-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A7ZIeB4T/LkE1qF4OT0EFRDAbBFJi1AUWq+8P7+8FqPzcefQ6ILjBN7iHC8kjIDJ buBEoDaatU+w8ZyUxsQOeg== 0000899243-99-000673.txt : 19990403 0000899243-99-000673.hdr.sgml : 19990403 ACCESSION NUMBER: 0000899243-99-000673 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUALNET COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000936163 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 760457803 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-75497 FILM NUMBER: 99585740 BUSINESS ADDRESS: STREET 1: 1250 WOOD BRANCH PARK DR CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2815294600 MAIL ADDRESS: STREET 1: 1250 WOOD BRANCH PARK DR CITY: HOUSTON STATE: TX ZIP: 77079 FORMER COMPANY: FORMER CONFORMED NAME: EQUALNET HOLDING CORP DATE OF NAME CHANGE: 19950125 S-3 1 FORM S-3 As filed with the Securities and Exchange Commission on April __, 1999 Registration No. 333-____ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _______________________ EQUALNET COMMUNICATIONS CORP. (Exact name of Registrant as specified in its charter) TEXAS 76-0457803 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) EQUALNET COMMUNICATIONS CORP. MITCHELL H. BODIAN, PRESIDENT Copy to: HOUSTON, TEXAS 77079 EQUALNET COMMUNICATIONS CORP. W. ROBERT SHEARER 1250 WOOD BRANCH PARK DRIVE 1250 WOOD BRANCH PARK DRIVE WEIL, GOTSHAL & MANGES LLP (281) 529-4600 HOUSTON, TEXAS 77079 700 LOUISIANA, SUITE 1600 (Address, including zip code, and (281) 529-4600 HOUSTON, TEXAS 77002 telephone number, including area (Name, address, including zip code, (713) 546-5275 code, of Registrant's principal and telephone number, including area executive offices) code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. CALCULATION OF REGISTRATION FEE
=================================================================================================================================== Title of each class of Amount to be Proposed maximum offering Proposed maximum aggregate Amount of securities to be registered registered price per share (2) offering price (2) registration fee - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share.............................. 23,723,963 shares (1) $0.6406 $15,197,571 $4,225 ===================================================================================================================================
(1) Such 23,723,963 shares comprise 3,988,620 issued and outstanding shares, an aggregate of 1,260,232 shares that are issuable upon the exercise of four outstanding warrants, an aggregate of 4,108,042 shares that are issuable upon the conversion of certain notes, an aggregate of 11,367,069 shares that are issuable upon the conversion of preferred stock, an aggregate of 1,500,000 shares that are reserved for issuance upon the conversion of notes or preferred stock issuable as interest or dividends on outstanding notes or preferred stock, and an aggregate of 1,500,000 shares that are issuable pursuant to an agreement in connection with an acquisition of certain assets by a subsidiary of the Registrant. Pursuant to Rule 416 under the Securities Act of 1933, as amended, this Registration Statement also relates to an indeterminate number of additional shares of Common Stock that may be issuable upon exercise of such outstanding warrants or conversion of such notes or preferred stock to prevent dilution resulting from stock splits, stock dividends and similar transactions. (2) Estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457 under the Securities Act, based on the average of the high and low sales prices for the Registrant's Common Stock on March 26, 1999, as reported on the Nasdaq National Market. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to completion, dated April 1, 1999 23,723,963 EQUALNET COMMUNICATIONS CORP. Common Stock _____________________________ This is an offering of shares of our common We will not receive any of the proceeds stock. Selling shareholders identified in from the offering. If the selling the prospectus are offering all of the shares shareholders exercise the warrants, we to be sold in the offering. The offered will receive proceeds from those shares consist of: warrants. . issued and outstanding shares, The selling shareholders may sell any or all of the shares of common stock at . shares issuable upon the exercise of market prices prevailing at the time of warrants, sale, at prices related to prevailing market prices, at negotiated prices or . shares issuable upon the conversion of at fixed prices. notes and preferred stock, and Our common stock is listed on the Nasdaq . shares issuable under an agreement through National Market under the symbol "ENET." which one of our wholly owned subsidiaries will acquire another company's assets in exchange for shares of our common stock.
_____________________________ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 1. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense. ---------------------- April __, 1999 TABLE OF CONTENTS PAGE ---- RISK FACTORS........................................... 1 ABOUT EQUALNET COMMUNICATIONS CORP..................... 12 USE OF PROCEEDS........................................ 12 SELLING SHAREHOLDERS................................... 13 PLAN OF DISTRIBUTION................................... 19 FORWARD-LOOKING STATEMENTS............................. 21 WHERE YOU CAN FIND MORE INFORMATION.................... 21 LEGAL MATTERS.......................................... 22 EXPERTS................................................ 23 i RISK FACTORS The shares offered are speculative and involve a high degree of risk. You should consider carefully the following risk factors, as well as the other matters in this prospectus, in deciding whether to purchase common stock. We recorded losses We recorded net losses of $8.4 million, during our three most $15.0 million and $17.9 million for the recent fiscal years and years ended June 30, 1996, 1997 and the most recent six 1998, respectively. We recorded a net month period, and we loss of $8.0 million for the six months will likely continue to ended December 31, 1998. We cannot record losses in the assure you that our financial results near future. will improve or that we will become profitable in future periods. In the future, we will have to generate significantly higher revenues while reducing operating expenses to continue our operations. Because of our losses, we have relied heavily on third-party sources of capital to fund operating expenses. We cannot assure you that we will be able to continue to obtain capital from third parties in sufficient amounts to continue our operations. Our auditors' have qualified Our independent auditors have qualified their opinion regarding our their report on our most recent audited consolidated financial consolidated financial statements to statements. reflect that EqualNet Corporation's bankruptcy filing, our losses from operations and related circumstances raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects that may result from the outcome of this uncertainty. Defaults by us under material We are in default under several agreements could result in material agreements to which we are a the loss of services and the party. Many of the other parties to payment of penalties. those agreements have filed lawsuits against us for breaches of contract. If we do not cure those defaults or settle those lawsuits on favorable terms, the other parties to those agreements may cease providing services or impose financial penalties, if applicable, under the relevant agreement. The loss of services or the payment of penalties could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be able to cure those defaults or settle those lawsuits on favorable terms. 1 One of our principal EqualNet Corporation, one of our operating subsidiaries, principal operating subsidiaries, filed EqualNet Corporation, filed for Chapter 11 protection on September for bankruptcy in September 10, 1998. EqualNet Corporation intends 1998. to reorganize its business, stabilize its operations and improve its balance sheet under bankruptcy protection. However, if EqualNet Corporation is not able to . negotiate new carrier agreements, . improve the efficiency of its operations, . increase cash flow, . retain a substantial portion of its customer base, and . obtain the approval by its creditors of a plan of reorganization, EqualNet Corporation may be forced into liquidation. EqualNet Corporation generated substantially all of our revenues during fiscal year 1998 and currently generates approximately 55% of our revenues. The liquidation of EqualNet Corporation could have a material adverse effect on our financial condition and results of operations. There are several risks We intend to grow by acquiring other related to our acquisition telecommunication services providers program, including the risk (or the customer accounts owned by that our issuance of common those providers) and other stock in acquisitions might complementary businesses. We expect be highly dilutive. these acquisitions to enable us to receive greater volume discounts on the rates we pay to our underlying carriers, although we cannot assure you that we will receive those discounts. We expect to compete with other potential acquirors, many of whom will be larger and have greater financial resources than us, for these acquisition candidates. This competition will likely limit the number of acquisition opportunities and increase acquisition prices, or increase the dilution our shareholders will experience to the extent acquisitions are paid for with our equity securities. 2 The success of our acquisition strategy will depend on whether we can identify, acquire and manage additional businesses profitably and integrate acquired businesses into our organization without substantial costs, delays or other financial or operational difficulties. As part of this strategy, we must successfully implement potential marketing and cost-saving opportunities. Acquisitions involve a number of special risks, including: . failure of the acquired business to achieve expected results; . our failure to retain customers or accounts of acquired businesses; . diversion of our management's attention and resources; . our failure to retain key personnel of the acquired business; and . risks associated with unanticipated events or liabilities. The occurrence of any of these events or circumstances could have a material adverse effect on our business, financial condition and results of operations. Finally, we cannot assure you that we can obtain financing for acquisitions on satisfactory terms. We cannot predict the timing, size and success of our acquisitions. We intend to finance future acquisitions by using shares of our common stock for all or a substantial portion of the purchase price to be paid. At the current price levels of our common stock, acquisitions could be highly dilutive. Furthermore, if our common stock is delisted by the Nasdaq National Market or does not maintain a sufficient market value, or if potential acquisition candidates refuse to accept common stock as part of the payment for the sale of their businesses, we may not be able to continue our acquisition program. If we are unable to 3 use our common stock to finance acquisitions, our growth could be limited unless we are able to borrow money on acceptable terms. We are dependent on AT&T, We depend upon AT&T Corp., Sprint, Frontier and MCI-WorldCom, Frontier Communications MCI-WorldCom, and the loss of the West, Inc. and Sprint of their services would Communications Company, L.P. to provide substantially impair our us with the telecommunications services operations. that we resell to our customers and the detailed information upon which we base our customer billings. We do not currently have contracts with AT&T, MCI-WorldCom or Sprint. Instead, we use our relationships with other resellers such as US Republic Communications, Inc., S4 Communications, Inc. and The Furst Group, Inc., each of which supplies partitions under its contract with the underlying carrier. Our near-term ability to expand our business partially depends upon our ability to maintain relationships with these underlying and intermediary carriers. If we lose any of these relationships, it could have a material adverse effect on our financial condition and results of operations. Our financial performance and The market price of our common stock our acquisition program have has moved up or down dramatically in made the price of our common response to variations in our quarterly stock fluctuate and yearly operating results, general significantly over time. trends in the long-distance industry, changes in federal regulations affecting us or the long-distance industry, and other factors. For example, during calendar year 1998, the market price for the common stock as reported by Nasdaq ranged from a high of $3.00 per share to a low of $0.1875 per share. We might be delisted by During the last four months of 1998, we Nasdaq. received notices from Nasdaq indicating that we did not meet Nasdaq's listing requirements with respect to minimum stock price, minimum net tangible asset value and minimum value of public float, and that our continued failure to meet these minimum listing requirements would result in Nasdaq delisting our common stock. We had a hearing with Nasdaq on February 4, 1999 to review our ability to continue to meet the minimum listing requirements for Nasdaq. Nasdaq is still considering whether we will be able to meet their 4 continued listing requirements. If Nasdaq delists our common stock: . there will be no established public trading market for our common stock; . we will most likely not be able to use common stock in our acquisition program; . we will be in default under the terms of some of our convertible debt and convertible preferred stock; and . we will most likely not be able to raise the capital required to confirm EqualNet Corporation's bankruptcy plan of reorganization. Because we have numerous As long as our outstanding options, outstanding options, warrants and convertible securities warrants and convertible remain unexercised or are not securities, we may have converted, the terms under which we difficulty obtaining capital could obtain additional capital may be and your share value may be adversely affected. Moreover, the significantly diluted. holders of these options, warrants and convertible securities are likely to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital by a new offering of our securities on terms more favorable than those provided by these securities. As of the date of this prospectus, we have outstanding options and warrants to purchase an aggregate of approximately 3,524,899 shares of common stock, 2,000 outstanding shares of Series A Preferred Stock convertible into 2,666,667 shares of common stock, 1,500 outstanding shares of Series B Preferred Stock convertible into 1,500,000 shares of common stock, 206,707 outstanding shares of Series C Preferred Stock convertible into 2,067,070 shares of common stock, 3,850 shares of Series D Preferred Stock convertible into approximately 5,133,332 shares of common stock and 6% Senior Secured Convertible Notes due 2001 convertible into an aggregate of 4,108,042 shares of common stock. 