allocation of any increase thereof among the shares of
Series F Convertible Preferred Stock based on the number of shares of Series F
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) [intentionally omitted];
(2) [intentionally omitted];
(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 F 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 F
Convertible Preferred Stock under the terms of this Statement of Resolution
or under the Registration Rights Agreements or any other instrument 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 F 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 F 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 F Convertible Preferred Stock
to the Corporation;
(4) [intentionally omitted]; or
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(5) The taking of any action, including any amendment to the
Corporation's Articles of Incorporation, without the consent of the
Majority Holders which materially and adversely affects the rights of any
holder of shares of Series F Convertible Preferred Stock.
"Optional Redemption Notice" means a notice from a holder of shares of
Series F 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 F 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 F 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 F
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 F Convertible Preferred Stock.
"Premium Percentage" means 115%.
"Premium Price" means, for any share of Series F 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 F 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 F
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
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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 by December 15, 2001, (2) the Company fails to file the Registration
Statement with the SEC on or before January 1, 2001, (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 F Convertible Preferred Stock who is named therein as a
selling stockholder for any reason (including, without limitation, by reason of
an SEC stop order, a material misstatement or omission in the Registration
Statement or the information contained in the Registration Statement having
become outdated); provided, however, that no Registration Event pursuant to this
clause (4) shall be deemed to occur prior to the SEC Effective Date, (5) the
Common Stock is not listed for trading on any of the NYSE, the AMEX, the Nasdaq
or the Nasdaq SmallCap, or (6) a holder of shares of Series F Preferred Stock
having become unable to convert any shares of Series F 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 F 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.
"Reverse Stock Split Date" means the first date after the Issuance
Date and prior to December 31, 1999 on which the outstanding shares of the
Corporation's Common Stock are combined into a smaller amount of shares of
Common Stock.
"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.
"Semi-Annual Reset Date" means the first Trading Day that occurs on or
after six months following the Initial Reset Date or the previous Semi-Annual
Reset Date as the case may be.
"Senior Dividend Stock" means any class or series of capital stock of
the Corporation ranking senior as to dividends to the Series F 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 F
Convertible Preferred Stock.
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"Series F Convertible Preferred Stock" means the Series F 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 F 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 F 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 F Convertible Preferred Stock, provided for in the
Exchange Agreements.
SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series F Convertible Preferred Stock", and the number of
shares constituting the Series F Convertible Preferred Stock shall be 6,500, and
shall not be subject to increase. Of the authorized shares of Series F
Convertible Preferred Stock, 1,500 shares may be issued only as dividends on the
outstanding shares of Series F Convertible Preferred Stock.
SECTION 3. SERIES F PREFERRED STOCK CAPITAL. The amount to be
represented in the Series F Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series F 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 F Convertible Preferred Stock capital not less
frequently than monthly.
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SECTION 4. RANK. All Series F Convertible Preferred Stock shall rank
(i) senior to the Common Stock and Series E Junior Preferred 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, Series C Convertible Preferred Stock, and
Series D 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 F 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 F Convertible Preferred Stock and shall be payable
quarterly on February 15, May 15, August 15, and November 15 of each year
commencing November 15, 1999 (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 F
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 F 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 F 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 F Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends
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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 F Convertible Preferred Stock. No full
dividends shall be paid or declared and set apart for payment on the Series F
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 F Convertible Preferred Stock and the Parity
Dividend Stock, all dividends paid or declared and set apart for payment upon
shares of Series F 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 F
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 F 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 F 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 F
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 F 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 F 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 F Convertible Preferred Stock if:
(i) the number of shares of Series F 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;
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(ii) the issuance or delivery of Dividend Shares as a dividend
payment or the issuance of shares of Common Stock upon conversion of such
Dividend Shares by the holder thereof would require registration with or
approval of any governmental authority under any law or regulation, and
such registration or approval has not been effected or obtained or is not
in effect or the Registration Statement is unavailable for use by such
holder for the resale of such shares of Common Stock; provided, however,
that this limitation shall not be deemed to be applicable at any time prior
to the date which is 105 days after the Issuance Date, if the Registration
Statement is on Form S-3, or 120 days after the Issuance Date, if the
Registration Statement is on Form S-1, if this limitation otherwise would
be applicable solely because the Registration Statement shall not yet have
been declared effective, so long as the Corporation shall be in compliance
in all material respects with its obligations under the Registration Rights
Agreements;
(iii) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock
is then listed; or have not been approved for quotation if the Common Stock
is traded in the over-the-counter market;
(iv) the number of shares of Common Stock registered pursuant to
Section 2(a) of the Registration Rights Agreements for resale upon issuance
upon conversion of Dividend Shares shall be sufficient (after taking into
account the 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 F 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 F 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.
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(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 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 unless the Corporation or such subsidiary offers to purchase for
cash from each holder of shares of Series F Convertible Preferred Stock at the
time of such redemption, repurchase or acquisition the same percentage of such
holder's shares of Series F 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 F 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 F Convertible Preferred Stock to
purchase for cash at the time of purchase in such Tender Offer the same
percentage of shares of Series F 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 F 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 F 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 F 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
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shall accrue to the holders of Series F 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 F 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 F
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 F 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 F Convertible Preferred Stock at the
time of initial issuance thereof pro rata based on the initial issuance of 5,000
shares of Series F Convertible Preferred Stock. Each certificate for shares of
Series F 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 F 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 F Convertible
Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on
the shares of Series F Convertible Preferred Stock represented by each
certificate, which records shall be controlling in the absence of manifest
error. Each such additional share of Series F Convertible Preferred Stock shall
be allocated a portion of the Maximum Share Amount allocated to the shares of
Series F Convertible Preferred Stock in respect of which such additional shares
of Series F Convertible Preferred Stock are issued as a dividend and the
certificate for such additional shares of Series F Convertible Preferred Stock
shall bear a notation as to the certificate number of the share of Series F
Convertible Preferred Stock in respect of which such additional share of Series
F Convertible Preferred Stock is issued as a dividend. Upon surrender of any
certificate for shares of Series F 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 F 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 F
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Convertible Preferred Stock evidenced by such new certificate. If any
certificate for shares of Series F Convertible Preferred Stock is surrendered
for split-up into two or more certificates representing an aggregate number of
shares of Series F Convertible Preferred Stock equal to the number of shares of
Series F Convertible Preferred Stock represented by the certificate so
surrendered (as reduced by any contemporaneous conversion of shares of Series F
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 F 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 F Convertible Preferred Stock which remains unissued after such
conversion shall be re-allocated pro rata to the outstanding shares of Series F
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 F Convertible
Preferred Stock so converted, and if there shall be no other shares of Series F
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 F 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 F 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 F 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 F 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 F 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 F Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series F
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
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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 F Convertible Preferred Stock directs the Corporation to redeem
outstanding shares of Series F Convertible Preferred Stock and, prior to the
date the Corporation is required to redeem such shares of Series F 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 F
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 F Convertible
Preferred Stock, as the case may be, had such holder exercised its right to
convert all of such holder's shares of Series F 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 F
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 F Convertible Preferred Stock pursuant to
Section 7(a)(2) or the giving or the absence of any notice by the holders of the
Series F Convertible Preferred Stock in response thereto or any redemption of
shares of Series F 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 F Convertible Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series F 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 F 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 F 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 F Convertible Preferred Stock
evidenced by such certificate which have not been redeemed. Only whole shares
of Series F Convertible Preferred Stock may be redeemed.
