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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
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 CORPORATION IRS EMPLOYER 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 [_]
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 March 24, 2000 $9,667,431
Number of shares of registrant's common stock outstanding as of March 24,
2000 36,231,035
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TABLE OF CONTENTS
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Item Page
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PART I
1. BUSINESS........................................................... 1
2. PROPERTIES......................................................... 7
3. LEGAL PROCEEDINGS.................................................. 8
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 9
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......... 19
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 19
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 19
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 19
11. EXECUTIVE COMPENSATION............................................. 21
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 22
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 27
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K... 30
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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 $28.0 million, $17.9 million, and $12.6 million, respectively.
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.
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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
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 distance over MCI WorldCom's network. In 1999, EqualNet entered
into 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 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.
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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 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
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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.
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, in consideration
for the issued shares of the Company's common stock, no longer be liable for
ACMI's $1 million note payable the Company had previously agreed to pay, and
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
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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 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.
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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.
Restrictions on the marketing of telecommunications services are becoming
stricter in the wake of widespread consumer complaints throughout the industry
for "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
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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 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.
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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 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
8
<PAGE>
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 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.
9
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
Price Range
-----------------------
High Low
--------- --------
<S> <C> <C>
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
</TABLE>
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 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
10
<PAGE>
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.
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
11
<PAGE>
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
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
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
administrative
expenses............... 8,936,000 13,720,000 12,453,000 14,139,000 13,372,000
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)
Other income (expense).. (93,000) (1,089,000) (1,889,000) (820,000) (2,918,000)
----------- ------------ ------------ ------------ ------------
Income (loss) before
federal income taxes
and extraordinary
item................... 2,871,000 (11,077,000) (12,635,000) (17,943,000) (28,011,000)
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 of
current portion........ 1,143,000 45,000 -- -- 5,301,000
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.
12
<PAGE>
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 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
13
<PAGE>
information technology necessary to support customer service with the purchase
of and successful implementation of a new and effective information system.
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.
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.
14
<PAGE>
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 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 ($4.6 million), and
a full year of depreciation associated with the Company's switches ($2.7
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 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.
15
<PAGE>
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 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 Activities
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
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 $0.3 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 January
31, 2000. Additionally, this note contains an automatic monthly renewal period
unless the Willis Group presents a written demand for the payment of principal
and accrued interest.
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 exchange 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
16
<PAGE>
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.
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,
17
<PAGE>
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 and have been
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-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 and beyond. 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 implementation activities have also been completed. The Company completed
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;
18
<PAGE>
. 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
. The Company's ability to continued to receive favorable payment terms
from its creditors.
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 41 through 61 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
Name Age Position(s) Will Expire
---- --- ----------- ------------
<S> <C> <C> <C>
Mark A. Willis.......... 31 Chairman of the Board, Director 2000
Mitchell H. Bodian...... 48 President, Chief Executive Officer, Director 1999
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
19
<PAGE>
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 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.
20
<PAGE>
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 Common Stock
--------------- -----------------
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
--------------------------- ------ -------- ------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Mitchell H. Bodian.......... 1999 $204,808 15,000 -- $ 24
Chief Executive Officer
Hal Turner.................. 1999 14,423 -- -- 685
Former Chief Executive
Officer 1998 100,961 3,076
Dean H. Fisher.............. 1999 167,887 -- -- 9,713
General Counsel and former 1998 129,000 -- 35,000 3,451
Senior Vice President and
Secretary 1997 128,000 -- -- 6,097
</TABLE>
- --------
(1) Represents contributions in 1999 by the Company under the Company's 401(k)
Plan for Mr. Fisher of $2,136 and health insurance premiums paid in 1999 by
the Company for Messrs. Bodian, Turner and Fisher of $24, $658 and $7,577,
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 Value of Unexercised In
Common Stock Underlying the Money Warrants and
Unexercised Warrants and Options at June 30,
Options at June 30, 1998 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.
21
<PAGE>
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
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
Common Stock Preferred Preferred Preferred
---------------------- ------------ ------------ -------------
Directors, Executive
Officers and No. of % of No. of % of No. of % of No. of % of
5.0% Shareholders Shares Class Shares Class Shares Class Shares Class
-------------------- --------- ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael T. Willis....... 9,281,082 (1)(2) 28.9% -- 0.0% -- 0.0% -- 0.0%
5005 Woodway, Ste. 350
Houston, TX 77056
James T. Harris......... 8,797,232 (1) 27.8% -- 0.0% -- 0.0% -- 0.0%
5005 Woodway, Ste. 350
Houston, TX 77056
Willis Group............ 8,781,082 (1) 27.7% -- 0.0% -- 0.0% -- 0.0%
5005 Woodway, Ste. 350
Houston, TX 77056
Mark A. Willis.......... 8,813,495 (1)(4) 27.8% -- 0.0% -- 0.0% -- 0.0%
5005 Woodway, Ste. 350
Houston, TX 77056
James R. Crane.......... 4,070,000 (5) 13.2% -- 0.0% -- 0.0% -- 0.0%
15350 Vickery Drive
Houston, TX 77032
MCM Partners............ 833,333 (6) 2.6% 2,087 100.0% -- 0.0% -- 0.0%
10500 NE 8th, Ste. 1920
Bellevue, WA 98004
Advantage Fund Limited.. 22,500 (7) 0.1% -- 0.0% -- 0.0% -- 0.0%
10500 NE 8th, Ste. 1920
Bellevue, WA 98004
Genesee Fund Limited.... 333,116 (8) 1.1% -- 0.0% -- 0.0% -- 0.0%
Portfolio B
10500 NE 8th, Ste. 1920
Bellevue, WA 98004
SA Telecommunications,
Inc.................... 2,198,830 (9) 6.7% -- 0.0% -- 0.0% 219,883 100.0%
1600 Promenade Center
15th Floor
Richardson, TX 75080
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C
Common Stock Preferred Preferred Preferred
-------------------- ------------ ------------ ------------
Directors, Executive
Officers and No. of % of No. of % of No. of % of No. of % of
5.0% Shareholders Shares Class Shares Class Shares Class Shares Class
-------------------- --------- ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Furst Group......... 1,822,000 (10) 5.7% -- 0.0% 3,000 100.0% -- 0.0%
459 Oakshade Road
Shamong, NJ 08088
James D. Kaylor......... 1,822,000 (10) 5.7% -- 0.0% 3,000 100.0% -- 0.0%
916 P Street, Ste. 200
Lincoln, NE 68508
John S. Streep.......... 1,822,000 (10) 5.7% -- 0.0% 3,000 100.0% -- 0.0%
15841 Kilmarnock Drive
Ft. Meyers, FL 33912
Mitchell H. Bodian...... 25,443 (11) 0.1% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
R. Chadwick Paul........ -- 0.0% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
John Isaac "Ike" Epley.. 20,909 (12) 0.1% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
Ronald J. Salazar,
Ph.D................... 94,195 (13) 0.3% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
William D. Rhodes....... -- (14) 0.0% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
Michael P. Gallagher.... -- (15) 0.0% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
Dean H. Fisher.......... 267,601 (16) 0.9% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
Robert H. Turner........ 575,000 (17) 1.8% -- 0.0% -- 0.0% -- 0.0%
8714 Stable Crest
Houston, TX 77024
Zane Russell............ 195,000 (18) 0.6% -- 0.0% -- 0.0% -- 0.0%
20607 Shadow Mill Court
Houston, TX 77450
Michael L. Hlinak....... 190,000 (19) 0.6% -- 0.0% -- 0.0% -- 0.0%
19910 Erika Way
Katy, TX 77450
Bruce N. Shortt......... -- 0.0% -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park
Dr.
Houston, TX 77079
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Series D Series E Series F
Preferred Preferred Preferred
---------------- ------------- ----------------
Directors, Executive
Officers No. of % of No. of % of No. of % of
and 5.0% Shareholders Shares Class Shares Class Shares Class
--------------------- ------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Michael T. Willis........... 2,069 (3) 50.7% -- 0.0% 1,647(3) 50.0%
5005 Woodway, Ste. 350
Houston, TX 77056
James T. Harris............. 2,069 (3) 50.7% -- 0.0% 1,647(3) 50.0%
5005 Woodway, Ste. 350
Houston, TX 77056
Willis Group................ 2,069 (3) 50.7% -- 0.0% 1,647(3) 50.0%
5005 Woodway, Ste. 350
Houston, TX 77056
Mark A. Willis.............. 2,069 (3) 50.7% -- 0.0% 1,647(3) 50.0%
5005 Woodway, Ste. 350
Houston, TX 77056
James R. Crane.............. -- 0.0% -- 0.0% -- 0.0%
15350 Vickery Drive
Houston, TX 77032
MCM Partners................ -- 0.0% 833,333 100.0% -- 0.0%
10500 NE 8th, Ste. 1920
Bellevue, WA 98004
Advantage Fund Limited...... 2,012 49.3% -- 0.0% -- 0.0%
10500 NE 8th, Ste. 1920
Bellevue, WA 98004
Genesee Fund Limited--...... -- 0.0% -- 0.0% 1,647 50.0%
Portfolio B
10500 NE 8th, Ste. 1920
Bellevue, WA 98004
SA Telecommunications,
Inc........................ -- 0.0% -- 0.0% -- 0.0%
1600 Promenade Center
15th Floor
Richardson, TX 75080
The Furst Group............. -- 0.0% -- 0.0% -- 0.0%
459 Oakshade Road
Shamong, NJ 08088
James D. Kaylor............. -- 0.0% -- 0.0% -- 0.0%
916 P Street, Ste. 200
Lincoln, NE 68508
John S. Streep.............. -- 0.0% -- 0.0% -- 0.0%
15841 Kilmarnock Drive
Ft. Meyers, FL 33912
Mitchell H. Bodian.......... -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park Dr.
Houston, TX 77079
R. Chadwick Paul............ -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park Dr.
Houston, TX 77079
John Isaac "Ike' Epley...... -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park Dr.
Houston, TX 77079
Ronald J. Salazar, Ph.D..... -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park Dr.
Houston, TX 770079
William D. Rhodes........... -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park Dr.
Houston, TX 77079
Michael P. Gallagher........ -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park Dr.
Houston, TX 77079
Dean H. Fisher.............. -- 0.0% -- 0.0% -- 0.0%
1250 Wood Branch Park Dr.
Houston, TX 77079
Robert W. Turner............ -- 0.0% -- 0.0% -- 0.0%
8714 Stable Crest
Houston, TX 77024
Zane Russell................ -- 0.0% -- 0.0% -- 0.0%
20607 Shadow Mill Court
Houston, TX 77450
Michael L. Hlinak........... -- 0.0% -- 0.0% -- 0.0%
19910 Erika Way Katy, TX
77450
</TABLE>
24
<PAGE>
- --------
(1) Includes warrants exercisable for an aggregate of 933,116 shares of
common stock, but does not include 2,069 shares of Series D Preferred
Stock or 1,647 shares of Series F Preferred Stock, which if converted,
would convert in the aggregate into 18,412,265 shares of common stock.
The terms of both the Series D and Series F Preferred Stock designation
allow conversion of the respective series of preferred stock only so long
as the holder seeking conversion does not hold more than 4.9% of the
Company's common stock at the time of conversion. None of such shares
issuable pursuant to the terms of the warrants were outstanding as of
December 17, 1999. Information relating to ownership by Willis Group and
Messers. Michael T. Willis, Mark A. Willis and James T. Harris is based
on Schedule 13-D/A filed with the SEC on March 9, 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 warrants for the purchase of 500,000 shares of common stock.
(3) All 2,069 shares of Series D Preferred Stock and 1,647 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 LLC.
(4) Includes 1,666 shares of common stock issuable upon exercise of stock
options awarded under the Non-Employee Director Stock Option Plan (the
"Director Plan") that are exercisable within 60 days, but does not
include 3,334 shares of common stock issuable upon exercise of stock
options awarded under the Director Plan that are not exercisable within
60 days.
(5) Includes warrants for the purchase of 170,000 shares of common stock.
(6) Does not include 2,087 shares of Series A Preferred Stock, which if
converted, would convert into 10,340,795 shares of common stock. The
terms of the Series A Preferred Stock designation allow conversion of the
preferred stock only so long as the holder seeking conversion does not
hold more than 4.9% of the Company's common stock at the time of
conversion. Includes 833,333 shares of Series E Junior Preferred Stock
convertible in the aggregate into 833,333 shares of common stock.
(7) Does not include 2,012 shares of Series D Preferred Stock, which if
converted, would convert into 9,969,181 shares of common stock. The terms
of the Series D Preferred Stock designation allow conversion of the
preferred stock only so long as the holder seeking conversion does not
hold more than 4.9% of the Company's common stock at the time of
conversion.
(8) Does not include 1,647 shares of Series F Preferred Stock, which if
converted, would convert into 8,160,657 shares of common stock. The terms
of the Series F Preferred Stock designation allow conversion of the
preferred stock only so long as the holder seeking conversion does not
hold more than 4.9% of the Company's common stock at the time of
conversion.
(9) Includes 219,883 shares of Series C Preferred Stock convertible in the
aggregate into 2,198,830 shares of common stock.
(10) 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.
(11) Includes 1,666 shares of common stock issuable upon exercise of stock
options awarded under the Director Plan that are exercisable within 60
days, but does not include 3,334 shares of common stock issuable upon
exercise of stock options awarded under the Director Plan that are not
exercisable within 60 days.
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<PAGE>
(12) Includes 1,666 shares of common stock issuable upon exercise of stock
options awarded under the Director Plan that are exercisable within 60
days, but does not include 3,334 shares of common stock issuable upon
exercise of stock options awarded under the Director Plan that are not
exercisable within 60 days.
(13) Includes 1,666 shares of common stock issuable upon exercise of stock
options awarded under the Director Plan that are exercisable within 60
days, but does not include 3,334 shares of common stock issuable upon
exercise of stock options awarded under the Director Plan that are not
exercisable within 60 days.
(14) Does not include 500,000 shares of common stock issuable upon exercise of
stock options awarded under the Employee Stock Option Plan that are not
exercisable within 60 days.
(15) Does not include 300,000 shares of common stock issuable upon exercise of
stock options awarded under the Employee Stock Option Plan that are not
exercisable within 60 days.
(16) Includes 35,000 shares of common stock issuable upon exercise of stock
options awarded under the Employee Stock Option Plan that are exercisable
within 60 days.
(17) Includes 450,000 shares of common stock issuable upon exercise of stock
options awarded under the Independent Contractor Stock Option Plan that
are exercisable within 60 days.
(18) Includes warrants for the purchase of 90,000 shares of common stock. (19)
Includes warrants for the purchase of 90,000 shares of common stock.
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 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.
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<PAGE>
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 March 15, 2000.
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
27
<PAGE>
"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.
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 was 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, Genesee agreed to pay Bodian:
. 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;
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<PAGE>
. 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.
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.
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 treated as a claim in EqualNet's bankruptcy
proceedings.
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 originally matured on January 31, 1999. This note was renewed and
extended through January 31, 2000.
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.
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
29
<PAGE>
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
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
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.
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<PAGE>
(C) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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).
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).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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).
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).
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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).
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.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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.
10.64** Statement of Resolution of Board of Directors Establishing and
Designating Series E Junior Preferred Stock and Fixing the Rights and
Preferences of such Series adopted by Board of Directors on June 15,
1999.
10.65** Amendment Agreement of Statement of Resolution of Board of Directors
Establishing and Designating Series A Convertible Preferred Stock and
Fixing the Rights and Preferences of such Series dated as of June 15,
1999, by and among Equalnet Communications Corp. and MCM Partners.
10.66** Amendment Agreement of Statement of Resolution of Board of Directors
Establishing and Designating Series D Convertible Preferred Stock and
Fixing the Rights and Preferences of such Series dated as of June 15,
1999, by and among Equalnet Communications Corp. and Willis Group LLC.
10.67** Amendment Agreement of Statement of Resolution of Board of Directors
Establishing and Designating Series D Convertible Preferred Stock and
Fixing the Rights and Preferences of Such Series dated as of June 15,
1999 by and among Equalnet Communications Corp. and Advantage Fund
Limited.
10.68** Exchange Agreement dated as of June 15, 1999 by and among Equalnet
Communications Corp. and Willis Group LLC.
10.69** Exchange Agreement dated as of June 15, 1999 by and among Equalnet
Communications Corp. and Genessee Fund Limited--Portfolio B.
23.1* Consent of Independent Auditors.
23.2** Consent of Independent Auditors.
27.1 Financial Data Schedule (previously filed).
</TABLE>
- --------
* 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, 1999
filed on October 13, 1999.
** Filed herewith.
34
<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>
35
<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
36
<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.
37
<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.
38
<PAGE>
EQUALNET COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Preferred Common Treasury Paid-in-
Stock Stock Stock 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......... -- -- 8,797,000
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.
39
<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.
40
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
41
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
42
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
43
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
44
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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 (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
45
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
46
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
47
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 convertible at a discounted price.
A deemed distribution approximating $3.6 million 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.
48
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
49
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
50
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
51
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Shares Per Share
--------- ----------------
<S> <C> <C>
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
---------
</TABLE>
Vested stock options as of June 30, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Shares Per Share
------- ----------------
<S> <C> <C>
June 30, 1999..................................... 243,000 $ 1.12
June 30, 1998..................................... 95,000 3.93
June 30, 1997..................................... 3,000 16.93
</TABLE>
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
52
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
<TABLE>
<CAPTION>
Exercise
Warrants Price Exercise Price
- -------- -------- -----------------------------
<S> <C> <C>
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
</TABLE>
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.
53
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Federal State Total
---------- -------- ----------
<S> <C> <C> <C>
Current........................................ $ 29,000 $ 88,000 $ 117,000
Deferred....................................... 1,953,000 276,000 2,229,000
---------- -------- ----------
$1,982,000 $364,000 $2,346,000
========== ======== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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............................ $ -- $ --
============ ============
</TABLE>
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.
54
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 March 1, 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
55
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
56
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
57
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Year Ended June 30, Amount
- ------------------- ----------
<S> <C>
2000 $ 396,000
2001 365,000
2002 375,000
2003 375,000
2004 375,000
Thereafter --
----------
$1,886,000
==========
</TABLE>
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
58
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
59
<PAGE>
EQUALNET COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 preceding the date that is two
years after the effective date of the reorganization be less than $1 per share
as defined Plan of Reorganization.
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.
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<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/A 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,
Principal Financial and
Accounting Officer and Director
Dated: April 19, 2000
In accordance with the Securities and Exchange Act of 1934, this Annual
Report on Form 10-K/A has been signed by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- -------------------------- -------------------
<S> <C> <C>
/s/ Mark A. Willis Chairman of the Board April 19, 2000
______________________________________ of Directors
Mark A. Willis
/s/ Mitchell H. Bodian President, Chief Executive April 19, 2000
______________________________________ Officer, Principal
Mitchell H. Bodian Financial and Accounting
Officer and Director
/s/ Ronald J. Salazar Director April 19, 2000
______________________________________
Ronald J. Salazar
</TABLE>
<PAGE>
EXHIBIT 10.61
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.
"Amended and Restated 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.
"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
2
<PAGE>
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.
"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 as attached hereto.
"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 Amended and
Restated 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 Trading Day immediately prior to the
Initial Reset Date, $0.75;
(b) from the Initial Reset Date to the Trading Day immediately prior
to the first Semi-Annual Reset Date, 75% of the arithmetic average of the
Closing Bid Price of
3
<PAGE>
the Common Stock for each of the Trading Days during 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) thereafter, on and after each occurrence of a Semi-Annual Reset
Date, 75% of the arithmetic average of the Closing Bid Price of the Common Stock
for each of the Trading Days during the five Trading Day period immediately
prior to such 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.
4
<PAGE>
"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.
"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; provided however, if the Reverse Stock Split Date does not
occur on or before December 31, 1999, "Initial Reset Date" shall mean the last
date on which any shares of Series F Convertible Preferred Stock are
outstanding.
"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.
5
<PAGE>
"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.
"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, (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., or (d) if
not quoted or listed or admitted to trading on any national securities exchange
or quotation system, the over-the-counter market on the day in question, as
reported by the Bloomberg, L.P., or a similar generally accepted reporting
service, or if not so available, in such manner as furnished by any new York
Stock Exchange member firm selected from time to time by the Board of Directors
for that purpose, or a price determined in good faith by the Board of Directors,
whose determination shall be conclusive and described in a Board Resolution;
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 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
7
<PAGE>
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 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
8
<PAGE>
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 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
9
<PAGE>
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 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
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adjustment shall be made for such Tender Offer under this clause (vi) for
such day.
"Maximum Share Amount" means 1,843,000 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 Series A
Convertible Preferred Stock and the issuance of shares of Common Stock upon
conversion thereof, (y) the issuance of the Series D Convertible Preferred Stock
and the issuance of shares of Common Stock upon conversion thereof, or (z) the
issuance of the common stock purchase warrants issued in connection with the
issuance of the 6% Senior Convertible Notes Due 2001 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
(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:
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<PAGE>
(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 Amended and Restated 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
(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
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<PAGE>
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; or
(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 Amended and Restated
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 Statement" means the Registration Statement required to
be filed by the Corporation with the SEC pursuant to Section 2(a) of the Amended
and Restated 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.
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"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 (i) 180 days following the Initial Reset Date and (ii) every 180 days
after the date determined in clause (i).
"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.
"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.
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<PAGE>
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 or (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 quarterly.
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
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<PAGE>
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 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
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<PAGE>
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;
(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 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 Amended and Restated 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 Amended and Restated Registration Rights Agreements for
resale upon issuance upon conversion of Dividend Shares shall not be
sufficient (after taking into account the number of shares of Common Stock
issued or issuable upon conversion of Dividend Shares theretofore issued)
to allow 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
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<PAGE>
(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.
(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
18
<PAGE>
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 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
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<PAGE>
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
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
20
<PAGE>
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 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
21
<PAGE>
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).
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 Amended and Restated
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
22
<PAGE>
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 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 Amended and Restated 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
23
<PAGE>
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 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
24
<PAGE>
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 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
25
<PAGE>
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 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
26
<PAGE>
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 nonetheless be effective on
the date given if the converting holder promptly undertakes to correct all such
defects.
(4) From and after the Reverse Stock Split Date, the Corporation shall
reserve from its authorized, unissued and otherwise unreserved Common Stock free
from preemptive and similar rights 3,000,000 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.
27
<PAGE>
(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,
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
28
<PAGE>
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
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
29
<PAGE>
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 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.
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(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 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
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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.
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.
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(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.
(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.
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<PAGE>
(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.
(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.
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<PAGE>
(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 Amended and Restated 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 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
35
<PAGE>
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.
36
<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 30 day of November, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
------------------------
Mitchell H. Bodian
37
<PAGE>
EXHIBIT 10.62
Annex I
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 as attached hereto.
"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:
3
<PAGE>
(a) from the Issuance Date to the Trading Day immediately prior to the
Initial Reset Date, $0.75;
(b) from the Initial Reset Date to the Trading Day immediately prior
to the first Semi-Annual Reset Date, 75% of the arithmetic average of the
Closing Bid Price of the Common Stock for each of the Trading Days during 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) thereafter, on and after each occurrence of a Semi-Annual Reset
Date, 75% of the arithmetic average of the closing Bid Price of the Common Stock
for each of the Trading Days during the five Trading Day period immediately
prior to such 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 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.
4
<PAGE>
"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.
"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; provided however, if the Reverse Stock Split Date does not
occur on or before December 31, 1999, "Initial Reset Date" shall mean the last
date on which any shares of Series F Convertible Preferred Stock are
outstanding.
"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.