5 Future resales of our Sales of substantial amounts of our outstanding shares may common stock in the public market may substantially diminish the hurt the common stock's market price. market price of our common As of the date of this prospectus, stock. including the shares covered by this prospectus, in excess of 75% of the shares of our common stock issuable upon conversion of preferred stock or convertible notes or upon exercise of options or warrants, and substantially all of our issued and outstanding shares of common stock, are eligible for sale under Rule 144 or have been registered under the Securities Act for resale by the holders. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock. Our operations might not We currently must make minimum monthly generate sufficient funds payments to Frontier for the for us to fulfill our telecommunications services it provides commitments to our carriers. to us. If we are unable to resell long-distance service purchased from Frontier in amounts that are at least equal to our minimum payment obligations to Frontier, we will have to use revenues from other customers to cover our operating costs under the Frontier contract. If any of our underlying carriers or intermediate carriers are considered to be utilities in EqualNet Corporation's bankruptcy proceeding, they will be entitled to adequate assurance of payment for carrier services provided to EqualNet Corporation after September 10, 1998, the bankruptcy filing date. This may require us to make cash deposits or advance payments in an amount the court determines is sufficient to provide these carriers with adequate assurance of payment. If we fail to provide these carriers with adequate assurance of payment for future services, they will have the right to cease providing services. Current sources of funds from operations and working capital may not be sufficient to provide the amount of adequate assurance of payment required by these carriers. We cannot assure you that EqualNet Corporation could secure funding for the amount of any adequate assurance that may be required of EqualNet Corporation. 6 Most of the companies we Our industry is highly competitive. We compete with have compete based upon brand recognition, significantly greater pricing, customer service, network resources than us. quality and value-added services. AT&T, MCI-WorldCom and Sprint dominate the long-distance segment of our market. In addition to AT&T, MCI-WorldCom and Sprint, we compete with national and regional long-distance carriers, and more recently with regional Bell operating companies. The Telecommunications Act of 1996 permits these regional Bell operating companies, which already provide local telephone service in most markets, to provide long distance services under certain conditions. Although there are currently restrictions that prohibit these companies from providing long-distance services in areas where they furnish local service without competition, we anticipate that in the foreseeable future these carriers will be able to provide long-distance services both inside and outside their local service areas. This increased competition from regional Bell operating companies, which typically have broader customer bases and greater financial resources than us, may have a material adverse effect on our financial condition and results of operations. We believe that there are over 900 companies in the long-distance telecommunications market, many of which have substantially greater market share and financial resources than we do. To compete effectively with other carriers, we must provide high quality services at competitive prices. The prices we receive from our underlying and intermediate carriers generally depend upon the amount of customer traffic we can commit to those carriers. Given our recent operational problems, we may not be able to commit enough customer traffic to our carriers to enable us to maintain profitability, and we may incur substantial penalties because of our failure to meet our commitments. 7 Some telecommunications laws The Telecommunications Act of 1996 and decrease our profit margin related orders issued by the Federal in a manner that is Communications Commission shifted disproportionate to the responsibility for the payment of decrease experienced by our certain service and access charges from competitors. underlying carriers such as AT&T, Sprint, Frontier and MCI-WorldCom to interexchange carriers such as EqualNet Corporation. Although AT&T, Sprint, Frontier and MCI-WorldCom no longer pay for these service and access charges, they have not reduced their rates sufficiently to account for the elimination of those charges. Thus we pay only a slightly lower rate for the access we purchase from AT&T, Sprint, Frontier and MCI-WorldCom, but must now cover the significantly increased costs attributable to the service and access charges, as well as preferred interexchange carrier charges and universal service fund charges at both a federal and state level. These increased costs and the administrative costs of complying with the reporting requirements referred to in the next paragraph may reduce our profit margin or increase the cost of service for our customers. This decrease in profit margin or the loss of business likely to result from an increase in customers' billing rates may have a material adverse effect on our financial condition and results of operations. The long-distance telecommunications operations of EqualNet Corporation and USC Telecom, Inc. are subject to various federal and state laws and regulations, including prior certification, notification and registration requirements. EqualNet Corporation and USC Telecom must generally obtain and maintain certificates of public convenience and necessity from regulatory authorities in most states in which they offer service. Any failure to maintain proper certification in jurisdictions in which either of these companies provides a significant amount of intrastate long-distance service could have a material adverse effect on our business. We have had significant We converted to a new customer problems with our billing management, billing and rating system system. ("AMS") in March 1998. The conversion was not successful because, among other things, we acquired a new customer base and attempted to migrate to a switch-based environment at the same time as the conversion. The failed 8 conversion caused considerable billing errors and delays. Additionally, there were aspects of AMS that required continuing support from the seller of AMS. This reliance upon an outside source for billing system troubleshooting slowed the conversion process. Since we converted to AMS in March 1998, we have been unable to generate reliable information concerning our customer attrition rate and other data necessary or desirable for the operation of our business. We are currently in the process of installing, and have begun to use portions of, CostGuard ENTERPRISE, an industrial class rating, billing and customer care system. We cannot assure you that CostGuard will fully meet our current and ongoing needs. If CostGuard fails to provide the expected results, we may need to invest in alternative billing systems. Converting to a new system could cause billing errors and delays and could disrupt our ability to provide effective customer service. We are not Year 2000 The Year 2000 problem is the result of compliant. computer programs and other business systems being written using two digits rather than four to represent the year. Many of our time-sensitive applications and business systems and those of our vendors and customers may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failure or a material disruption of operations. We recently began making the internal preparations necessary to avoid computer-related losses and work stoppages as a result of the Year 2000 problem. While we cannot currently predict the consequences of, including the potential lost revenue that could result from, the failure to be Year 2000 compliant, if not remedied before the year 2000, such non-compliance will have a material adverse effect on our operations. Furthermore, the underlying operating system for our CostGuard ENTERPRISE billing system is not currently Year 2000 compliant. We believe that future updates to this operating system will make the billing system Year 2000 compliant, but we cannot assure you that such compliance will be achieved. If this system does not achieve Year 2000 compliance, 9 we may experience substantial difficulties in billing and servicing our customers. The manufacturer of the telecommunications switches that we own has represented that the switches are Year 2000 compliant. However, we cannot assure you that our vendors and customers are or will be Year 2000 compliant. If a customer's phone equipment is not Year 2000 compliant, that customer may not be able to use all of the capabilities of the phone system; this inability to make full use of the phone system could reduce our revenues. In addition, if a customer is not Year 2000 compliant, we cannot provide that customer with billing information in an electronic data format through the CostGuard system. The failure of our vendors and customers to be Year 2000 compliant could have a material adverse effect on our financial condition and results of operations. We depend heavily on our We have a small internal sales force agents. and obtain most of our new customers from independent marketing agents. Our near-term ability to expand our business depends upon whether we can maintain relationships with existing agents and establish new relationships with additional agents. During fiscal year 1998 and the first six months of fiscal year 1999, our relationship with our independent marketing agents deteriorated because we failed to pay commissions on a timely and regular basis. If we continue to fail to pay commissions to our agents on a timely and regular basis, our existing agents may choose not to provide us with new orders or we may not be able to attract and establish relationships with new agents. In addition, the agents may choose to solicit our customers to transfer them to other long-distance carriers. Those events could have a material adverse effect on our financial condition and results of operations. 10 Because of our financial We have lost many experienced and problems and EqualNet valuable employees, including key Corporation's Bankruptcy members of management, because of our filing, we have lost and may continuing financial problems and continue to lose valuable because of EqualNet Corporation's employees. bankruptcy filing. We may experience operational difficulties if we continue to lose key employees or if we cannot replace those employees with equally qualified personnel. 11 ABOUT EQUALNET COMMUNICATIONS CORP. We are a long-distance telephone company with three principal operating subsidiaries: . USC Telecom, a long-distance telephone company that provides service to the customer base acquired from SA Telecommunications, Inc. in July 1998; . EqualNet Corporation, a long-distance telephone company that provides services to generally smaller commercial and residential accounts nationwide; and . Netco Acquisition Corp., the owner of nine switches located in major U.S. cities. EqualNet Corporation, and EqualNet Wholesale Services, Inc., a non- operating wholly owned subsidiary of EqualNet Corporation, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on September 10, 1998. EqualNet Wholesale Services later converted its bankruptcy proceeding from a Chapter 11 reorganization to a Chapter 7 liquidation. EqualNet Corporation, as a debtor-in-possession under the bankruptcy laws, expects to continue to manage and operate its assets and business pending the confirmation of its reorganization plan. At the time of its bankruptcy filing, EqualNet Corporation had total assets of $20.7 million and total liabilities of approximately $57.6 million and owed us, its largest individual creditor, approximately $33.0 million. We purchase large volumes of long-distance telephone usage at volume discounts using the networks of major carriers such as AT&T, Sprint, Frontier and MCI-WorldCom, and resell long distance services to smaller-volume users of these services. Our strategy is to compete as a regional reseller and as a reseller of dedicated T-1 service, using the networks of AT&T, Sprint, Frontier and MCI-WorldCom to transmit our customers' traffic. T-1 service is service from a customer's premises directly to our switch that bypasses the local carrier's facilities, thus replacing the customer's variable usage costs with a lower fixed rate of service. We market our services primarily to small business customers with monthly long-distance bills of less than $500. We use independent marketing agents and an internal sales force to sell our services. The independent marketing agents typically receive residual commissions based on billed revenue. We intend to focus our business on offering bundled services to our customers, including long-distance service and local service, as well as internet access and web pages. We were incorporated in Texas in January 1995 to acquire all of the outstanding stock of EqualNet Corporation, which was incorporated in Texas in 1990. Our principal executive office is located at EqualNet Plaza, 1250 Wood Branch Park Drive, Houston, Texas 77079, and our telephone number is (281) 529-4600. USE OF PROCEEDS We will not receive any of the proceeds from the sale of the offered shares (the "Shares") by the selling shareholders. If the selling shareholders exercise all of the warrants, we will receive estimated gross proceeds of approximately $1,159,413, based upon an average exercise price of $0.92 per share. We intend to use the proceeds from any exercise of the warrants for general corporate purposes. However, the selling shareholders may choose not to exercise the warrants. 12 SELLING SHAREHOLDERS The following table sets forth, as of March 26, 1999, (1) the name of each selling shareholder, (2) the number of shares of common stock beneficially owned by each selling shareholder before the offering (and the source of those shares), (3) the number of those shares of common stock that may be offered under this prospectus (regardless of whether those selling shareholders presently intend to offer those Shares), including shares of common stock that are not currently beneficially owned but that may become beneficially owned upon the issuance of 6% Senior Secured Convertible Notes due 2001 or Series D Convertible Preferred Stock issuable as interest or dividends on outstanding notes or preferred stock, and (4) the number of shares of common stock that will be beneficially owned by each selling shareholder after the completion of the offering and sale of the Shares (assuming that all Shares are sold). The number of shares of common stock beneficially owned by each selling shareholder before the offering of the Shares is based on information furnished to us by that selling shareholder or set forth in our securities ledgers.
Number of Shares of Common Number of Shares of Stock That Will Be Common Stock Number of Shares of Beneficially Owned After the Beneficially Owned Common Stock That May Be Completion of the Offering and Name of Selling Before the Offering Offered Under This Sale of the Shares (assuming Shareholder of the Shares(1) Prospectus all Shares are sold) - ------------------------- ------------------------ -------------------------- ------------------------------- Willis Group, LLC 12,276,769 (2) 7,703,803 4,572,966 (12) Genesee Fund Limited 2,737,137 (3) 2,737,137 0 Portfolio B Advantage Fund Limited 2,989,166 (4) 2,966,666 22,500 RFC Capital Corporation 594,000 (5) 594,000 0 MCM Partners 2,666,667 (6) 2,666,667 0 Limit LLC (d/b/a ACMI) 2,500,000 (7) 2,500,000 0 The Furst Group, Inc. 1,822,500 (8) 1,822,500 0 James T. Harris 12,576,769 (2) 300,000 4,572,966 (12) Bernice Arceneaux 10,000 10,000 0 SA Telecommunications, Inc. 2,067,070 (9) 2,067,070 0 Michael L. Hlinak 190,000 (10) 100,000 90,000 Dean H. Fisher 267,602 (11) 226,120 41,482 Ronald J. Salazar 92,529 (13) 30,000 62,529