(b) NO OTHER MANDATORY REDEMPTION. The shares of Series F Convertible
Preferred Stock shall not be subject to mandatory redemption by the Corporation
except as provided in Section 7(a).
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SECTION 8. NO SINKING FUND. The shares of Series F 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 F Convertible Preferred Stock (including, without limitation,
its obligations under the Exchange Agreement, the Registration Rights Agreements
and the provisions of this Statement of Resolution), (2) on the date the
Corporation Optional Redemption Notice is given and at all times until the
Redemption Date, the Registration Statement is effective and available for use
by each holder of shares of Series F Convertible Preferred Stock for the resale
of shares of Common Stock acquired by such holder upon conversion of all shares
of Series F 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 F 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 F Convertible Preferred Stock, at any time to redeem all or from time
to time to redeem any part of the outstanding shares of Series F Convertible
Preferred Stock in accordance with this Section 9(a). If the Corporation shall
redeem less than all outstanding shares of Series F Convertible Preferred Stock,
such redemption shall be made as nearly as practical pro rata from all holders
of shares of Series F 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 F 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 F Convertible
Preferred Stock of any other holder. On the Redemption Date (or such later date
as a holder of shares of Series F Convertible Preferred Stock surrenders to the
Corporation the certificate(s) for shares of Series F 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 F
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 F
Convertible Preferred Stock to be redeemed pursuant to this Section 9(a) shall
be entitled to convert such shares of Series F 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 F 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 F Convertible Preferred Stock. No share of Series F Convertible
Preferred Stock as to which the holder exercises the right of conversion
pursuant to Section 10 or the optional redemption right pursuant
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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 F 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 F 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 F 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 F Convertible Preferred Stock. Any
Final Redemption Notice shall be given to the holders of record of the shares of
Series F 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 F Convertible Preferred Stock of any other holder. On the
Final Redemption Date (or such later date as a holder of shares of Series F
Convertible Preferred Stock surrenders to the Corporation the certificate(s) for
shares of Series F 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 F 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 F Convertible Preferred
Stock to be redeemed pursuant to this Section 9(b) shall be entitled to convert
such shares of Series F 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 F
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 F Convertible Preferred Stock to such holder. No share of Series F
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
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<PAGE>
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 F 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 F
Convertible Preferred Stock, meet the criteria in clauses (i) through (vi) of
Section 5(b).
(c) NO OTHER OPTIONAL REDEMPTION. The shares of Series F 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 F
Convertible Preferred Stock may at any time after the Issuance Date convert at
any time all or from time to time any part of their shares of Series F
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 F 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 F Convertible Preferred Stock being
converted, and (iii) accrued but unpaid interest on the dividends on the share
of Series F 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 F Convertible
Preferred Stock be entitled to convert any shares of Series F Convertible
Preferred Stock in excess of that number of shares of Series F 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 F Convertible Preferred Stock) and
(2) the number of shares of Common Stock issuable upon the conversion of the
number of shares of Series F Convertible Preferred Stock with respect to which
the determination in this proviso is being made, would result in
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<PAGE>
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 F Convertible Preferred Stock is
converted being less than the par value of the Common Stock into which shares of
Series F Convertible Preferred Stock are at the time convertible.
(2) The holders of shares of Series F Convertible Preferred Stock at
the close of business on the record date for any dividend payment to holders of
Series F 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 F
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 F 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 F 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 F
Convertible Preferred Stock. Except as provided above, no adjustment shall be
made in respect of cash dividends on Common Stock or Series F Convertible
Preferred Stock that may be accrued and unpaid at the date of surrender of
shares of Series F Convertible Preferred Stock.
(3) (A) The right of the holders of Series F 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 F Convertible Preferred Stock elects to convert
any shares of Series F 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 F Convertible
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<PAGE>
Preferred Stock to the Corporation unless all of the shares of Series F
Convertible Preferred Stock represented thereby are so converted. Each holder of
shares of Series F 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 F
Convertible Preferred Stock evidenced by a particular certificate therefor are
converted as aforesaid, the holder of Series F Convertible Preferred Stock may
not transfer the certificate(s) representing such shares of Series F 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 F
Convertible Preferred Stock new certificate(s) of like tenor, registered as such
holder of shares of Series F Convertible Preferred Stock (upon payment by such
holder of shares of Series F Convertible Preferred Stock of any applicable
transfer taxes) may request, representing in the aggregate the remaining number
of shares of Series F Convertible Preferred Stock represented by such
certificate(s). Each holder of shares of Series F 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 F Convertible Preferred Stock represented by such certificate,
the number of shares of Series F 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 F 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 F 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 F 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 F
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 F 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
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<PAGE>
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
8,666,667 shares (such amount to be subject to equitable adjustment from time to
time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, capital reorganizations and similar events relating to
the Common Stock occurring on or after the Issuance Date) to provide for the
issuance of Common Stock upon the conversion in full of the Series F Convertible
Preferred Stock, subject to reduction from time to time by the number of shares
of Common Stock issued on conversion of the Series F 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 F 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 F 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 F 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 F
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 F Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series F
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 F 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 F 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,
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<PAGE>
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 F Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series F 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 F 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 F 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
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<PAGE>
prior to delivery to such holder of the certificates for the shares of Common
Stock issuable upon such conversion of shares of Series F Convertible Preferred
Stock, rescind such conversion, whereupon such holder shall have the right to
convert such shares of Series F Convertible Preferred Stock thereafter in
accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series F 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 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.
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(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.
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 F 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 F 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 F Convertible Preferred Stock and the transfer agent for the Common
Stock, a statement
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<PAGE>
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 F 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, to the holders of record of the
outstanding Series F 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 F
Convertible Preferred Stock, each holder of shares of Series F 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 F 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 F 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 F 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.
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<PAGE>
No failure of the Corporation to give such notice or defect therein
shall limit the right of any holder of shares of Series F 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 F Convertible Preferred Stock.
(2) To exercise its optional redemption right, each holder of
outstanding shares of Series F 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 F 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 F 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 F 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 F 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 F 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 F 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 F Convertible Preferred Stock shall not be
entitled to vote on any matter.
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(b) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote or
consent of the holders of a majority of the outstanding shares of the Series F
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 F 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 F Convertible Preferred Stock except as otherwise required by
law.
(c) REPURCHASES OF SERIES F CONVERTIBLE PREFERRED STOCK. The
Corporation shall not repurchase or otherwise acquire any shares of Series F
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 F
Convertible Preferred Stock for cash at the same price per share.
(d) OTHER. So long as any shares of Series F 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
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<PAGE>
will cause each subsidiary of the Corporation to preserve, renew and keep in
full force and effect, their respective corporate existence and their respective
material rights, privileges and franchises necessary or desirable in the normal
conduct of business.
(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause
each subsidiary of the Corporation to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate 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 F 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 F 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 F Convertible Preferred Stock shall be deemed
outstanding except (i) from the applicable Conversion Date, each share of Series
F 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
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transfer, all shares of Series F 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 F 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 F 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 F 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 F 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 F
Convertible Preferred Stock or such other address as the Corporation shall have
provided by notice to the holders of shares of Series F Convertible Preferred
Stock in accordance with this Section or any holder of shares of Series F
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 F
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
F 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 F Convertible Preferred Stock, the Corporation will execute and
deliver to such holder a new certificate for such shares of Series F 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 F Convertible
Preferred Stock, whenever any amount which is due to any holder of shares of
Series F 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 15th day of June, 1999.