5
<PAGE>
"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, (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., or (d) if
not quoted or listed or admitted to trading on any national securities exchange
or quotation system, the over-the-counter market on the day in question, as
reported by the Bloomberg, L.P., or a similar generally accepted reporting
service, or if not so available, in such manner as furnished by any new York
Stock Exchange member firm selected from time to time by the Board of Directors
for that purpose, or a price determined in good faith by the Board of Directors,
whose determination shall be conclusive and described in a Board Resolution;
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
6
<PAGE>
denominator of which shall be the sum of such number of shares and the
total number of shares constituting such dividend or other distribution;
(ii) The Corporation shall issue rights or warrants to all holders of
its outstanding shares of Common Stock, or fix a record date for such
issuance, which rights or warrants entitle such holders (for a period
expiring within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share
less than the Market Price (determined without regard to this proviso) for
any day in such Measurement Period or such other period which day is prior
to the end of such 45-day period, then the Market Price for each such day
shall be reduced so that the same shall equal the price determined by
multiplying the Market Price (determined without regard to this proviso) by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding at the close of business on the record date fixed for the
determination of stockholders entitled to receive such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Market Price, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the close of business on such record date plus the total
number of additional shares of Common Stock so offered for subscription or
purchase. In determining whether any rights or warrants entitle the
holders to subscribe for or purchase shares of Common Stock at less than
the Market Price (determined without regard to this proviso), and in
determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received for such
rights or warrants, the value of such consideration, if other than cash, to
be determined in good faith by a resolution of the Board of Directors of
the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of 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
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Corporation (other than any dividends or distributions to which clause (i)
of this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or warrants referred
to in clause (ii) of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for each day in such Measurement Period or
such other period which day is prior to the earlier of (1) the record date
for such distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins shall be reduced so
that the same shall be equal to the price determined by multiplying the
Market Price (determined without regard to this proviso) by a fraction, the
numerator of which shall be the Market Price (determined without regard to
this proviso) for such date less the fair market value (as determined in
good faith by resolution of the Board of Directors of the Corporation) on
such date of the portion of the Securities so distributed or to be
distributed applicable to one share of Common Stock and the denominator of
which shall be the Market Price (determined without regard to this proviso)
for such date; provided, however, that in the event the then fair market
value (as so determined) of the portion of the Securities so distributed
applicable to one share of Common Stock is equal to or greater than the
Market Price (determined without regard to this clause (iv) of this
proviso) for any such Trading Day, in lieu of the foregoing adjustment,
adequate provision shall be made so that the holders of shares of Series A
Preferred Stock shall have the right to receive upon conversion of the
shares of Series A Preferred Stock the amount of Securities the holders of
shares of Series A Preferred Stock would have received had the holders of
shares of Series A Preferred Stock converted the shares of Series A
Preferred Stock immediately prior to the record date for such distribution.
If the Board of Directors of the Corporation determines the fair market
value of any distribution for purposes of this clause (iv) by reference to
the actual or when issued trading market for any securities comprising all
or part of such distribution, it must in doing so consider the prices in
such market on the same day for which an adjustment in the Market Price is
being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this proviso,
any dividend or distribution to which this clause (iv) is applicable that
also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which clause (i) or (ii) of this
proviso applies (or both), shall be deemed instead to be (1) a dividend or
distribution of the evidences of 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)
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<PAGE>
of this proviso with respect to such dividend or distribution shall then be
made), except that any shares of Common Stock included in such dividend or
distribution shall not be deemed "outstanding at the close of business on
the date fixed for such determination" within the meaning of clause (i) of
this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash
in (or fix any record date for any such distribution), or (y) repurchase or
reacquire shares of its Common Stock (other than an Option Share Surrender)
for, in either case, an aggregate amount that, combined with (1) the
aggregate amount of any other such distributions to all holders of its
Common Stock made exclusively in cash after the Issuance Date and within
the 12 months preceding the date of payment of such distribution, and in
respect of which no adjustment pursuant to this clause (v) has been made,
(2) the aggregate amount of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration paid in respect of any repurchase or other
reacquisition by the Corporation or any subsidiary of the Corporation of
any shares of Common Stock (other than an Option Share Surrender) made
after the Issuance Date and within the 12 months preceding the date of
payment of such distribution or making of such repurchase or reacquisition,
as the case may be, and in respect of which no adjustment pursuant to this
clause (v) has been made, and (3) the aggregate of any cash plus the fair
market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration payable in respect of any
Tender Offer by the Corporation or any of its subsidiaries for all or any
portion of the Common Stock concluded within the 12 months preceding the
date of payment of such distribution or completion of such repurchase or
reacquisition, as the case may be, and in respect of which no adjustment
pursuant to clause (vi) of this proviso has been made (such aggregate
amount combined with the amounts in clauses (1), (2) and (3) above being
the "Combined Amount"), exceeds 10% of the product of the Market Price
(determined without regard to this proviso) for any day in such Measurement
Period or such other period which day is prior to the earlier of (A) the
record date with respect to such distribution and (B) the date on which ex-
dividend trading in the Common Stock with respect to such distribution
begins or the date of such repurchase or reacquisition, as the case may be,
times the number of shares of Common Stock outstanding on such date, then,
and in each such case, the Market Price for each such day shall be reduced
so that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction (i) the numerator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day less an amount
equal to the quotient of (x) the excess of such Combined Amount over 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
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<PAGE>
reacquisition of shares (determined per share based on the number of shares
of Common Stock outstanding) applicable to one share of Common Stock is
equal to or greater than the Market Price (determined without regard to
this clause (v) of this proviso) of the Common Stock for any such day, then
in lieu of the foregoing adjustment with respect to such day, adequate
provision shall be made so that the holders of shares of Series A Preferred
Stock shall have the right to receive upon conversion of shares of Series A
Preferred Stock the amount of cash the holders of shares of Series A
Preferred Stock would have received had the holders of shares of Series A
Preferred Stock converted shares of Series A Preferred Stock immediately
prior to the record date for such distribution or the payment date of such
repurchase, as applicable; or
(vi) A Tender Offer made by the Corporation or any of its subsidiaries
for all or any portion of the Common Stock shall expire and such Tender
Offer (as amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the
terms of the Tender Offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined in good
faith by resolution of the Board of Directors of the Corporation) that
combined together with (1) the aggregate of the cash plus the fair market
value (as determined in good faith by a resolution of the Board of
Directors of the Corporation), as of the expiration of such Tender Offer,
of consideration payable in respect of any other Tender Offers, by the
Corporation or any of its subsidiaries for all or any portion of the Common
Stock expiring within the 12 months preceding the expiration of such Tender
Offer and in respect of which no adjustment pursuant to this clause (vi)
has been made, (2) the aggregate amount of any cash plus the fair market
value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration paid in respect of any
repurchase or other reacquisition by the Corporation or any subsidiary of
the Corporation of any shares of Common Stock (other than an Option Share
Surrender) made after the Issuance Date and within the 12 months preceding
the expiration of such Tender Offer and in respect of which no adjustment
pursuant to clause (v) of this proviso has been made, and (3) the aggregate
amount of any distributions to all holders of Common Stock made exclusively
in cash within 12 months preceding the expiration of such Tender Offer and
in respect of which no adjustment pursuant to clause (v) of this proviso
has been made, exceeds 10% of the product of the Market Price (determined
without regard to this proviso) for any day in such period times the number
of shares of Common Stock outstanding on such day, then, and in each such
case, the Market Price for such day shall be reduced so that the same shall
equal the price determined by multiplying the Market Price (determined
without regard to this proviso) for such day by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding on such
day multiplied by the Market Price (determined without regard to this
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
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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 1,843,000 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 Series D
Convertible Preferred Stock and the issuance of shares of Common Stock upon
conversion thereof, (y) the issuance of the Series F Convertible Preferred Stock
and the issuance of shares of Common Stock upon conversion thereof, or (z) the
issuance of the common stock purchase warrants issued in connection with the
issuance of the 6% Senior Convertible Notes Due 2001 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.
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"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 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.
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"Parity Dividend Stock" means any class or series or the Corporation's
capital stock ranking, as to dividends, on a parity with the Series A
Convertible Preferred Stock.
"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series A Convertible Preferred Stock.
"Premium Percentage" means 115%.
"Premium Price" means, for any share of Series A Convertible Preferred
Stock as of any date of determination, the product obtained by multiplying (a)
the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but
unpaid dividends on such share of Series A Convertible Preferred Stock to the
date of determination, plus (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 5) to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of shares of Series A
Convertible Preferred Stock pursuant to Section 9(a) determined in accordance
therewith.
"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; or
(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
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<PAGE>
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 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 (i) 180 days following the Initial Reset Date and (ii) every 180 days
after the date determined in clause (i), 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
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the stockholders of the Corporation (duly convened at which a quorum was
present), or a written consent of holders of shares of Common Stock entitled to
such number of votes given without a meeting, of the issuance by the Corporation
of 20% or more of the Common Stock of the Corporation outstanding on the
Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series A Convertible Preferred Stock, as and
to the extent required under Rule 4460(i) of the Nasdaq as in effect from time
to time or any successor provision.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the principal securities market for the Common Stock is open for
general trading of securities.
"Transfer Agent 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 or (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 quarterly.
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.
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<PAGE>
Section 5. Dividends and Distributions. (a) The holders of shares of
---------------------------
Series A Convertible Preferred Stock shall be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $60.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series A Convertible Preferred Stock and shall be payable
quarterly on February 15, May 15, August 15, and November 15 of each year
commencing November 15, 1998 (except that if any such date is a Saturday,
Sunday, or legal holiday, then such dividend shall be payable on the next
succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of
record as they appear on the stock books of the Corporation on such record
dates, not more than 20 nor less than 10 days preceding the payment dates for
such dividends, as shall be fixed by the Board. Dividends on the Series A
Convertible Preferred Stock shall be paid in cash or, subject to the limitations
in Section 5(b) hereof, Dividend Shares or any combination of cash and Dividend
Shares, at the option of the Corporation as hereinafter provided. The amount of
the dividends payable per share of Series A Convertible Preferred Stock for each
quarterly dividend period shall be computed by dividing the annual dividend
amount by four. The amount of dividends payable for the initial dividend period
and any period shorter than a full quarterly dividend period shall be computed
on the basis of a 360-day year of twelve 30-day months. Dividends not paid on a
payment date, whether or not such dividends have been declared, will bear
interest at the rate of 14% per annum until paid (or such lesser rate as shall
be the maximum rate allowable by applicable law). No dividends or other
distributions, other than the dividends payable solely in shares of any Junior
Dividend Stock, shall be paid or set apart for payment on any shares of Junior
Dividend Stock, and no purchase, redemption, or other acquisition shall be made
by the Corporation of any shares of Junior Dividend Stock (except for Option
Share Surrenders), unless and until all accrued and unpaid dividends on the
Series A Convertible Preferred Stock and interest on dividends in arrears at the
rate specified herein shall have been paid or declared and set apart for
payment.
If at any time any dividend on any Senior Dividend Stock shall be in
arrears, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series A Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any Parity
Dividend Stock for any period unless all accrued but unpaid dividends (and
interest on dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series A Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series A Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series A Convertible Preferred Stock and the Parity Dividend Stock, all
dividends
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<PAGE>
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 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 if this limitation
otherwise would be applicable solely because the
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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 not be sufficient (after taking
into account the number of shares of Common Stock issued or issuable upon
conversion of Dividend Shares theretofore issued) to allow 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,
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<PAGE>
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 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
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<PAGE>
Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series A Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
Liquidation Preference of the shares of Series A Convertible Preferred Stock and
the liquidation preference of the shares of Parity Liquidation Stock, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation. Neither a consolidation or merger of
the Corporation with another corporation nor a sale or transfer of all or part
of the Corporation's assets for cash, securities, or other property in and of
itself will be considered a liquidation, dissolution or winding up of the
Corporation.
Section 7. Mandatory Redemption.
--------------------
(a) Mandatory Redemption Based on Maximum Share Amount.
--------------------------------------------------
(1) Notwithstanding any other provision herein, unless the Stockholder Approval
shall have been obtained from the stockholders of the Corporation or waived by
the Nasdaq, so long as the Common Stock is listed on the Nasdaq, the Nasdaq
SmallCap, the NYSE or the AMEX, the Corporation shall not be required to issue
upon conversion of shares of Series A Convertible Preferred Stock pursuant to
Section 10 more than the Maximum Share Amount. The Maximum Share Amount shall
be allocated among the shares of Series A Convertible Preferred Stock at the
time of initial issuance thereof pro rata based on the initial issuance of 2,000
shares of Series A Convertible Preferred Stock. Each certificate for shares of
Series A Convertible Preferred Stock initially issued shall bear a notation as
to the number of shares constituting the portion of the Maximum Share Amount
allocated to the shares of Series A Convertible Preferred Stock represented by
such certificate for purposes of conversion thereof. The Corporation shall
maintain records which show the number of shares of Series A Convertible
Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on
the shares of Series A Convertible Preferred Stock represented by each
certificate, which records shall be controlling in the absence of manifest
error. Each such additional share of Series A Convertible Preferred Stock shall
be allocated a portion of the Maximum Share Amount allocated to the shares of
Series A Convertible Preferred Stock in respect of which such additional shares
of Series A Convertible Preferred Stock are issued as a dividend and the
certificate for such additional shares of Series A Convertible Preferred Stock
shall bear a notation as to the certificate number of the share of Series A
Convertible Preferred Stock in respect of which such additional share of Series
A Convertible Preferred Stock is 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
20
<PAGE>
shares of Series A Convertible Preferred Stock is surrendered for split-up into
two or more certificates representing an aggregate number of shares of Series A
Convertible Preferred Stock equal to the number of shares of Series A
Convertible Preferred Stock represented by the certificate so surrendered (as
reduced by any contemporaneous conversion of shares of Series A Convertible
Preferred Stock represented by the certificate so surrendered), each certificate
issued on such split-up shall bear a notation of the portion of the Maximum
Share Amount allocated thereto determined by pro rata allocation from among the
remaining portion of the Maximum Share Amount allocated to the certificate so
surrendered. If any shares of Series A Convertible Preferred Stock represented
by a single certificate are converted in full pursuant to Section 10, all of the
portion of the Maximum Share Amount allocated to such shares of Series A
Convertible Preferred Stock which remains unissued after such conversion shall
be re-allocated pro rata to the outstanding shares of Series A Convertible
Preferred Stock held of record by the holder of record at the close of business
on the date of such conversion of the shares of Series A Convertible Preferred
Stock so converted, and if there shall be no other shares of Series A
Convertible Preferred Stock held of record by such holder at the close of
business on such date, then such portion of the Maximum Share Amount shall be
allocated pro rata among the shares of Series A Convertible Preferred Stock
outstanding on such date.
(2) The Corporation shall promptly, but in no event later than five
business days after the occurrence, give notice to each holder of shares of
Series A Convertible Preferred Stock (by telephone line facsimile transmission
at such number as such holder has specified in writing to the Corporation for
such purposes or, if such holder shall not have specified any such number, by
overnight courier or first class mail, postage prepaid, at such holder's address
as the same appears on the stock books of the Corporation) and any holder of
shares of Series A Convertible Preferred Stock may at any time after the
occurrence give notice to the Corporation, in either case, if at any time on or
after December 16, 1998 and on or prior to 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
21
<PAGE>
such redemption, be convertible into shares of Common Stock by reason of the
limitations set forth in Section 7(a)(1) (determined without regard to the
limitation, if any, on beneficial ownership of Common Stock by such holder
contained in the proviso to the second sentence of Section 10(a)), within ten
business days after such holder so directs the Corporation, at a price per share
equal to the Share Limitation Redemption Price. If a holder of shares of Series
A Convertible Preferred Stock directs the Corporation to redeem outstanding
shares of Series A Convertible Preferred Stock and, prior to the date the
Corporation is required to redeem such shares of Series A Convertible Preferred
Stock, the Corporation would have been able, within the limitations set forth in
Section 7(a)(1), to convert all of such holder's shares of Series A Convertible
Preferred Stock (determined without regard to the limitation, if any, on
beneficial ownership of shares of Common Stock by such holder contained in the
proviso to the second sentence of Section 10(a)) on any ten Trading Days within
any period of 15 consecutive Trading Days commencing after the period of 20
consecutive Trading Days which gave rise to the applicable Inconvertibility
Notice from the Corporation or such holder of shares of Series A Convertible
Preferred Stock, as the case may be, had such holder exercised its right to
convert all of such holder's shares of Series A Convertible Preferred Stock into
Common Stock on each of such ten Trading Days within such 15 Trading Day period,
then the Corporation shall not be required to redeem any shares of Series A
Convertible Preferred Stock by reason of such Inconvertibility Notice.
(3) Notwithstanding the giving of any Inconvertibility Notice by the
Corporation to the holders of Series A Convertible Preferred Stock pursuant to
Section 7(a)(2) or the giving or the absence of any notice by the holders of the
Series A Convertible Preferred Stock in response thereto or any redemption of
shares of Series A Convertible Preferred Stock pursuant to Section 7(a)(2),
thereafter the provisions of Section 7(a)(2) shall continue to be applicable on
any occasion unless the Stockholder Approval shall have been obtained from the
stockholders of the Corporation or waived by the Nasdaq.
(4) On each Share Limitation Redemption Date (or such later date as a
holder of shares of Series A Convertible Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series A Convertible Preferred
Stock being redeemed pursuant to this Section 7(a)), the Corporation shall make
payment in immediately available funds of the applicable Share Limitation
Redemption Price to such holder of shares of Series A Convertible Preferred
Stock to be redeemed to or upon the order of such holder as specified by such
holder in writing to the Corporation at least one business day prior to such
Share Limitation Redemption Date. Upon redemption of less than all of the
shares of Series A Convertible Preferred Stock evidenced by a particular
certificate, promptly, but in no event later than three business days after
surrender of such certificate to the Corporation, the Corporation shall issue a
replacement certificate for the 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.
22
<PAGE>
(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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<PAGE>
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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<PAGE>
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
25
<PAGE>
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
26
<PAGE>
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
27
<PAGE>
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) From and after the Reverse Stock Split Date, the Corporation shall
reserve from its authorized, unissued and otherwise unreserved Common Stock free
from preemptive and similar rights 3,000,000 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
28
<PAGE>
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
(5) In case of any consolidation or merger of the Corporation with any
other corporation (other than a wholly-owned subsidiary of the Corporation) in
which the Corporation is not the surviving corporation, or in case of any sale
or transfer of all or substantially all of the assets of the Corporation, or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series A Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series A
Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series A Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger, sale,
transfer, or share exchange and on a basis which preserves the economic benefits
of the conversion rights of the holders of shares of Series A Convertible
Preferred Stock on a basis as nearly as practical as such rights exist hereunder
prior thereto. If, in connection with any such consolidation, merger, sale,
transfer, or share exchange, each holder of shares of Common Stock is entitled
to elect to receive securities, cash, or other assets upon completion of such
transaction, the Corporation shall provide or cause to be provided to each
holder of Series A Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series A Convertible Preferred
Stock held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
(6) If a holder shall have given a Conversion Notice for shares of
Series A Convertible Preferred Stock, the Corporation shall issue and deliver to
such person certificates for the Common Stock issuable upon such conversion
within three Trading Days after such Conversion Notice is given and the person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the 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
29
<PAGE>
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 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.
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 30 th day of November, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
-------------------------
Mitchell H. Bodian
38
<PAGE>
Exhibit 10.63
Annex I
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 June
15, 1999, by and between the Corporation and the original holders 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
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"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 as attached hereto.
"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:
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(a) from the Issuance Date to the Trading Day immediately prior to
Initial Reset Date, $0.75;
(b) from the Initial Reset Date to the Trading Day immediately prior
to the first Semi-Annual Reset Date, 75% of the arithmetic average of the
Closing Bid Price of the Common Stock for each of the Trading Days during 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) thereafter, on and after each occurrence of a Semi-Annual Reset
Date, 75% of the arithmetic average of the Closing Bid Price of the Common Stock
for each of the Trading Days during the five Trading Day period immediately
prior to such 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 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.
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"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; provided, however, if the Reverse Stock Split Date does not
occur on or before December 31, 1999, "Initial Reset Date" shall mean the last
date on which any shares of Series F convertible Preferred Stock are
outstanding.
"Issuance Date" means the first date of original issuance of any
shares of Series D Convertible Preferred Stock.
"Junior Dividend Stock" means, collectively, the Common Stock and any
other class or series of capital stock of the Corporation ranking junior as to
dividends to the Series D Convertible Preferred Stock.
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"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, (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., or (d) if
not quoted or listed or admitted to trading on any national securities exchange
or quotation system, the over-the-counter market on the day in question, as
reported by the Bloomberg, L.P., or a similar generally accepted reporting
service, or if not so available, in such manner as furnished by any new York
Stock Exchange member firm selected from time to time by the Board of Directors
for that purpose, or a price determined in good faith by the Board of Directors,
whose determination shall be conclusive and described in a Board Resolution;
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
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denominator of which shall be the sum of such number of shares and
the total number of shares constituting such dividend or other
distribution;
(ii) The Corporation shall issue rights or warrants to all holders of
its outstanding shares of Common Stock, or fix a record date for such
issuance, which rights or warrants entitle such holders (for a period
expiring within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share
less than the Market Price (determined without regard to this proviso) for
any day in such Measurement Period or such other period which day is prior
to the end of such 45-day period, then the Market Price for each such day
shall be reduced so that the same shall equal the price determined by
multiplying the Market Price (determined without regard to this proviso) by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding at the close of business on the record date fixed for the
determination of stockholders entitled to receive such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Market Price, and the
denominator of which shall be the number of shares of Common Stock
outstanding on the close of business on such record date plus the total
number of additional shares of Common Stock so offered for subscription or
purchase. In determining whether any rights or warrants entitle the holders
to subscribe for or purchase shares of Common Stock at less than the Market
Price (determined without regard to this proviso), and in determining the
aggregate offering price of such shares of Common Stock, there shall be
taken into account any consideration received for such rights or warrants,
the value of such consideration, if other than cash, to be determined in
good faith by a resolution of the Board of Directors of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for
each day in such Measurement Period or such other period which day is prior
to the earlier of (1) the day upon which such subdivision becomes effective
and (2) the date on which ex-dividend trading in the Common Stock with
respect to such subdivision begins shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of 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
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Corporation (other than any dividends or distributions to which clause (i)
of this proviso applies) or evidences of its indebtedness, cash or other
assets (including securities, but excluding any rights or warrants referred
to in clause (ii) of this proviso and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for each day in such Measurement Period or
such other period which day is prior to the earlier of (1) the record date
for such distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins shall be reduced so
that the same shall be equal to the price determined by multiplying the
Market Price (determined without regard to this proviso) by a fraction, the
numerator of which shall be the Market Price (determined without regard to
this proviso) for such date less the fair market value (as determined in
good faith by resolution of the Board of Directors of the Corporation) on
such date of the portion of the Securities so distributed or to be
distributed applicable to one share of Common Stock and the denominator of
which shall be the Market Price (determined without regard to this proviso)
for such date; provided, however, that in the event the then fair market
value (as so determined) of the portion of the Securities so distributed
applicable to one share of Common Stock is equal to or greater than the
Market Price (determined without regard to this clause (iv) of this
proviso) for any such Trading Day, in lieu of the foregoing adjustment,
adequate provision shall be made so that the holders of shares of Series 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)
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of this proviso with respect to such dividend or distribution shall then be
made), except that any shares of Common Stock included in such dividend or
distribution shall not be deemed "outstanding at the close of business on
the date fixed for such determination" within the meaning of clause (i) of
this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash
in (or fix any record date for any such distribution), or (y) repurchase or
reacquire shares of its Common Stock (other than an Option Share Surrender)
for, in either case, an aggregate amount that, combined with (1) the
aggregate amount of any other such distributions to all holders of its
Common Stock made exclusively in cash after the Issuance Date and within
the 12 months preceding the date of payment of such distribution, and in
respect of which no adjustment pursuant to this clause (v) has been made,
(2) the aggregate amount of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration paid in respect of any repurchase or other
reacquisition by the Corporation or any subsidiary of the Corporation of
any shares of Common Stock (other than an Option Share Surrender) made
after the Issuance Date and within the 12 months preceding the date of
payment of such distribution or making of such repurchase or reacquisition,
as the case may be, and in respect of which no adjustment pursuant to this
clause (v) has been made, and (3) the aggregate of any cash plus the fair
market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration payable in respect of any
Tender Offer by the Corporation or any of its subsidiaries for all or any
portion of the Common Stock concluded within the 12 months preceding the
date of payment of such distribution or completion of such repurchase or
reacquisition, as the case may be, and in respect of which no adjustment
pursuant to clause (vi) of this proviso has been made (such aggregate
amount combined with the amounts in clauses (1), (2) and (3) above being
the "Combined Amount"), exceeds 10% of the product of the Market Price
(determined without regard to this proviso) for any day in such Measurement
Period or such other period which day is prior to the earlier of (A) the
record date with respect to such distribution and (B) the date on which ex-
dividend trading in the Common Stock with respect to such distribution
begins or the date of such repurchase or reacquisition, as the case may be,
times the number of shares of Common Stock outstanding on such date, then,
and in each such case, the Market Price for each such day shall be reduced
so that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction (i) the numerator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day less an amount
equal to the quotient of (x) the excess of such Combined Amount over 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
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reacquisition of shares (determined per share based on the number of shares
of Common Stock outstanding) applicable to one share of Common Stock is
equal to or greater than the Market Price (determined without regard to
this clause (v) of this proviso) of the Common Stock for any such day, then
in lieu of the foregoing adjustment with respect to such day, adequate
provision shall be made so that the holders of shares of Series D Preferred
Stock shall have the right to receive upon conversion of shares of Series D
Preferred Stock the amount of cash the holders of shares of Series D
Preferred Stock would have received had the holders of shares of Series D
Preferred Stock converted shares of Series D Preferred Stock immediately
prior to the record date for such distribution or the payment date of such
repurchase, as applicable; or
(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
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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 1,843,000 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 Series A
Convertible Preferred Stock and the issuance of shares of Common Stock upon
conversion thereof, (y) the issuance of the Series F Convertible Preferred Stock
and the issuance of shares of Common Stock upon conversion thereof, or (z) the
issuance of the common stock purchase warrants issued in connection with the
issuance of the 6% Senior Convertible Notes Due 2001 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.