(1) For purposes of calculating the beneficial ownership of each shareholder, it was assumed (in accordance with the Securities and Exchange Commission's definition of "beneficial ownership") that the shareholder had exercised all options or warrants, or converted any convertible securities, by which the shareholder had the right, within 60 days following March 15, 1999, to acquire shares of common stock. 13 (2) Includes warrants exercisable for an aggregate of 933,116 shares of common stock, 1,925 shares of Series D Convertible Preferred Stock convertible in the aggregate into up to 2,566,666 shares of common stock and notes convertible in the aggregate into up to 2,054,021 shares of common stock. None of the shares referred to in the preceding sentence were outstanding as of February 22, 1999. Also includes 750,000 shares of common stock that may be issued upon the conversion of additional 6% Senior Secured Convertible Notes due 2001 or Series D Convertible Preferred Stock issuable as interest or dividends on outstanding notes or preferred stock. James T. Harris holds 300,000 shares of common stock directly as a result of a transfer from Willis Group, LLC. Mr. Harris is the treasurer of, and owns a 5% membership interest in, Willis Group, LLC. Mr. Harris was a member of our Board of Directors from March 1998 to October 1998. Information relating to ownership by Willis Group, LLC and Mr. Harris is based on the Amendment No. 5 to Schedule 13D filed with the SEC on March 12, 1999. According to the report, Willis Group, LLC has sole voting and dispositive power with respect to all shares other than shares or warrants held directly by its members and Mr. Harris shares voting and dispositive power with the other members of Willis Group, LLC with respect to all shares other than shares held directly. (3) Includes a warrant exercisable for an aggregate of 333,116 shares of common stock and notes convertible into an aggregate of up to 2,054,021 shares of common stock. Also includes 350,000 shares of common stock that may be issued upon conversion of additional 6% Senior Secured Convertible Notes due 2001 issuable as interest on outstanding notes. (4) Includes 1,925 shares of Series D Convertible Preferred Stock convertible in the aggregate into up to 2,566,666 shares of common stock. Also includes 400,000 shares of common stock that may be issued upon conversion of additional Series D Convertible Preferred Stock issuable as dividends on outstanding preferred stock. (5) Includes warrants exercisable for an aggregate of 594,000 shares of common stock. (6) Includes 2,000 shares of Series A Convertible Preferred Stock convertible in the aggregate into 2,666,667 shares of common stock. (7) Includes 1,500,000 shares of common stock to be issued pursuant to an Amended and Restated Asset Purchase Agreement dated effective as of November 6, 1998 among Equalnet, ACMI Acquisition Corp., LIMIT LLC (d/b/a ACMI) and the members of LIMIT LLC (d/b/a ACMI). (8) Includes 3,000 shares of Series B Senior Convertible Preferred Stock convertible in the aggregate into approximately 1,500,000 shares of common stock. (9) Includes 206,707 shares of Series C Convertible Preferred Stock convertible in the aggregate into 2,067,070 shares of common stock. (10) Includes a warrant exercisable for an aggregate of 90,000 shares of Common Stock. Mr. Hlinak held the offices of Executive Vice President, Chief Financial Officer and Chief Operating Officer of Equalnet during the period from 1995 to 1998 and was a director of Equalnet from January 1995 to June 1998. 14 (11) Includes options exercisable for an aggregate of 35,000 shares of common stock. Excludes 40,000 shares of common stock held by trusts for the benefit of Mr. Fisher's children. Mr. Fisher has disclaimed any beneficial ownership of these shares. Mr. Fisher is the General Counsel of Equalnet and was the Senior Vice President and Secretary of Equalnet from January 1995 until February 1999. (12) This amount will constitute beneficial ownership of 10% of our common stock outstanding immediately after the sale of all of the Shares. (13) Dr. Salazar is a member of the Board of Directors of Equalnet. Under the terms of the 6% Senior Secured Convertible Notes due 2001, the warrants held by Willis Group, LLC and Genesee Fund Limited-Portfolio B, and the Series A and Series D Convertible Preferred Stock, those securities are convertible or exercisable by any holder only to the extent that the number of shares of common stock issuable upon the conversion of those securities, together with the number of shares of common stock owned by the holder and its affiliates (but not including shares of common stock underlying unconverted and unexercised portions of those securities or securities containing similar provisions) would not exceed 4.9% of the then outstanding common stock as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. Thus, the number of shares of common stock set forth in the table for each of Willis Group, Genesee, MCM Partners and Advantage Fund Limited exceeds the number of shares of common stock that Willis Group, Genesee, MCM Partners and Advantage could own beneficially at any given time through their ownership of the 6% Senior Secured Convertible Notes due 2001, the warrants and the Series A and Series D Convertible Preferred Stock. The sources of the Shares acquired or to be acquired by the selling shareholders are: . up to 2,566,666 shares of common stock issuable by us to each of Advantage and Willis Group upon the conversion of 1,925 shares of our Series D Convertible Preferred Stock owned by each of Advantage and Willis Group; . up to 2,054,021 shares of common stock issuable by us to each of Willis Group and Genesee upon the conversion of $1,540,516 aggregate principal amount of 6% Senior Secured Convertible Notes due 2001 owned by each of Willis Group and Genesee; . up to 333,116 shares of common stock issuable by us to each of Willis Group and Genesee upon the exercise of warrants owned by Willis Group and Genesee; . up to 1,500,000 shares of common stock reserved for issuance upon the conversion of 6% Senior Secured Convertible Notes due 2001 or Series D Convertible Preferred Stock issued as interest or dividends on outstanding notes or preferred stock; . up to 594,000 shares of common stock issuable by us to RFC Capital Corporation upon the exercise of two warrants owned by RFC; 15 . 1,000,000 shares of common stock held directly by LIMIT LLC (d/b/a ACMI) and 1,500,000 shares of common stock to be issued to LIMIT LLC (d/b/a/ ACMI) pursuant to an Amended and Restated Asset Purchase Agreement among us, ACMI Acquisition Corp., LIMIT LLC (d/b/a ACMI) and the members of LIMIT LLC (d/b/a ACMI); . 322,500 shares of common stock held directly by The Furst Group, Inc. and up to 1,500,000 shares of common stock issuable by us to The Furst Group upon the conversion of 3,000 shares of our Series B Senior Convertible Preferred Stock owned by The Furst Group; . 300,000 shares of common stock held directly by James Harris; . 10,000 shares of common stock held directly by Bernice Arceneaux; . 2,067,070 shares of common stock issuable by us to SA Telecommunications, Inc. upon the conversion of 206,707 shares of our Series C Convertible Preferred Stock owned by SA Telecommunications, Inc.; . up to 2,666,667 shares of common stock issuable by us to MCM Partners upon the conversion of 2,000 shares of our Series A Convertible Preferred Stock owned by MCM Partners; . 2,000,000 shares of common stock held directly by Willis Group; . 100,000 shares of common stock held directly by Michael L. Hlinak; . 226,120 shares of common stock held directly by Dean H. Fisher; and . 30,000 shares of common stock held directly by Ronald J. Salazar. On March 6, 1998 as a result of various transactions, Willis Group and its affiliates gained control of our Board of Directors, having nominated for shareholder approval four of the seven members of the Board. Willis Group beneficially owns approximately 54% of our voting securities. Mark A. Willis, the Chairman of our Board of Directors, owns a 47.5% membership interest in Willis Group. On October 1, 1997, we issued to Willis Group a $1,000,000 Convertible Secured Note, bearing interest at the rate of 12% per year, and a warrant for the purchase of up to 200,000 shares of common stock at an exercise price of $1.00 per share, subject to adjustment. The October 1, 1997 warrant is exercisable for five years. As of the date of issuance of the October 1, 1997 note, we recorded an interest charge of $150,000 to record the impact of the debt being convertible at a discount to market. On March 5, 1998, Willis Group exchanged the October 1, 1997 note and accrued interest for 1,050,000 shares of our common stock. Under the terms of several related agreements among us, Willis Group and MCM Partners entered into on December 2, 1997, we acquired nine telecommunications switches from Willis Group for aggregate consideration consisting of $5,850,000 in cash, 1,400,000 shares of common stock, and warrants to purchase an additional 400,000 shares of common stock. In addition, we granted warrants to 16 purchase 500,000 shares of common stock to Michael T. Willis, a member of Willis Group and father of director Mark A. Willis, for guaranteeing a portion of the financing incurred to purchase the switches. Under the terms of the December 2, 1997 agreements, we acquired Netco Acquisition Corp. from the Willis Group. Netco Acquisition Corp. held certain intangible rights and assets previously acquired by Willis Group and formerly held by Total National Telecommunications. These assets consisted of intangible rights to use certain software and codes necessary to operate the switches. We acquired Netco Acquisition Corp. for aggregate consideration consisting of approximately 3,581,633 shares of common stock, 2,000 shares of Series A Convertible Preferred Stock and the issuance of approximately 4,000,000 shares of common stock for $1.00 per share in cash. During the quarter ended March 31, 1998, we obtained a cash flow bridge loan of $400,000 from Netco Acquisition, LLC, an entity owned 50% by Willis Group. This note is secured by the accounts attributable to web page customers. Effective December 31, 1998, the maturity date of the note was extended from March 31, 1998 to July 31, 1999 and the principal balance of the note was increased by the amount of interest payable on the note. We paid Willis Group a finder's fee of $54,000 related to certain financing transactions that closed during fiscal year 1998. Willis Group entered into an agreement with us in April 1998 related to merger and acquisition consulting services. The agreement required us to pay Willis Group $20,000 per month beginning in May 1998, and a success fee based on a percentage of the purchase price of acquisitions that we close. To date, we have not made any payments to Willis Group under these agreements. During fiscal year 1998, Willis Group incurred approximately $140,000 in out-of-pocket expenses on our behalf related to services provided by consultants, travel expenses and other miscellaneous expenses. We issued a note dated as of July 31, 1998 payable to Willis Group for these expenses. On September 2, 1998, we executed a loan agreement in favor of Willis Group in the amount of $241,106. The loan documents certain advances Willis Group has made on our behalf. This loan is secured by our assets, bears interest at a rate of 11% per year and matures on July 31, 1999. We also entered into other transactions with Willis Group under which Willis Group received some of the notes, preferred stock and warrants upon the conversion or exercise of which the Shares are issuable. The aggregate consideration paid by Willis Group for the notes, preferred stock and warrants was $1.5 million and 1,500,000 shares of our common stock. We are a party to several financing arrangements with RFC Capital Corporation under which RFC provides working capital to us, including debtor-in- possession financing to EqualNet Corporation. Our obligations to RFC are secured by our accounts receivable and substantially all of our other assets. On March 6, 1998, we entered into an exchange agreement with The Furst Group, an accredited investor and the holder of our $3.0 million subordinated debt, under which The Furst Group exchanged the $3.0 million 10% subordinated note due December 31, 1998 and warrants to purchase 1.5 million shares of common stock for 3,000 shares of Series B Senior Convertible Preferred Stock and 322,500 shares of our common stock to satisfy the accrued interest due on the note. Each share of the Series B 17 Preferred has a stated value of $1,000 and is entitled to share with the common stock in any dividends declared based upon the number of shares of common stock the Series B Preferred is convertible into at the time that dividend is declared. Each share of Series B Preferred is convertible initially into 500 shares of common stock subject to certain anti-dilution provisions. The Series B Preferred has a $1,000 per share liquidation preference over our Series A Convertible Preferred Stock and the common stock. Each share of Series B Preferred also entitles the holder to one vote, voting as a single class with the common stock, on matters submitted to our shareholders. Effective March 1, 1998 we acquired substantially all of the assets of SA Telecommunications, Inc. in exchange for: . $3,477,500 in cash; . our assumption of liabilities of approximately $4,000,000; and . the issuance of 195,073 shares of our Series C Convertible Preferred Stock. Equalnet terminated an executive employment agreement with Michael L. Hlinak during the second half of fiscal year 1998. Equalnet is currently obligated to make severance payments of $155,833 to Mr. Hlinak over an 11 month severance period and is providing health insurance benefits to him during that period. Additionally, Equalnet issued a warrant to Mr. Hlinak for the purchase of up to 90,000 shares of Common Stock at an exercise price of $2.00 per share. Equalnet issued the Shares to be sold by Mr. Hlinak under this prospectus to Mr. Hlinak in lieu of all severance payments payable to Mr. Hlinak. The 30,000 shares of common stock being offered under this prospectus by Ronald J. Salazar, a member of our Board of Directors, were issued to Dr. Salazar in lieu of consulting fees payable to Dr. Salazar pursuant to a consulting agreement between Equalnet and Dr. Salazar. We have agreed with the selling shareholders to file with the SEC, under the Securities Act of 1933, as amended, a Registration Statement on Form S-3, of which this prospectus forms a part, with respect to the resale of the Shares, and have agreed to prepare and file any amendments and supplements to the registration statement as may be necessary to keep the registration statement effective until the Shares are no longer required to be registered for the sale of the Shares by the selling shareholders. 