EQUALNET COMMUNICATIONS CORP.
By:
--------------------------------
Mitchell H. Bodian
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<PAGE>
Annex I
NOTICE OF CONVERSION
OF
SERIES F 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 F 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 F Convertible Preferred Stock and Fixing the Rights and Preferences of
Such Series (the "Statement of Resolution").
(2) Please issue a certificate or certificates for ________________
shares of Common Stock or other securities into which such number of shares of
Preferred Stock is convertible in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
_________________________ ________________________
Name Name
_________________________ ________________________
Address Address
_________________________ ________________________
SS or Tax ID Number SS or Tax ID Number
(3) The Conversion Date is ___________________________. Check and
complete one of the following:
<PAGE>
[_] The undersigned elects to convert based on the Average
Market Price of the Common Stock. The Market Price of the Common
Stock on each of the five Trading Days (whether or not consecutive)
during the 25 consecutive Trading Days preceding the Conversion Date
having the lowest Market Prices, and the arithmetic average thereof
are as follows:
Date Market Price
---- ------------
__________ __________
__________ __________
__________ __________
__________ __________
__________ __________
Arithmetic Average: $_______
OR
[_] The undersigned elects to convert based on the Ceiling Price
of the Common Stock of $__________ applicable to conversions of
Preferred Stock.
(4) If the shares of Common Stock issuable upon conversion of the
Preferred Stock have not been registered for resale under the Securities Act of
1933, as amended (the "Act"), and this Notice is submitted prior to the date
which is two years after the Issuance Date, the undersigned represents and
warrants that (i) the shares of Common Stock not so registered are being
acquired for the account of the undersigned for investment, and not with a view
to, or for resale in connection with, the public distribution thereof other than
pursuant to registration under the Act, and that the undersigned has no present
intention of distributing or reselling the shares of Common Stock not so
registered other than pursuant to registration under the Act and (ii) the
undersigned is an "accredited investor" as defined in Regulation D under the
Act. The undersigned further agrees that (A) the shares of Common Stock not so
registered shall not be sold or transferred unless either (i) they first shall
have been registered under the Act and applicable state securities laws or (ii)
the Company first shall have been furnished with an opinion of legal counsel
reasonably satisfactory to the Company to the
38
<PAGE>
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.)
39
<PAGE>
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 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 June
15, 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 A Convertible Preferred Stock and Fixing the
Rights and Preferences of Such Series that was filed with the Secretary of State
of the State of Texas on March 25, 1999 is cancelled and deleted in its entirety
and shall be replaced with the following:
SERIES 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.
<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.
"Amendment Agreement" means the Amendment Agreement, dated as of
_______________, 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 $1.228 (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 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).
"Closing Bid Price" of the Common Stock on any date means the closing
bid price 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.
"Common Stock" means the Common Stock, $.01 par value, of the
Corporation.
2
<PAGE>
"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 A 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 A Convertible Preferred Stock pursuant to Section 10, the date on which
the Conversion Notice relating to such conversion is actually received by the
Conversion 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 specified in the Amendment 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, for any Conversion Date, the lesser of:
(1) the product of (a) the Average Market Price for such Conversion
Date multiplied by (b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that so long as (x) the Common Stock is listed or
quoted on the Nasdaq, the Nasdaq SmallCap, the NYSE or the Amex and (y) the
Corporation is in compliance in all material respects with its obligations to
the holders of Series A Convertible Preferred Stock (including, without
limitation, its obligations under the Amendment Agreement, the Registration
Rights Agreements and the provisions of this Statement of Resolution), the
Conversion Price shall not be less than:
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<PAGE>
(a) from the Issuance Date to the Initial Reset Date, $0.75 (subject
to equitable adjustments on the Reverse Stock Split Date and from time to time
before or after the Reverse Stock Split Date 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 this
Statement of Resolution with the Secretary of the State of Texas);
(b) from the Initial Reset Date to the first Semi-Annual Reset Date,
the lesser of (1) the price determined in clause (a) or (2) 75% of the
arithmetic average of the closing Bid Price of the Common Stock for the five
Trading Day period immediately prior to the Initial Reset Date (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 Reverse Stock Split
Date); and
(c) on and after each Semi-Annual Reset Date, the lesser of (1) the
price determined in clause (a) or (2) 75% of the arithmetic average of the
closing Bid Price of the Common Stock for the five Trading Day period
immediately prior to the Semi-Annual Reset Date (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 Reverse Stock Split Date).
provided further, however, that the Conversion Price applicable to a
particular conversion shall be subject to reduction as provided in Section
10(b)(6).
"Conversion Rate" shall have the meaning provided in Section 10(a).
"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
4
<PAGE>
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.
"Amendment Agreements" means the several Note Purchase and Amendment
Agreements by and between the Corporation and the original holders of shares of
Series A Convertible Preferred Stock pursuant to which the shares of Series A
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 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).
"Initial Reset Date" means the 31st Trading Day after the Reverse
Stock Split Date.
5
<PAGE>
"Issuance Date" means the first date of original issuance of any
shares of Series A 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 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;
6
<PAGE>
(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 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
7
<PAGE>
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 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
8
<PAGE>
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 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
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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
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
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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 5,661,995 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.
"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
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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) [intentionally omitted];
(2) [intentionally omitted];
(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 Agreements 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) [intentionally omitted]; or
(5) The taking of any action, including any amendment to the
Corporation's Articles of Incorporation, without the consent of the
Majority Holders which materially and adversely affects the rights of any
holder of shares of Series 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.
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"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series 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.
"Registration Event" shall mean (1) the Registration Statement is not
effective by December 15, 2001, (2) the Company fails to file the Registration
Statement with the SEC on or before January 1, 2001, (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 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 (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 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
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<PAGE>
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 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 2(a) of the
Registration Rights Agreements.
"Reverse Stock Split Date" means the first date after the Issuance
Date and prior to December 31, 1999 on which the outstanding shares of the
Corporation's Common Stock are combined into a smaller amount of shares of
Common Stock.
"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.
"Semi-Annual Reset Date" means the first Trading Day that occurs on or
after six months following the Initial Reset Date or the previous Semi-Annual
Reset Date as the case may be.
"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.
"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.
"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
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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 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 A Convertible Preferred Stock, provided for in the
Amendment Agreements.
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. 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 3. SERIES A PREFERRED STOCK CAPITAL. The amount to be
represented in the Series A Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series A 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 A Convertible Preferred Stock capital not less
frequently than monthly.
SECTION 4. RANK. All Series A 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 B Senior Convertible Preferred Stock, 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 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
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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 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
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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:
(i) 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;
(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
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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
Agreements;
(iii) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock
is then listed; or have not been approved for quotation if the Common Stock
is traded in the over-the-counter market;
(iv) the number of shares of Common Stock registered pursuant to
Section 2(a) of the Registration Rights Agreements for resale upon issuance
upon conversion of Dividend Shares shall be sufficient (after taking into
account the 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 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
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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 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).
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
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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 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
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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 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 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 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
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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 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.