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"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 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.
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"Parity Dividend Stock" means any class or series or the Corporation's
capital stock ranking, as to dividends, on a parity with the Series D
Convertible Preferred Stock.
"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series D Convertible Preferred Stock.
"Premium Percentage" means 115%.
"Premium Price" means, for any share of Series D Convertible Preferred
Stock as of any date of determination, the product obtained by multiplying (a)
the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but
unpaid dividends on such share of Series D Convertible Preferred Stock to the
date of determination, plus (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 5) to the date of
determination times (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of shares of Series D
Convertible Preferred Stock pursuant to Section 9(a) determined in accordance
therewith.
"Redemption Price" means the greater of:
(1) the Premium Price on the applicable Redemption Date; or
(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
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for trading on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap, or
(6) a holder of shares of Series D Preferred Stock having become unable to
convert any shares of Series D Preferred Stock in accordance with Section 10(a)
for any reason (other than by reason of the 4.9% limitation on beneficial
ownership set forth therein or a redemption or repurchase thereof).
"Registration Rights Agreements" means the several Registration Rights
Agreements entered into between the Corporation and the original holders of the
shares of Series D Convertible Preferred Stock, as amended or modified from time
to time in accordance with their respective terms.
"Registration Statement" means the Registration Statement required to
be filed by the Corporation with the SEC pursuant to Section 2(a) of the
Registration Rights Agreements.
"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 (i) 180 days following the Initial Reset Date and (ii) every 180 days
after the date determined in clause (i), 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
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the stockholders of the Corporation (duly convened at which a quorum was
present), or a written consent of holders of shares of Common Stock entitled to
such number of votes given without a meeting, of the issuance by the Corporation
of 20% or more of the Common Stock of the Corporation outstanding on the
Issuance Date for less than the greater of the book or market value of such
Common Stock on conversion of the Series D Convertible Preferred Stock, as and
to the extent required under Rule 4460(i) of the Nasdaq as in effect from time
to time or any successor provision.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the 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 or (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 quarterly.
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.
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<PAGE>
Section 5. Dividends and Distributions. (a) The holders of shares of
---------------------------
Series D Convertible Preferred Stock shall be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $60.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series D Convertible Preferred Stock and shall be payable
quarterly on February 15, May 15, August 15, and November 15 of each year
commencing November 15, 1998 (except that if any such date is a Saturday,
Sunday, or legal holiday, then such dividend shall be payable on the next
succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of
record as they appear on the stock books of the Corporation on such record
dates, not more than 20 nor less than 10 days preceding the payment dates for
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
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<PAGE>
paid or declared and set apart for payment upon shares of Series D Convertible
Preferred Stock (and interest on dividends in arrears at the rate specified
herein) and the Parity Dividend Stock shall be paid or declared and set apart
for payment pro rata, so that the amount of dividends paid or declared and set
apart for payment per share on the Series D Convertible Preferred Stock and the
Parity Dividend Stock shall in all cases bear to each other the same ratio that
accrued and unpaid dividends per share on the shares of Series D Convertible
Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 5 shall not
be deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(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 if this limitation
otherwise would be applicable solely because the
17
<PAGE>
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 not be sufficient (after taking
into account the number of shares of Common Stock issued or issuable upon
conversion of Dividend Shares theretofore issued) to allow 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,
18
<PAGE>
outstanding immediately prior to such transaction or series of related
transactions if such transaction or series of related transactions is with any
one person or group of affiliated persons, unless the Corporation or such
subsidiary offers to purchase for cash from each holder of shares of Series D
Convertible Preferred Stock at the time of such redemption, repurchase or
acquisition the same percentage of such holder's shares of Series D Convertible
Preferred Stock as the percentage of the number of outstanding shares of Common
Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to
be so redeemed, repurchased or acquired at a purchase price per share of Series
D Convertible Preferred Stock equal to the greater of (i) the Premium Price in
effect on the date of purchase pursuant to this Section 5(c) and (ii) the
Converted Market Price on the date of purchase pursuant to this Section 5(c);
provided, however, that if in connection with any determination of the purchase
price payable pursuant to this Section 5(c) the amount specified in clause (y)
of the definition of the term Converted Market Price is greater than 200% of the
Ceiling Price on the date as of which such amount is 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
19
<PAGE>
Liquidation Stock are fully met, the entire assets of the Corporation available
for distribution shall be distributed ratably among the holders of the Series D
Convertible Preferred Stock and any Parity Liquidation Stock in proportion to
the respective preferential amounts to which each is entitled (but only to the
extent of such preferential amounts). After payment in full of the Liquidation
Preference of the shares of Series D Convertible Preferred Stock and the
liquidation preference of the shares of Parity Liquidation Stock, the holders of
such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation. Neither a consolidation or merger of
the Corporation with another corporation nor a sale or transfer of all or part
of the Corporation's assets for cash, securities, or other property in and of
itself will be considered a liquidation, dissolution or winding up of the
Corporation.
Section 7. Mandatory Redemption.
--------------------
(a) Mandatory Redemption Based on Maximum Share Amount.
--------------------------------------------------
(1) Notwithstanding any other provision herein, unless the Stockholder Approval
shall 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
20
<PAGE>
shares of Series D Convertible Preferred Stock is surrendered for split-up into
two or more certificates representing an aggregate number of shares of Series D
Convertible Preferred Stock equal to the number of shares of Series D
Convertible Preferred Stock represented by the certificate so surrendered (as
reduced by any contemporaneous conversion of shares of Series D Convertible
Preferred Stock represented by the certificate so surrendered), each certificate
issued on such split-up shall bear a notation of the portion of the Maximum
Share Amount allocated thereto determined by pro rata allocation from among the
remaining portion of the Maximum Share Amount allocated to the certificate so
surrendered. If any shares of Series D Convertible Preferred Stock represented
by a single certificate are converted in full pursuant to Section 10, all of the
portion of the Maximum Share Amount allocated to such shares of Series D
Convertible Preferred Stock which remains unissued after such conversion shall
be re-allocated pro rata to the outstanding shares of Series D Convertible
Preferred Stock held of record by the holder of record at the close of business
on the date of such conversion of the shares of Series D Convertible Preferred
Stock so converted, and if there shall be no other shares of Series D
Convertible Preferred Stock held of record by such holder at the close of
business on such date, then such portion of the Maximum Share Amount shall be
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
21
<PAGE>
such redemption, be convertible into shares of Common Stock by reason of the
limitations set forth in Section 7(a)(1) (determined without regard to the
limitation, if any, on beneficial ownership of Common Stock by such holder
contained in the proviso to the second sentence of Section 10(a)), within ten
business days after such holder so directs the Corporation, at a price per share
equal to the Share Limitation Redemption Price. If a holder of shares of Series
D Convertible Preferred Stock directs the Corporation to redeem outstanding
shares of Series D Convertible Preferred Stock and, prior to the date the
Corporation is required to redeem such shares of Series D Convertible Preferred
Stock, the Corporation would have been able, within the limitations set forth in
Section 7(a)(1), to convert all of such holder's shares of Series D Convertible
Preferred Stock (determined without regard to the limitation, if any, on
beneficial ownership of shares of Common Stock by such holder contained in the
proviso to the second sentence of Section 10(a)) on any ten Trading Days within
any period of 15 consecutive Trading Days commencing after the period of 20
consecutive Trading Days which gave rise to the applicable Inconvertibility
Notice from the Corporation or such holder of shares of Series D Convertible
Preferred Stock, as the case may be, had such holder exercised its right to
convert all of such holder's shares of Series D Convertible Preferred Stock into
Common Stock on each of such ten Trading Days within such 15 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.
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<PAGE>
(b) No Other Mandatory Redemption. The shares of Series D
-----------------------------
Convertible Preferred Stock shall not be subject to mandatory redemption by the
Corporation except as provided in Section 7(a).
Section 8. No Sinking Fund. The shares of Series D Convertible
---------------
Preferred Stock shall not be subject to the operation of a purchase, retirement
or sinking fund.
Section 9. Optional Redemption.
-------------------
(a) Corporation Optional Redemption. If (1) the Corporation shall be
-------------------------------
in compliance in all material respects with its obligations to the holders of
shares of Series D Convertible Preferred Stock (including, without limitation,
its obligations under the 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
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<PAGE>
Series D Convertible Preferred Stock in accordance with Section 10(a) through
the day prior to the Redemption Date and (2) if the Corporation shall fail to
pay the Redemption Price of any share of Series D Convertible Preferred Stock
when due, at any time after the due date thereof until such date as the
Corporation pays the Redemption Price of such share of Series D Convertible
Preferred Stock. No share of Series D Convertible Preferred Stock as to which
the holder exercises the right of conversion pursuant to Section 10 or the
optional redemption right pursuant to Section 11 may be redeemed by the
Corporation pursuant to this Section 9(a) on or after the date of exercise of
such conversion right or optional redemption right, as the case may be,
regardless of whether the Corporation Optional Redemption Notice shall have been
given prior to, or on or after, the date of exercise of such conversion right or
optional redemption right, as the case may be.
(b) Final Redemption. The Corporation shall have the right to redeem
----------------
all, but not less than all, outstanding shares of Series D Convertible Preferred
Stock at any time on or after the date which is 1,080 days after the Issuance
Date so long as (1) the Corporation shall be in compliance in all material
respects with its obligations to the holders of the Series D Convertible
Preferred Stock (including, without limitation, its obligations under the
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
24
<PAGE>
Redemption Price of such share of Series D Convertible Preferred Stock to such
holder. No share of Series D Convertible Preferred Stock as to which a holder
exercises the right of conversion pursuant to Section 10 or the optional
redemption right pursuant to Section 11 may be redeemed by the Corporation
pursuant to this Section 9(b) on or after the date of exercise of such
conversion right or optional redemption right, as the case may be, regardless of
whether the Final Redemption Notice shall have been given prior to, or on or
after, the date of exercise of such conversion right or optional redemption
right, as the case may be. So long as during the period from the Issuance Date
through the date the Corporation pays the Final Redemption Price the Corporation
shall not have commenced a voluntary case or other proceeding, and no person
shall have commenced an involuntary case or other proceeding against the
Corporation, in any such case seeking liquidation, reorganization or other
relief with respect to the Corporation or its debts under any bankruptcy,
insolvency, receivership, moratorium, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian,
or other similar official of the Corporation or any substantial part of the
Corporation's property, the Corporation shall not have consented to any such
relief or to the appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, and the Corporation
shall not have made a general assignment for the benefit of creditors, then the
Corporation shall have the right, exercisable by a statement to such effect in
the Final Redemption Notice, to pay the Final Redemption Price by the issuance
to the holders of shares of Series D Convertible Preferred Stock to be redeemed
of shares of Common Stock, valued for this purpose at the Conversion Price on
the Final Redemption Date, in lieu of payment of cash, so long as all shares of
Common Stock to 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
25
<PAGE>
but unpaid interest on the dividends on the share of Series D Convertible
Preferred Stock being converted in arrears to the applicable Conversion Date at
the rate provided in Section 5 by (y) the Conversion Price for such Conversion
Date (the "Conversion Rate"); provided, however, that in no event shall any
holder of shares of Series D Convertible Preferred Stock be entitled to convert
any shares of Series D Convertible Preferred Stock in excess of that number of
shares of Series D Convertible Preferred Stock upon conversion of which the sum
of (1) the number of shares of Common Stock beneficially owned by such holder
and all Aggregated Persons of such holder (other than shares of Common Stock
deemed beneficially owned through the ownership of unconverted shares of Series
D Convertible Preferred Stock) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series D Convertible
Preferred Stock with respect to which the determination in this proviso is being
made, would result in beneficial ownership by such holder and all Aggregated
Persons of such holder of more than 4.9% of the outstanding shares of Common
Stock. For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in
clause (1) of the proviso to the immediately preceding sentence.
(b) Other Provisions. (1) Notwithstanding anything in this Section
----------------
10(b) to the contrary, no change in the Conversion Amount pursuant to this
Section 10(b) shall actually be made until the cumulative effect of the
adjustments called for by this Section 10(b) since the date of the last change
in the Conversion Amount would change the Conversion Amount by more than 1%.
However, once the cumulative effect would result in such a change, then the
Conversion Amount shall actually be changed to reflect all adjustments called
for by this Section 10(b) and not previously made. 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
26
<PAGE>
payment date will receive the dividend payable by the Corporation on such shares
of Series D Convertible Preferred Stock on such date, and the converting holder
need not make any payment of the amount of such dividend in connection with such
conversion of shares of Series D Convertible Preferred Stock. Except as provided
above, no adjustment shall be made in respect of cash dividends on Common Stock
or Series D Convertible Preferred Stock that may be accrued and unpaid at the
date of surrender of shares of Series D Convertible Preferred Stock.
(3) (A) The right of the holders of Series D Convertible Preferred
Stock to convert their shares shall be exercised by giving (which may be done by
telephone line facsimile transmission) a Conversion Notice to the Conversion
Agent. If a holder of Series D Convertible Preferred Stock elects to convert
any shares of Series D Convertible Preferred Stock in accordance with Section
10(a), such holder shall not be required to surrender the certificate(s)
representing such shares of Series D Convertible Preferred Stock to the
Corporation unless all of the shares of Series D Convertible Preferred Stock
represented thereby are so converted. Each holder of shares of Series D
Convertible Preferred Stock and the Corporation shall maintain records showing
the number of shares so converted and the dates of such conversions or shall use
such other method, satisfactory to such holder and the Corporation, so as to not
require physical surrender of such certificates upon each such conversion. In
the event of any dispute or discrepancy, such records of the Corporation shall
be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any shares of Series D Convertible Preferred
Stock evidenced by a particular certificate therefor are converted as aforesaid,
the holder of Series D Convertible Preferred Stock may not transfer the
certificate(s) representing such shares of Series D Convertible Preferred Stock
unless such holder first physically surrenders such certificate(s) to the
Corporation, whereupon the Corporation will forthwith issue and deliver upon the
order of such holder of shares of Series D Convertible Preferred Stock new
certificate(s) of like tenor, registered as such 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
27
<PAGE>
the shares of the Series D Convertible Preferred Stock being converted, and the
Corporation shall not be required to issue or deliver any such shares or other
securities or property unless and until the person or persons requesting the
issuance thereof shall have paid to the Corporation the amount of any such tax
or shall have established to the satisfaction of the Corporation that such tax
has been paid. The number of shares of Common Stock to be issued upon each
conversion of shares of Series D Convertible Preferred Stock shall be the number
set forth in the applicable Conversion Notice which number shall be conclusive
absent manifest error. The Corporation shall notify a holder who has given a
Conversion Notice of any claim of manifest error within one Trading Day after
such holder gives such Conversion Notice and no such claim of error shall limit
or delay performance of the Corporation's obligation to issue upon such
conversion the number of shares of Common Stock which are not in dispute. A
Conversion Notice shall be deemed for all purposes to be in proper form unless
the Corporation notifies a holder of shares of Series D Convertible Preferred
Stock being converted within one Trading Day after a Conversion Notice has been
given (which notice shall specify all defects in the Conversion Notice) and any
Conversion Notice containing any such defect shall nonetheless be effective on
the date given if the converting holder promptly undertakes to correct all such
defects.
(4) From and after the Reverse Stock Split Date, the Corporation shall
reserve from its authorized, unissued and otherwise unreserved Common Stock free
from preemptive and similar rights 3,000,000 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
28
<PAGE>
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
(5) In case of any consolidation or merger of the Corporation with any
other corporation (other than a wholly-owned subsidiary of the Corporation) in
which the Corporation is not the surviving corporation, or in case of any sale
or transfer of all or substantially all of the assets of the Corporation, or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series D Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series D
Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series D Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger, sale,
transfer, or share exchange and on a basis which preserves the economic benefits
of the conversion rights of the holders of shares of Series D Convertible
Preferred Stock on a basis as nearly as practical as such rights exist hereunder
prior thereto. If, in connection with any such consolidation, merger, sale,
transfer, or share exchange, each holder of shares of Common Stock is entitled
to elect to receive securities, cash, or other assets upon completion of such
transaction, the Corporation shall provide or cause to be provided to each
holder of Series D Convertible Preferred Stock the right to elect the
securities, cash, or other assets into which the Series D Convertible Preferred
Stock held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
(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
29
<PAGE>
holder, or any setoff, counterclaim, recoupment, limitation or termination, or
any breach or alleged breach by such holder or any other person of any
obligation to the Corporation or any violation or alleged violation of law by
such holder or any other person, and irrespective of any other circumstance
which might otherwise limit such obligation of the Corporation to the holder in
connection with such conversion. If the Corporation fails to issue and deliver
the certificates for the Common Stock to the holder converting shares of Series
D Convertible Preferred Stock pursuant to the first sentence of this paragraph
as and when required to do so, in addition to any other liabilities the
Corporation may have hereunder and under applicable law (1) the Corporation
shall pay or reimburse such holder on demand for all out-of-pocket expenses
including, without limitation, reasonable fees and expenses of legal counsel
incurred by such holder as a result of such failure, (2) the Conversion
Percentage used to determine the Conversion Price applicable to such conversion
shall be reduced by one percentage point from the Conversion Percentage
otherwise used to calculate the Conversion Price applicable to such conversion
or, if such conversion is based on the Ceiling Price, the Ceiling Price used to
determine the Conversion Price applicable to such conversion shall be reduced by
one percentage point from the amount that the Conversion Price otherwise would
have been without reduction pursuant hereto, in either such case, for each
Trading Day after such third Trading Day until such shares of Common Stock are
delivered to such holder and (3) such holder may by written notice (which may be
given by mail, courier, personal service or telephone line facsimile
transmission) or oral notice (promptly confirmed in writing) given at any time
prior to delivery to such holder of the certificates for the shares of Common
Stock issuable upon such conversion of shares of Series D Convertible Preferred
Stock, rescind such conversion, whereupon such holder shall have the right to
convert such shares of Series D Convertible Preferred Stock thereafter in
accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series D Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock to purchase fractional shares of Common Stock which
would otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the Corporation shall
pay in cash an amount equal to the product of (i) the arithmetic average of the
Market Price of one share of Common Stock on the three consecutive Trading Days
ending on the Trading Day immediately preceding the Conversion Date times (ii)
such fraction of a share.
(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\\ = 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.
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 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
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 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.
33
<PAGE>
(3) If a holder of shares of Series D Convertible Preferred Stock
shall have given an Optional Redemption Notice, on the date which is three
business days after the date such Optional Redemption Notice is given (or such
later date as such holder surrenders such holder's certificates for the shares
of Series D Convertible Preferred Stock redeemed) the Corporation shall make
payment in immediately available funds of the applicable Optional Redemption
Price to such account as specified by such holder in writing to the Corporation
at least one business day prior to the applicable redemption date.
(c) Other. (1) In connection with a redemption pursuant to this
-----
Section 11 of less than all of the shares of Series D Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three Trading Days after surrender of such certificate to the Corporation,
the Corporation shall issue and deliver to such holder a replacement certificate
for the shares of Series D Convertible Preferred Stock evidenced by such
certificate which have not been redeemed.
(2) An Optional Redemption Notice given by a holder of shares of
Series D Convertible Preferred Stock shall be deemed for all purposes to be in
proper form unless the Corporation notifies such holder in writing within three
business days after such Optional Redemption Notice has been given (which notice
shall specify all defects in such Optional Redemption Notice), and any Optional
Redemption Notice containing any such defect shall nonetheless be effective on
the date given if such holder promptly undertakes to correct all such defects.
No such claim of error shall limit or delay performance of the Corporation's
obligation to redeem all shares of Series D Convertible Preferred Stock not in
dispute whether or not such holder makes such undertaking.
Section 12. Voting Rights; Certain Restrictions.
-----------------------------------
(a) Voting Rights. Except as otherwise required by law or expressly
--------------
provided herein, shares of Series D Convertible Preferred Stock shall not be
entitled to vote on any matter.
(b) Articles of Incorporation; Certain Stock. The affirmative vote or
----------------------------------------
consent of the holders of a majority of the outstanding shares of the Series D
Convertible Preferred Stock, voting separately as a class, will be required for
(1) any amendment, alteration, or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Articles of Incorporation if the amendment,
alteration, or repeal materially and adversely affects the powers, preferences,
or special rights of the Series D Convertible Preferred Stock, or (2) the
creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock;
provided, however, that any increase in the authorized Preferred Stock of the
Corporation or the creation and issuance of any stock which is 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 D Convertible Preferred Stock except as otherwise required by law.
(c) Repurchases of Series D Convertible Preferred Stock. The
---------------------------------------------------
Corporation shall not repurchase or otherwise acquire any shares of Series D
Convertible Preferred Stock (other than pursuant to Sections 7(a), 9(a), 9(b) or
11) unless the Corporation offers to repurchase or otherwise acquire
simultaneously a pro rata portion of each holder's shares of Series D
Convertible Preferred Stock for cash at the same price per share.
(d) Other. So long as any shares of Series D Convertible Preferred
-----
Stock are outstanding:
(1) Payment of Obligations. The Corporation will pay and discharge,
----------------------
and will cause each subsidiary of the Corporation to pay and discharge, when due
all their respective obligations and liabilities which are material to the
Corporation and its subsidiaries taken as a whole, including, without
limitation, tax liabilities, except where the same may be contested in good
faith by appropriate proceedings.
(2) Maintenance of Property; Insurance. (A) The Corporation will
----------------------------------
keep, and will cause each subsidiary of the Corporation to keep, all material
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary of
the Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance, including but not limited to, product liability insurance, in
such amounts and covering such risks as is reasonably adequate for the conduct
of their businesses and the value of their properties.
(3) Conduct of Business and Maintenance of Existence. The Corporation
------------------------------------------------
will continue, and will cause each subsidiary of the Corporation to continue, to
engage in business of the same general type as conducted by the Corporation and
its operating subsidiaries at the time this Statement of Resolution filed with
the Secretary of State of the State of Texas, and will preserve, renew and keep
in full force and effect, and will cause each subsidiary of the Corporation to
preserve, renew and keep in full force and effect, their respective corporate
existence and their respective material rights, privileges and franchises
necessary or desirable in the normal conduct of business.
(4) Compliance with Laws. The Corporation will comply, and will cause
--------------------
each subsidiary of the Corporation to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate 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 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
36
<PAGE>
D Convertible Preferred Stock shall have been paid by the Corporation as and
when due hereunder.
Section 14. Miscellaneous.
-------------
(a) Notices. Any notices required or permitted to be given under the
-------
terms of this Statement of Resolution shall be in writing and shall be sent by
mail or delivered personally (which shall include telephone line facsimile
transmission) or by courier and shall be deemed given five days after being
placed in the mail, if mailed, or upon receipt, if delivered personally or by
courier (a) in the case of the Corporation, addressed to the Corporation at 1250
Wood Branch Park Drive, Houston, Texas, 77079, Attention: Chief Executive
Officer (telephone line facsimile transmission number (281) 529-4650), or, in
the case of any holder of shares of Series D Convertible Preferred Stock, at
such holder's address or telephone line facsimile transmission number shown on
the stock books maintained by the Corporation with respect to the Series D
Convertible Preferred Stock or such other address as the Corporation shall have
provided by notice to the holders of shares of Series D Convertible Preferred
Stock in accordance with this Section or any holder of shares of Series D
Convertible Preferred Stock shall have provided to the Corporation in accordance
with this Section.