18 PLAN OF DISTRIBUTION The selling shareholders or their permitted transferees or pledgees may offer and sell the Shares by and for their respective accounts. We will not receive any of the proceeds from the sale of the Shares by the selling shareholders. If the selling shareholders exercise the warrants, we will receive proceeds from the sale of the warrants. See "Use of Proceeds." The selling shareholders may offer and sell any or all of the Shares: . in one or more transactions on the Nasdaq National Market; . in the over-the-counter market; . in one or more brokerage transactions; or . in one or more privately negotiated transactions, at market prices prevailing at the time of sale, at prices related to prevailing market prices, at negotiated prices or at fixed prices. The selling shareholders may offer and sell the Shares directly or through underwriters, brokers, dealers or agents, who may receive discounts, concessions or commissions from the selling shareholders or the purchasers of Shares for whom those underwriters, brokers, dealers and agents may act as agent or to whom they may sell as principal, or both. As of the date of this prospectus, we are not aware of any agreement or understanding between any broker or dealer and any selling shareholder regarding the offering and sale of the Shares. The selling shareholders and any underwriters, brokers, dealers or agents to or through whom sales of the Shares are made under this prospectus may be deemed to be "underwriters" within the meaning of the Securities Act in connection with those sales. In that event, any commissions or discounts or other compensation paid to those persons and any profit on the resale of Shares originally purchased by them may be deemed to be underwriting compensation under the Securities Act. The selling shareholders will be responsible for all brokerage commissions and other amounts payable with respect to any sale of Shares with respect to the selling shareholders and any legal, accounting or other expenses incurred. If required by the Securities Act, a selling shareholder will distribute a prospectus supplement that will set forth: . the number of Shares being offered under that supplement; . the terms of the offering, including the names of the underwriters; . any discounts, concessions, commissions and other items constituting compensation to underwriters, brokers, dealers or agents; . the public offering price of the Shares; and . any discounts, concessions or commissions allowed or reallowed or paid by underwriters to dealers. 19 In order to comply with the securities laws of certain states, if applicable, the selling shareholders will offer and sell the Shares in those jurisdictions only through registered or licensed brokers or dealers. In addition, the selling shareholders may not sell the Shares in certain states unless the Shares have been registered or qualified for sale in those states or an exemption from registration or qualification is available and complied with. The selling shareholders may indemnify any underwriter, broker, dealer or agent that participates in transactions involving sales of the Shares against certain liabilities, including liabilities arising under the Securities Act. The selling shareholders may offer and sell any or all of the Shares under Rule 144 of the Securities Act rather than under this prospectus if the requirements of Rule 144 are satisfied. One or more of the selling shareholders may pledge or grant a security interest in some of all of the Shares owned by them, and the pledgees or secured parties will, upon foreclosure in the event of default, be deemed to be selling shareholders under this prospectus. In addition, a selling shareholder may sell short our common stock, and in those instances, this prospectus may be delivered in connection with those short sales and the Shares offered under this prospectus may be used to cover the short sales. One or more of the selling shareholders may transfer their Shares to lenders or others and each of those persons will be deemed to be a selling shareholder for purposes of this prospectus. The number of selling shareholders' Shares beneficially owned by those selling shareholders that so transfer selling shareholders' Shares will decrease as and when they make the transfer. The plan of distribution for selling shareholders' Shares sold will otherwise remain unchanged, except that the transferees will be selling shareholders under this prospectus. A selling shareholder may enter into hedging transactions with broker- dealers and the broker-dealers may engage in short sales of the common stock in the course of hedging the position they assume with the selling shareholder, including in connection with distributions of the common stock by those broker- dealers. A selling shareholder may also enter into options or other transactions with broker-dealers that involve the delivery of common stock to the broker-dealers, who may then resell or otherwise transfer the common stock. A selling shareholder may also loan or pledge the common stock to a broker- dealer and the broker-dealer may sell the common stock so loaned or, upon a default, may sell or otherwise transfer the pledged common stock. Under applicable rules and regulations under the Exchange Act, any person that distributes Shares may not bid for or purchase shares of common stock during a period that commences one business day (five business days, if our public float is less than $25 million or our average daily trading volume is less than $100,000) before that person's participation in the distribution, subject to exceptions for passive market making activities. We are bearing all costs relating to the registration of the Shares other than certain fees and expenses, if any, of the selling shareholders' counsel or other advisors. Any commissions, discounts or other fees payable to brokers or dealers in connection with any sale of the Shares will be borne by the selling shareholders, the purchasers participating in that sale, or both. We and the selling shareholders 20 each have agreed to indemnify the other against certain liabilities, including liabilities arising under the Securities Act. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements, including: . statements regarding our financial position, business strategy, markets, budgets and plans and objectives of management for future operations; and . other statements introduced by words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate" or "continue" and similar expressions or variations. We cannot assure you that the expectations reflected in the forward-looking statements made in this prospectus will prove to be correct. There are important factors that could cause actual results to differ materially from our expectations and from any forward-looking statements made in this prospectus or that are otherwise made by us or on our behalf. These factors include the risk factors set forth in this prospectus and in our filings with the SEC. All future written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by those risk factors. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any report or document we file at the public reference facilities that the SEC maintains at the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for more information on the operation of the Public Reference Room. Our filings with the SEC are available from the SEC's internet site located at http://www.sec.gov. We have filed the registration statement with the SEC. This prospectus, which is a part of the registration statement, does not contain all the information set forth in, or annexed as schedules and exhibits to, the registration statement, as permitted by the SEC's rules and regulations. Statements made in this prospectus concerning the contents of any documents referred to in this prospectus are not necessarily complete. For a more complete description, we refer you to the complete copy of each document filed with the SEC as an exhibit to the registration statement. Our common stock is quoted on the Nasdaq National Market under the symbol "ENET." You may inspect reports, proxy statements and other information about us at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The SEC allows us to "incorporate by reference" information into this prospectus, which means that we can disclose important information to you by referring you to another document filed separately 21 with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information in this prospectus. This prospectus incorporates by reference the documents set forth below that we previously filed with the SEC. These documents contain important information about us. The following documents filed by us with the SEC are incorporated by reference into this prospectus: . our Annual Report on Form 10-K for the fiscal year ended June 30, 1998, filed with the SEC on October 13, 1998; . our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998, filed with the SEC on November 20, 1998; . our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1998, filed with the SEC on February 19, 1998; . our Current Report on Form 8-K filed with the SEC on September 21, 1998; . our Current Report on Form 8-K filed with the SEC on February 5, 1999; and . the description of our common stock contained in a Registration Statement on Form 8-A filed with the SEC on February 2, 1995 (Registration No. 1-5725), including any amendment or report filed with the SEC for the purpose of updating the description. We also incorporate by reference all of our future filings under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act. Any statement or information contained in this prospectus or in any document all or part of which is incorporated or deemed to be incorporated by reference in this prospectus will be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement or information contained in this prospectus or in any other document filed after this prospectus that also is or is deemed to be incorporated by reference in this prospectus modifies or supersedes that statement or information. Any statement or information so modified or superseded will not be deemed, except as so modified or superseded, to be a part of this prospectus. We will provide, upon written or oral request, a free copy of any or all of the documents incorporated in this prospectus by reference (other than certain exhibits to those documents) to any person to whom this prospectus is delivered. Please direct your requests for copies to Dean H. Fisher, Corporate Counsel, Equalnet Communications Corp., 1250 Wood Branch Park Drive, Houston, Texas 77079, telephone number (281) 529-4600. LEGAL MATTERS Weil, Gotshal & Manges LLP, Houston, Texas, will pass upon the validity of the Shares for us. 22 EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule included in our Annual Report on Form 10-K for the year ended June 30, 1998 as set forth in their report (which contains an explanatory paragraph describing conditions that raise substantial doubt as to our ability to continue as a going concern as described in Notes 2 and 4 to the consolidated financial statements), which is incorporated by reference in this prospectus. Our consolidated financial statements and schedule are incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. 23 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Securities and Exchange Commission Registration Fee....... $ 4,225 Accounting fees and expenses.............................. 10,000 Legal fees and expenses................................... 40,000 Miscellaneous............................................. 5,000 ------- Total................................................ $59,225 ======= All fees and expenses listed above, other than the Commission Registration Fee, are estimates. The Company will pay the fees and expenses listed above. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article IX of the Bylaws provides for mandatory indemnification to at least the extent specifically allowed by Article 2.021 of the Texas Business Corporation Act (the "TBCA"). Pursuant to Article 2.021 of the TBCA, the Company generally has the power to indemnify its current and former directors, officers, employees and agents against expenses and liabilities incurred by them in connection with any suit to which they were, are, or are threatened to be made, a party by reason of their serving in such positions so long as they acted in good faith and in a manner which they reasonably believed to be in, or, under certain circumstances, not opposed to, the best interest of the Company, and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. However, the Company will not indemnify such person if they are adjudged to be liable to the Company unless the court determines that indemnification is appropriate, in which case indemnification is limited to reasonable expenses actually incurred by that person in connection with the proceeding. The Company can also purchase and maintain insurance for such persons. The Company's Articles of Incorporation provide that a director shall not be liable to the Company or its shareholders for monetary damages for acts or omissions in the director's capacity as a director, except (i) for breaches of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith that constitute a breach of duty of the director to the Company or for acts and omissions involving intentional misconduct or known violations of law, (iii) for transactions in which the director received an improper personal benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, or (iv) for acts or omissions for which the liability of the director is expressly provided by an applicable statute. The Articles of Incorporation further provide that neither amendment nor repeal of such provision shall eliminate or reduce the effect of such provision in respect of any matter occurring, or any cause of action, suit or claim that, but for such provision, would accrue or arise, prior to such amendment or repeal. II-1 The above discussion of the Company's Articles of Incorporation and Bylaws and Article 2.021 of the TBCA is not intended to be exhaustive and is qualified in its entirety by such documents and statute. ITEM 16. EXHIBITS. Exhibit No. Description - -------- ----------- 4.1 Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-88742; filed on February 13, 1995). 4.2* Statement of Resolution of Board of Directors Establishing and Designating Series A Convertible Preferred Stock and Fixing the Rights and Preferences of such Series. 4.3 Statement of Resolution Establishing Series of Shares (Series B Senior Convertible Preferred) (incorporated by reference to Annex G to the Company's Schedule 14A filed with the Commission on June 15, 1998). 4.4 Statement of Resolution Establishing Series of Shares (Series C Convertible Preferred Stock) (incorporated by reference to Annex A to the Company's Schedule 14A filed with the Commission on June 15, 1998). 4.5* Statement of Resolution of Board of Directors Establishing and Designating Series D Convertible Preferred Stock and Fixing the Rights and Preferences of such Series. 4.6 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 (Registration No. 33-88742), filed with the Commission on January 24, 1995). 5.1* Opinion of Weil, Gotshal & Manges LLP, counsel for the Registrant. 23.1 Consent of Weil, Gotshal & Manges LLP (contained in Exhibit 5.1). 23.2* Consent of Ernst & Young LLP. 24.1 Power of Attorney (set forth on the signature page to the Registration Statement) *Filed herewith. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (a) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to include any material information with II-2 respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (b) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (c) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company under the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Houston, State of Texas, on March 30, 1999. EQUALNET COMMUNICATIONS CORP. By: /s/ Mitchell H. Bodian ------------------------ Mitchell H. Bodian, President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Mitchell H. Bodian and Dean H. Fisher, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or his or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - ---------------------------------- ----------------------------------- ----------------------------------- /s/ Mitchell H. Bodian President, Chief Executive Officer March 30, 1999 - ---------------------------------- and Director (Principal executive Mitchell H. Bodian officer and Principal financial officer) /s/ Mark A. Willis Chairman of the Board of Directors March 30, 1999 - ---------------------------------- Mark A. Willis /s/ John Isaac "Ike" Eply Director March 30, 1999 - ---------------------------------- John Isaac "Ike" Epley /s/ Ronald J. Salazar, Ph.D. Director March 30, 1999 - ---------------------------------- Ronald J. Salazar, Ph.D.
EXHIBIT INDEX - ------------- Exhibit Description No. - ----------- ------------------------------------------------------------------- 4.1 Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-88742; filed on February 13, 1995). 4.2* Statement of Resolution of Board of Directors Establishing and Designating Series A Convertible Preferred Stock and Fixing the Rights and Preferences of such Series. 4.3 Statement of Resolution Establishing Series of Shares (Series B Senior Convertible Preferred) (incorporated by reference to Annex G to the Company's Schedule 14A filed with the Commission on June 15, 1998). 4.4 Statement of Resolution Establishing Series of Shares (Series C Convertible Preferred Stock) (incorporated by reference to Annex A to the Company's Schedule 14A filed with the Commission on June 15, 1998). 4.5* Statement of Resolution of Board of Directors Establishing and Designating Series D Convertible Preferred Stock and Fixing the Rights and Preferences of such Series 4.6 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 (Registration No. 33-88742), filed with the Commission on January 24, 1995). 5.1* Opinion of Weil, Gotshal & Manges LLP, counsel for the Registrant. 23.1 Consent of Weil, Gotshal & Manges LLP (contained in Exhibit 5.1). 23.2* Consent of Ernst & Young LLP. 24.1 Power of Attorney (set forth on the signature page to the Registration Statement) *Filed herewith. EX-4.2 2 STATEMENT OF RESOLUTION-SERIES A STOCK EXHIBIT 4.2 EQUALNET COMMUNICATIONS CORP. STATEMENT OF RESOLUTION OF BOARD OF DIRECTORS ESTABLISHING AND DESIGNATING SERIES A CONVERTIBLE PREFERRED STOCK AND FIXING THE RIGHTS AND PREFERENCES OF SUCH SERIES TO THE SECRETARY OF STATE OF THE STATE OF TEXAS Equalnet Communications Corp., pursuant to the provisions of Articles 2.13 and 2.19B of the Texas Business Corporation Act, submits the following statement for the purpose of establishing and designating a series of shares and fixing the rights and preferences thereof: 1. The name of the Corporation is Equalnet Communications Corp. 2. The following is a true and correct copy of an extract from the minutes of a meeting of the Board of Directors of the Corporation held on October 28, 1998, and includes a true and correct copy of certain resolutions duly adopted thereat. RESOLVED, that pursuant to authority vested in the Board of Directors by the Articles of Incorporation of the Corporation, the Board of Directors does hereby provide that the Statement of Resolution Establishing Series of Shares (Series A Convertible Preferred) that was filed with the Secretary of State of the State of Texas on March 5, 1998 is cancelled and deleted in its entirety and shall be replaced with the following: SERIES A CONVERTIBLE PREFERRED STOCK SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following meanings: "Affiliate" means, with respect to any person, any other person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject person; for purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. "Aggregated Person" means, with respect to any person, any person whose beneficial ownership of shares of Common Stock would be aggregated with the beneficial ownership of shares of Common Stock by such person for purposes of Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder. "Amendment Agreement" means the Amendment Agreement, dated as of July 31, 1998, by and between the Corporation and the original holder of Series A Convertible Preferred Stock. "AMEX" means the American Stock Exchange, Inc. "Average Market Price" for any date means the arithmetic average of the Market Price on each of the five Trading Days, whether or not consecutive, during the applicable Measurement Period having the lowest Market Prices. "Board of Directors" or "Board" means the Board of Directors of the Corporation. "Ceiling Price" means $1.2281 (subject to equitable adjustments from time to time on terms reasonably acceptable to the Majority Holders for stock splits, stock dividends, combinations, recapitalizations, reclassifications and similar events occurring or with respect to which "ex-" trading commences on or after the date of filing of this Statement of Resolution with the Secretary of State of the State of Texas); provided, however, that, notwithstanding any other provision hereof, the Ceiling Price applicable to a particular conversion shall be subject to reduction as provided in Section 10(b)(6); provided further, however, that if a Registration Event occurs, then, in addition to any other right or remedy of any holder of shares of Series A Convertible Preferred Stock thereafter the Ceiling Price shall be permanently reduced on each Computation Date by an amount equal to two percent of the amount that the Ceiling Price otherwise would have been without any reduction pursuant to this proviso (pro rated in the case of any Computation Date which is less than 30 days after a Registration Event occurs or less than 30 days after another Computation Date). 2 "Common Stock" means the Common Stock, $.01 par value, of the Corporation. "Computation Date" means, if a Registration Event occurs, any of (1) the date which is 30 days after such Registration Event occurs, if any Registration Event is continuing on such date, (2) each date which is 30 days after a Computation Date, if any Registration Event is continuing on such date, and (3) the date on which all Registration Events cease to continue. "Conversion Amount" initially shall be equal to $1,000.00, subject to adjustment as herein provided. "Conversion Date" means, with respect to each conversion of shares of Series A Convertible Preferred Stock pursuant to Section 10, the date on which the Conversion Notice relating to such conversion is actually received by the Transfer Agent, whether by mail, courier, personal service, telephone line facsimile transmission or other means. "Conversion Notice" means a written notice, duly signed by or on behalf of a holder of shares of Series A Convertible Preferred Stock, stating the number of shares of Series A Convertible Preferred Stock to be converted in the form attached hereto as ANNEX I or such other form as agreed to by the Majority Holders. "Conversion Percentage" means 85%; provided, however, that, notwithstanding any other provision hereof, if a Registration Event occurs, then such percentage stated above shall be permanently reduced by two percentage points on each Computation Date (pro rated in the case of any Computation Date which is less than 30 days after a Registration Event occurs or less than 30 days after another Computation Date). "Conversion Price" means the lesser of: (1) the product of (a) the Average Market Price for such date times (b) the applicable Conversion Percentage; and (2) the Ceiling Price; provided, however, that the Conversion Price applicable to a particular conversion shall be subject to reduction as provided in Section 10(b)(6); provided, further, however, that as long as (x) the Common Stock is listed or quoted on the Nasdaq, the Nasdaq Small Cap, the NYSE or the AMEX and (y) the Corporation is in compliance in all material respects with its obligations to the holders of the Series A Convertible Preferred Stock, the Conversion Price shall be no less than $0.75. "Conversion Rate" shall have the meaning provided in Section 10(a). 3 "Converted Market Price" means, for any share of Series A Convertible Preferred Stock as of any date of determination, an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock which would, at the time of such determination, be issuable on conversion in accordance with Section 10(a) of one share of Series A Convertible Preferred Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears if a Conversion Notice were given by the holder of such share of Series A Convertible Preferred Stock on the date of such determination (determined without regard to any limitation on conversion based on beneficial ownership contained in Section 10(a)) times (y) the arithmetic average of the Market Price of the Common Stock for the five consecutive Trading Days ending on the Trading Day prior to the date of such determination. "Corporation Optional Redemption Notice" means a notice given by the Corporation to the holders of shares of Series A Convertible Preferred Stock pursuant to Section 9(a) which notice shall state (1) that the Corporation is exercising its right to redeem all or a portion of the outstanding shares of Series A Convertible Preferred Stock pursuant to Section 9(a), (2) the number of shares of Series A Convertible Preferred Stock held by such holder which are to be redeemed, (3) the Redemption Price per share of Series A Convertible Preferred Stock to be redeemed or the formula for determining the same, determined in accordance herewith, and (4) the applicable Redemption Date. "Current Price" means with respect to any date the arithmetic average of the Market Price of the Common Stock on the 30 consecutive Trading Days commencing 45 Trading Days before such date. "Dividend Shares" means shares of Series A Convertible Preferred Stock issued as dividends on outstanding shares of Series A Convertible Preferred Stock in accordance with Section 5(b). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Agreements" means the several Note Purchase and Exchange Agreements by and between the Corporation and the original holders of shares of Series D Convertible Preferred Stock pursuant to which the shares of Series D Convertible Preferred Stock were issued. "Final Redemption Date" means the date of redemption of shares of Series A Convertible Preferred Stock pursuant to Section 9(b), determined in accordance therewith. "Final Redemption Notice" means a notice given by the Corporation to each holder of Series A Convertible Preferred Stock pursuant to Section 9(b), which notice shall state (1) that the Corporation is exercising its right to redeem all outstanding shares of Series A Convertible Preferred Stock pursuant to Section 9(b), (2) the number of shares of Series A Convertible Preferred Stock held by such holder which are to be redeemed, (3) the Final Redemption Price per share of Series A Convertible Preferred 4 Stock held by such holder which are to be redeemed, determined in accordance herewith, and (4) the Final Redemption Date. "Final Redemption Price" on any date means an amount equal to the product obtained by multiplying (a) the sum of (1) $1,000 plus (2) an amount equal to the accrued but unpaid dividends on the share of Series A Convertible Preferred Stock to be redeemed to the Final Redemption Date, plus (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share of Series A Convertible Preferred Stock to the Final Redemption Date (determined as provided in Section 5) times (b) the Premium Percentage. "Inconvertibility Notice" shall have the meaning provided in Section 7(a)(2). "Issuance Date" means the first date of original issuance of any shares of Series D Convertible Preferred Stock. "Junior Dividend Stock" means, collectively, the Common Stock and any other class or series of capital stock of the Corporation ranking junior as to dividends to the Series A Convertible Preferred Stock. "Junior Liquidation Stock" means the Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series A Convertible Preferred Stock. "Liquidation Preference" means, for each share of Series A Convertible Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the date of final distribution to such holders, (ii) accrued and unpaid interest on dividends in arrears (computed in accordance with Section 5(a)) to the date of such distribution, and (iii) $1,000.00. "Majority Holders" means at any time the holders of shares of Series A Preferred Stock which shares constitute a majority of the outstanding shares of Series A Preferred Stock. "Market Price" of the Common Stock on any date means the lowest sale price (regular way) for one share of Common Stock on such date on the first applicable among the following: (a) the national securities exchange on which the shares of Common Stock are listed which constitutes the principal securities market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap, if the Nasdaq SmallCap constitutes the principal securities market for the Common Stock on such date, in any such case as reported by Bloomberg, L.P.; provided, however, that if during any Measurement Period or other period during which the Market Price is being determined: (i) The Corporation shall declare or pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock or fix any record date for any such action, then the Market Price for each day in such Measurement Period or such other period 5 which day is prior to the earlier of (1) the date fixed for the determination of stockholders entitled to receive such dividend or other distribution and (2) the date on which ex-dividend trading in the Common Stock with respect to such dividend or distribution begins shall be reduced by multiplying the Market Price (determined without regard to this proviso) for each such day in such Measurement Period or such other period by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the earlier of (1) the record date fixed for such determination and (2) the date on which ex-dividend trading in the Common Stock with respect to such dividend or distribution begins and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution; (ii) The Corporation shall issue rights or warrants to all holders of its outstanding shares of Common Stock, or fix a record date for such issuance, which rights or warrants entitle such holders (for a period expiring within forty-five (45) days after the date fixed for the determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price (determined without regard to this proviso) for any day in such Measurement Period or such other period which day is prior to the end of such 45-day period, then the Market Price for each such day shall be reduced so that the same shall equal the price determined by multiplying the Market Price (determined without regard to this proviso) by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the record date fixed for the determination of stockholders entitled to receive such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding on the close of business on such record date plus the total number of additional shares of Common Stock so offered for subscription or purchase. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than the Market Price (determined without regard to this proviso), and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined in good faith by a resolution of the Board of Directors of the Corporation; (iii) The outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock or a record date for any such subdivision shall be fixed, then the Market Price of the Common Stock for each day in such Measurement Period or such other period which day is prior to the earlier of (1) the day upon which such subdivision becomes effective and (2) the date on which ex-dividend trading in the Common Stock with respect to such subdivision begins shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of 6 shares of Common Stock, the Market Price each trade (regular way) on for each day in such Measurement Period or such other period which day is prior to the earlier of (1) the date on which such combination becomes effective and (2) the date on which trading in the Common Stock on a basis which gives effect to such combination begins, shall be proportionately increased; (iv) The Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Corporation (other than any dividends or distributions to which clause (i) of this proviso applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants referred to in clause (ii) of this proviso and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation) (the foregoing hereinafter in this clause (iv) of this proviso called the "Securities"), or fix a record date for any such distribution, then, in each such case, the Market Price for each day in such Measurement Period or such other period which day is prior to the earlier of (1) the record date for such distribution and (2) the date on which ex-dividend trading in the Common Stock with respect to such distribution begins shall be reduced so that the same shall be equal to the price determined by multiplying the Market Price (determined without regard to this proviso) by a fraction, the numerator of which shall be the Market Price (determined without regard to this proviso) for such date less the fair market value (as determined in good faith by resolution of the Board of Directors of the Corporation) on such date of the portion of the Securities so distributed or to be distributed applicable to one share of Common Stock and the denominator of which shall be the Market Price (determined without regard to this proviso) for such date; provided, however, that in the event the then fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Market Price (determined without regard to this clause (iv) of this proviso) for any such Trading Day, in lieu of the foregoing adjustment, adequate provision shall be made so that the holders of shares of Series A Preferred Stock shall have the right to receive upon conversion of the shares of Series A Preferred Stock the amount of Securities the holders of shares of Series A Preferred Stock would have received had the holders of shares of Series A Preferred Stock converted the shares of Series A Preferred Stock immediately prior to the record date for such distribution. If the Board of Directors of the Corporation determines the fair market value of any distribution for purposes of this clause (iv) by reference to the actual or when issued trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market on the same day for which an adjustment in the Market Price is being determined. For purposes of this clause (iv) and clauses (i) and (ii) of this proviso, any dividend or distribution to which this clause (iv) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock to which clause (i) or (ii) of this proviso applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of 7 indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock or rights or warrants to which clause (i) or (ii) of this proviso applies (and any Market Price reduction required by this clause (iv) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Market Price reduction required by clauses (i) and (ii) of this proviso with respect to such dividend or distribution shall then be made), except that any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of clause (i) of this proviso; (v) The Corporation or any subsidiary of the Corporation shall (x) by dividend or otherwise, distribute to all holders of its Common Stock cash in (or fix any record date for any such distribution), or (y) repurchase or reacquire shares of its Common Stock (other than an Option Share Surrender) for, in either case, an aggregate amount that, combined with (1) the aggregate amount of any other such distributions to all holders of its Common Stock made exclusively in cash after the Issuance Date and within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this clause (v) has been made, (2) the aggregate amount of any cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation) of consideration paid in respect of any repurchase or other reacquisition by the Corporation or any subsidiary of the Corporation of any shares of Common Stock (other than an Option Share Surrender) made after the Issuance Date and within the 12 months preceding the date of payment of such distribution or making of such repurchase or reacquisition, as the case may be, and in respect of which no adjustment pursuant to this clause (v) has been made, and (3) the aggregate of any cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation) of consideration payable in respect of any Tender Offer by the Corporation or any of its subsidiaries for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution or completion of such repurchase or reacquisition, as the case may be, and in respect of which no adjustment pursuant to clause (vi) of this proviso has been made (such aggregate amount combined with the amounts in clauses (1), (2) and (3) above being the "Combined Amount"), exceeds 10% of the product of the Market Price (determined without regard to this proviso) for any day in such Measurement Period or such other period which day is prior to the earlier of (A) the record date with respect to such distribution and (B) the date on which ex-dividend trading in the Common Stock with respect to such distribution begins or the date of such repurchase or reacquisition, as the case may be, times the number of shares of Common Stock outstanding on such date, then, and in each such case, the Market Price for each such day shall be reduced so that the same shall equal the price determined by multiplying the Market Price (determined without regard to this proviso) for such day by a fraction (i) the numerator of which shall be equal to the Market Price (determined without regard to this proviso) for such day less an amount equal to the quotient of (x) the excess of such Combined Amount over 8 such 10% and (y) the number of shares of Common Stock outstanding on such day and (ii) the denominator of which shall be equal to the Market Price (determined without regard to this proviso) for such day; provided, however, that in the event the portion of the cash so distributed or paid for the repurchase or reacquisition of shares (determined per share based on the number of shares of Common Stock outstanding) applicable to one share of Common Stock is equal to or greater than the Market Price (determined without regard to this clause (v) of this proviso) of the Common Stock for any such day, then in lieu of the foregoing adjustment with respect to such day, adequate provision shall be made so that the holders of shares of Series A Preferred Stock shall have the right to receive upon conversion of shares of Series A Preferred Stock the amount of cash the holders of shares of Series A Preferred Stock would have received had the holders of shares of Series A Preferred Stock converted shares of Series A Preferred Stock immediately prior to the record date for such distribution or the payment date of such repurchase, as applicable; or (vi) A Tender Offer made by the Corporation or any of its subsidiaries for all or any portion of the Common Stock shall expire and such Tender Offer (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the Tender Offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined in good faith by resolution of the Board of Directors of the Corporation) that combined together with (1) the aggregate of the cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation), as of the expiration of such Tender Offer, of consideration payable in respect of any other Tender Offers, by the Corporation or any of its subsidiaries for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such Tender Offer and in respect of which no adjustment pursuant to this clause (vi) has been made, (2) the aggregate amount of any cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation) of consideration paid in respect of any repurchase or other reacquisition by the Corporation or any subsidiary of the Corporation of any shares of Common Stock (other than an Option Share Surrender) made after the Issuance Date and within the 12 months preceding the expiration of such Tender Offer and in respect of which no adjustment pursuant to clause (v) of this proviso has been made, and (3) the aggregate amount of any distributions to all holders of Common Stock made exclusively in cash within 12 months preceding the expiration of such Tender Offer and in respect of which no adjustment pursuant to clause (v) of this proviso has been made, exceeds 10% of the product of the Market Price (determined without regard to this proviso) for any day in such period times the number of shares of Common Stock outstanding on such day, then, and in each such case, the Market Price for such day shall be reduced so that the same shall equal the price determined by multiplying the Market Price (determined without regard to this proviso) for such day by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on such day multiplied by the Market Price (determined without regard to this 9 proviso) for such day and the denominator of which shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the Tender Offer) of all shares validly tendered and not withdrawn as of the last time tenders could have been made pursuant to such Tender Offer (the "Expiration Time") (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on such day times the Market Price (determined without regard to this proviso) of the Common Stock on the Trading Day next succeeding the Expiration Time. If the application of this clause (vi) to any Tender Offer would result in an increase in the Market Price (determined without regard to this proviso) for any trade, no adjustment shall be made for such Tender Offer under this clause (vi) for such day. "Maximum Share Amount" means 3,478,613 shares, (such amount to be subject to equitable adjustment from time to time on terms reasonably acceptable to the Majority Holders for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring or with respect to which "ex-" trading commences after the date of filing this Statement of Resolution with the Secretary of State of the State of Texas), of Common Stock, or such greater number as permitted by the rules of the Nasdaq; provided, however, that