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(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
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 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 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
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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 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 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
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Redemption Price of such share of Series A 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
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 A Convertible Preferred Stock being
converted, and (iii) accrued
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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"); 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
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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 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 Conversion
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
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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 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.
(4) The Corporation shall reserve from its authorized, unissued and
otherwise unreserved Common Stock free from preemptive and similar rights
3,333,333 shares (such amount to be subject to equitable adjustment from time to
time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, capital reorganizations and similar events relating to
the Common Stock occurring on or after the Issuance Date) to provide for the
issuance of Common Stock upon the conversion in full of the Series 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 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 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 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
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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 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
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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 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
-----
30
<PAGE>
O + N x P
-----
M
where
C\\1\\ = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock issuable
pursuant to the exercise of such rights or warrants.
P = the offering price per share of the additional shares (which
amount shall include amounts received by the Corporation in
respect of the issuance and the exercise of such rights or
warrants).
M = the Current Price per share of Common Stock on the record date.
Such adjustment shall become effective immediately after the
record date for the determination of stockholders entitled to receive
such rights or warrants. If any or all such rights or warrants are not
so issued or expire or terminate before being exercised, the Conversion
Amount then in effect shall be readjusted appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
C\\1\\ = Cx M
----
M - F
where
C\\1\\ = the adjusted Conversion Amount
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.
31
<PAGE>
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, 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
32
<PAGE>
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.
33
<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
34
<PAGE>
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.
(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 to pay and discharge, when due
all their respective obligations and liabilities which are material to the
Corporation and its subsidiaries taken as a whole, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
(2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will
keep, and will cause each subsidiary of the Corporation to keep, all material
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary of
the Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance, including but not limited to, product liability insurance, in
such amounts and covering such risks as is reasonably adequate for the conduct
of their businesses and the value of their properties.
(3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Corporation
will continue, and will cause each subsidiary of the Corporation to continue, to
engage in business of the same general type as conducted by the Corporation and
its operating subsidiaries at the time this Statement of Resolution filed with
the Secretary of State of the State of Texas, and will preserve, renew and keep
in full force and effect, and will cause each subsidiary of the Corporation to
preserve, renew and keep in full force and effect, their respective corporate
existence and their respective material rights, privileges and franchises
necessary or desirable in the normal conduct of business.
(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause
each subsidiary of the Corporation to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to
35
<PAGE>
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 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 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.
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
36
<PAGE>
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 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.
37
<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 ___th day of ___________, 1999.
EQUALNET COMMUNICATIONS CORP.
By:
--------------------------
Mitchell H. Bodian
38
<PAGE>
Annex I
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
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 "Statement of Resolution").
(2) Please issue a certificate or certificates for ________________
shares of Common Stock or other securities into which such number of shares of
Preferred Stock is convertible in the name(s) specified immediately below or, if
additional space is necessary, on an attachment hereto:
_____________________ _____________________
Name Name
_____________________ _____________________
Address Address
_____________________ _____________________
SS or Tax ID Number SS or Tax ID Number
(3) The Conversion Date is ________________. Check and complete one
of the following:
<PAGE>
[_]
The undersigned elects to convert based on the Average
Market Price of the Common Stock. The Market Price of the Common
Stock on each of the five Trading Days (whether or not consecutive)
during the 25 consecutive Trading Days preceding the Conversion Date
having the lowest Market Prices, and the arithmetic average thereof
are as follows:
Date Market Price
---- ------------
----------- ------------
----------- ------------
----------- ------------
----------- ------------
----------- ------------
Arithmetic Average: $
OR
[_]
The undersigned elects to convert based on the Ceiling Price
of the Common Stock of $__________ applicable to conversions of
Preferred Stock.
(4) If the shares of Common Stock issuable upon conversion of the
Preferred Stock have not been registered for resale under the Securities Act of
1933, as amended (the "Act"), and this Notice is submitted prior to the date
which is two years after the Issuance Date, the undersigned represents and
warrants that (i) the shares of Common Stock not so registered are being
acquired for the account of the undersigned for investment, and not with a view
to, or for resale in connection with, the public distribution thereof other than
pursuant to registration under the Act, and that the undersigned has no present
intention of distributing or reselling the shares of Common Stock not so
registered other than pursuant to registration under the Act and (ii) the
undersigned is an "accredited investor" as defined in Regulation D under the
Act. The undersigned further agrees that (A) the shares of Common Stock not so
registered shall not be sold or transferred unless either (i) they first shall
have been registered under the
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>
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 June
15, 1999, and includes a true and correct copy of certain resolutions duly
adopted thereat.
RESOLVED, that pursuant to authority vested in the Board of Directors
by the Articles of Incorporation of the Corporation, the Board of Directors does
hereby provide that the Statement of Resolution of Board of Directors
Establishing and Designating Series D Convertible Preferred Stock and Fixing the
Rights and Preferences of Such Series that was filed with the Secretary of State
of the State of Texas on March 25, 1999 is cancelled and deleted in its entirety
and shall be replaced with the following:
SERIES D CONVERTIBLE PREFERRED STOCK
SECTION 1. DEFINITIONS. As used herein, the following terms shall
have the following meanings:
"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the subject person; for purposes
of this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
<PAGE>
"Aggregated Person" means, with respect to any person, any person
whose beneficial ownership of shares of Common Stock would be aggregated with
the beneficial ownership of shares of Common Stock by such person for purposes
of Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder.
"Amendment Agreement" means the Amendment Agreement, dated as of
_______________, by and between the Corporation and the original holder of
Series D 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 $1.228 (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).
"Closing Bid Price" of the Common Stock on any date means the closing
bid price 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.
"Common Stock" means the Common Stock, $.01 par value, of the
Corporation.
2
<PAGE>
"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 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 Amendment 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, for any Conversion Date, the lesser of:
(1) the product of (a) the Average Market Price for such Conversion
Date multiplied by (b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
provided, however, that so long as (x) the Common Stock is listed or
quoted on the Nasdaq, the Nasdaq SmallCap, the NYSE or the Amex and (y) the
Corporation is in compliance in all material respects with its obligations to
the holders of Series D Convertible Preferred Stock (including, without
limitation, its obligations under the Amendment Agreement, the Registration
Rights Agreements and the provisions of this Statement of Resolution), the
Conversion Price shall not be less than:
3
<PAGE>
(a) from the Issuance Date to the Initial Reset Date, $0.75 (subject
to equitable adjustments on the Reverse Stock Split Date and from time to time
before or after the Reverse Stock Split Date 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 this
Statement of Resolution with the Secretary of the State of Texas);
(b) from the Initial Reset Date to the first Semi-Annual Reset Date,
the lesser of (1) the price determined in clause (a) or (2) 75% of the
arithmetic average of the closing Bid Price of the Common Stock for the five
Trading Day period immediately prior to the Initial Reset Date (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 Reverse Stock Split
Date); and
(c) on and after each Semi-Annual Reset Date, the lesser of (1) the
price determined in clause (a) or (2) 75% of the arithmetic average of the
closing Bid Price of the Common Stock for the five Trading Day period
immediately prior to the Semi-Annual Reset Date (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 Reverse Stock Split Date).
provided further, however, that the Conversion Price applicable to a
particular conversion shall be subject to reduction as provided in Section
10(b)(6).
"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 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
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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.
"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).