(b) Replacement of Certificates. Upon receipt by the Corporation of
---------------------------
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series D
Convertible Preferred Stock and (1) in the case of loss, theft or destruction,
of indemnity from the record holder of the certificate for such shares of Series
D Convertible Preferred Stock reasonably satisfactory in form to the Corporation
(and without the requirement to post any bond or other security) or (2) in the
case of mutilation, upon surrender and cancellation of the certificate for such
shares of Series D Convertible Preferred Stock, the Corporation will execute and
deliver to such holder a new certificate for such shares of Series D Convertible
Preferred Stock without charge to such holder.
(c) Overdue Amounts. Except as otherwise specifically provided in
---------------
Section 5 with respect to dividends in arrears on the Series D Convertible
Preferred Stock, whenever any amount which is due to any holder of shares of
Series D Convertible Preferred Stock is not paid to such holder when due, such
amount shall bear interest at the rate of 14% per annum (or such other rate as
shall be the maximum rate allowable by applicable law) until paid in full.
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 30th day of November, 1999.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell H. Bodian
------------------------
Mitchell H. Bodian
38
<PAGE>
EXHIBIT 10.64
EQUALNET COMMUNICATIONS CORP.
STATEMENT OF RESOLUTION OF BOARD OF
DIRECTORS ESTABLISHING AND DESIGNATING
SERIES E JUNIOR 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 May
24, 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 E Junior Preferred Stock and Fixing the
Rights and Preferences of Such Series is as follows:
SERIES E JUNIOR PREFERRED STOCK
Section 1. Designation and Amount. The shares of such series shall
----------------------
be designated as "Series E Junior Preferred Stock", and the number of shares
constituting the Series E Junior Preferred Stock shall be 900,000, and shall not
be subject to increase.
Section 2. Series E Preferred Stock Capital. The amount to be
--------------------------------
represented in the Series E Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series E Junior Preferred
Stock shall be $0.01 per share. 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 E Junior Preferred Stock capital not less
frequently than monthly.
<PAGE>
Section 3. Rank. All Series E Junior Preferred Stock shall rank (i)
----
senior to the Common Stock, now or hereafter issued, as to 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, 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 4. Dividends and Distributions. (a) The holders of shares of
---------------------------
Series E Junior Preferred Stock shall not be entitled to receive dividends.
Section 5. Liquidation Preference. In the event of a liquidation,
----------------------
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series E Junior 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 E Junior Preferred Stock
equal to the Liquidation Preference, which is $5.00 for the entire 900,000
shares to be prorated to the number of Series E Junior Preferred Stock then
outstanding 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 E Junior 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 E Junior 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 E Junior
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 6. No Mandatory Redemption. The shares of Series E Junior
-----------------------
Preferred Stock shall not be subject to mandatory redemption by the Corporation.
Section 7. No Sinking Fund. The shares of Series E Junior Preferred
---------------
Stock shall not be subject to the operation of a purchase, retirement or sinking
fund.
2
<PAGE>
Section 8. Optional Redemption.
-------------------
(a) Corporation Optional Redemption. If the Corporation shall be in
-------------------------------
compliance in all material respects with its obligations to the holders of
shares of Series E Junior Preferred Stock, , 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 E Junior Preferred Stock, at any time to redeem
all or from time to time to redeem any part of the outstanding shares of Series
E Junior Preferred Stock in accordance with this Section. If the Corporation
shall redeem less than all outstanding shares of Series E Junior Preferred
Stock, such redemption shall be made as nearly as practical pro rata from all
holders of shares of Series E Junior Preferred Stock. Any Corporation Optional
Redemption Notice under this Section shall be given to the holders of record of
the shares of Series E Junior 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 E Junior Preferred Stock of any
other holder. On the Redemption Date (or such later date as a holder of shares
of Series E Junior Preferred Stock surrenders to the Corporation the
certificate(s) for shares of Series E Junior Preferred Stock to be redeemed
pursuant to this Section the Corporation shall make payment of the applicable
Redemption Price to each holder of shares of Series E Junior Preferred Stock.
The Redemption Price for each outstanding share of Series E Junior Preferred
Stock will be one (1) share of unregistered $.01 par value common stock of the
Corporation. Each holder of Series E Junior Preferred Stock acknowledges that
any common stock received may not have been registered under the Securities Act
of 1933; will be acquired for their own account without any view to the further
distribution thereof; that they can afford the economic risk of holding such
securities for an indefinite period and can afford to suffer a complete
economic loss of my investments in these Securities; that they understand and
take cognizance of the economic risks related to said Securities; have such
knowledge and experience in financial and business matters so as to be capable
of evaluating the risk of investment in these Securities; and has been furnished
the most recent 10K filing by the Corporation and all other financial
information considered by them to be relevant to the decision to acquire the
Securities.
(b) Final Redemption. The Corporation shall have the obligation to
----------------
redeem all, but not less than all, outstanding shares of Series E Junior
Preferred Stock on the fifth (5th) anniversary of the date of its issuance.
at the option of the Corporation except as provided in Sections 9(a)
and 9(b).
Section 9. Conversion.
----------
(a) Conversion at Option of Holder. The holders of the Series E
------------------------------
Junior Preferred Stock shall have no rights to convert the preferred stock to
common
3
<PAGE>
stock. The Corporation shall have no obligation to reserve any common stock in
connection with the issuance of Series E Junior Preferred Stock.
Section 10. Voting Rights; Certain Restrictions.
-----------------------------------
(a) Voting Rights. Except as otherwise required by law or expressly
--------------
provided herein, shares of Series E Junior 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
E Junior 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 E Junior Preferred Stock. The Corporation
----------------------------------------------
shall not repurchase or otherwise acquire any shares of Series E Junior
Preferred Stock unless the Corporation offers to repurchase or otherwise acquire
simultaneously a pro rata portion of each holder's shares of Series E Junior
Preferred Stock for cash at the same price per share.
(d) Other. So long as any shares of Series E Junior 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,
4
<PAGE>
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.
(6) Transactions with Affiliates. The Corporation will not, and will
----------------------------
not permit any subsidiary of the Corporation, directly or indirectly, to pay any
funds to or for the account of, make any investment (whether by acquisition of
stock or indebtedness, by loan, advance, transfer of property, guarantee or
other agreement to pay, purchase or service, directly or indirectly, any
indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of
any assets, tangible or intangible, to, or participate in, or effect any
transaction in connection with, any joint enterprise or other joint arrangement
with, any Affiliate of the Corporation, except, on terms to the Corporation or
such subsidiary no less favorable than terms that could be obtained by the
Corporation or such subsidiary from a person that is not an Affiliate of the
Corporation, as determined in good faith by the Board of Directors.
(7) Compliance. The Corporation shall (a) use its commercially
-----------
reasonable best efforts to obtain knowledge of any failure or default by the
Corporation in the timely performance of any material obligation to the holders
of the Series D Convertible Preferred Stock under the terms of this Statement of
Resolution, the Exchange Agreements, the Registration Rights Agreement, the
Transfer Agent
5
<PAGE>
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 11. Miscellaneous.
-------------
(a) Notices. Any notices required or permitted to be given under the
-------
terms of this Statement of Resolution shall be in writing and shall be sent by
mail or delivered personally (which shall include telephone line facsimile
transmission) or by courier and shall be deemed given five days after being
placed in the mail, if mailed, or upon receipt, if delivered personally or by
courier (a) in the case of the Corporation, addressed to the Corporation at 1250
Wood Branch Park Drive, Houston, Texas, 77079, Attention: Chief Executive
Officer (telephone line facsimile transmission number (281) 529-4650), or, in
the case of any holder of shares of Series D Convertible Preferred Stock, at
such holder's address or telephone line facsimile transmission number shown on
the stock books maintained by the Corporation with respect to the Series D
Convertible Preferred Stock or such other address as the Corporation shall have
provided by notice to the holders of shares of Series D Convertible Preferred
Stock in accordance with this Section or any holder of shares of Series D
Convertible Preferred Stock shall have provided to the Corporation in accordance
with this Section.
(b) Replacement of Certificates. Upon receipt by the Corporation of
---------------------------
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series D
Convertible Preferred Stock and (1) in the case of loss, theft or destruction,
of indemnity from the record holder of the certificate for such shares of Series
D Convertible Preferred Stock reasonably satisfactory in form to the Corporation
(and without the requirement to post any bond or other security) or (2) in the
case of mutilation, upon surrender and cancellation of the certificate for such
shares of Series D Convertible Preferred Stock, the Corporation will execute and
deliver to such holder a new certificate for such shares of Series D Convertible
Preferred Stock without charge to such holder.
(c) Overdue Amounts. Except as otherwise specifically provided in
---------------
Section 5 with respect to dividends in arrears on the Series D Convertible
Preferred Stock, whenever any amount which is due to any holder of shares of
Series D Convertible Preferred Stock is not paid to such holder when due, such
amount shall bear interest at the rate of 14% per annum ( or such other rate as
shall be the maximum rate allowable by applicable law) until paid in full.
6
<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: /s/ Mitchell H. Bodian
---------------------------
Mitchell H. Bodian
7
<PAGE>
EXHIBIT 10.65
AMENDMENT AGREEMENT
This Amendment Agreement ("Agreement") is dated as of 15th day of June, 1999
(the "Effective Date"), and is made by and among Equalnet Communications Corp.,
a Texas corporation, hereinafter referred to as "Equalnet" or "Company", and MCM
Partners, a Washington limited liability partnership, hereinafter referred to as
"Holder."
WHEREAS, Holder is the holder of record of 2,030 shares of Series A Convertible
Preferred Stock which represents 100% of the issued and outstanding shares of
Series A Convertible Preferred Stock; and
WHEREAS, pursuant to the Agreement of Merger and Plan of Reorganization, dated
as of December 2, 1997, by and between the Company and the Holder (the "Purchase
and Exchange Agreement"), the Company issued to the Holder shares (the "Series A
preferred Shares") of Preferred Stock, $0.01 par value (the "Series A Preferred
Stock") of the Company; and
WHEREAS, Equalnet and the Holder wish to amend the terms of the Series A
Preferred Stock;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained and intending to be
legally bound hereby, Equalnet and Holder hereby agree as follows:
SECTION 1.
AMENDMENT OF STATEMENT OF RESOLUTIONS
a. Series A Preferred Stock. The Company and the Holder agree that the
------------------------
Statement of Resolutions of the Board of Directors Establishing and
Designating Series A Convertible Preferred Stock and Fixing the Rights and
Preferences of Such Series be amended to read as set forth in Annex I
-------
attached hereto (the "Amended Statement of Resolutions").
b. Approval of Amendments. Holder shall vote in favor of the resolutions as set
----------------------
forth in Annex IV attached hereto ratifying the amendments as set forth in
--------
Section 1.a at a Special Meeting of the Shareholders of Series A Preferred
Stock to be held on or before Closing.
c. Closing. The closing of this Agreement shall take place at the Law Offices
-------
of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York
10019 at 10:00 A.M., New York City Time, as soon as practicable, but no
later than December 8, 1999, or at such other time and place as the Company
and the Holder mutually agree upon orally or in writing (which time and
place are designated as the "Closing").
d. Certain Terms. The shares of Series A Preferred Stock issuable pursuant to
--------------
Section 5 of the Amended Statement of Resolutions as dividends on the Series
A Preferred Shares are referred to herein as "Dividend Shares." The shares
of Common Stock issuable upon conversion of the Series A Preferred Shares and
the Dividend Shares are referred to herein collectively as the "Common
Shares." The Series A Preferred Shares, the Dividend Shares and the Common
Shares are referred to herein collectively as the "Securities."
SECTION 2.
CONDITIONS PRECEDENT TO HOLDER'S OBLIGATION
<PAGE>
The obligation of the Holder to ratify the amendment of the Series A Preferred
Stock as set forth herein is subject to the following conditions (any or all of
which may be waived by the Holder in its sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Company set forth in this Agreement shall be true on the date of the
Closing.
b. Documentation at Closing. The Holder shall have received, on or prior to
------------------------
the date of the Closing, all of the following, each in form and substance
satisfactory to the Holder and its counsel:
(1) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying (1) the Articles of Incorporation and By-
Laws of the Company as in effect on the date of the Closing; (2) all
resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated
hereby; and (3) such other matters as reasonably requested by the
Holder;
(2) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying the statements of the Company to the effect
set forth in Sections 2.a. and 2.c.;
(3) Evidence of the filing with, and acceptance by, the Secretary of State
of the State of Texas, of the Amended Statement of Resolutions;
(4) An opinion of Dean H. Fisher, General Counsel of the Company, dated the
date of the Closing, in form, scope and substance reasonably
satisfactory to the Holder, to the effect set forth in Annex III
---------
attached hereto.
c. Performance; No Default. The Company shall have performed and complied with
-----------------------
all covenants and agreements contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
d. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be
satisfactory to the Holder and its counsel, and the Holder and its counsel
shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
SECTION 3.
CONDITIONS PRECEDENT TO EQUALNET'S OBLIGATION
The obligation of the Company to amend the Series A Preferred Stock as set forth
herein is subject to the following conditions (any or all of which may be waived
by the Company in its sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Holder set forth in this Agreement shall be true on the date of the
Closing.
b. Performance; No Default. The Holder shall have performed and complied with
-----------------------
all agreements and conditions contained in this Agreement required to be
performed or
<PAGE>
complied with by the Holder prior to or at the Closing.
c. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be
satisfactory to the Company and its counsel, and the Company and its counsel
shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
SECTION 4.
REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF EQUALNET
The Company represents and warrants to, and covenants and agrees with, the
Holder as follows:
a. Organization and Standing of the Company. The Company is a corporation duly
----------------------------------------
organized, validly existing and in good standing under the laws of its state
of incorporation and has all requisite corporate power and authority (i) to
own, lease and operate its properties, to carry on its business as now being
conducted and (ii) to execute, deliver and perform its obligations under
this Agreement, the Amended Statement of Resolutions, the Amended and
Restated Registration Rights Agreement, the form of which is set forth in
Annex II attached hereto (the "Amended and Restated Registration Rights
--------
Agreement"), and the other agreements to be executed by the Company in
connection herewith and to consummate the transactions contemplated hereby
and thereby. The Company and EqualNet Corporation, Netco Acquisitions Corp.
or USC Telecom Corp. (the "Subsidiaries") are duly qualified to do business
and are in good standing in all jurisdictions wherein such qualification is
necessary and where failure so to qualify would have a material adverse
effect on their business, properties, operations, condition (financial or
other), results of operations or prospects of the Company. The Company has
no equity investment in any person other than its subsidiaries.
b. Concerning the Common Shares and the Common Stock. The Common Shares (1) to
-------------------------------------------------
the extent available out of the total shares currently authorized on the
date hereof; and (2) subject to shareholder approval of the Reverse Stock
Split as contemplated in Section 4.j herein, for such Common Shares
unavailable out of the total shares authorized on the date hereof have been
duly authorized and when issued upon conversion of the Preferred Shares or
the Dividend Shares will be validly issued, fully paid and nonassessable and
will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive or similar rights of any stockholder of
the Company or any other person to acquire the Series A Preferred Shares and
Dividend Shares or any of the Common Shares. The Common Stock is listed for
trading on the Nasdaq SmallCap Market ("Nasdaq") and no suspension of
trading in the Common Stock is in effect.
c. Amendment Agreement, and Other Transaction Documents. This Agreement, the
----------------------------------------------------
Amended and Restated Registration Rights Agreement, the Amended Statement of
Resolutions (subject to Series A Shareholder approval of the Amended
Statement of Resolutions) and the other agreements and instruments
contemplated hereby and thereby have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company
and this Agreement is, and the Amended and Restated Registration Rights
Agreement, the Amended Statement of Resolutions and such other agreements,
when executed and delivered by the Company, will be, valid and binding
<PAGE>
obligations of the Company enforceable in accordance with their respective
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditor's rights generally.
d. Non-contravention. The execution and delivery by the Company of this
-----------------
Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Series A Preferred Shares
as contemplated by this Agreement, and the other transactions contemplated
by this Agreement, the Amended and Restated Registration Rights Agreement
and the Amended Statement of Resolutions do not and will not, with or
without the giving of notice or the lapse of time, or both (i) result in any
violation of any terms of the Articles of Incorporation or By-laws of the
Company and the Subsidiaries; (ii) conflict with or result in a breach by
the Company or the Subsidiaries or any of the terms or provisions of, or
constitute a default under, or result in the modification, amendment,
termination or cancellation of, result in the acceleration of any obligation
of the Company or the Subsidiaries under, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company or the Subsidiaries pursuant to any
indenture, mortgage, deed of trust or other agreement or instrument to which
the Company or the Subsidiaries is a party or by which the Company or the
Subsidiaries or any of their properties or assets is bound or affected;
(iii) violate or contravene any applicable law, rule or regulation or any
applicable decree, judgment or order of any court, United States federal or
state regulatory body, administrative agency or other governmental body
having jurisdiction over the Company or the Subsidiaries or any of their
properties or assets; or (iv) have any material adverse effect on any
permit, certification, registration, approval, consent, license or franchise
necessary for the Company or the Subsidiaries to own or lease and operate
any of their properties or to conduct any of their businesses or the ability
of the Company or the Subsidiaries to make use thereof.
e. Approvals. No authorization, approval or consent of, or filing with, any
---------
court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required
to be obtained or made by the Company for (1) the execution, delivery and
performance by the Company of this Agreement, the Amended and Restated
Registration Rights Agreement, and the other agreements and instruments
contemplated hereby and thereby, (2) the execution and filing and
performance by the Company of the Statement of Resolution, (3) the issuance
of the Dividend Shares as contemplated by this Agreement and (4) the
issuance of Common Shares on conversion of the Series A Preferred Shares or
the issuance of Dividend Shares, other than (u) shareholder approval of the
issue required by Section 5.h herein, (v) a reverse stock split
substantially similar to that as described in Section 4.j herein; (w) the
listing of the Common Shares on Nasdaq; (x) registration of the resale of
the Common Shares under the 1933 Act as contemplated by the Amended and
Restated Registration Rights Agreement and (y) Series A Shareholder approval
of the Amended Statement of Resolutions.
f. SEC Filings. The Company has timely filed all required forms, reports and
-----------
other documents required to be filed with the Securities Exchange Commission
(the "SEC") under the Securities Exchange Act of 1934, as amended (the "1934
Act") since January 1, 1997. All of such forms, reports and other documents
complied in all material respects with all applicable requirements of the
1933 Act and the 1934 Act (1) when declared effective for those forms,
reports and other documents filed under the 1933 Act; and (2) as filed or
subsequently amended for those forms, reports and other documents filed
under the 1934 Act.
<PAGE>
g. Absence of Brokers, Finders, Solicitation Compensation, Etc. No broker,
------------------------------------------------------------
finder or similar person is entitled to any commission, fee or other
compensation in respect of the transactions contemplated by this Agreement
by reason of any action or conduct of the Company or any person acting on
its behalf, and the Company shall pay, and indemnify and hold harmless the
Holder from, any claim made against the Holder by any person for any such
commission, fee or other compensation. The Company has not and will not pay
any commission or other remuneration to any person for solicitation of
exchanges of Notes for shares of Series A Preferred Stock pursuant to this
Agreement.
h. [Reserved].
i. [Reserved].
j. Capitalization. Following the reverse stock split as contemplated by the
--------------
Company (based on the number of shares outstanding on September 24, 1999),
the authorized capital stock of the Company will be (a) 50,000,000 shares of
Common Stock of which approximately 2,872,262 shares will be outstanding,
all of which are fully paid and nonassessable; and (b) 5,000,000 shares of
Preferred Stock, $.01 par value, of which 2,000 shares have been designated
Series A Convertible Preferred Stock and of which 2,057 shares are
outstanding, 3,000 shares have been designated Series B Senior Convertible
Preferred Stock and of which 3,000 shares are outstanding, 300,000 shares
have been designated Series C Convertible Preferred Stock and of which
215,799 shares are outstanding, 6,500 shares have been designated Series D
Convertible Preferred Stock and of which 3,964 shares are outstanding,
900,000 shares have been designated Series E Convertible Preferred Stock
("Series E Preferred Stock") of which 833,333 are outstanding and of which
6,500 shares will be designated as Series F Convertible Preferred Stock of
which 3,142 shares are outstanding. As of September 24, 1999, the Company
had outstanding options, warrants and similar rights, including preferred
stock convertible into Common Stock, entitling the holders to purchase or
acquire 25,324,269 shares of Common Stock. Other than as set forth in the
preceding sentence, the Company does not have outstanding any material
amount of securities (or obligation to issue any such securities)
convertible into, exchangeable for or otherwise entitling the holders
thereof to acquire shares of Common Stock. The Company has duly reserved
from its authorized and unissued shares of Common Stock the full number of
shares required for (a) all options, warrants, convertible securities and
other rights to acquire shares of Common Stock which are outstanding and (b)
all shares of Common Stock and options and other rights to acquire shares of
Common Stock which may be issued or granted under the stock option and
similar plans which have been adopted by the Company or any of its
Subsidiaries other than those shares required for full conversion of Series
A Convertible Preferred Stock, Series A Convertible Preferred Stock, Series
E Junior Preferred Stock and Series F Convertible Preferred Stock.
SECTION 5.
CERTAIN COVENANTS
a. [Reserved].
b. Nasdaq Listing; Reporting Status. As soon as reasonably possible after the
--------------------------------
Closing Date and subject to the waiver in Section 5.e, the Company shall
file an application for listing of additional shares with Nasdaq covering
such of the Common Shares as shall not previously have been listed for
trading on Nasdaq and shall provide evidence of such filing to the
<PAGE>
Holders. The Company shall use its best efforts to obtain the listing,
subject to official notice of issuance, of such Common Shares and on Nasdaq.
So long as the Holder beneficially owns any shares of Series F Preferred
Stock or Common Shares, the Company shall timely file all reports required
to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act,
and the Company shall not terminate its status as an issuer required to file
reports under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would permit such termination. So long as the Holder beneficially
owns any shares of Series A Preferred Stock or Common Shares, the company
shall timely file all reports required to be filed with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would permit such
termination.
c. Rule 144. The Company will use its best efforts to provide to the Holder
--------
and/or the Company's transfer agent an opinion of counsel, within 3 business
days of receipt of a request for such opinion from the Holder or the
transfer agent, to the effect that the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock may be resold without
registration under the 1933 Act pursuant to Rule 144 thereof based upon
customary representations by or on behalf of the Holder as such
representations may be reasonably requested by the Company.
d. Amended and Restated Registration Rights. The parties hereto agree to enter
----------------------------------------
into the Amended and Restated Registration Rights Agreement as of the
Effective Date.
e. Waivers. As of the Effective Date and until the earlier of (i) the Initial
-------
Reset Date as defined in the Amended Statement of Resolutions or (ii)
January 15, 2000, the Holder waives (x) any requirement in the Amended
Statement of Resolutions or in any related instrument (including Section 5.b
herein) that the Company reserve a sufficient number of shares of Common
Stock to permit conversion in full of the outstanding shares of Series A
Preferred Stock or list such shares with Nasdaq; and (y) any rights Holder
may have to demand redemption of the Series A Preferred Stock based on
redemption events, inconvertibility events, repurchase events or events of
default except those redemption rights that may arise from the Company's
failure to timely perform its obligations to issue Common Stock upon
conversion (subject to the limitations in Section 5.f) set forth in Section
10 of the Statement of Resolutions; provided, however, that if the Closing
Date does not occur on or before December 8, 1999, the waivers granted
herein shall expire and cease to be effective.
f. Agreed Limitation on Conversion. The Holder agrees that, provided the
-------------------------------
Reverse Stock Split Date occurs on or before December 31, 1999, during the
period commencing with the Reverse Stock Split Date and ending on the
Trading Day immediately prior to the Initial Reset Date, as those terms are
defined in the Amended Statement of Resolutions, Holder will not convert
Series A Preferred Stock into Common Stock in an amount greater than the
number of shares of Common Stock that the Holder would have had the ability
to sell pursuant to Rule 144 during such period of time (the "Limitation
Amount"). Holder also agrees that during the same time period of this
Section 5.f, the redemption obligations of the Company upon inability to
convert Series F Preferred Stock into Common Stock and related obligations
to provide Inconvertibility Notices shall be limited to those instances
created by the inability of the Company to issue the Limitation Amount of
Common Stock upon conversion of Series A Preferred Stock.
g. Call Option. Until October 13, 2000, the Company shall have the option, but
-----------
not the obligation, to repurchase at any time, for a cash payment equal to
$1,000 per share of
<PAGE>
Series A Preferred Stock so repurchased, any portion of Holder's Series A
Preferred Stock that the Company in its sole discretion chooses to
repurchase, upon 20 days prior written notice of exercise of this call
option. This provision shall in no way be construed to limit Holder's
conversion rights under the Amended Statement of Resolutions prior to such
repurchase.
h. Shareholder Approval. The Company agrees to submit as soon as practicable,
--------------------
for purposes of Rule 4460 of the NASDAQ, a proposal for approval by
shareholders of the Company's Common Stock allowing conversion of Series A
Preferred Stock in amounts greater than the Maximum Share Amount, as such
term is defined in the Amended Statement of Resolutions.
i. Dividend Calculation. Holder agrees that for all dividends due from the
--------------------
Effective Date through Closing under the Amended Statement of Resolutions
and not previously waived as to payment by any holder of Series A
Convertible Preferred Stock, such dividends shall not be deemed untimely so
long as they are paid on or before Closing.