if for purposes of Rule 4460(i) of the Nasdaq (or any successor or replacement provision of any stock exchange or stock market on which the Common Stock is listed or traded) the (x) the issuance of the Notes and the issuance of shares of Common Stock upon conversion thereof or (y) the issuance of the common stock purchase warrants issued in connection with the issuance of the Notes and the issuance of shares of Common Stock upon exercise thereof is not required to be integrated with the issuance of the shares of Series A Convertible Preferred Stock and the issuance of shares of Common Stock upon conversion thereof, then in each such case the "Maximum Share Amount" shall mean such greater number as equals the maximum number of shares of Common Stock permitted by the rules of the Nasdaq (determined by pro rata allocation of any increase thereof among the shares of Series A Convertible Preferred Stock based on the number of shares of Series A Convertible Preferred Stock originally represented by each certificate therefor) (such amount to be subject to equitable adjustment in terms reasonably acceptable to the Majority Holders from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date of filing of this Statement of Resolution with the Secretary of State of the State of Texas). "Measurement Period" means, with respect to any date, the period of 25 consecutive Trading Days ending on the Trading Day prior to such date. "Nasdaq" means the Nasdaq National Market. "Nasdaq SmallCap" means the Nasdaq SmallCap Market. "NYSE" means the New York Stock Exchange, Inc. 10 "Option Share Surrender" means the surrender of shares of Common Stock to the Corporation in payment of the exercise price or tax obligations incurred in connection with the exercise of a stock option granted by the Corporation to any of its employees, directors or consultants. "Optional Redemption Event" means the occurrence on or before September 4, 2001 of any one of the following events: (1) For so long as the Common Stock is listed for trading on the Nasdaq SmallCap, the NYSE or the AMEX, for any period of five consecutive Trading Days there shall be no reported sale price of the Common Stock on the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX; (2) The inability for 45 or more days (whether or not consecutive) of any holder of shares of Series A Convertible Preferred Stock to sell shares of Common Stock issued or issuable on conversion of shares of Series A Convertible Preferred Stock pursuant to the Registration Statement for any reason on each of such 45 days; (3) The Corporation shall (A) default in the timely performance of the obligation to issue shares of Common Stock upon conversion of shares of Series A Convertible Preferred Stock as and when required by Section 10 or shall default in the timely performance of its obligations under Section 12(d)(7) or (B) the Corporation shall fail or default in the timely performance of any material obligation (other than as specifically set forth elsewhere in this definition) to a holder of shares of Series A Convertible Preferred Stock under the terms of this Statement of Resolution or under the Registration Rights Agreement or any other agreement or document entered into in connection with the issuance of shares of Series A Convertible Preferred Stock, as such instruments may be amended from time to time and such failure or default shall continue for ten business days after notice thereof from any holder of shares of Series A Convertible Preferred Stock to the Corporation; (4) Any consolidation or merger of the Corporation with or into another entity (other than a merger or consolidation of a subsidiary of the Corporation into the Corporation or a wholly-owned subsidiary of the Corporation) where the shareholders of the Corporation immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction or the common stock of such surviving corporation is not listed for trading on the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap or any sale or other transfer of all or substantially all of the assets of the Corporation; or (5) The taking of any action, including any amendment to the Corporation's Articles of Incorporation, without the consent of the Majority Holders 11 which materially and adversely affects the rights of any holder of shares of Series A Convertible Preferred Stock. "Optional Redemption Notice" means a notice from a holder of shares of Series A Convertible Preferred Stock to the Corporation which states (1) that the holder delivering such notice is thereby requiring the Corporation to redeem shares of Series A Convertible Preferred Stock pursuant to Section 11, (2) in general terms the Optional Redemption Event giving rise to such redemption, and (3) the number of shares of Series A Convertible Preferred Stock held by such holder which are to be redeemed. "Optional Redemption Price" means the Premium Price on the applicable redemption date. "Parity Dividend Stock" means any class or series or the Corporation's capital stock ranking, as to dividends, on a parity with the Series A Convertible Preferred Stock. "Parity Liquidation Stock" means any class or series of the Corporation's capital stock having parity as to liquidation rights with the Series A Convertible Preferred Stock. "Premium Percentage" means 115%. "Premium Price" means, for any share of Series A Convertible Preferred Stock as of any date of determination, the product obtained by multiplying (a) the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but unpaid dividends on such share of Series A Convertible Preferred Stock to the date of determination, plus (3) an amount equal to the accrued and unpaid interest on dividends in arrears (as provided in Section 5) to the date of determination times (b) the Premium Percentage. "Redemption Date" means the date of a redemption of shares of Series A Convertible Preferred Stock pursuant to Section 9(a) determined in accordance therewith. "Redemption Price" means the greater of: (1) the Premium Price on the applicable Redemption Date; and (2) the Converted Market Price on the applicable Redemption Date; provided, however, that if in connection with any determination of the Redemption Price the amount specified in clause (y) of the definition of the term Converted Market Price is greater than 200% of the Ceiling Price on the date as of which such amount is determined, then for purposes of computing the Redemption Price in such instance, the amount otherwise specified in clause (y) of the definition of the term Converted Market Price shall be reduced by 20% of the amount by which (A) the amount otherwise specified in clause (y) of the definition of the term Converted Market Price exceeds (B) the Ceiling Price on the date as of which such amount is determined. 12 "Registration Event" shall mean (1) the Registration Statement is not effective within 105 days of the Issuance Date, if the Registration Statement is on Form S-3, or 120 days after the Issuance Date, if the Registration Statement is on Form S-1, (2) the Company fails to file the Registration Statement with the SEC within 60 days after the Issuance Date, (3) the Registration Statement shall cease to be available for use by any holder of shares of Series A Convertible Preferred Stock who is named therein as a selling stockholder for any reason (including, without limitation, by reason of an SEC stop order, a material misstatement or omission in the Registration Statement or the information contained in the Registration Statement having become outdated); provided, however, that no Registration Event pursuant to this clause (3) shall be deemed to occur prior to the SEC Effective Date, or (4) a holder of shares of Series A Preferred Stock having become unable to convert any shares of Series A Preferred Stock in accordance with Section 10(a) for any reason (other than by reason of the 4.9% limitation on beneficial ownership set forth therein or a redemption or repurchase thereof). "Registration Rights Agreement" means the Registration Rights Agreement entered into between the Corporation and the original holders of the shares of Series A Convertible Preferred Stock, as amended or modified from time to time in accordance with their respective terms. "Registration Statement" means the Registration Statement required to be filed by the Corporation with the SEC pursuant to Section 1 of the Registration Rights Agreement. "SEC" means the United States Securities and Exchange Commission. "SEC Effective Date" means the date the Registration Statement is first declared effective by the SEC. "Senior Dividend Stock" means any class or series of capital stock of the Corporation ranking senior as to dividends to the Series A Convertible Preferred Stock. "Senior Liquidation Stock" means any class or series of capital stock of the Corporation ranking senior as to liquidation rights to the Series A Convertible Preferred Stock. "Series A Convertible Preferred Stock" means the Series A Convertible Preferred Stock, $.01 par value, of the Corporation. "Series D Convertible Preferred Stock" means the Series D Convertible Preferred Stock, $.01 par value, of the Corporation. "Share Limitation Redemption Date" shall mean each date on which the Corporation is required to redeem shares of Series A Convertible Preferred Stock as provided in Section 7(a). "Share Limitation Redemption Price" means the Premium Price on the applicable Share Limitation Redemption Date. 13 "Stockholder Approval" shall mean the approval by a majority of the votes cast by the holders of shares of Common Stock (in person or by proxy) at a meeting of the stockholders of the Corporation (duly convened at which a quorum was present), or a written consent of holders of shares of Common Stock entitled to such number of votes given without a meeting, of the issuance by the Corporation of 20% or more of the Common Stock of the Corporation outstanding on the Issuance Date for less than the greater of the book or market value of such Common Stock on conversion of the Series A Convertible Preferred Stock, as and to the extent required under Rule 4460(i) of the Nasdaq as in effect from time to time or any successor provision. "Tender Offer" means a tender offer or exchange offer. "Trading Day" means a day on whichever of (x) the national securities exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time constitutes the principal securities market for the Common Stock is open for general trading of securities. "Transfer Agent" means American Stock Transfer & Trust Company, or its duly appointed successor, as transfer agent for the Series A Convertible Preferred Stock. 14 SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Convertible Preferred Stock", and the number of shares constituting the Series A Convertible Preferred Stock shall be 2,500, and shall not be subject to increase. SECTION 3. LIMITATION ON ISSUANCE. Of the authorized shares of Series A Convertible Preferred Stock, 500 shares may be issued only as dividends on the outstanding shares of Series A Convertible Preferred Stock. SECTION 4. RANK. All Series A Convertible Preferred Stock shall rank (i) senior to the Common Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock of the Corporation now or hereafter issued, as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, (ii) junior to the Series B Senior Convertible Preferred Stock of the Corporation, both as to payment of dividends and as to distributions of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary and (iii) senior to any additional series of the class of Preferred Stock which series the Board of Directors may from time to time authorize and any additional class of preferred stock (or series of preferred stock of such class) which the Board of Directors or the stockholders may from time to time authorize in accordance herewith. 15 SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series A Convertible Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors out of funds legally available for such purpose, dividends at the rate of $60.00 per annum per share, and no more, which shall be fully cumulative, shall accrue without interest (except as otherwise provided herein as to dividends in arrears) from the date of original issuance of each share of Series A Convertible Preferred Stock and shall be payable quarterly on February 15, May 15, August 15, and November 15 of each year commencing November 15, 1998 (except that if any such date is a Saturday, Sunday, or legal holiday, then such dividend shall be payable on the next succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 20 nor less than 10 days preceding the payment dates for such dividends, as shall be fixed by the Board. Dividends on the Series A Convertible Preferred Stock shall be paid in cash or, subject to the limitations in Section 5(b) hereof, Dividend Shares or any combination of cash and Dividend Shares, at the option of the Corporation as hereinafter provided. The amount of the dividends payable per share of Series A Convertible Preferred Stock for each quarterly dividend period shall be computed by dividing the annual dividend amount by four. The amount of dividends payable for the initial dividend period and any period shorter than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. Dividends not paid on a payment date, whether or not such dividends have been declared, will bear interest at the rate of 14% per annum until paid (or such lesser rate as shall be the maximum rate allowable by applicable law). No dividends or other distributions, other than the dividends payable solely in shares of any Junior Dividend Stock, shall be paid or set apart for payment on any shares of Junior Dividend Stock, and no purchase, redemption, or other acquisition shall be made by the Corporation of any shares of Junior Dividend Stock (except for Option Share Surrenders), unless and until all accrued and unpaid dividends on the Series A Convertible Preferred Stock and interest on dividends in arrears at the rate specified herein shall have been paid or declared and set apart for payment. If at any time any dividend on any Senior Dividend Stock shall be in arrears, in whole or in part, no dividend shall be paid or declared and set apart for payment on the Series A Convertible Preferred Stock unless and until all accrued and unpaid dividends with respect to the Senior Dividend Stock, including the full dividends for the then current dividend period, shall have been paid or declared and set apart for payment, without interest. No full dividends shall be paid or declared and set apart for payment on any Parity Dividend Stock for any period unless all accrued but unpaid dividends (and interest on dividends in arrears at the rate specified herein) have been, or contemporaneously are, paid or declared and set apart for such payment on the