"Initial Reset Date" means the 31st Trading Day after the Reverse
Stock Split Date.
"Issuance Date" means the first date of original issuance of any
shares of Series D Convertible Preferred Stock.
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"Junior Dividend Stock" means, collectively, the Common Stock and any
other class or series of capital stock of the Corporation ranking junior as to
dividends to the Series D Convertible Preferred Stock.
"Junior Liquidation Stock" means the Common Stock or any other class
or series of the Corporation's capital stock ranking junior as to liquidation
rights to the Series D Convertible Preferred Stock.
"Liquidation Preference" means, for each share of Series D Convertible
Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the
date of final distribution to such holders, (ii) accrued and unpaid interest on
dividends in arrears (computed in accordance with Section 5(a)) to the date of
such distribution, and (iii) $1,000.00.
"Majority Holders" means at any time the holders of shares of Series D
Preferred Stock which shares constitute a majority of the outstanding shares of
Series D Preferred Stock.
"Market Price" of the Common Stock on any date means the lowest sale
price (regular way) for one share of Common Stock on such date on the first
applicable among the following: (a) the national securities exchange on which
the shares of Common Stock are listed which constitutes the principal securities
market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the
principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap,
if the Nasdaq SmallCap constitutes the principal securities market for the
Common Stock on such date, in any such case as reported by Bloomberg, L.P.;
provided, however, that if during any Measurement Period or other period during
which the Market Price is being determined:
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price for each day in such Measurement Period or such other period which
day is prior to the earlier of (1) the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution and
(2) the date on which ex-dividend trading in the Common Stock with respect
to such dividend or distribution begins shall be reduced by multiplying the
Market Price (determined without regard to this proviso) for each such day
in such Measurement Period or such other period by a fraction, the
numerator of which shall be the number of shares of Common Stock
outstanding at the close of business on the earlier of (1) the record date
fixed for such determination and (2) the date on which ex-dividend trading
in the Common Stock with respect to such dividend or distribution begins
and the denominator of which shall be the sum of such number of shares and
the total number of shares constituting such dividend or other
distribution;
(ii) The Corporation shall issue rights or warrants to all holders
of its outstanding shares of Common Stock, or fix a record date for such
issuance,
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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 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
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<PAGE>
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 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;
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(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 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
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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
(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
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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 5,611,995 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.
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"Optional Redemption Event" means the occurrence on or before August
31, 2001 of any one of the following events:
(1) [intentionally omitted];
(2) [intentionally omitted];
(3) The Corporation shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of shares of
Series D Convertible Preferred Stock as and when required by Section 10 or
shall default in the timely performance of its obligations under Section
12(d)(7) or (B) the Corporation shall fail or default in the timely
performance of any material obligation (other than as specifically set
forth elsewhere in this definition) to a holder of shares of Series D
Convertible Preferred Stock under the terms of this Statement of Resolution
or under the Registration Rights Agreements or any other agreement or
document entered into in connection with the issuance of shares of Series D
Convertible Preferred Stock, as such instruments may be amended from time
to time and such failure or default shall continue for ten business days
after notice thereof from any holder of shares of Series D Convertible
Preferred Stock to the Corporation;
(4) [intentionally omitted]; or
(5) The taking of any action, including any amendment to the
Corporation's Articles of Incorporation, without the consent of the
Majority Holders which materially and adversely affects the rights of any
holder of shares of Series D Convertible Preferred Stock.
"Optional Redemption Notice" means a notice from a holder of shares of
Series D Convertible Preferred Stock to the Corporation which states (1) that
the holder delivering such notice is thereby requiring the Corporation to redeem
shares of Series D Convertible Preferred Stock pursuant to Section 11, (2) in
general terms the Optional Redemption Event giving rise to such redemption, and
(3) the number of shares of Series D Convertible Preferred Stock held by such
holder which are to be redeemed.
"Optional Redemption Price" means the Premium Price on the applicable
redemption date.
"Parity Dividend Stock" means any class or series or the Corporation's
capital stock ranking, as to dividends, on a parity with the Series D
Convertible Preferred Stock.
"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.
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"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 by December 15, 2001, (2) the Company fails to file the Registration
Statement with the SEC on or before January 1, 2001, (3) the Company fails to
submit a request for acceleration of the effective date of the Registration
Statement in accordance with Section 3(a) of the Registration Rights Agreement,
(4) the Registration Statement shall cease to be available for use by any holder
of shares of Series D Convertible Preferred Stock who is named therein as a
selling stockholder for any reason (including, without limitation, by reason of
an SEC stop order, a material misstatement or omission in the Registration
Statement or the information contained in the Registration Statement having
become outdated); provided, however, that no Registration Event pursuant to this
clause (4) shall be deemed to occur prior to the SEC Effective Date, (5) the
Common Stock is not listed for trading on any of the NYSE, the AMEX, the Nasdaq
or the Nasdaq SmallCap, or (6) a holder of shares of Series D Preferred Stock
having become unable to convert any shares of Series D Preferred Stock in
accordance with Section 10(a) for any reason (other than by reason 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
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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.
"Reverse Stock Split Date" means the first date after the Issuance
Date and prior to December 31, 1999 on which the outstanding shares of the
Corporation's Common Stock are combined into a smaller amount of shares of
Common Stock.
"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.
"Semi-Annual Reset Date" means the first Trading Day that occurs on or
after six months following the Initial Reset Date or the previous Semi-Annual
Reset Date as the case may be.
"Senior Dividend Stock" means any class or series of capital stock of
the Corporation ranking senior as to dividends to the Series D Convertible
Preferred Stock.
"Senior Liquidation Stock" means any class or series of capital stock
of the Corporation ranking senior as to liquidation rights to the Series D
Convertible Preferred Stock.
"Series D Convertible Preferred Stock" means the Series D Convertible
Preferred Stock, $.01 par value, of the Corporation.
"Share Limitation Redemption Date" shall mean each date on which the
Corporation is required to redeem shares of Series D Convertible Preferred Stock
as provided in Section 7(a).
"Share Limitation Redemption Price" means the Premium Price on the
applicable Share Limitation Redemption Date.
"Stockholder Approval" shall mean the approval by a majority of the
votes cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Corporation (duly convened at which a quorum
was present), or a written consent of holders of shares of Common Stock entitled
to such number of votes given without a meeting, of the issuance by the
Corporation of 20% or more of the Common Stock of the Corporation outstanding on
the Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series D Convertible Preferred Stock, as and
to the extent required under Rule 4460(i) of the Nasdaq as in effect from time
to time or any successor provision.
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"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
Amendment Agreements.
SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series D Convertible Preferred Stock", and the number of
shares constituting the Series D Convertible Preferred Stock shall be 6,500, and
shall not be subject to increase. Of the authorized shares of Series D
Convertible Preferred Stock, 1,500 shares may be issued only as dividends on the
outstanding shares of Series D Convertible Preferred Stock.
SECTION 3. SERIES D PREFERRED STOCK CAPITAL. The amount to be
represented in the Series D Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series D Convertible
Preferred Stock shall be the greater of (i) the Premium Price and (ii) the
Converted Market Price. The Corporation shall take such action as may be
required to maintain the amount required by this Section 3 to be represented in
stated capital for the Series D Convertible Preferred Stock capital not less
frequently than monthly.