SECTION 6.
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF HOLDER
The Holder represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Amendment Agreement. This Agreement has been duly and validly authorized,
-------------------
executed and delivered on behalf of the Holder and is a valid and binding
agreement of the Holder enforceable in accordance with its terms, subject as
to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
SECTION 7.
MISCELLANEOUS
a. Costs, Expenses and Taxes. Each party shall bear its own costs and expenses
-------------------------
in connection with the preparation, execution and delivery of this
Agreement. The Company shall pay any and all stamp and other taxes payable
or determined to be payable in connection with the execution and delivery of
this Agreement.
b. Survival of Representations. The representations, warranties, covenants and
---------------------------
agreements of the Holder and the Company contained in this Agreement or in
any certificate furnished hereunder shall survive the Closing.
c. Prior Agreements. Except to the extent expressly amended hereby, the terms
----------------
and provisions of the Purchase and Exchange Agreement is hereby confirmed
and shall remain in full force and effect. Subject to the foregoing
sentence, this Agreement constitutes the entire agreement between the
parties concerning the subject matter hereof and supersedes any prior
representations, understandings or agreements. There are no representations,
warranties, agreements, conditions or covenants, of any nature whatsoever
(whether express or implied, written or oral) between the parties hereto
with respect to such subject matter except as expressly set forth herein.
d. Severability. The invalidity or unenforceability of any provision hereof
------------
shall in no way affect
<PAGE>
the validity or enforceability of any other provision or the validity and
enforceability of this Agreement in any other jurisdiction.
e. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO ITS CHOICE OF LAW RULES.
f. Headings. Section headings in this Agreement are included herein for
--------
convenience of reference only and shall not constitute a part of, or affect
the interpretation of, this Agreement.
g. Counterparts. This Agreement may be executed in any number of counterparts,
------------
all of which taken together shall constitute one and the same instrument,
and either of the parties hereto may execute this Agreement by signing any
such counterpart. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such
party.
h. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and permitted
assigns.
i. Further Assurances. Each party to this Agreement will perform any and all
------------------
acts and execute any and all documents as may be necessary and proper under
the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
j. Publicity. Neither the Company nor the Holder shall, nor shall they permit
---------
their respective stockholders, directors, officers or advisors to, issue or
cause the publication of any press release or make any other public
statement, filing or announcement with respect to this Agreement and the
transactions contemplated hereby without the prior approval of the other
parties; provided, however, that the Company shall be entitled, without the
prior approval of the Holder, to make any press release or other public
disclosure with respect to such transactions as is required by applicable
law or the Nasdaq Stock Market (although the Holder shall be consulted by
the Company in connection with any such press release or other public
disclosure prior to its release and shall be provided with a copy thereof).
The Company and the Holder shall cooperate in issuing press releases or
otherwise making public statements with respect to this Agreement and the
transactions contemplated hereby, which cooperation shall include first
consulting the other party hereto concerning the requirement for, and timing
and content of, such public announcement.
[The rest of this page is intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
caused this Agreement to be executed by their respective duly authorized
officers, as of the date first above written.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell Bodian
---------------------
Name: Mitchell Bocian
Title: CEO
MCM PARTNERS
By: /s/ Donald R. Morken
--------------------
Name: Donald R. Morken
Title: General Partner
<PAGE>
EXHIBIT 10.66
AMENDMENT AGREEMENT
This Amendment Agreement ("Agreement") is dated as of 15th day of June, 1999
(the "Effective Date"), and is made by and among Equalnet Communications Corp.,
a Texas corporation, hereinafter referred to as "Equalnet" or "Company", and
Willis Group, LLC, a Texas limited liability company, hereinafter referred to as
"Holder."
WHEREAS, Holder is the holder of record of 1,982 shares of Series D Preferred
Stock; and
WHEREAS, pursuant to the Note Purchase and Exchange Agreement, dated as of July
31, 1998, by and between the Company and the Holder (the "Purchase and Exchange
Agreement"), the Company issued to the Holder shares (the "Series D preferred
Shares") of Preferred Stock, $0.01 par value (the "Series D Preferred Stock") of
the Company; and
WHEREAS, Equalnet and the Holder wish to amend the terms of the Series D
preferred Stock;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained and intending to be
legally bound hereby, Equalnet and Holder hereby agree as follows:
SECTION 1.
AMENDMENT OF STATEMENT OF RESOLUTIONS
a. Series D Preferred Stock. The Company and the Holder agree that the
------------------------
Statement of Resolutions of the Board of Directors Establishing and
Designating Series D Convertible Preferred Stock and Fixing the Rights and
Preferences of Such Series be amended to read as set forth in Annex I
-------
attached hereto (the "Amended Statement of Resolutions").
b. Approval of Amendments. Holder shall vote in favor of the resolutions as set
----------------------
forth in Annex IV attached hereto ratifying the amendments as set forth in
--------
Section 1.a at a Special Meeting of the Shareholders of Series D Preferred
Stock to be held on or before Closing.
c. Closing. The closing of this Agreement shall take place at the Law Offices
-------
of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York
10019 at 10:00 A.M., New York City Time, as soon as practicable, but no later
than December 8, 1999, or at such other time and place as the Company and the
Holder mutually agree upon orally or in writing (which time and place are
designated as the "Closing").
d. Certain Terms. The shares of Series D Preferred Stock issuable pursuant to
-------------
Section 5 of the Amended Statement of Resolutions as dividends on the Series
D Preferred Shares are referred to herein as "Dividend Shares." The shares
of Common Stock issuable upon conversion of the Series D Preferred Shares and
the Dividend Shares are referred to herein collectively as the "Common
Shares." The Series D Preferred Shares, the Dividend Shares and the Common
Shares are referred to herein collectively as the "Securities."
SECTION 2.
CONDITIONS PRECEDENT TO HOLDER'S OBLIGATION
The obligation of the Holder to ratify the amendment of the Series D Preferred
Stock as set forth
<PAGE>
herein is subject to the following conditions (any or all of which may be waived
by the Holder in its sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Company set forth in this Agreement shall be true on the date of the
Closing.
b. Documentation at Closing. The Holder shall have received, on or prior to
------------------------
the date of the Closing, all of the following, each in form and substance
satisfactory to the Holder and its counsel:
(1) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying (1) the Articles of Incorporation and By-
Laws of the Company as in effect on the date of the Closing; (2) all
resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated
hereby; and (3) such other matters as reasonably requested by the
Holder;
(2) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying the statements of the Company to the effect
set forth in Sections 2.a. and 2.c.;
(3) Evidence of the filing with, and acceptance by, the Secretary of State
of the State of Texas, of the Amended Statement of Resolutions;
(4) An opinion of Dean H. Fisher, General Counsel of the Company, dated the
date of the Closing, in form, scope and substance reasonably
satisfactory to the Holder, to the effect set forth in Annex III
---------
attached hereto.
c. Performance; No Default. The Company shall have performed and complied with
-----------------------
all covenants and agreements contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
d. Proceedings and Documents. All corporate and other proceedings in connection
-------------------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to the
Holder and its counsel, and the Holder and its counsel shall have received
all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
SECTION 3.
CONDITIONS PRECEDENT TO EQUALNET'S OBLIGATION
The obligation of the Company to amend the Series D Preferred Stock as set forth
herein is subject to the following conditions (any or all of which may be waived
by the Company in its sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Holder set forth in this Agreement shall be true on the date of the
Closing.
b. Performance; No Default. The Holder shall have performed and complied with
-----------------------
all agreements and conditions contained in this Agreement required to be
performed or complied with by the Holder prior to or at the Closing.
2
<PAGE>
c. Proceedings and Documents. All corporate and other proceedings in connection
-------------------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to the
Company and its counsel, and the Company and its counsel shall have received
all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
SECTION 4.
REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF EQUALNET
The Company represents and warrants to, and covenants and agrees with, the
Holder as follows:
a. Organization and Standing of the Company. The Company is a corporation duly
----------------------------------------
organized, validly existing and in good standing under the laws of its state
of incorporation and has all requisite corporate power and authority (i) to
own, lease and operate its properties, to carry on its business as now being
conducted and (ii) to execute, deliver and perform its obligations under
this Agreement, the Amended Statement of Resolutions, the Amended and
Restated Registration Rights Agreement, the form of which is set forth in
Annex II attached hereto (the "Amended and Restated Registration Rights
--------
Agreement"), and the other agreements to be executed by the Company in
connection herewith and to consummate the transactions contemplated hereby
and thereby. The Company and EqualNet Corporation, Netco Acquisitions Corp.
or USC Telecom Corp. (the "Subsidiaries") are duly qualified to do business
and are in good standing in all jurisdictions wherein such qualification is
necessary and where failure so to qualify would have a material adverse
effect on their business, properties, operations, condition (financial or
other), results of operations or prospects of the Company. The Company has
no equity investment in any person other than its subsidiaries.
b. Concerning the Common Shares and the Common Stock. The Common Shares (1) to
-------------------------------------------------
the extent available out of the total shares currently authorized on the
date hereof; and (2) subject to shareholder approval of the Reverse Stock
Split as contemplated in Section 4.j herein, for such Common Shares
unavailable out of the total shares authorized on the date hereof have been
duly authorized and when issued upon conversion of the Preferred Shares or
the Dividend Shares will be validly issued, fully paid and nonassessable and
will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive or similar rights of any stockholder of
the Company or any other person to acquire the Series D Preferred Shares and
Dividend Shares or any of the Common Shares. The Common Stock is listed for
trading on the Nasdaq SmallCap Market ("Nasdaq") and no suspension of
trading in the Common Stock is in effect.
c. Amendment Agreement, and Other Transaction Documents. This Agreement, the
----------------------------------------------------
Amended and Restated Registration Rights Agreement, the Amended Statement of
Resolutions (subject to Series D Shareholder approval of the Amended
Statement of Resolutions) and the other agreements and instruments
contemplated hereby and thereby have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company
and this Agreement is, and the Amended and Restated Registration Rights
Agreement, the Amended Statement of Resolutions and such other agreements,
when executed and delivered by the Company, will be, valid and binding
obligations of the Company enforceable in accordance with their respective
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium
3
<PAGE>
and other similar laws affecting the enforcement of creditor's rights
generally.
d. Non-contravention. The execution and delivery by the Company of this
-----------------
Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Series D Preferred Shares
as contemplated by this Agreement, and the other transactions contemplated
by this Agreement, the Amended and Restated Registration Rights Agreement
and the Amended Statement of Resolutions do not and will not, with or
without the giving of notice or the lapse of time, or both (i) result in any
violation of any terms of the Articles of Incorporation or By-laws of the
Company and the Subsidiaries; (ii) conflict with or result in a breach by
the Company or the Subsidiaries or any of the terms or provisions of, or
constitute a default under, or result in the modification, amendment,
termination or cancellation of, result in the acceleration of any obligation
of the Company or the Subsidiaries under, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company or the Subsidiaries pursuant to any
indenture, mortgage, deed of trust or other agreement or instrument to which
the Company or the Subsidiaries is a party or by which the Company or the
Subsidiaries or any of their properties or assets is bound or affected;
(iii) violate or contravene any applicable law, rule or regulation or any
applicable decree, judgment or order of any court, United States federal or
state regulatory body, administrative agency or other governmental body
having jurisdiction over the Company or the Subsidiaries or any of their
properties or assets; or (iv) have any material adverse effect on any
permit, certification, registration, approval, consent, license or franchise
necessary for the Company or the Subsidiaries to own or lease and operate
any of their properties or to conduct any of their businesses or the ability
of the Company or the Subsidiaries to make use thereof.
e. Approvals. No authorization, approval or consent of, or filing with, any
---------
court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required
to be obtained or made by the Company for (1) the execution, delivery and
performance by the Company of this Agreement, the Amended and Restated
Registration Rights Agreement, and the other agreements and instruments
contemplated hereby and thereby, (2) the execution and filing and
performance by the Company of the Statement of Resolution, (3) the issuance
of the Dividend Shares as contemplated by this Agreement and (4) the
issuance of Common Shares on conversion of the Series D Preferred Shares or
the issuance of Dividend Shares, other than (u) shareholder approval of the
issue required by Section 5.h herein, (v) a reverse stock split
substantially similar to that as described in Section 4.j herein; (w) the
listing of the Common Shares on Nasdaq; (x) registration of the resale of
the Common Shares under the 1933 Act as contemplated by the Amended and
Restated Registration Rights Agreement and (y) Series D Shareholder approval
of the Amended Statement of Resolutions.
f. SEC Filings. The Company has timely filed all required forms, reports and
-----------
other documents required to be filed with the Securities Exchange Commission
(the "SEC") under the Securities Exchange Act of 1934, as amended (the "1934
Act") since January 1, 1997. All of such forms, reports and other documents
complied in all material respects with all applicable requirements of the
1933 Act and the 1934 Act (1) when declared effective for those forms,
reports and other documents filed under the 1933 Act; and (2) as filed or
subsequently amended for those forms, reports and other documents filed
under the 1934 Act.
g. Absence of Brokers, Finders, Solicitation Compensation, Etc. No broker,
------------------------------------------------------------
finder or similar person is entitled to any commission, fee or other
compensation in respect of the
4
<PAGE>
transactions contemplated by this Agreement by reason of any action or
conduct of the Company or any person acting on its behalf, and the Company
shall pay, and indemnify and hold harmless the Holder from, any claim made
against the Holder by any person for any such commission, fee or other
compensation. The Company has not and will not pay any commission or other
remuneration to any person for solicitation of exchanges of Notes for shares
of Series D Preferred Stock pursuant to this Agreement.
h. [Reserved].
i. [Reserved].
j. Capitalization. Following the reverse stock split as contemplated by the
--------------
Company (based on the number of shares outstanding on September 24, 1999),
the authorized capital stock of the Company will be (a) 50,000,000 shares of
Common Stock of which approximately 2,872,262 shares will be outstanding,
all of which are fully paid and nonassessable; and (b) 5,000,000 shares of
Preferred Stock, $.01 par value, of which 2,000 shares have been designated
Series A Convertible Preferred Stock and of which 2,057 shares are
outstanding, 3,000 shares have been designated Series B Senior Convertible
Preferred Stock and of which 3,000 shares are outstanding, 300,000 shares
have been designated Series C Convertible Preferred Stock and of which
215,799 shares are outstanding, 6,500 shares have been designated Series D
Convertible Preferred Stock and of which 3,964 shares are outstanding,
900,000 shares have been designated Series E Convertible Preferred Stock
("Series E Preferred Stock") of which 833,333 are outstanding and of which
6,500 shares will be designated as Series F Convertible Preferred Stock of
which 3,142 shares are outstanding. As of September 24, 1999, the Company
had outstanding options, warrants and similar rights, including preferred
stock convertible into Common Stock, entitling the holders to purchase or
acquire 25,324,269 shares of Common Stock. Other than as set forth in the
preceding sentence, the Company does not have outstanding any material
amount of securities (or obligation to issue any such securities)
convertible into, exchangeable for or otherwise entitling the holders
thereof to acquire shares of Common Stock. The Company has duly reserved
from its authorized and unissued shares of Common Stock the full number of
shares required for (a) all options, warrants, convertible securities and
other rights to acquire shares of Common Stock which are outstanding and (b)
all shares of Common Stock and options and other rights to acquire shares of
Common Stock which may be issued or granted under the stock option and
similar plans which have been adopted by the Company or any of its
Subsidiaries other than those shares required for full conversion of Series
A Convertible Preferred Stock, Series D Convertible Preferred Stock, Series
E Junior Preferred Stock and Series F Convertible Preferred Stock.
SECTION 5.
CERTAIN COVENANTS
a. [Reserved].
b. Nasdaq Listing; Reporting Status. As soon as reasonably possible after the
--------------------------------
Closing Date and subject to the waiver in Section 5.e, the Company shall
file an application for listing of additional shares with Nasdaq covering
such of the Common Shares as shall not previously have been listed for
trading on Nasdaq and shall provide evidence of such filing to the Holders.
The Company shall use its best efforts to obtain the listing, subject to
official notice of issuance, of such Common Shares and on Nasdaq. So long as
the Holder beneficially
5
<PAGE>
owns any shares of Series F Preferred Stock or Common Shares, the Company
shall timely file all reports required to be filed with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would permit such
termination. So long as the Holder beneficially owns any shares of Series D
Preferred Stock or Common Shares, the company shall timely file all reports
required to be filed with the SEC pursuant to Section 13 or 15(d) of the
1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
c. Rule 144. The Company will use its best efforts to provide to the Holder
--------
and/or the Company's transfer agent an opinion of counsel, within 3 business
days of receipt of a request for such opinion from the Holder or the
transfer agent, to the effect that the shares of Common Stock issuable upon
conversion of the Series D Preferred Stock may be resold without
registration under the 1933 Act pursuant to Rule 144 thereof based upon
customary representations by or on behalf of the Holder as such
representations may be reasonably requested by the Company.
d. Amended and Restated Registration Rights. The parties hereto agree to enter
----------------------------------------
into the Amended and Restated Registration Rights Agreement as of the
Effective Date.
e. Waivers. As of the Effective Date and until the earlier of (i) the Initial
-------
Reset Date as defined in the Amended Statement of Resolutions or (ii)
January 15, 2000, the Holder waives (x) any requirement in the Amended
Statement of Resolutions or in any related instrument (including Section 5.b
herein) that the Company reserve a sufficient number of shares of Common
Stock to permit conversion in full of the outstanding shares of Series D
Preferred Stock or list such shares with Nasdaq; and (y) any rights Holder
may have to demand redemption of the Series D Preferred Stock based on
redemption events, inconvertibility events, repurchase events or events of
default except those redemption rights that may arise from the Company's
failure to timely perform its obligations to issue Common Stock upon
conversion (subject to the limitations in Section 5.f) set forth in Section
10 of the Statement of Resolutions; provided, however, that if the Closing
Date does not occur on or before December 8, 1999, the waivers granted
herein shall expire and cease to be effective.
f. Agreed Limitation on Conversion. The Holder agrees that, provided the
-------------------------------
Reverse Stock Split Date occurs on or before December 31, 1999, during the
period commencing with the Reverse Stock Split Date and ending on the
Trading Day immediately prior to the Initial Reset Date, as those terms are
defined in the Amended Statement of Resolutions, Holder will not convert
Series D Preferred Stock into Common Stock in an amount greater than the
number of shares of Common Stock that the Holder would have had the ability
to sell pursuant to Rule 144 during such period of time (the "Limitation
Amount"). Holder also agrees that during the same time period of this
Section 5.f, the redemption obligations of the Company upon inability to
convert Series F Preferred Stock into Common Stock and related obligations
to provide Inconvertibility Notices shall be limited to those instances
created by the inability of the Company to issue the Limitation Amount of
Common Stock upon conversion of Series D Preferred Stock.
g. Call Option. Until October 13, 2000, the Company shall have the option, but
-----------
not the obligation, to repurchase at any time, for a cash payment equal to
$1,000 per share of Series D Preferred Stock so repurchased, any portion of
Holder's Series D Preferred Stock that the Company in its sole discretion
chooses to repurchase, upon 20 days prior written
6
<PAGE>
notice of exercise of this call option. This provision shall in no way be
construed to limit Holder's conversion rights under the Amended Statement of
Resolutions prior to such repurchase.
h. Shareholder Approval. The Company agrees to submit as soon as practicable,
--------------------
for purposes of Rule 4460 of the NASDAQ, a proposal for approval by
shareholders of the Company's Common Stock allowing conversion of Series D
Preferred Stock in amounts greater than the Maximum Share Amount, as such
term is defined in the Amended Statement of Resolutions.
i. Dividend Calculation. Holder agrees that for all dividends due from the
--------------------
Effective Date through Closing under the Amended Statement of Resolutions
and not previously waived as to payment by any holder of Series D
Convertible Preferred Stock, such dividends shall not be deemed untimely so
long as they are paid on or before Closing.
SECTION 6.
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF HOLDER
The Holder represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Amendment Agreement. This Agreement has been duly and validly authorized,
-------------------
executed and delivered on behalf of the Holder and is a valid and binding
agreement of the Holder enforceable in accordance with its terms, subject as
to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
SECTION 7.
MISCELLANEOUS
a. Costs, Expenses and Taxes. Each party shall bear its own costs and expenses
-------------------------
in connection with the preparation, execution and delivery of this
Agreement. The Company shall pay any and all stamp and other taxes payable
or determined to be payable in connection with the execution and delivery of
this Agreement.
b. Survival of Representations. The representations, warranties, covenants and
---------------------------
agreements of the Holder and the Company contained in this Agreement or in
any certificate furnished hereunder shall survive the Closing.
c. Prior Agreements. Except to the extent expressly amended hereby, the terms
----------------
and provisions of the Purchase and Exchange Agreement is hereby confirmed
and shall remain in full force and effect. Subject to the foregoing
sentence, this Agreement constitutes the entire agreement between the
parties concerning the subject matter hereof and supersedes any prior
representations, understandings or agreements. There are no representations,
warranties, agreements, conditions or covenants, of any nature whatsoever
(whether express or implied, written or oral) between the parties hereto
with respect to such subject matter except as expressly set forth herein.
d. Severability. The invalidity or unenforceability of any provision hereof
------------
shall in no way affect the validity or enforceability of any other provision
or the validity and enforceability of this Agreement in any other
jurisdiction.
7
<PAGE>
e. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO ITS CHOICE OF LAW RULES.
f. Headings. Section headings in this Agreement are included herein for
--------
convenience of reference only and shall not constitute a part of, or affect
the interpretation of, this Agreement.
g. Counterparts. This Agreement may be executed in any number of counterparts,
------------
all of which taken together shall constitute one and the same instrument,
and either of the parties hereto may execute this Agreement by signing any
such counterpart. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such
party.
h. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and permitted
assigns.
i. Further Assurances. Each party to this Agreement will perform any and all
------------------
acts and execute any and all documents as may be necessary and proper under
the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
j. Publicity. Neither the Company nor the Holder shall, nor shall they permit
---------
their respective stockholders, directors, officers or advisors to, issue or
cause the publication of any press release or make any other public
statement, filing or announcement with respect to this Agreement and the
transactions contemplated hereby without the prior approval of the other
parties; provided, however, that the Company shall be entitled, without the
prior approval of the Holder, to make any press release or other public
disclosure with respect to such transactions as is required by applicable
law or the Nasdaq Stock Market (although the Holder shall be consulted by
the Company in connection with any such press release or other public
disclosure prior to its release and shall be provided with a copy thereof).
The Company and the Holder shall cooperate in issuing press releases or
otherwise making public statements with respect to this Agreement and the
transactions contemplated hereby, which cooperation shall include first
consulting the other party hereto concerning the requirement for, and timing
and content of, such public announcement.
[The rest of this page is intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused this Agreement to be executed by their respective duly authorized
officers, as of the date first above written.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell Bodian
-------------------
Name: Mitchell Bodian
Title: President & CEO
WILLIS GROUP, LLC
By: /s/ Mark Willis
---------------
Name: Mark Willis
Title: President
9
<PAGE>
EXHIBIT 10.67
AMENDMENT AGREEMENT
This Amendment Agreement ("Agreement") is dated as of 15th day of June, 1999
(the "Effective Date"), and is made by and among Equalnet Communications Corp.,
a Texas corporation, hereinafter referred to as "Equalnet" or "Company", and
Advantage Fund Limited, a British Virgin Islands corporation, hereinafter
referred to as "Holder."
WHEREAS, Holder is the holder of record of 1,982 shares of Series D Preferred
Stock; and
WHEREAS, pursuant to the Note Purchase and Exchange Agreement, dated as of July
31, 1998, by and between the Company and the Holder (the "Purchase and Exchange
Agreement"), the Company issued to the Holder shares (the "Series D preferred
Shares") of Preferred Stock, $0.01 par value (the "Series D Preferred Stock") of
the Company; and
WHEREAS, Equalnet and the Holder wish to amend the terms of the Series D
preferred Stock;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained and intending to be
legally bound hereby, Equalnet and Holder hereby agree as follows:
SECTION 1.