SECTION 4. RANK. All Series D Convertible Preferred Stock shall rank
(i) senior to the Common Stock, now or hereafter issued, as to payment of
dividends and distribution of assets upon liquidation, dissolution, or winding
up of the Corporation, whether voluntary or involuntary, (ii) junior to the
Series A Convertible Preferred Stock, Series B Senior Convertible Preferred
Stock and Series C Convertible Preferred Stock of the Corporation, both as to
payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary
and (iii) senior to any additional series of the class of Preferred Stock which
series the Board of Directors may from time to time authorize and any additional
class of preferred stock (or series of preferred stock of such class) which the
Board of Directors or the stockholders may from time to time authorize in
accordance herewith.
SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of
Series D Convertible Preferred Stock shall be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $60.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series D Convertible Preferred Stock and shall be payable
quarterly on February 15, May 15, August 15, and November 15 of
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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 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.
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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;
(iii) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice
of
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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
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Convertible Preferred Stock at the time of such redemption, repurchase or
acquisition the same percentage of such holder's shares of Series D Convertible
Preferred Stock as the percentage of the number of outstanding shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to
be so redeemed, repurchased or acquired at a purchase price per share of Series
D Convertible Preferred Stock equal to the greater of (i) the Premium Price in
effect on the date of purchase pursuant to this Section 5(c) and (ii) the
Converted Market Price on the date of purchase pursuant to this Section 5(c);
provided, however, that if in connection with any determination of the purchase
price payable pursuant to this Section 5(c) the amount specified in clause (y)
of the definition of the term Converted Market Price is greater than 200% of the
Ceiling Price on the date as of which such amount is 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
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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 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
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certificate so surrendered (as reduced by any contemporaneous conversion of
shares of Series D Convertible Preferred Stock represented by the certificate so
surrendered), each certificate issued on such split-up shall bear a notation of
the portion of the Maximum Share Amount allocated thereto determined by pro rata
allocation from among the remaining portion of the Maximum Share Amount
allocated to the certificate so surrendered. If any shares of Series D
Convertible Preferred Stock represented by a single certificate are converted in
full pursuant to Section 10, all of the portion of the Maximum Share Amount
allocated to such shares of Series D Convertible Preferred Stock which remains
unissued after such conversion shall be re-allocated pro rata to the outstanding
shares of Series D Convertible Preferred Stock held of record by the holder of
record at the close of business on the date of such conversion of the shares of
Series D Convertible Preferred Stock so converted, and if there shall be no
other shares of Series D Convertible Preferred Stock held of record by such
holder at the close of business on such date, then such portion of the Maximum
Share Amount shall be 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
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holder of shares of Series D Convertible Preferred Stock directs the Corporation
to redeem outstanding shares of Series D Convertible Preferred Stock and, prior
to the date the Corporation is required to redeem such shares of Series D
Convertible Preferred Stock, the Corporation would have been able, within the
limitations set forth in Section 7(a)(1), to convert all of such holder's shares
of Series D Convertible Preferred Stock (determined without regard to the
limitation, if any, on beneficial ownership of shares of Common Stock by such
holder contained in the proviso to the second sentence of Section 10(a)) on any
ten Trading Days within any period of 15 consecutive Trading Days commencing
after the period of 20 consecutive Trading Days which gave rise to the
applicable Inconvertibility Notice from the Corporation or such holder of shares
of Series D Convertible Preferred Stock, as the case may be, had such holder
exercised its right to convert all of such holder's shares of Series D
Convertible Preferred Stock into Common Stock on each of such ten Trading Days
within such 15 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).
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SECTION 8. NO SINKING FUND. The shares of Series D Convertible
Preferred Stock shall not be subject to the operation of a purchase, retirement
or sinking fund.
SECTION 9. OPTIONAL REDEMPTION.
(a) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall be
in compliance in all material respects with its obligations to the holders of
shares of Series D Convertible Preferred Stock (including, without limitation,
its obligations under the Amendment 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
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share of Series D Convertible Preferred Stock. No share of Series D Convertible
Preferred Stock as to which the holder exercises the right of conversion
pursuant to Section 10 or the optional redemption right pursuant to Section 11
may be redeemed by the Corporation pursuant to this Section 9(a) on or after the
date of exercise of such conversion right or optional redemption right, as the
case may be, regardless of whether the Corporation Optional Redemption Notice
shall have been given prior to, or on or after, the date of exercise of such
conversion right or optional redemption right, as the case may be.
(b) FINAL REDEMPTION. The Corporation shall have the right to redeem
all, but not less than all, outstanding shares of Series D Convertible Preferred
Stock at any time on or after the date which is 1,080 days after the Issuance
Date so long as (1) the Corporation shall be in compliance in all material
respects with its obligations to the holders of the Series D Convertible
Preferred Stock (including, without limitation, its obligations under the
Amendment 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
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of exercise of such conversion right or optional redemption right, as the case
may be, regardless of whether the Final Redemption Notice shall have been given
prior to, or on or after, the date of exercise of such conversion right or
optional redemption right, as the case may be. So long as during the period from
the Issuance Date through the date the Corporation pays the Final Redemption
Price the Corporation shall not have commenced a voluntary case or other
proceeding, and no person shall have commenced an involuntary case or other
proceeding against the Corporation, in any such case seeking liquidation,
reorganization or other relief with respect to the Corporation or its debts
under any bankruptcy, insolvency, receivership, moratorium, or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of the Corporation or any
substantial part of the Corporation's property, the Corporation shall not have
consented to any such relief or to the appointment of or taking possession by
any such official in an involuntary case or other proceeding commenced against
it, and the Corporation shall not have made a general assignment for the benefit
of creditors, then the Corporation shall have the right, exercisable by a
statement to such effect in the Final Redemption Notice, to pay the Final
Redemption Price by the issuance to the holders of shares of Series D
Convertible Preferred Stock to be redeemed of shares of Common Stock, valued for
this purpose at the Conversion Price on the Final Redemption Date, in lieu of
payment of cash, so long as all shares of Common Stock to 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
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Preferred Stock be entitled to convert any shares of Series D Convertible
Preferred Stock in excess of that number of shares of Series D Convertible
Preferred Stock upon conversion of which the sum of (1) the number of shares of
Common Stock beneficially owned by such holder and all Aggregated Persons of
such holder (other than shares of Common Stock deemed beneficially owned through
the ownership of unconverted shares of Series D Convertible Preferred Stock) and
(2) the number of shares of Common Stock issuable upon the conversion of the
number of shares of Series D Convertible Preferred Stock with respect to which
the determination in this proviso is being made, would result in beneficial
ownership by such holder and all Aggregated Persons of such holder of more than
4.9% of the outstanding shares of Common Stock. For purposes of the proviso to
the immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and Regulation 13D-G
thereunder, except as otherwise provided in clause (1) of the proviso to the
immediately preceding sentence.
(b) OTHER PROVISIONS. (1) Notwithstanding anything in this Section
10(b) to the contrary, no change in the Conversion Amount pursuant to this
Section 10(b) shall actually be made until the cumulative effect of the
adjustments called for by this Section 10(b) since the date of the last change
in the Conversion Amount would change the Conversion Amount by more than 1%.
However, once the cumulative effect would result in such a change, then the
Conversion Amount shall actually be changed to reflect all adjustments called
for by this Section 10(b) and not previously made. 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
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<PAGE>
shall be made in respect of cash dividends on Common Stock or Series D
Convertible Preferred Stock that may be accrued and unpaid at the date of
surrender of shares of Series D Convertible Preferred Stock.
(3) (A) The right of the holders of Series D Convertible Preferred
Stock to convert their shares shall be exercised by giving (which may be done by
telephone line facsimile transmission) a Conversion Notice to the Conversion
Agent. If a holder of Series D Convertible Preferred Stock elects to convert
any shares of Series D Convertible Preferred Stock in accordance with Section
10(a), such holder shall not be required to surrender the certificate(s)
representing such shares of Series D Convertible Preferred Stock to the
Corporation unless all of the shares of Series D Convertible Preferred Stock
represented thereby are so converted. Each holder of shares of Series D
Convertible Preferred Stock and the Corporation shall maintain records showing
the number of shares so converted and the dates of such conversions or shall use
such other method, satisfactory to such holder and the Corporation, so as to not
require physical surrender of such certificates upon each such conversion. In
the event of any dispute or discrepancy, such records of the Corporation shall
be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any shares of Series D Convertible Preferred
Stock evidenced by a particular certificate therefor are converted as aforesaid,
the holder of Series D Convertible Preferred Stock may not transfer the
certificate(s) representing such shares of Series D Convertible Preferred Stock
unless such holder first physically surrenders such certificate(s) to the
Corporation, whereupon the Corporation will forthwith issue and deliver upon the
order of such holder of shares of Series D Convertible Preferred Stock new
certificate(s) of like tenor, registered as such 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
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<PAGE>
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
8,666,667 shares (such amount to be subject to equitable adjustment from time to
time on terms reasonably acceptable to the Holder for stock splits, stock
dividends, combinations, capital reorganizations and similar events relating to
the Common Stock occurring on or after the Issuance Date) to provide for the
issuance of Common Stock upon the conversion in full of the Series D Convertible
Preferred Stock, subject to reduction from time to time by the number of shares
of Common Stock issued on conversion of the Series D Convertible Preferred
Stock. The Corporation (and any successor corporation) shall take all action
necessary so that a number of shares of the authorized but unissued Common Stock
(or common stock in the case of any successor corporation) sufficient to 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
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<PAGE>
Corporation is not the surviving corporation, or in case of any sale or transfer
of all or substantially all of the assets of the Corporation, or in the case of
any share exchange pursuant to which all of the outstanding shares of Common
Stock are converted into other securities or property, the Corporation shall
make appropriate provision or cause appropriate provision to be made so that
each holder of shares of Series D Convertible Preferred Stock then outstanding
shall have the right thereafter to convert such shares of Series D Convertible
Preferred Stock into the kind of shares of stock and other securities and
property receivable upon such consolidation, merger, sale, transfer, or share
exchange by a holder of shares of Common Stock into which such shares of Series
D Convertible Preferred Stock could have been converted immediately prior to the
effective date of such consolidation, merger, sale, transfer, or share exchange
and on a basis which preserves the economic benefits of the conversion rights of
the holders of shares of Series D Convertible Preferred Stock on a basis as
nearly as practical as such rights exist hereunder prior thereto. If, in
connection with any such consolidation, merger, sale, transfer, or share
exchange, each holder of shares of Common Stock is entitled to elect to receive
securities, cash, or other assets upon completion of such transaction, the
Corporation shall provide or cause to be provided to each holder of Series D
Convertible Preferred Stock the right to elect the securities, cash, or other
assets into which the Series D Convertible Preferred Stock held by such holder
shall be convertible after completion of any such transaction on the same terms
and subject to the same conditions applicable to holders of the Common Stock
(including, without limitation, notice of the right to elect, limitations on the
period in which such election shall be made, and the effect of failing to
exercise the election). The Corporation shall not effect any such transaction
unless the provisions of this paragraph have been complied with. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, or share exchanges.
(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
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<PAGE>
issue and deliver the certificates for the Common Stock to the holder converting
shares of Series D Convertible Preferred Stock pursuant to the first sentence of
this paragraph as and when required to do so, in addition to any other
liabilities the Corporation may have hereunder and under applicable law (1) the
Corporation shall pay or reimburse such holder on demand for all out-of-pocket
expenses including, without limitation, reasonable fees and expenses of legal
counsel incurred by such holder as a result of such failure, (2) the Conversion
Percentage used to determine the Conversion Price applicable to such conversion
shall be reduced by one percentage point from the Conversion Percentage
otherwise used to calculate the Conversion Price applicable to such conversion
or, if such conversion is based on the Ceiling Price, the Ceiling Price used to
determine the Conversion Price applicable to such conversion shall be reduced by
one percentage point from the amount that the Conversion Price otherwise would
have been without reduction pursuant hereto, in either such case, for each
Trading Day after such third Trading Day until such shares of Common Stock are
delivered to such holder and (3) such holder may by written notice (which may be
given by mail, courier, personal service or telephone line facsimile
transmission) or oral notice (promptly confirmed in writing) given at any time
prior to delivery to such holder of the certificates for the shares of Common
Stock issuable upon such conversion of shares of Series D Convertible Preferred
Stock, rescind such conversion, whereupon such holder shall have the right to
convert such shares of Series D Convertible Preferred Stock thereafter in
accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series D Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock to purchase fractional shares of Common Stock which
would otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the Corporation shall
pay in cash an amount equal to the product of (i) the arithmetic average of the
Market Price of one share of Common Stock on the three consecutive Trading Days
ending on the Trading Day immediately preceding the Conversion Date times (ii)
such fraction of a share.
(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
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<PAGE>
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.
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
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<PAGE>
ranking junior as to dividends or upon liquidation to the Series D Convertible
Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent
or to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
Section 10(b)(5), the holder of any Series D Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive
securities, cash, or assets other than Common Stock, the number or amount of
such securities or property so receivable upon conversion shall be subject to
adjustment from time to time in a manner and on terms nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
subparagraphs (i) to (iii) above.
(9) Except as otherwise provided above in this Section 10, no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein provided,
the Corporation shall send to each holder and each transfer agent, if any, for
the Series D Convertible Preferred Stock and the transfer agent for the Common
Stock, a statement signed by the Chairman of the Board, the President, or any
Vice President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 10, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation.
Whenever the Conversion Amount is adjusted, the Corporation will give notice by
mail to the holders of record of Series D Convertible Preferred Stock, which
notice shall be made within 15 days after the effective date of such adjustment
and shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.
(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.
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(a) REDEMPTION RIGHT. If an Optional Redemption Event occurs, then,
in addition to any other right or remedy of any holder of shares of Series D
Convertible Preferred Stock, each holder of shares of Series D Convertible
Preferred Stock shall have the right, at such holder's option, to require the
Corporation to redeem all of such holder's shares of Series D Convertible
Preferred Stock, or any portion thereof, on the date that is 10 business days
after the date such holder gives the Corporation an Optional Redemption Notice
with respect to such Optional Redemption Event at any time while any of such
holder's shares of Series D Convertible Preferred Stock are outstanding, at a
price equal to the Optional Redemption Price.
(b) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS, ETC.