AMENDMENT OF STATEMENT OF RESOLUTIONS
a. Series D Preferred Stock. The Company and the Holder agree that the
------------------------
Statement of Resolutions of the Board of Directors Establishing and
Designating Series D Convertible Preferred Stock and Fixing the Rights and
Preferences of Such Series be amended to read as set forth in Annex I
-------
attached hereto (the "Amended Statement of Resolutions").
b. Approval of Amendments. Holder shall vote in favor of the resolutions as set
----------------------
forth in Annex IV attached hereto ratifying the amendments as set forth in
--------
Section 1.a at a Special Meeting of the Shareholders of Series D Preferred
Stock to be held on or before Closing.
c. Closing. The closing of this Agreement shall take place at the Law Offices
-------
of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York
10019 at 10:00 A.M., New York City Time, as soon as practicable, but no
later than December 8, 1999, or at such other time and place as the Company
and the Holder mutually agree upon orally or in writing (which time and
place are designated as the "Closing").
d. Certain Terms. The shares of Series D Preferred Stock issuable pursuant to
-------------
Section 5 of the Amended Statement of Resolutions as dividends on the Series
D Preferred Shares are referred to herein as "Dividend Shares." The shares
of Common Stock issuable upon conversion of the Series D Preferred Shares
and the Dividend Shares are referred to herein collectively as the "Common
Shares." The Series D Preferred Shares, the Dividend Shares and the Common
Shares are referred to herein collectively as the "Securities."
SECTION 2.
CONDITIONS PRECEDENT TO HOLDER'S OBLIGATION
The obligation of the Holder to ratify the amendment of the Series D Preferred
Stock as set forth
<PAGE>
herein is subject to the following conditions (any or all of which may be waived
by the Holder in its sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Company set forth in this Agreement shall be true on the date of the
Closing.
b. Documentation at Closing. The Holder shall have received, on or prior to
------------------------
the date of the Closing, all of the following, each in form and substance
satisfactory to the Holder and its counsel:
(1) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying (1) the Articles of Incorporation and By-
Laws of the Company as in effect on the date of the Closing; (2) all
resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated
hereby; and (3) such other matters as reasonably requested by the
Holder;
(2) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying the statements of the Company to the effect
set forth in Sections 2.a. and 2.c.;
(3) Evidence of the filing with, and acceptance by, the Secretary of State
of the State of Texas, of the Amended Statement of Resolutions;
(4) An opinion of Dean H. Fisher, General Counsel of the Company, dated the
date of the Closing, in form, scope and substance reasonably
satisfactory to the Holder, to the effect set forth in Annex III
---------
attached hereto.
c. Performance; No Default. The Company shall have performed and complied with
-----------------------
all covenants and agreements contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
d. Proceedings and Documents. All corporate and other proceedings in connection
-------------------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to the
Holder and its counsel, and the Holder and its counsel shall have received
all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
SECTION 3.
CONDITIONS PRECEDENT TO EQUALNET'S OBLIGATION
The obligation of the Company to amend the Series D Preferred Stock as set forth
herein is subject to the following conditions (any or all of which may be waived
by the Company in its sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Holder set forth in this Agreement shall be true on the date of the
Closing.
b. Performance; No Default. The Holder shall have performed and complied with
-----------------------
all agreements and conditions contained in this Agreement required to be
performed or complied with by the Holder prior to or at the Closing.
<PAGE>
c. Proceedings and Documents. All corporate and other proceedings in connection
-------------------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to the
Company and its counsel, and the Company and its counsel shall have received
all such counterpart originals or certified or other copies of such documents
as they may reasonably request.
SECTION 4.
REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF EQUALNET
The Company represents and warrants to, and covenants and agrees with, the
Holder as follows:
a. Organization and Standing of the Company. The Company is a corporation duly
----------------------------------------
organized, validly existing and in good standing under the laws of its state
of incorporation and has all requisite corporate power and authority (i) to
own, lease and operate its properties, to carry on its business as now being
conducted and (ii) to execute, deliver and perform its obligations under
this Agreement, the Amended Statement of Resolutions, the Amended and
Restated Registration Rights Agreement, the form of which is set forth in
Annex II attached hereto (the "Amended and Restated Registration Rights
--------
Agreement"), and the other agreements to be executed by the Company in
connection herewith and to consummate the transactions contemplated hereby
and thereby. The Company and EqualNet Corporation, Netco Acquisitions Corp.
or USC Telecom Corp. (the "Subsidiaries") are duly qualified to do business
and are in good standing in all jurisdictions wherein such qualification is
necessary and where failure so to qualify would have a material adverse
effect on their business, properties, operations, condition (financial or
other), results of operations or prospects of the Company. The Company has
no equity investment in any person other than its subsidiaries.
b. Concerning the Common Shares and the Common Stock. The Common Shares (1) to
--------------------------------------------------
the extent available out of the total shares currently authorized on the
date hereof; and (2) subject to shareholder approval of the Reverse Stock
Split as contemplated in Section 4.j herein, for such Common Shares
unavailable out of the total shares authorized on the date hereof have been
duly authorized and when issued upon conversion of the Preferred Shares or
the Dividend Shares will be validly issued, fully paid and nonassessable and
will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive or similar rights of any stockholder of
the Company or any other person to acquire the Series D Preferred Shares and
Dividend Shares or any of the Common Shares. The Common Stock is listed for
trading on the Nasdaq SmallCap Market ("Nasdaq") and no suspension of
trading in the Common Stock is in effect.
c. Amendment Agreement, and Other Transaction Documents. This Agreement, the
----------------------------------------------------
Amended and Restated Registration Rights Agreement, the Amended Statement of
Resolutions (subject to Series D Shareholder approval of the Amended
Statement of Resolutions) and the other agreements and instruments
contemplated hereby and thereby have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company
and this Agreement is, and the Amended and Restated Registration Rights
Agreement, the Amended Statement of Resolutions and such other agreements,
when executed and delivered by the Company, will be, valid and binding
obligations of the Company enforceable in accordance with their respective
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium
<PAGE>
and other similar laws affecting the enforcement of creditor's rights
generally.
d. Non-contravention. The execution and delivery by the Company of this
-----------------
Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Series D Preferred Shares
as contemplated by this Agreement, and the other transactions contemplated
by this Agreement, the Amended and Restated Registration Rights Agreement
and the Amended Statement of Resolutions do not and will not, with or
without the giving of notice or the lapse of time, or both (i) result in any
violation of any terms of the Articles of Incorporation or By-laws of the
Company and the Subsidiaries; (ii) conflict with or result in a breach by
the Company or the Subsidiaries or any of the terms or provisions of, or
constitute a default under, or result in the modification, amendment,
termination or cancellation of, result in the acceleration of any obligation
of the Company or the Subsidiaries under, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company or the Subsidiaries pursuant to any
indenture, mortgage, deed of trust or other agreement or instrument to which
the Company or the Subsidiaries is a party or by which the Company or the
Subsidiaries or any of their properties or assets is bound or affected;
(iii) violate or contravene any applicable law, rule or regulation or any
applicable decree, judgment or order of any court, United States federal or
state regulatory body, administrative agency or other governmental body
having jurisdiction over the Company or the Subsidiaries or any of their
properties or assets; or (iv) have any material adverse effect on any
permit, certification, registration, approval, consent, license or franchise
necessary for the Company or the Subsidiaries to own or lease and operate
any of their properties or to conduct any of their businesses or the ability
of the Company or the Subsidiaries to make use thereof.
e. Approvals. No authorization, approval or consent of, or filing with, any
---------
court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required
to be obtained or made by the Company for (1) the execution, delivery and
performance by the Company of this Agreement, the Amended and Restated
Registration Rights Agreement, and the other agreements and instruments
contemplated hereby and thereby, (2) the execution and filing and
performance by the Company of the Statement of Resolution, (3) the issuance
of the Dividend Shares as contemplated by this Agreement and (4) the
issuance of Common Shares on conversion of the Series D Preferred Shares or
the issuance of Dividend Shares, other than (u) shareholder approval of the
issue required by Section 5.h herein, (v) a reverse stock split
substantially similar to that as described in Section 4.j herein; (w) the
listing of the Common Shares on Nasdaq; (x) registration of the resale of
the Common Shares under the 1933 Act as contemplated by the Amended and
Restated Registration Rights Agreement and (y) Series D Shareholder approval
of the Amended Statement of Resolutions.
f. SEC Filings. The Company has timely filed all required forms, reports and
-----------
other documents required to be filed with the Securities Exchange Commission
(the "SEC") under the Securities Exchange Act of 1934, as amended (the "1934
Act") since January 1, 1997. All of such forms, reports and other documents
complied in all material respects with all applicable requirements of the
1933 Act and the 1934 Act (1) when declared effective for those forms,
reports and other documents filed under the 1933 Act; and (2) as filed or
subsequently amended for those forms, reports and other documents filed
under the 1934 Act.
g. Absence of Brokers, Finders, Solicitation Compensation, Etc. No broker,
------------------------------------------------------------
finder or similar person is entitled to any commission, fee or other
compensation in respect of the
<PAGE>
transactions contemplated by this Agreement by reason of any action or
conduct of the Company or any person acting on its behalf, and the Company
shall pay, and indemnify and hold harmless the Holder from, any claim made
against the Holder by any person for any such commission, fee or other
compensation. The Company has not and will not pay any commission or other
remuneration to any person for solicitation of exchanges of Notes for shares
of Series D Preferred Stock pursuant to this Agreement.
h. [Reserved].
i. [Reserved].
j. Capitalization. Following the reverse stock split as contemplated by the
--------------
Company (based on the number of shares outstanding on September 24, 1999),
the authorized capital stock of the Company will be (a) 50,000,000 shares of
Common Stock of which approximately 2,872,262 shares will be outstanding,
all of which are fully paid and nonassessable; and (b) 5,000,000 shares of
Preferred Stock, $.01 par value, of which 2,000 shares have been designated
Series A Convertible Preferred Stock and of which 2,057 shares are
outstanding, 3,000 shares have been designated Series B Senior Convertible
Preferred Stock and of which 3,000 shares are outstanding, 300,000 shares
have been designated Series C Convertible Preferred Stock and of which
215,799 shares are outstanding, 6,500 shares have been designated Series D
Convertible Preferred Stock and of which 3,964 shares are outstanding,
900,000 shares have been designated Series E Convertible Preferred Stock
("Series E Preferred Stock") of which 833,333 are outstanding and of which
6,500 shares will be designated as Series F Convertible Preferred Stock of
which 3,142 shares are outstanding. As of September 24, 1999, the Company
had outstanding options, warrants and similar rights, including preferred
stock convertible into Common Stock, entitling the holders to purchase or
acquire 25,324,269 shares of Common Stock. Other than as set forth in the
preceding sentence, the Company does not have outstanding any material
amount of securities (or obligation to issue any such securities)
convertible into, exchangeable for or otherwise entitling the holders
thereof to acquire shares of Common Stock. The Company has duly reserved
from its authorized and unissued shares of Common Stock the full number of
shares required for (a) all options, warrants, convertible securities and
other rights to acquire shares of Common Stock which are outstanding and (b)
all shares of Common Stock and options and other rights to acquire shares of
Common Stock which may be issued or granted under the stock option and
similar plans which have been adopted by the Company or any of its
Subsidiaries other than those shares required for full conversion of Series
A Convertible Preferred Stock, Series D Convertible Preferred Stock, Series
E Junior Preferred Stock and Series F Convertible Preferred Stock.
SECTION 5.
CERTAIN COVENANTS
a. [Reserved].
b. Nasdaq Listing; Reporting Status. As soon as reasonably possible after the
--------------------------------
Closing Date and subject to the waiver in Section 5.e, the Company shall
file an application for listing of additional shares with Nasdaq covering
such of the Common Shares as shall not previously have been listed for
trading on Nasdaq and shall provide evidence of such filing to the Holders.
The Company shall use its best efforts to obtain the listing, subject to
official notice of issuance, of such Common Shares and on Nasdaq. So long as
the Holder beneficially
<PAGE>
owns any shares of Series F Preferred Stock or Common Shares, the Company
shall timely file all reports required to be filed with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would permit such
termination. So long as the Holder beneficially owns any shares of Series D
Preferred Stock or Common Shares, the company shall timely file all reports
required to be filed with the SEC pursuant to Section 13 or 15(d) of the
1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
c. Rule 144. The Company will use its best efforts to provide to the Holder
--------
and/or the Company's transfer agent an opinion of counsel, within 3 business
days of receipt of a request for such opinion from the Holder or the
transfer agent, to the effect that the shares of Common Stock issuable upon
conversion of the Series D Preferred Stock may be resold without
registration under the 1933 Act pursuant to Rule 144 thereof based upon
customary representations by or on behalf of the Holder as such
representations may be reasonably requested by the Company.
d. Amended and Restated Registration Rights. The parties hereto agree to enter
----------------------------------------
into the Amended and Restated Registration Rights Agreement as of the
Effective Date.
e. Waivers. As of the Effective Date and until the earlier of (i) the Initial
-------
Reset Date as defined in the Amended Statement of Resolutions or (ii)
January 15, 2000, the Holder waives (x) any requirement in the Amended
Statement of Resolutions or in any related instrument (including Section 5.b
herein) that the Company reserve a sufficient number of shares of Common
Stock to permit conversion in full of the outstanding shares of Series D
Preferred Stock or list such shares with Nasdaq; and (y) any rights Holder
may have to demand redemption of the Series D Preferred Stock based on
redemption events, inconvertibility events, repurchase events or events of
default except those redemption rights that may arise from the Company's
failure to timely perform its obligations to issue Common Stock upon
conversion (subject to the limitations in Section 5.f) set forth in Section
10 of the Statement of Resolutions; provided, however, that if the Closing
Date does not occur on or before December 8, 1999, the waivers granted
herein shall expire and cease to be effective.
f. Agreed Limitation on Conversion. The Holder agrees that, provided the
-------------------------------
Reverse Stock Split Date occurs on or before December 31, 1999, during the
period commencing with the Reverse Stock Split Date and ending on the
Trading Day immediately prior to the Initial Reset Date, as those terms are
defined in the Amended Statement of Resolutions, Holder will not convert
Series D Preferred Stock into Common Stock in an amount greater than the
number of shares of Common Stock that the Holder would have had the ability
to sell pursuant to Rule 144 during such period of time (the "Limitation
Amount"). Holder also agrees that during the same time period of this
Section 5.f, the redemption obligations of the Company upon inability to
convert Series F Preferred Stock into Common Stock and related obligations
to provide Inconvertibility Notices shall be limited to those instances
created by the inability of the Company to issue the Limitation Amount of
Common Stock upon conversion of Series D Preferred Stock.
g. Call Option. Until October 13, 2000, the Company shall have the option, but
-----------
not the obligation, to repurchase at any time, for a cash payment equal to
$1,000 per share of Series D Preferred Stock so repurchased, any portion of
Holder's Series D Preferred Stock that the Company in its sole discretion
chooses to repurchase, upon 20 days prior written
<PAGE>
notice of exercise of this call option. This provision shall in no way be
construed to limit Holder's conversion rights under the Amended Statement of
Resolutions prior to such repurchase.
h. Shareholder Approval. The Company agrees to submit as soon as practicable,
--------------------
for purposes of Rule 4460 of the NASDAQ, a proposal for approval by
shareholders of the Company's Common Stock allowing conversion of Series D
Preferred Stock in amounts greater than the Maximum Share Amount, as such
term is defined in the Amended Statement of Resolutions.
i. Dividend Calculation. Holder agrees that for all dividends due from the
--------------------
Effective Date through Closing under the Amended Statement of Resolutions
and not previously waived as to payment by any holder of Series D
Convertible Preferred Stock, such dividends shall not be deemed untimely so
long as they are paid on or before Closing.
SECTION 6.
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF HOLDER
The Holder represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Amendment Agreement. This Agreement has been duly and validly authorized,
-------------------
executed and delivered on behalf of the Holder and is a valid and binding
agreement of the Holder enforceable in accordance with its terms, subject as
to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
SECTION 7.
MISCELLANEOUS
a. Costs, Expenses and Taxes. Each party shall bear its own costs and expenses
-------------------------
in connection with the preparation, execution and delivery of this
Agreement. The Company shall pay any and all stamp and other taxes payable
or determined to be payable in connection with the execution and delivery of
this Agreement.
b. Survival of Representations. The representations, warranties, covenants and
---------------------------
agreements of the Holder and the Company contained in this Agreement or in
any certificate furnished hereunder shall survive the Closing.
c. Prior Agreements. Except to the extent expressly amended hereby, the terms
----------------
and provisions of the Purchase and Exchange Agreement is hereby confirmed
and shall remain in full force and effect. Subject to the foregoing
sentence, this Agreement constitutes the entire agreement between the
parties concerning the subject matter hereof and supersedes any prior
representations, understandings or agreements. There are no representations,
warranties, agreements, conditions or covenants, of any nature whatsoever
(whether express or implied, written or oral) between the parties hereto
with respect to such subject matter except as expressly set forth herein.
d. Severability. The invalidity or unenforceability of any provision hereof
------------
shall in no way affect the validity or enforceability of any other provision
or the validity and enforceability of this Agreement in any other
jurisdiction.
<PAGE>
e. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO ITS CHOICE OF LAW RULES.
f. Headings. Section headings in this Agreement are included herein for
--------
convenience of reference only and shall not constitute a part of, or affect
the interpretation of, this Agreement.
g. Counterparts. This Agreement may be executed in any number of counterparts,
------------
all of which taken together shall constitute one and the same instrument,
and either of the parties hereto may execute this Agreement by signing any
such counterpart. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such
party.
h. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and permitted
assigns.
i. Further Assurances. Each party to this Agreement will perform any and all
------------------
acts and execute any and all documents as may be necessary and proper under
the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
j. Publicity. Neither the Company nor the Holder shall, nor shall they permit
---------
their respective stockholders, directors, officers or advisors to, issue or
cause the publication of any press release or make any other public
statement, filing or announcement with respect to this Agreement and the
transactions contemplated hereby without the prior approval of the other
parties; provided, however, that the Company shall be entitled, without the
prior approval of the Holder, to make any press release or other public
disclosure with respect to such transactions as is required by applicable
law or the Nasdaq Stock Market (although the Holder shall be consulted by
the Company in connection with any such press release or other public
disclosure prior to its release and shall be provided with a copy thereof).
The Company and the Holder shall cooperate in issuing press releases or
otherwise making public statements with respect to this Agreement and the
transactions contemplated hereby, which cooperation shall include first
consulting the other party hereto concerning the requirement for, and timing
and content of, such public announcement.
[The rest of this page is intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused this Agreement to be executed by their respective duly authorized
officers, as of the date first above written.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell Bodian
-------------------
Name: Mitchell Bodian
Title: CEO
ADVANTAGE FUND LIMITED
By: Genesee International Inc.
General Manager
By: /s/ Donald R. Morken
--------------------
Donald R. Morken
President
<PAGE>
EXHIBIT 10.68
EXCHANGE AGREEMENT
This Exchange Agreement ("Agreement") is dated as of 15th day of June, 1999 (the
"Effective Date"), and is made by and among Equalnet Communications Corp., a
Texas corporation, hereinafter referred to as "Equalnet" or "Company", and
Willis Group, LLC, a Texas limited liability company, hereinafter referred to as
"Holder."
WHEREAS, Holder is the holder of $1,563,624 aggregate principal amount of 6%
Senior Secured Convertible Notes due 2001 (collectively, the "Notes") of
Equalnet; and
WHEREAS, Holder is currently due accrued but unpaid interest on the Notes
totaling $7,818.00, bringing the aggregate amount due to $1,571,442; and
WHEREAS, Equalnet has requested that Holder exchange the Notes for shares of
convertible preferred stock of Equalnet as described herein; and
WHEREAS, Holder is desirous of undertaking this exchange accepting the preferred
stock and releasing Equalnet from any liability in connection with the Notes;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained and intending to be
legally bound hereby, Equalnet and Holder hereby agree as follows:
SECTION 1.
EXCHANGE AND TERMS OF SERIES F PREFERRED STOCK
a. Series F Preferred Stock. The Company shall authorize the issuance and sale
------------------------
to the Holder of 1,571 shares of Series F Convertible Preferred Stock
("Series F Preferred Stock") of the Company. The Series F Preferred Stock
shall have the terms and conditions as set forth in the form of Statement of
Resolutions 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 Resolutions") set forth in Annex I attached
-------
hereto.
b. Exchange of Notes for Series F Preferred Stock. Subject to the terms and
----------------------------------------------
conditions of this Agreement, the Holder agrees to deliver to the Company at
the Closing the Holder's Note or Notes and the Company agrees (x) to deliver
to the Holder or its designee at the Closing in exchange for such Notes a
certificate representing the number of shares (the "Series F Preferred
Shares") of Series F Preferred Stock as set forth in Section 1.a and (y) to
pay the Holder an amount in cash equal to $442.00. The Company and Holder
agree that each Note so exchanged shall be cancelled in full as of the
Effective Date and the Company agrees to ministerially cancel in full each
Note so exchanged immediately after the Closing.
c. Closing. The closing of the exchange described in Section 1.b. shall take
-------
place at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th
Street, New York, New York 10019 at 10:00 A.M., New York City Time, as soon
as practicable, but no later than December 8, 1999, or at such other time
and place as the Company and the Holder mutually agree upon orally or in
writing (which time and place are designated as the "Closing").
d. Certain Terms. The shares of Series F Preferred Stock issuable pursuant to
-------------
Section 5 of the Statement of Resolutions as dividends on the Series F
Preferred Shares are referred to
<PAGE>
herein as "Dividend Shares." The shares of Common Stock issuable upon
conversion of the Series F Preferred Shares and the Dividend Shares are
referred to herein collectively as the "Common Shares." The Series F
Preferred Shares, the Dividend Shares and the Common Shares are referred to
herein collectively as the "Securities."
SECTION 2.
CONDITIONS PRECEDENT TO HOLDER'S OBLIGATION
The obligation of the Holder to exchange the Notes for Series F Preferred Stock,
such exchange to be effective as of the Effective Date, is subject to the
following conditions (any or all of which may be waived by the Holder in its
sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Company set forth in this Agreement shall be true on the date of the
Closing.
b. Documentation at Closing. The Holder shall have received, on or prior to
------------------------
the date of the Closing, all of the following, each in form and substance
satisfactory to the Holder and its counsel:
(1) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying (1) the Articles of Incorporation and By-
Laws of the Company as in effect on the date of the Closing; (2) all
resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated
hereby; and (3) such other matters as reasonably requested by the
Holder;
(2) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying the statements of the Company to the effect
set forth in Sections 2.a. and 2.c.;
(3) Evidence of the filing with, and acceptance by, the Secretary of State
of the State of Texas, of the Statement of Resolutions;
(4) An opinion of Dean H. Fisher, General Counsel of the Company, dated the
date of the Closing, in form, scope and substance reasonably
satisfactory to the Holder, to the effect set forth in Annex III
attached hereto.
c. Performance; No Default. The Company shall have performed and complied with
-----------------------
all covenants and agreements contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
d. Proceedings and Documents. All corporate and other proceedings in connection
-------------------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to the
Holder and its counsel, and the Holder and its counsel shall have received
all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
SECTION 3.
CONDITIONS PRECEDENT TO EQUALNET'S OBLIGATION
The obligation of the Company to exchange the Notes for Series F Preferred
Stock, such exchange to be effective as of the Effective Date, is subject to the
following conditions (any or all of which may be waived by the Company in its
sole discretion):
<PAGE>
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Holder set forth in this Agreement shall be true on the date of the
Closing.
b. Performance; No Default. The Holder shall have performed and complied with
-----------------------
all agreements and conditions contained in this Agreement required to be
performed or complied with by the Holder prior to or at the Closing.
c. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be
satisfactory to the Company and its counsel, and the Company and its counsel
shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
SECTION 4.
REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF EQUALNET
The Company represents and warrants to, and covenants and agrees with, the
Holder as follows
a. Organization and Standing of the Company. The Company is a corporation duly
----------------------------------------
organized, validly existing and in good standing under the laws of its state
of incorporation and has all requisite corporate power and authority (i) to
own, lease and operate its properties, to carry on its business as now being
conducted and (ii) to execute, deliver and perform its obligations under
this Agreement, the Statement of Resolutions, the Amended and Restated
Registration Rights Agreement, the form of which is set forth in Annex II
--------
attached hereto (the "Amended and Restated Registration Rights Agreement"),
and the other agreements to be executed by the Company in connection
herewith and to consummate the transactions contemplated hereby and thereby.