(1) On or before the fifth business day after the occurrence of an Optional
Redemption Event, the Corporation shall give to each holder of outstanding
shares of Series D Convertible Preferred Stock a notice of the occurrence of
such Optional Redemption Event and of the redemption right set forth herein
arising as a result thereof. Such notice from the Corporation shall set forth:
(i) the date by which the optional redemption right must be
exercised, and
(ii) a description of the procedure (set forth below) which each
such holder must follow to exercise such holder's optional redemption
right.
No failure of the Corporation to give such notice or defect therein
shall limit the right of any holder of shares of Series D Convertible
Preferred Stock to exercise the optional redemption right or affect the
validity of the proceedings for the redemption of such holder's shares of
Series D Convertible Preferred Stock.
(2) To exercise its optional redemption right, each holder of
outstanding shares of Series D Convertible Preferred Stock shall deliver to the
Corporation on or before the thirtieth day after the notice required by Section
11(b)(1) is given to such holder (or if no such notice has been given by the
Corporation to such holder, within forty days after such holder first learns of
such Optional Redemption 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.
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<PAGE>
(c) OTHER. (1) In connection with a redemption pursuant to this
Section 11 of less than all of the shares of Series D Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three Trading Days after surrender of such certificate to the Corporation,
the Corporation shall issue and deliver to such holder a replacement certificate
for the shares of Series D Convertible Preferred Stock evidenced by such
certificate which have not been redeemed.
(2) An Optional Redemption Notice given by a holder of shares of
Series D Convertible Preferred Stock shall be deemed for all purposes to be in
proper form unless the Corporation notifies such holder in writing within three
business days after such Optional Redemption Notice has been given (which notice
shall specify all defects in such Optional Redemption Notice), and any Optional
Redemption Notice containing any such defect shall nonetheless be effective on
the date given if such holder promptly undertakes to correct all such defects.
No such claim of error shall limit or delay performance of the Corporation's
obligation to redeem all shares of Series D Convertible Preferred Stock not in
dispute whether or not such holder makes such undertaking.
SECTION 12. VOTING RIGHTS; CERTAIN RESTRICTIONS.
(a) VOTING RIGHTS. Except as otherwise required by law or expressly
provided herein, shares of Series D Convertible Preferred Stock shall not be
entitled to vote on any matter.
(b) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote or
consent of the holders of a majority of the outstanding shares of the Series D
Convertible Preferred Stock, voting separately as a class, will be required for
(1) any amendment, alteration, or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Articles of Incorporation if the amendment,
alteration, or repeal materially and adversely affects the powers, preferences,
or special rights of the Series D Convertible Preferred Stock, or (2) the
creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock;
provided, however, that any increase in the authorized Preferred Stock of the
Corporation or the creation and issuance of any stock which is 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.
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<PAGE>
(d) OTHER. So long as any shares of Series D Convertible Preferred
Stock are outstanding:
(1) PAYMENT OF OBLIGATIONS. The Corporation will pay and discharge,
and will cause each subsidiary of the Corporation to pay and discharge, when due
all their respective obligations and liabilities which are material to the
Corporation and its subsidiaries taken as a whole, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
(2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will
keep, and will cause each subsidiary of the Corporation to keep, all material
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary of
the Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance, including but not limited to, product liability insurance, in
such amounts and covering such risks as is reasonably adequate for the conduct
of their businesses and the value of their properties.
(3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Corporation
will continue, and will cause each subsidiary of the Corporation to continue, to
engage in business of the same general type as conducted by the Corporation and
its operating subsidiaries at the time this Statement of Resolution filed with
the Secretary of State of the State of Texas, and will preserve, renew and keep
in full force and effect, and will cause each subsidiary of the Corporation to
preserve, renew and keep in full force and effect, their respective corporate
existence and their respective material rights, privileges and franchises
necessary or desirable in the normal conduct of business.
(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause
each subsidiary of the Corporation to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate 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.
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<PAGE>
(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 Amendment Agreements, the Registration Rights Agreement, the
Transfer Agent Instruction or any other document or instrument executed and
delivered by the Corporation in connection herewith or therewith and (b) shall
notify the holders of the Series D Convertible Preferred Stock promptly, but in
no event later than three Business Days after the Corporation first learns of
any such failure or default.
SECTION 13. OUTSTANDING SHARES. For purposes of this Statement of
Resolution, all shares of Series D Convertible Preferred Stock shall be deemed
outstanding except (i) from the applicable Conversion Date, each share of Series
D Convertible Preferred Stock converted into Common Stock, unless the
Corporation shall default in its obligation to issue and deliver shares of
Common Stock upon such conversion as and when required by Section 10; (ii) from
the date of registration of transfer, all shares of Series D Convertible
Preferred Stock held of record by the Corporation or any subsidiary or Affiliate
of the Corporation (other than any original holder of shares of Series D
Convertible Preferred Stock) and (iii) from the applicable Redemption Date,
Share Limitation Redemption Date, Final Redemption Date or date of redemption
pursuant to Section 11, all shares of Series D Convertible Preferred Stock which
are redeemed or repurchased, so long as in each case the Redemption Price, the
Share Limitation Redemption Price, the Final Redemption Price, the Optional
Redemption Price or other repurchase price, as the case may be, of such shares
of 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
36
<PAGE>
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.
37
<PAGE>
IN WITNESS WHEREOF, Equalnet Communications Corp. has caused this
certificate to be signed by Mitchell H. Bodian, its Chief Executive Officer, as
of the 17th day of June, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
-------------------------------------
Mitchell H. Bodian
38
<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:
<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
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>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-23427, Form S-3 No. 333-32049) of Equalnet Communications
Corp., formerly EqualNet Holding Corp., and in the related Prospectus and in the
Registration Statements (Form S-8 No. 333-81641) pertaining to the Equalnet
Communications Corp. Independent Contractors Stock Option Plan, (Form S-8 No.
33-97200) pertaining to the Employee Stock Option and Restricted Stock Option
Plan of Equalnet Holding Corp., (Form S-8 No.333-04485) pertaining to the
EqualNet Holding Corp. Employee Stock Purchase Plan, (Form S-8 No. 333-04483)
pertaining to the EqualNet Holding Corp. 1995 Non-Employee Director Stock Option
Plan of our report dated October 13, 1999, with respect to the consolidated
financial statements and schedule of Equalnet Communications Corp. included in
the Annual Report for the year ended June 30, 1999.
ERNST & YOUNG LLP
Houston, Texas
October 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 266,000
<SECURITIES> 0
<RECEIVABLES> 8,745,000
<ALLOWANCES> (400,000)
<INVENTORY> 0
<CURRENT-ASSETS> 9,012,000
<PP&E> 20,801,000
<DEPRECIATION> (8,368,000)
<TOTAL-ASSETS> 25,714,000
<CURRENT-LIABILITIES> 16,685,000
<BONDS> 0
0
16,153,000
<COMMON> 284,000
<OTHER-SE> (12,709,000)
<TOTAL-LIABILITY-AND-EQUITY> 25,714,000
<SALES> 32,436,000
<TOTAL-REVENUES> 32,436,000
<CGS> 24,114,000
<TOTAL-COSTS> 24,114,000
<OTHER-EXPENSES> 27,001,000
<LOSS-PROVISION> 6,414,000
<INTEREST-EXPENSE> 2,827,000
<INCOME-PRETAX> (28,011,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,011,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 10,022,000
<CHANGES> 0
<NET-INCOME> (22,166,000)
<EPS-BASIC> (1.11)
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