The Company and EqualNet Corporation, Netco Acquisitions Corp. or USC
Telecom Corp. (the "Subsidiaries") are duly qualified to do business and are
in good standing in all jurisdictions wherein such qualification is
necessary and where failure so to qualify would have a material adverse
effect on their business, properties, operations, condition (financial or
other), results of operations or prospects of the Company. The Company has
no equity investment in any person other than its subsidiaries.
b. Concerning the Common Shares and the Common Stock. The Common Shares (1) to
---------------------------------------------------
the extent available out of the total shares currently authorized on the
date hereof; and (2) subject to shareholder approval of the Reverse Stock
Split as contemplated in Section 4.j herein, for such Common Shares
unavailable out of the total shares authorized on the date hereof have been
duly authorized and when issued upon conversion of the Preferred Shares or
the Dividend Shares will be validly issued, fully paid and nonassessable and
will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive or similar rights of any stockholder of
the Company or any other person to acquire the Series F Preferred Shares and
Dividend Shares or any of the Common Shares. The Common Stock is listed for
trading on the Nasdaq SmallCap Market ("Nasdaq") and no suspension of
trading in the Common Stock is in effect.
c. Exchange Agreement, and Other Transaction Documents. This Agreement, the
---------------------------------------------------
Amended and Restated Registration Rights Agreement, the Statement of
Resolutions and the other agreements and instruments contemplated hereby and
thereby have been duly and validly
<PAGE>
authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Amended and Restated
Registration Rights Agreement, the Statement of Resolutions and such other
agreements, when executed and delivered by the Company, will be, valid and
binding obligations of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of
equity and to bankruptcy, insolvency, moratorium and other similar laws
affecting the enforcement of creditor's rights generally.
d. Non-contravention. The execution and delivery by the Company of this
-----------------
Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Series F Preferred Shares
as contemplated by this Agreement, and the other transactions contemplated
by this Agreement, the Amended and Restated Registration Rights Agreement
and the Statement of Resolutions do not and will not, with or without the
giving of notice or the lapse of time, or both (i) result in any violation
of any terms of the Articles of Incorporation or By-laws of the Company and
the Subsidiaries; (ii) conflict with or result in a breach by the Company or
the Subsidiaries or any of the terms or provisions of, or constitute a
default under, or result in the modification, amendment, termination or
cancellation of, result in the acceleration of any obligation of the Company
or the Subsidiaries under, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or the Subsidiaries pursuant to any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or the Subsidiaries is a party or by which the Company or the
Subsidiaries or any of their properties or assets is bound or affected;
(iii) violate or contravene any applicable law, rule or regulation or any
applicable decree, judgment or order of any court, United States federal or
state regulatory body, administrative agency or other governmental body
having jurisdiction over the Company or the Subsidiaries or any of their
properties or assets, including, without limitation, any law of the State of
New York relating to usury of the maximum rate chargeable with respect to
indebtedness; or (iv) have any material adverse effect on any permit,
certification, registration, approval, consent, license or franchise
necessary for the Company or the Subsidiaries to own or lease and operate
any of their properties or to conduct any of their businesses or the ability
of the Company or the Subsidiaries to make use thereof.
e. Approvals. No authorization, approval or consent of, or filing with, any
---------
court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required
to be obtained or made by the Company for (1) the execution, delivery and
performance by the Company of this Agreement, the Amended and Restated
Registration Rights Agreement, and the other agreements and instruments
contemplated hereby and thereby, (2) the execution and filing and
performance by the Company of the Statement of Resolution, (3) the issuance
of the Series F Preferred Shares and Dividend Shares as contemplated by this
Agreement and (4) the issuance of Common Shares on conversion of the Series
F Preferred Shares or the issuance of Dividend Shares, other than (u)
shareholder approval of the issue required by Section 5.h herein, (v) a
reverse stock split substantially similar to that as described in Section
4.j herein; (w) the listing of the Common Shares on Nasdaq; (x) registration
of the resale of the Common Shares under the 1933 Act as contemplated by the
Amended and Restated Registration Rights Agreement; (y) as may be required
under applicable state securities or "blue sky" laws and (z) filing of one
or more Forms D with respect to the Securities as required under Regulation
D.
f. SEC Filings. The Company has timely filed all required forms, reports and
-----------
other documents required to be filed with the Securities Exchange Commission
(the "SEC") under the
<PAGE>
Securities Exchange Act of 1934, as amended (the "1934 Act") since January
1, 1997. All of such forms, reports and other documents complied in all
material respects with all applicable requirements of the 1933 Act and the
1934 Act (1) when declared effective for those forms, reports and other
documents filed under the 1933 Act; and (2) as filed or subsequently amended
for those forms, reports and other documents filed under the 1934 Act.
g. Absence of Brokers, Finders, Solicitation Compensation, Etc. No broker,
------------------------------------------------------------
finder or similar person is entitled to any commission, fee or other
compensation in respect of the transactions contemplated by this Agreement
by reason of any action or conduct of the Company or any person acting on
its behalf, and the Company shall pay, and indemnify and hold harmless the
Holder from, any claim made against the Holder by any person for any such
commission, fee or other compensation. The Company has not and will not pay
any commission or other remuneration to any person for solicitation of
exchanges of Notes for shares of Series F Preferred Stock pursuant to this
Agreement.
h. [Reserved.]
i. Certain Securities Law Matters. The shares of Series F Preferred Stock may
------------------------------
be issued to the Holder pursuant to this Agreement without registration
under the 1933 Act by reason of Section 3(a)(9) thereof. For purposes of
Rule 144 under the 1933 Act, the Company understands and believes that each
Holder will be entitled to tack the holding period of its Note to the
holding period of the shares of Series F Preferred Stock issued to such
holder in exchange for such Note.
j. Capitalization. Following the reverse stock split as contemplated by the
--------------
Company (based on the number of shares outstanding on September 24, 1999),
the authorized capital stock of the Company will be (a) 50,000,000 shares of
Common Stock of which approximately 2,872,262 shares will be outstanding,
all of which are fully paid and nonassessable; and (b) 5,000,000 shares of
Preferred Stock, $.01 par value, of which 2,000 shares have been designated
Series A Convertible Preferred Stock and of which 2,057 shares are
outstanding, 3,000 shares have been designated Series B Senior Convertible
Preferred Stock and of which 3,000 shares are outstanding, 300,000 shares
have been designated Series C Convertible Preferred Stock and of which
215,799 shares are outstanding, 6,500 shares have been designated Series D
Convertible Preferred Stock and of which 3,964 shares are outstanding,
900,000 shares have been designated Series E Convertible Preferred Stock
("Series E Preferred Stock") of which 833,333 are outstanding and of which
6,500 shares will be designated as Series F Convertible Preferred Stock of
which 3,142 shares will be issued pursuant to this Agreement and the
Exchange Agreement of even date herewith by and among the company and Willis
Group, LLC, a Texas limited liability company. As of September 24, 1999, the
Company had outstanding options, warrants and similar rights, including
preferred stock convertible into Common Stock, entitling the holders to
purchase or acquire 25,324,269 shares of Common Stock. Other than as set
forth in the preceding sentence, the Company does not have outstanding any
material amount of securities (or obligation to issue any such securities)
convertible into, exchangeable for or otherwise entitling the holders
thereof to acquire shares of Common Stock. The Company has duly reserved
from its authorized and unissued shares of Common Stock the full number of
shares required for (a) all options, warrants, convertible securities and
other rights to acquire shares of Common Stock which are outstanding and (b)
all shares of Common Stock and options and other rights to acquire shares of
Common Stock which may be issued or granted under the stock option and
similar plans which have been adopted by the Company or any of its
Subsidiaries other than those shares required for full conversion
<PAGE>
of Series A Convertible Preferred Stock, Series D Convertible Preferred
Stock, Series E Junior Preferred Stock and Series F Convertible Preferred
Stock.
SECTION 5.
CERTAIN COVENANTS
a. Restrictive Legends. (1) The Holder acknowledges and agrees that the
-------------------
certificates for the shares of Series F Preferred Stock issued to such
Holder shall bear restrictive legends in substantially the following form
(and a stop-transfer order may be placed against transfer of such shares of
Series F Preferred Stock):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR AN OPINION OF
COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
THE NUMBER OF SHARES CONSTITUTING THE PORTION OF THE MAXIMUM SHARE
AMOUNT, AS DEFINED IN THE STATEMENT OF RESOLUTION OF SERIES F
CONVERTIBLE STOCK (THE "STATEMENT OF RESOLUTION"), ALLOCATED TO THE
SHARES REPRESENTED BY THIS CERTIFICATE FOR THE PURPOSES OF CONVERSION
THEREOF IS [NUMBER].
SECTION 10(B)(3)(A) OF THE STATEMENT OF RESOLUTION PERMITS A HOLDER OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE TO CONVERT SUCH
SECURITIES IN ACCORDANCE WITH THE STATEMENT OF RESOLUTION WITHOUT BEING
REQUIRED TO SURRENDER THIS CERTIFICATE TO THE COMPANY UNLESS ALL OF THE
SECURITIES REPRESENTED HEREBY ARE CONVERTED. CONSEQUENTLY, FOLLOWING
CONVERSION OF ANY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE
NUMBER OF SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE
NUMBER OF SHARES STATED HEREON. UPON REQUEST OF ANY PROPOSED TRANSFEREE
OF THIS CERTIFICATE, THE COMPANY WILL PROVIDE CONFIRMATION OF THE NUMBER
OF SHARES EVIDENCED BY THIS CERTIFICATE.
STATEMENTS (1) SETTING FORTH THE DESIGNATIONS, PREFERENCES, LIMITATIONS
AND RELATIVE RIGHTS OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
AND (2) DENYING THE PREEMPTIVE RIGHT OF SHAREHOLDERS OF THE COMPANY TO
ACQUIRE UNISSUED OR TREASURY SHARES OF THE COMPANY ARE SET FORTH IN THE
ARTICLES OF INCORPORATION OF THE COMPANY ON FILE IN THE OFFICE OF THE
SECRETARY OF STATE OF THE STATE OF TEXAS. THE COMPANY WILL FURNISH A
COPY OF SUCH STATEMENTS TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT
CHARGE UPON RECEIPT OF WRITTEN REQUEST THEREFOR DIRECTED TO DEAN H.
FISHER, EQUALNET PLAZA, 1250 WOOD BRANCH PARK DRIVE, HOUSTON, TEXAS
77079-1212.
(2) The Holder further acknowledges and agrees that until such time as the
Common Shares issued or issuable have been registered for resale under
the 1933 Act as contemplated by the Amended and Restated Registration
Rights Agreement, the certificates for the Common Shares which are not
so registered may bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against
transfer of the certificates for the Common Shares):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act").
The securities have been acquired for investment and may not be
resold, transferred or assigned in the absence of an effective
registration statement for the securities under the Act, or an
opinion of counsel reasonably satisfactory in form, scope and
substance to the Company that
<PAGE>
registration is not required under the Act.
(3) Once the Registration Statement required to be filed by the Company has
been declared effective, thereafter (1) upon request of any Holder the
Company will substitute certificates without restrictive legend for
certificates for any Common Shares issued prior to the date such
Registration Statement is declared effective by the SEC which bear such
restrictive legend and remove any stop-transfer restriction relating
thereto promptly, but in no event later than three days after surrender
of such certificates by such Holder and (2) the Company shall not place
any restrictive legend on certificates for Conversion Shares issued on
conversion of or as dividends on the shares of Series F Preferred Stock
or impose any stop-transfer restriction thereon.
b. Nasdaq Listing; Reporting Status. As soon as reasonably possible after the
--------------------------------
Closing Date and subject to the waiver in Section 5.e, the Company shall
file an application for listing of additional shares with Nasdaq covering
such of the Common Shares as shall not previously have been listed for
trading on Nasdaq and shall provide evidence of such filing to the Holders.
The Company shall use its best efforts to obtain the listing, subject to
official notice of issuance, of such Common Shares and on Nasdaq. So long as
the Holder beneficially owns any shares of Series F Preferred Stock or
Common Shares, the Company shall timely file all reports required to be
filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would permit such termination.
c. Rule 144. (1) The Company shall not, directly or indirectly, dispute or
--------
otherwise interfere with any claim by a holder of shares of Series F
Preferred Stock that such holder's holding period of such security (and the
shares of Common Stock issued upon conversion thereof) for purposes of Rule
144 under the 1933 Act ("Rule 144") relates back (i.e., tacks) to the
holding period for the Notes; provided, however, that nothing contained in
this Section 5.c shall obligate the Company or its legal counsel to take a
position that is inconsistent with the provisions of applicable law or
regulations and the administrative and judicial interpretations thereof in
effect from time to time in the future.
(2) The Company will use its best efforts to provide to the Holder and/or
the Company's transfer agent an opinion of counsel, within 3 business
days of receipt of a request for such opinion from the Holder or the
transfer agent, to the effect that the shares of Common Stock issuable
upon conversion of the Series F Preferred Stock may be resold without
registration under the 1933 Act pursuant to Rule 144 thereof based upon
customary opinions (which may include an opinion of the Law Offices of
Brian W Pusch, counsel to the Holder, with respect to the tacking under
Rule 144 of the holding period of the Notes to that of the Series F
Preferred Shares and, at the time such opinion is requested by the
Company, the Company shall pay the Holder $5,000 in cash to cover the
fees and expenses of obtaining such counsel and opinion) and
representations by or on behalf of the Holder as such opinions or
representations may be reasonably requested by the Company.
d. Amended and Restated Registration Rights. The parties hereto agree to enter
----------------------------------------
into the Amended and Restated Registration Rights Agreement as of the
Effective Date.
e. Waivers. As of the Effective Date and until the earlier of (i) the Initial
-------
Reset Date as defined in the Statement of Resolutions or (ii) January 15,
2000, the Holder waives (x) any
<PAGE>
requirement in the Statement of Resolutions or in any related instrument
(including Section 5.b herein) that the Company reserve a sufficient number
of shares of Common Stock to permit conversion in full of the outstanding
shares of Series F Preferred Stock or list such shares with Nasdaq; and (y)
any rights Holder may have to demand redemption of the Series F Preferred
Stock based on redemption events, inconvertibility events, repurchase events
or events of default except those redemption rights that may arise from the
Company's failure to timely perform its obligations to issue Common Stock
upon conversion (subject to the limitations in Section 5.f) set forth in
Section 10 of the Statement of Resolutions; provided, however, that if the
Closing Date does not occur on or before December 8, 1999, the waivers
granted herein shall expire and cease to be effective.
f. Agreed Limitation on Conversion. The Holder agrees that, provided the
-------------------------------
Reverse Stock Split Date occurs on or before December 31, 1999, during the
period commencing with the Reverse Stock Split Date and ending on the
Trading Day immediately prior to the Initial Reset Date, as those terms are
defined in the Statement of Resolutions, Holder will not convert Series F
Preferred Stock into Common Stock in an amount greater than the number of
shares of Common Stock that the Holder would have had the ability to sell
pursuant to Rule 144 during such period of time.
g. Call Option. Until October 13, 2000, the Company shall have the option, but
-----------
not the obligation, to repurchase at any time, for a cash payment equal to
$1,000 per share of Series F Preferred Stock so repurchased, any portion of
Holder's Series F Preferred Stock that the Company in its sole discretion
chooses to repurchase, upon 20 days prior written notice of exercise of this
call option. This provision shall in no way be construed to limit Holder's
conversion rights under the Statement of Resolutions prior to such
repurchase.
h. Shareholder Approval. The Company agrees to submit as soon as practicable,
--------------------
for purposes of Rule 4460 of the NASDAQ, a proposal for approval by
shareholders of the Company's Common Stock allowing conversion of Series F
Preferred Stock in amounts greater than the Maximum Share Amount, as such
term is defined in the Statement of Resolutions.
i. Dividend Calculation. The Company and Holder agree that dividends on the
--------------------
Series F Preferred Stock shall be calculated as specified the Statement of
Resolutions as if (1) Holder held a certificate in the amount specified in
Section 1.a as of the Effective Date of this Agreement, and (2) the
Statement of Resolutions were filed with the Secretary of State of the State
of Texas as of the Effective Date. Holder agrees that for all dividends due
from the Effective Date through Closing under the Statement of Resolutions
and not previously waived as to payment by any holder of Series F
Convertible Preferred Stock, such dividends shall not be deemed untimely so
long as they are paid on or before Closing.
SECTION 6.
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF HOLDER
The Holder represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Organization and Standing of the Holder. The Holder is a limited liability
---------------------------------------
company duly organized, validly existing and in good standing under the laws
of Texas and has all requisite power and authority to own and operate its
properties, to carry on its business as now conducted and to enter into and,
as applicable, perform its obligations hereunder.
<PAGE>
b. Purchase for Investment. The Holder is acquiring the Series F Preferred
------------------------
Shares for its own account for investment only and not with a view towards
the public sale or distribution thereof;
c. Accredited Investor. The Holder is an "accredited investor" as that term is
-------------------
defined in Rule 501 of the General Rules and Regulations under the 1933 Act
by reason of Rule 501(a)(3);
d. Reoffers and Resales. All subsequent offers and sales of the Securities by
--------------------
the Holder shall be made pursuant to registration of the Securities being
offered and sold under the 1933 Act or pursuant to an exemption from
registration;
e. Company Reliance. The Holder understands that the shares of Series F
----------------
Preferred Stock are being issued to it in reliance on specific exemptions
from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy
of, and the Holder's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of the Holder set forth
herein in order to determine the availability of such exemptions and the
eligibility of the Holder to acquire the shares of Series F Preferred Stock;
f. Information Provided. The Holder and its advisors, if any, have been
--------------------
furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the issuance of the
shares of Series F Preferred Stock which have been requested by the Holder;
the Holder and its advisors, if any, have been afforded the opportunity to
ask questions of the Company and have received satisfactory answers to any
such inquiries; and the Holder understands that its investment in the shares
of Series F Preferred Stock involves a high degree of risk;
g. Absence of Approvals. The Holder understands that no United States federal
--------------------
or state agency or any other government or governmental agency has passed on
or made any recommendation or endorsement of the shares of Series F
Preferred Stock; and
h. Exchange Agreement. This Agreement has been duly and validly authorized,
------------------
executed and delivered on behalf of the Holder and is a valid and binding
agreement of the Holder enforceable in accordance with its terms, subject as
to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
SECTION 7.
MISCELLANEOUS
a. Costs, Expenses and Taxes. Each party shall bear its own costs and expenses
-------------------------
in connection with the preparation, execution and delivery of this Agreement
and the issuance of the shares of Series F Preferred Stock. The Company
shall pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Agreement and
the exchange of the Notes for the shares of Series F Preferred Stock.
b. Survival of Representations. The representations, warranties, covenants and
---------------------------
agreements of the Holder and the Company contained in this Agreement or in
any certificate furnished hereunder shall survive the Closing.
<PAGE>
c. Prior Agreements. This Agreement constitutes the entire agreement between
----------------
the parties concerning the subject matter hereof and supersedes any prior
representations, understandings or agreements. There are no representations,
warranties, agreements, conditions or covenants, of any nature whatsoever
(whether express or implied, written or oral) between the parties hereto
with respect to such subject matter except as expressly set forth herein.
The parties acknowledge that certain material terms were agreed to pursuant
to the Notice of Intent to Exchange Secured Debt dated January 21, 1999 and
are expressed more fully herein.
d. Severability. The invalidity or unenforceability of any provision hereof
------------
shall in no way affect the validity or enforceability of any other provision
or the validity and enforceability of this Agreement in any other
jurisdiction.
e. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO ITS CHOICE OF LAW RULES.
f. Headings. Section headings in this Agreement are included herein for
--------
convenience of reference only and shall not constitute a part of, or affect
the interpretation of, this Agreement.
g. Counterparts. This Agreement may be executed in any number of counterparts,
------------
all of which taken together shall constitute one and the same instrument,
and either of the parties hereto may execute this Agreement by signing any
such counterpart. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such
party.
h. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and permitted
assigns.
i. Further Assurances. Each party to this Agreement will perform any and all
------------------
acts and execute any and all documents as may be necessary and proper under
the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
j. Publicity. Neither the Company nor the Holder shall, nor shall they permit
---------
their respective stockholders, directors, officers or advisors to, issue or
cause the publication of any press release or make any other public
statement, filing or announcement with respect to this Agreement and the
transactions contemplated hereby without the prior approval of the other
parties; provided, however, that the Company shall be entitled, without the
prior approval of the Holder, to make any press release or other public
disclosure with respect to such transactions as is required by applicable
law or the Nasdaq Stock Market (although the Holder shall be consulted by
the Company in connection with any such press release or other public
disclosure prior to its release and shall be provided with a copy thereof).
The Company and the Holder shall cooperate in issuing press releases or
otherwise making public statements with respect to this Agreement and the
transactions contemplated hereby, which cooperation shall include first
consulting the other party hereto concerning the requirement for, and timing
and content of, such public announcement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused this Agreement to be executed by their respective duly authorized
officers, as of the date first above written.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell Bodian
---------------------
Name: Mitchell Bodian
Title: President & CEO
WILLIS GROUP, LLC
By: /s/ Mark Willis
---------------
Name: Mark Willis
Title: President
<PAGE>
EXHIBIT 10.69
EXCHANGE AGREEMENT
This Exchange Agreement ("Agreement") is dated as of 15th day of June, 1999 (the
"Effective Date"), and is made by and among Equalnet Communications Corp., a
Texas corporation, hereinafter referred to as "Equalnet" or "Company", and
Genesee Fund Limited - Portfolio B, a British Virgin Islands Corporation,
hereinafter referred to as "Holder."
WHEREAS, Holder is the holder of $1,563,624 aggregate principal amount of 6%
Senior Secured Convertible Notes due 2001 (collectively, the "Notes") of
Equalnet; and
WHEREAS, Holder is currently due accrued but unpaid interest on the Notes
totaling $7,818.00, bringing the aggregate amount due to $1,571,442; and
WHEREAS, Equalnet has requested that Holder exchange the Notes for shares of
convertible preferred stock of Equalnet as described herein; and
WHEREAS, Holder is desirous of undertaking this exchange accepting the preferred
stock and releasing Equalnet from any liability in connection with the Notes;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained and intending to be
legally bound hereby, Equalnet and Holder hereby agree as follows:
SECTION 1.
EXCHANGE AND TERMS OF SERIES F PREFERRED STOCK
a. Series F Preferred Stock. The Company shall authorize the issuance and sale
------------------------
to the Holder of 1,571 shares of Series F Convertible Preferred Stock
("Series F Preferred Stock") of the Company. The Series F Preferred Stock
shall have the terms and conditions as set forth in the form of Statement of
Resolutions 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 Resolutions") set forth in Annex I attached hereto.
-------
b. Exchange of Notes for Series F Preferred Stock. Subject to the terms and
----------------------------------------------
conditions of this Agreement, the Holder agrees to deliver to the Company at
the Closing the Holder's Note or Notes and the Company agrees (x) to deliver
to the Holder or its designee at the Closing in exchange for such Notes a
certificate representing the number of shares (the "Series F Preferred
Shares") of Series F Preferred Stock as set forth in Section 1.a and (y) to
pay the Holder an amount in cash equal to $442.00. The Company and Holder
agree that each Note so exchanged shall be cancelled in full as of the
Effective Date and the Company agrees to ministerially cancel in full each
Note so exchanged immediately after the Closing.
c. Closing. The closing of the exchange described in Section 1.b. shall take
-------
place at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th
Street, New York, New York 10019 at 10:00 A.M., New York City Time, as soon
as practicable, but no later than December 8, 1999, or at such other time and
place as the Company and the Holder mutually agree upon orally or in writing
(which time and place are designated as the "Closing").
d. Certain Terms. The shares of Series F Preferred Stock issuable pursuant to
--------------
Section 5 of the Statement of Resolutions as dividends on the Series F
Preferred Shares are referred to
<PAGE>
herein as "Dividend Shares." The shares of Common Stock issuable upon
conversion of the Series F Preferred Shares and the Dividend Shares are
referred to herein collectively as the "Common Shares." The Series F
Preferred Shares, the Dividend Shares and the Common Shares are referred to
herein collectively as the "Securities."
SECTION 2.
CONDITIONS PRECEDENT TO HOLDER'S OBLIGATION
The obligation of the Holder to exchange the Notes for Series F Preferred Stock,
such exchange to be effective as of the Effective Date, is subject to the
following conditions (any or all of which may be waived by the Holder in its
sole discretion):
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Company set forth in this Agreement shall be true on the date of the
Closing.
b. Documentation at Closing. The Holder shall have received, on or prior to
------------------------
the date of the Closing, all of the following, each in form and substance
satisfactory to the Holder and its counsel:
(1) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying (1) the Articles of Incorporation and By-
Laws of the Company as in effect on the date of the Closing; (2) all
resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated
hereby; and (3) such other matters as reasonably requested by the
Holder;
(2) A certificate, dated the date of the Closing, duly executed by the Chief
Executive Officer certifying the statements of the Company to the effect
set forth in Sections 2.a. and 2.c.;
(3) Evidence of the filing with, and acceptance by, the Secretary of State
of the State of Texas, of the Statement of Resolutions;
(4) An opinion of Dean H. Fisher, General Counsel of the Company, dated the
date of the Closing, in form, scope and substance reasonably
satisfactory to the Holder, to the effect set forth in Annex III
attached hereto.
c. Performance; No Default. The Company shall have performed and complied with
-----------------------
all covenants and agreements contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
d. Proceedings and Documents. All corporate and other proceedings in connection
-------------------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to the
Holder and its counsel, and the Holder and its counsel shall have received
all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
SECTION 3.
CONDITIONS PRECEDENT TO EQUALNET'S OBLIGATION
The obligation of the Company to exchange the Notes for Series F Preferred
Stock, such exchange to be effective as of the Effective Date, is subject to the
following conditions (any or all of which may be waived by the Company in its
sole discretion):
<PAGE>
a. Representations and Warranties. Each of the representations and warranties
------------------------------
of the Holder set forth in this Agreement shall be true on the date of the
Closing.
b. Performance; No Default. The Holder shall have performed and complied with
-----------------------
all agreements and conditions contained in this Agreement required to be
performed or complied with by the Holder prior to or at the Closing.
c. Proceedings and Documents. All corporate and other proceedings in connection
-------------------------
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory to the
Company and its counsel, and the Company and its counsel shall have received
all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
SECTION 4.
REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF EQUALNET
The Company represents and warrants to, and covenants and agrees with, the
Holder as follows
a. Organization and Standing of the Company. The Company is a corporation duly
----------------------------------------
organized, validly existing and in good standing under the laws of its state
of incorporation and has all requisite corporate power and authority (i) to
own, lease and operate its properties, to carry on its business as now being
conducted and (ii) to execute, deliver and perform its obligations under
this Agreement, the Statement of Resolutions, the Amended and Restated
Registration Rights Agreement, the form of which is set forth in Annex II
--------
attached hereto (the "Amended and Restated Registration Rights Agreement"),
and the other agreements to be executed by the Company in connection
herewith and to consummate the transactions contemplated hereby and thereby.
The Company and EqualNet Corporation, Netco Acquisitions Corp. or USC
Telecom Corp. (the "Subsidiaries") are duly qualified to do business and are
in good standing in all jurisdictions wherein such qualification is
necessary and where failure so to qualify would have a material adverse
effect on their business, properties, operations, condition (financial or
other), results of operations or prospects of the Company. The Company has
no equity investment in any person other than its subsidiaries.
b. Concerning the Common Shares and the Common Stock. The Common Shares (1) to
-------------------------------------------------
the extent available out of the total shares currently authorized on the
date hereof; and (2) subject to shareholder approval of the Reverse Stock
Split as contemplated in Section 4.j herein, for such Common Shares
unavailable out of the total shares authorized on the date hereof have been
duly authorized and when issued upon conversion of the Preferred Shares or
the Dividend Shares will be validly issued, fully paid and nonassessable and
will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive or similar rights of any stockholder of
the Company or any other person to acquire the Series F Preferred Shares and
Dividend Shares or any of the Common Shares. The Common Stock is listed for
trading on the Nasdaq SmallCap Market ("Nasdaq") and no suspension of
trading in the Common Stock is in effect.
c. Exchange Agreement, and Other Transaction Documents. This Agreement, the
---------------------------------------------------
Amended and Restated Registration Rights Agreement, the Statement of
Resolutions and the other agreements and instruments contemplated hereby and
thereby have been duly and validly
<PAGE>
authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Amended and Restated
Registration Rights Agreement, the Statement of Resolutions and such other
agreements, when executed and delivered by the Company, will be, valid and
binding obligations of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of
equity and to bankruptcy, insolvency, moratorium and other similar laws
affecting the enforcement of creditor's rights generally.
d. Non-contravention. The execution and delivery by the Company of this
-----------------
Agreement and the other documents contemplated by this Agreement and the
consummation by the Company of the issuance of the Series F Preferred Shares
as contemplated by this Agreement, and the other transactions contemplated by
this Agreement, the Amended and Restated Registration Rights Agreement and
the Statement of Resolutions do not and will not, with or without the giving
of notice or the lapse of time, or both (i) result in any violation of any
terms of the Articles of Incorporation or By-laws of the Company and the
Subsidiaries; (ii) conflict with or result in a breach by the Company or the
Subsidiaries or any of the terms or provisions of, or constitute a default
under, or result in the modification, amendment, termination or cancellation
of, result in the acceleration of any obligation of the Company or the
Subsidiaries under, or result in the creation or imposition of any lien,
security interest, charge or encumbrance upon any of the properties or assets
of the Company or the Subsidiaries pursuant to any indenture, mortgage, deed
of trust or other agreement or instrument to which the Company or the
Subsidiaries is a party or by which the Company or the Subsidiaries or any of
their properties or assets is bound or affected; (iii) violate or contravene
any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or the Subsidiaries or any of their properties or assets, including,
without limitation, any law of the State of New York relating to usury of the
maximum rate chargeable with respect to indebtedness; or (iv) have any
material adverse effect on any permit, certification, registration, approval,
consent, license or franchise necessary for the Company or the Subsidiaries
to own or lease and operate any of their properties or to conduct any of
their businesses or the ability of the Company or the Subsidiaries to make
use thereof.
e. Approvals. No authorization, approval or consent of, or filing with, any
---------
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the stockholders of the Company is required to be
obtained or made by the Company for (1) the execution, delivery and
performance by the Company of this Agreement, the Amended and Restated
Registration Rights Agreement, and the other agreements and instruments
contemplated hereby and thereby, (2) the execution and filing and performance
by the Company of the Statement of Resolution, (3) the issuance of the Series
F Preferred Shares and Dividend Shares as contemplated by this Agreement and
(4) the issuance of Common Shares on conversion of the Series F Preferred
Shares or the issuance of Dividend Shares, other than (u) shareholder
approval of the issue required by Section 5.h herein, (v) a reverse stock
split substantially similar to that as described in Section 4.j herein; (w)
the listing of the Common Shares on Nasdaq; (x) registration of the resale of
the Common Shares under the 1933 Act as contemplated by the Amended and
Restated Registration Rights Agreement; (y) as may be required under
applicable state securities or "blue sky" laws and (z) filing of one or more
Forms D with respect to the Securities as required under Regulation D.
f. SEC Filings. The Company has timely filed all required forms, reports and
-----------
other documents required to be filed with the Securities Exchange Commission
(the "SEC") under the
<PAGE>
Securities Exchange Act of 1934, as amended (the "1934 Act") since January 1,
1997. All of such forms, reports and other documents complied in all material
respects with all applicable requirements of the 1933 Act and the 1934 Act
(1) when declared effective for those forms, reports and other documents
filed under the 1933 Act; and (2) as filed or subsequently amended for those
forms, reports and other documents filed under the 1934 Act.
g. Absence of Brokers, Finders, Solicitation Compensation, Etc. No broker,
------------------------------------------------------------
finder or similar person is entitled to any commission, fee or other
compensation in respect of the transactions contemplated by this Agreement by
reason of any action or conduct of the Company or any person acting on its
behalf, and the Company shall pay, and indemnify and hold harmless the Holder
from, any claim made against the Holder by any person for any such
commission, fee or other compensation. The Company has not and will not pay
any commission or other remuneration to any person for solicitation of
exchanges of Notes for shares of Series F Preferred Stock pursuant to this
Agreement.
h. [Reserved.]
i. Certain Securities Law Matters. The shares of Series F Preferred Stock may
------------------------------
be issued to the Holder pursuant to this Agreement without registration under
the 1933 Act by reason of Section 3(a)(9) thereof. For purposes of Rule 144
under the 1933 Act, the Company understands and believes that each Holder
will be entitled to tack the holding period of its Note to the holding period
of the shares of Series F Preferred Stock issued to such holder in exchange
for such Note.
j. Capitalization. Following the reverse stock split as contemplated by the
--------------
Company (based on the number of shares outstanding on September 24, 1999),
the authorized capital stock of the Company will be (a) 50,000,000 shares of
Common Stock of which approximately 2,872,262 shares will be outstanding, all
of which are fully paid and nonassessable; and (b) 5,000,000 shares of
Preferred Stock, $.01 par value, of which 2,000 shares have been designated
Series A Convertible Preferred Stock and of which 2,057 shares are
outstanding, 3,000 shares have been designated Series B Senior Convertible
Preferred Stock and of which 3,000 shares are outstanding, 300,000 shares
have been designated Series C Convertible Preferred Stock and of which
215,799 shares are outstanding, 6,500 shares have been designated Series D
Convertible Preferred Stock and of which 3,964 shares are outstanding,
900,000 shares have been designated Series E Convertible Preferred Stock
("Series E Preferred Stock") of which 833,333 are outstanding and of which
6,500 shares will be designated as Series F Convertible Preferred Stock of
which 3,142 shares will be issued pursuant to this Agreement and the Exchange
Agreement of even date herewith by and among the company and Willis Group,
LLC, a Texas limited liability company. As of September 24, 1999, the
Company had outstanding options, warrants and similar rights, including
preferred stock convertible into Common Stock, entitling the holders to
purchase or acquire 25,324,269 shares of Common Stock. Other than as set
forth in the preceding sentence, the Company does not have outstanding any
material amount of securities (or obligation to issue any such securities)
convertible into, exchangeable for or otherwise entitling the holders thereof
to acquire shares of Common Stock. The Company has duly reserved from its
authorized and unissued shares of Common Stock the full number of shares
required for (a) all options, warrants, convertible securities and other
rights to acquire shares of Common Stock which are outstanding and (b) all
shares of Common Stock and options and other rights to acquire shares of
Common Stock which may be issued or granted under the stock option and
similar plans which have been adopted by the Company or any of its
Subsidiaries other than those shares required for full conversion
<PAGE>
of Series A Convertible Preferred Stock, Series D Convertible Preferred
Stock, Series E Junior Preferred Stock and Series F Convertible Preferred
Stock.
SECTION 5.
CERTAIN COVENANTS
a. Restrictive Legends. (1) The Holder acknowledges and agrees that the
-------------------
certificates for the shares of Series F Preferred Stock issued to such Holder
shall bear restrictive legends in substantially the following form (and a
stop-transfer order may be placed against transfer of such shares of Series F
Preferred Stock):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR AN OPINION OF
COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
THE NUMBER OF SHARES CONSTITUTING THE PORTION OF THE MAXIMUM SHARE AMOUNT,
AS DEFINED IN THE STATEMENT OF RESOLUTION OF SERIES F CONVERTIBLE STOCK
(THE "STATEMENT OF RESOLUTION"), ALLOCATED TO THE SHARES REPRESENTED BY
THIS CERTIFICATE FOR THE PURPOSES OF CONVERSION THEREOF IS [NUMBER].
SECTION 10(B)(3)(A) OF THE STATEMENT OF RESOLUTION PERMITS A HOLDER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE TO CONVERT SUCH SECURITIES IN
ACCORDANCE WITH THE STATEMENT OF RESOLUTION WITHOUT BEING REQUIRED TO
SURRENDER THIS CERTIFICATE TO THE COMPANY UNLESS ALL OF THE SECURITIES
REPRESENTED HEREBY ARE CONVERTED. CONSEQUENTLY, FOLLOWING CONVERSION OF
ANY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE NUMBER OF SHARES
REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF SHARES
STATED HEREON. UPON REQUEST OF ANY PROPOSED TRANSFEREE OF THIS
CERTIFICATE, THE COMPANY WILL PROVIDE CONFIRMATION OF THE NUMBER OF SHARES
EVIDENCED BY THIS CERTIFICATE.
STATEMENTS (1) SETTING FORTH THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND (2)
DENYING THE PREEMPTIVE RIGHT OF SHAREHOLDERS OF THE COMPANY TO ACQUIRE
UNISSUED OR TREASURY SHARES OF THE COMPANY ARE SET FORTH IN THE ARTICLES OF
INCORPORATION OF THE COMPANY ON FILE IN THE OFFICE OF THE SECRETARY OF
STATE OF THE STATE OF TEXAS. THE COMPANY WILL FURNISH A COPY OF SUCH
STATEMENTS TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON
RECEIPT OF WRITTEN REQUEST THEREFOR DIRECTED TO DEAN H. FISHER, EQUALNET
PLAZA, 1250 WOOD BRANCH PARK DRIVE, HOUSTON, TEXAS 77079-1212.
(2) The Holder further acknowledges and agrees that until such time as the
Common Shares issued or issuable have been registered for resale under the
1933 Act as contemplated by the Amended and Restated Registration Rights
Agreement, the certificates for the Common Shares which are not so
registered may bear a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of the
certificates for the Common Shares):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"). The securities
have been acquired for investment and may not be resold, transferred or
assigned in the absence of an effective registration statement for the
securities under the Act, or an opinion of counsel reasonably
satisfactory in form, scope and substance to the Company that
<PAGE>
registration is not required under the Act.
(3) Once the Registration Statement required to be filed by the Company has
been declared effective, thereafter (1) upon request of any Holder the
Company will substitute certificates without restrictive legend for
certificates for any Common Shares issued prior to the date such
Registration Statement is declared effective by the SEC which bear such
restrictive legend and remove any stop-transfer restriction relating
thereto promptly, but in no event later than three days after surrender
of such certificates by such Holder and (2) the Company shall not place
any restrictive legend on certificates for Conversion Shares issued on
conversion of or as dividends on the shares of Series F Preferred Stock
or impose any stop-transfer restriction thereon.
b. Nasdaq Listing; Reporting Status. As soon as reasonably possible after the
--------------------------------
Closing Date and subject to the waiver in Section 5.e, the Company shall file
an application for listing of additional shares with Nasdaq covering such of
the Common Shares as shall not previously have been listed for trading on
Nasdaq and shall provide evidence of such filing to the Holders. The Company
shall use its best efforts to obtain the listing, subject to official notice
of issuance, of such Common Shares and on Nasdaq. So long as the Holder
beneficially owns any shares of Series F Preferred Stock or Common Shares,
the Company shall timely file all reports required to be filed with the SEC
pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would permit
such termination.
c. Rule 144. (1) The Company shall not, directly or indirectly, dispute or
--------
otherwise interfere with any claim by a holder of shares of Series F
Preferred Stock that such holder's holding period of such security (and the
shares of Common Stock issued upon conversion thereof) for purposes of Rule
144 under the 1933 Act ("Rule 144") relates back (i.e., tacks) to the holding
period for the Notes; provided, however, that nothing contained in this
Section 5.c shall obligate the Company or its legal counsel to take a
position that is inconsistent with the provisions of applicable law or
regulations and the administrative and judicial interpretations thereof in
effect from time to time in the future.
(2) The Company will use its best efforts to provide to the Holder and/or the
Company's transfer agent an opinion of counsel, within 3 business days of
receipt of a request for such opinion from the Holder or the transfer
agent, to the effect that the shares of Common Stock issuable upon
conversion of the Series F Preferred Stock may be resold without
registration under the 1933 Act pursuant to Rule 144 thereof based upon
customary opinions (which may include an opinion of the Law Offices of
Brian W Pusch, counsel to the Holder, with respect to the tacking under
Rule 144 of the holding period of the Notes to that of the Series F
Preferred Shares and, at the time such opinion is requested by the
Company, the Company shall pay the Holder $5,000 in cash to cover the
fees and expenses of obtaining such counsel and opinion) and
representations by or on behalf of the Holder as such opinions or
representations may be reasonably requested by the Company.
d. Amended and Restated Registration Rights. The parties hereto agree to enter
----------------------------------------
into the Amended and Restated Registration Rights Agreement as of the
Effective Date.
e. Waivers. As of the Effective Date and until the earlier of (i) the Initial
-------
Reset Date as defined in the Statement of Resolutions or (ii) January 15,
2000, the Holder waives (x) any
<PAGE>
requirement in the Statement of Resolutions or in any related instrument
(including Section 5.b herein) that the Company reserve a sufficient number
of shares of Common Stock to permit conversion in full of the outstanding
shares of Series F Preferred Stock or list such shares with Nasdaq; and (y)
any rights Holder may have to demand redemption of the Series F Preferred
Stock based on redemption events, inconvertibility events, repurchase events
or events of default except those redemption rights that may arise from the
Company's failure to timely perform its obligations to issue Common Stock
upon conversion (subject to the limitations in Section 5.f) set forth in
Section 10 of the Statement of Resolutions; provided, however, that if the
Closing Date does not occur on or before December 8, 1999, the waivers
granted herein shall expire and cease to be effective.
f. Agreed Limitation on Conversion. The Holder agrees that, provided the
-------------------------------
Reverse Stock Split Date occurs on or before December 31, 1999, during the
period commencing with the Reverse Stock Split Date and ending on the Trading
Day immediately prior to the Initial Reset Date, as those terms are defined
in the Statement of Resolutions, Holder will not convert Series F Preferred
Stock into Common Stock in an amount greater than the number of shares of
Common Stock that the Holder would have had the ability to sell pursuant to
Rule 144 during such period of time.
g. Call Option. Until October 13, 2000, the Company shall have the option, but
-----------
not the obligation, to repurchase at any time, for a cash payment equal to
$1,000 per share of Series F Preferred Stock so repurchased, any portion of
Holder's Series F Preferred Stock that the Company in its sole discretion
chooses to repurchase, upon 20 days prior written notice of exercise of this
call option. This provision shall in no way be construed to limit Holder's
conversion rights under the Statement of Resolutions prior to such
repurchase.
h. Shareholder Approval. The Company agrees to submit as soon as practicable,
--------------------
for purposes of Rule 4460 of the NASDAQ, a proposal for approval by
shareholders of the Company's Common Stock allowing conversion of Series F
Preferred Stock in amounts greater than the Maximum Share Amount, as such
term is defined in the Statement of Resolutions.
i. Dividend Calculation. The Company and Holder agree that dividends on the
--------------------
Series F Preferred Stock shall be calculated as specified the Statement of
Resolutions as if (1) Holder held a certificate in the amount specified in
Section 1.a as of the Effective Date of this Agreement, and (2) the Statement
of Resolutions were filed with the Secretary of State of the State of Texas
as of the Effective Date. Holder agrees that for all dividends due from the
Effective Date through Closing under the Statement of Resolutions and not
previously waived as to payment by any holder of Series F Convertible
Preferred Stock, such dividends shall not be deemed untimely so long as they
are paid on or before Closing.
SECTION 6.
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF HOLDER
The Holder represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Organization and Standing of the Holder. The Holder is a corporation duly
---------------------------------------
organized, validly existing and in good standing under the laws of the
British Virgin Islands and has all requisite power and authority to own and
operate its properties, to carry on its business as now conducted and to
enter into and, as applicable, perform its obligations hereunder.
<PAGE>
b. Purchase for Investment. The Holder is acquiring the Series F Preferred
------------------------
Shares for its own account for investment only and not with a view towards
the public sale or distribution thereof;
c. Accredited Investor. The Holder is an "accredited investor" as that term is
-------------------
defined in Rule 501 of the General Rules and Regulations under the 1933 Act
by reason of Rule 501(a)(3);
d. Reoffers and Resales. All subsequent offers and sales of the Securities by
--------------------
the Holder shall be made pursuant to registration of the Securities being
offered and sold under the 1933 Act or pursuant to an exemption from
registration;
e. Company Reliance. The Holder understands that the shares of Series F
----------------
Preferred Stock are being issued to it in reliance on specific exemptions
from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy
of, and the Holder's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of the Holder set forth herein
in order to determine the availability of such exemptions and the eligibility
of the Holder to acquire the shares of Series F Preferred Stock;
f. Information Provided. The Holder and its advisors, if any, have been
--------------------
furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the issuance of the
shares of Series F Preferred Stock which have been requested by the Holder;
the Holder and its advisors, if any, have been afforded the opportunity to
ask questions of the Company and have received satisfactory answers to any
such inquiries; and the Holder understands that its investment in the shares
of Series F Preferred Stock involves a high degree of risk;
g. Absence of Approvals. The Holder understands that no United States federal
--------------------
or state agency or any other government or governmental agency has passed on
or made any recommendation or endorsement of the shares of Series F Preferred
Stock; and
h. Exchange Agreement. This Agreement has been duly and validly authorized,
------------------
executed and delivered on behalf of the Holder and is a valid and binding
agreement of the Holder enforceable in accordance with its terms, subject as
to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
SECTION 7.
MISCELLANEOUS
a. Costs, Expenses and Taxes. Each party shall bear its own costs and expenses
-------------------------
in connection with the preparation, execution and delivery of this Agreement
and the issuance of the shares of Series F Preferred Stock. The Company
shall pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Agreement and
the exchange of the Notes for the shares of Series F Preferred Stock.
b. Survival of Representations. The representations, warranties, covenants and
---------------------------
agreements of the Holder and the Company contained in this Agreement or in
any certificate furnished hereunder shall survive the Closing.
<PAGE>
c. Prior Agreements. This Agreement constitutes the entire agreement between
----------------
the parties concerning the subject matter hereof and supersedes any prior
representations, understandings or agreements. There are no representations,
warranties, agreements, conditions or covenants, of any nature whatsoever
(whether express or implied, written or oral) between the parties hereto with
respect to such subject matter except as expressly set forth herein. The
parties acknowledge that certain material terms were agreed to pursuant to
the Notice of Intent to Exchange Secured Debt dated January 21, 1999 and are
expressed more fully herein.
d. Severability. The invalidity or unenforceability of any provision hereof
------------
shall in no way affect the validity or enforceability of any other provision
or the validity and enforceability of this Agreement in any other
jurisdiction.
e. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO ITS CHOICE OF LAW RULES.
f. Headings. Section headings in this Agreement are included herein for
--------
convenience of reference only and shall not constitute a part of, or affect
the interpretation of, this Agreement.
g. Counterparts. This Agreement may be executed in any number of counterparts,
------------
all of which taken together shall constitute one and the same instrument, and
either of the parties hereto may execute this Agreement by signing any such
counterpart. A facsimile transmission of this Agreement bearing a signature
on behalf of a party hereto shall be legal and binding on such party.
h. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and permitted
assigns.
i. Further Assurances. Each party to this Agreement will perform any and all
------------------
acts and execute any and all documents as may be necessary and proper under
the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
j. Publicity. Neither the Company nor the Holder shall, nor shall they permit
---------
their respective stockholders, directors, officers or advisors to, issue or
cause the publication of any press release or make any other public
statement, filing or announcement with respect to this Agreement and the
transactions contemplated hereby without the prior approval of the other
parties; provided, however, that the Company shall be entitled, without the
prior approval of the Holder, to make any press release or other public
disclosure with respect to such transactions as is required by applicable law
or the Nasdaq Stock Market (although the Holder shall be consulted by the
Company in connection with any such press release or other public disclosure
prior to its release and shall be provided with a copy thereof). The Company
and the Holder shall cooperate in issuing press releases or otherwise making
public statements with respect to this Agreement and the transactions
contemplated hereby, which cooperation shall include first consulting the
other party hereto concerning the requirement for, and timing and content of,
such public announcement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
caused this Agreement to be executed by their respective duly authorized
officers, as of the date first above written.
EQUALNET COMMUNICATIONS CORP.
By: /s/ Mitchell Bodian
-------------------
Name: Mitchell Bodian
Title: President
GENESEE FUND LIMITED - PORTFOLIO B
By: Genesee International Inc.
General Manager
By: /s/ Donald R. Morken
--------------------
Donald R. Morken
President
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated October 13, 1999, with respect to the
consolidated financial statements and schedule of Equalnet Communications Corp.
for the year ended June 30, 1999 with respect to the consolidated financial
statements, as amended, included in this Form 10-K/A.
ERNST & YOUNG LLP
Houston, Texas
April 18, 2000