Series A Convertible Preferred Stock. No full dividends shall be paid or declared and set apart for payment on the Series A Convertible Preferred Stock for any period unless all accrued but unpaid dividends have been, or contemporaneously are, paid or declared and set apart for payment on the Parity Dividend Stock for all dividend periods terminating on or prior to the date of payment of such full dividends. When dividends are not paid in full upon the Series A Convertible Preferred Stock and the Parity Dividend Stock, all dividends paid or declared and set apart for payment upon shares of Series A Convertible Preferred 16 Stock (and interest on dividends in arrears at the rate specified herein) and the Parity Dividend Stock shall be paid or declared and set apart for payment pro rata, so that the amount of dividends paid or declared and set apart for payment per share on the Series A Convertible Preferred Stock and the Parity Dividend Stock shall in all cases bear to each other the same ratio that accrued and unpaid dividends per share on the shares of Series A Convertible Preferred Stock and the Parity Dividend Stock bear to each other. Any references to "distribution" contained in this Section 5 shall not be deemed to include any stock dividend or distributions made in connection with any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary. (b) If the Corporation elects in the exercise of its sole discretion to issue Dividend Shares in payment of dividends on the Series A Convertible Preferred Stock in respect of any dividend payment date, the Corporation shall issue and deliver, or cause to be issued and delivered, by the third Trading Day after such dividend payment date to each holder of shares of Series A Convertible Preferred Stock a certificate representing the number of whole Dividend Shares arrived at by dividing (x) the total amount of cash dividends such holder would be entitled to receive if the aggregate dividends on the Series A Convertible Preferred Stock held by such holder which are being paid in Dividend Shares were being paid in cash by (y) $1,000.00; provided, however, that if certificates representing Dividend Shares are issued and delivered to holders of Series A Convertible Preferred Stock subsequent to the third Trading Day after a dividend payment date, the amount so divided into such total amount of cash dividends will be reduced by $10.00 for each Trading Day after the third Trading Day following such dividend payment date to the date of delivery of Dividend Shares. No fractional Dividend Shares shall be issued in payment of dividends. In lieu thereof, the Corporation shall pay cash in an amount equal to the balance of such dividend which is not paid in Dividend Shares. The Corporation shall not exercise its right to issue Dividend Shares in payment of dividends on Series A Convertible Preferred Stock if: (ii) the number of shares of Series A Convertible Preferred Stock at the time authorized, unissued and unreserved for all purposes, or held in the Corporation's treasury, is insufficient to permit the conversion of such Dividend Shares into shares of Common Stock; (iii) the issuance or delivery of Dividend Shares as a dividend payment or the issuance of shares of Common Stock upon conversion of such Dividend Shares by the holder thereof would require registration with or approval of any governmental authority under any law or regulation, and such registration or approval has not been effected or obtained or is not in effect or the Registration Statement is unavailable for use by such holder for the resale of such shares of Common Stock; provided, however, that this limitation shall not be deemed to be applicable at any time prior to the date which is 105 days after the Issuance Date, if the Registration Statement is on Form S-3, or 120 days after the Issuance Date, if the Registration Statement is on Form S-1, if this limitation otherwise would be applicable solely because the Registration Statement shall not yet have been 17 declared effective, so long as the Corporation shall be in compliance in all material respects with its obligations under the Registration Rights Agreement; (iv) the shares of Common Stock issuable upon conversion of such Dividend Shares have not been authorized for listing, upon official notice of issuance, on any securities exchange or market on which the Common Stock is then listed; or have not been approved for quotation if the Common Stock is traded in the over-the-counter market; (v) the number of shares of Common Stock registered pursuant to Section 1 of the Registration Rights Agreement for resale upon issuance upon conversion of Dividend Shares shall be sufficient (after taking into account the number of shares of Common Stock issued or issuable upon conversion of Dividend Shares theretofore issued) to prevent the resale pursuant to the Registration Statement of the shares of Common Stock issuable upon conversion of such Dividend Shares; (vi) the shares of Common Stock issuable upon conversion of such Dividend Shares (A) cannot be sold or transferred without restriction by unaffiliated holders who receive such Dividend Shares or (B) are no longer listed on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; or (vii) an Optional Redemption Event shall have occurred and any holder of shares of Series A Convertible Preferred Stock shall have exercised optional redemption rights under Section 11 by reason of such Optional Redemption Event and the Corporation shall not have paid the Optional Redemption Price to each holder. Dividend Shares issued in payment of dividends on Series A Convertible Preferred Stock pursuant to this Section and shares of Common Stock issuable upon conversion of such Dividend Shares shall be, and for all purposes shall be deemed to be, validly issued, fully paid and nonassessable shares of the Corporation; the issuance and delivery thereof is hereby authorized; and the delivery will be, and for all purposes shall be deemed to be, payment in full of the cumulative dividends to which holders are entitled on the applicable dividend payment date. (c) Neither the Corporation nor any subsidiary of the Corporation shall redeem, repurchase or otherwise acquire in any one transaction or series of related transactions any shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock if the number of shares so repurchased, redeemed or otherwise acquired in such transaction or series of related transactions (excluding any Option Share Surrender) is more than either (x) 5.0% of the number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions or (y) 1% of the number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions if such transaction or series of related transactions is with any one person or group of affiliated 18 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). 19 SECTION 6. LIQUIDATION PREFERENCE. In the event of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series A Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets constitute stated capital or surplus of any nature, an amount per share of Series A Convertible Preferred Stock equal to the Liquidation Preference, and no more, before any payment shall be made or any assets distributed to the holders of Junior Liquidation Stock; provided, however, that such rights shall accrue to the holders of Series A Convertible Preferred Stock only in the event that the Corporation's payments with respect to the liquidation preference of the holders of Senior Liquidation Stock are fully met. After the liquidation preferences of the Senior Liquidation Stock are fully met, the entire assets of the Corporation available for distribution shall be distributed ratably among the holders of the Series A Convertible Preferred Stock and any Parity Liquidation Stock in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the Liquidation Preference of the shares of Series A Convertible Preferred Stock and the liquidation preference of the shares of Parity Liquidation Stock, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities, or other property in and of itself will be considered a liquidation, dissolution or winding up of the Corporation. SECTION 7. MANDATORY REDEMPTION. (a) MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1) Notwithstanding any other provision herein, unless the Stockholder Approval shall have been obtained from the stockholders of the Corporation or waived by the Nasdaq, so long as the Common Stock is listed on the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX, the Corporation shall not be required to issue upon conversion of shares of Series A Convertible Preferred Stock pursuant to Section 10 more than the Maximum Share Amount. The Maximum Share Amount shall be allocated among the shares of Series A Convertible Preferred Stock at the time of initial issuance thereof pro rata based on the initial issuance of 2,000 shares of Series A Convertible Preferred Stock. Each certificate for shares of Series A Convertible Preferred Stock initially issued shall bear a notation as to the number of shares constituting the portion of the Maximum Share Amount allocated to the shares of Series A Convertible Preferred Stock represented by such certificate for purposes of conversion thereof. The Corporation shall maintain records which show the number of shares of Series A Convertible Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on the shares of Series A Convertible Preferred Stock represented by each certificate, which records shall be controlling in the absence of manifest error. Each such additional share of Series A Convertible Preferred Stock shall be allocated a portion of the Maximum Share Amount allocated to the shares of Series A Convertible Preferred Stock in respect of which such additional shares of Series A Convertible Preferred Stock are issued as a dividend and the certificate for such additional shares of Series A Convertible Preferred Stock shall bear a notation as to the certificate number of the share of Series A Convertible Preferred Stock in respect of which such additional share of Series A Convertible Preferred Stock is 20 issued as a dividend. Upon surrender of any certificate for shares of Series A Convertible Preferred Stock for transfer or re-registration thereof (or, at the option of the holder, for conversion pursuant to Section 10(a) of less than all of the shares of Series A Convertible Preferred Stock represented thereby), the Corporation shall make a notation on the new certificate issued upon such transfer or re-registration or evidencing such unconverted shares, as the case may be, as to the remaining number of shares of Common Stock from the Maximum Share Amount remaining available for conversion of the shares of Series A Convertible Preferred Stock evidenced by such new certificate. If any certificate for shares of Series A Convertible Preferred Stock is surrendered for split-up into two or more certificates representing an aggregate number of shares of Series A Convertible Preferred Stock equal to the number of shares of Series A Convertible Preferred Stock represented by the certificate so surrendered (as reduced by any contemporaneous conversion of shares of Series A Convertible Preferred Stock represented by the certificate so surrendered), each certificate issued on such split-up shall bear a notation of the portion of the Maximum Share Amount allocated thereto determined by pro rata allocation from among the remaining portion of the Maximum Share Amount allocated to the certificate so surrendered. If any shares of Series A Convertible Preferred Stock represented by a single certificate are converted in full pursuant to Section 10, all of the portion of the Maximum Share Amount allocated to such shares of Series A Convertible Preferred Stock which remains unissued after such conversion shall be re-allocated pro rata to the outstanding shares of Series A Convertible Preferred Stock held of record by the holder of record at the close of business on the date of such conversion of the shares of Series A Convertible Preferred Stock so converted, and if there shall be no other shares of Series A Convertible Preferred Stock held of record by such holder at the close of business on such date, then such portion of the Maximum Share Amount shall be allocated pro rata among the shares of Series A Convertible Preferred Stock outstanding on such date. (2) The Corporation shall promptly, but in no event later than five business days after the occurrence, give notice to each holder of shares of Series A Convertible Preferred Stock (by telephone line facsimile transmission at such number as such holder has specified in writing to the Corporation for such purposes or, if such holder shall not have specified any such number, by overnight courier or first class mail, postage prepaid, at such holder's address as the same appears on the stock books of the Corporation) and any holder of shares of Series A Convertible Preferred Stock may at any time after the occurrence give notice to the Corporation, in either case, if at any time on or after December 16, 1998 and on or prior to September 4, 2001 on any ten Trading Days within any period of 20 consecutive Trading Days the Corporation would not have been required to convert shares of Series A Convertible Preferred Stock of such holder in accordance with Section 10(a) as a consequence of the limitations set forth in Section 7(a)(1) had the shares of Series A Convertible Preferred Stock held by such holder been converted in full into Common Stock on each such day, determined without regard to the limitation, if any, on such holder contained in the proviso to the second sentence of Section 10(a) (any such notice, whether given by the Corporation or a holder, an "Inconvertibility Notice"). If the Corporation shall have given or been required to give any Inconvertibility Notice, or if a holder shall have given any Inconvertibility Notice, then within ten Trading Days after such Inconvertibility Notice is given or was required 21 to be given, the holder receiving or giving, as the case may be, such Inconvertibility Notice shall have the right by written notice to the Corporation (which written notice may be contained in the Inconvertibility Notice given by such holder) to direct the Corporation to redeem the portion of such holder's outstanding shares of Series A Convertible Preferred Stock (which, if applicable, shall be all of such holder's outstanding shares of Series A Convertible Preferred Stock) as shall not, on the business day prior to the date of such redemption, be convertible into shares of Common Stock by reason of the limitations set forth in Section 7(a)(1) (determined without regard to the limitation, if any, on beneficial ownership of Common Stock by such holder contained in the proviso to the second sentence of Section 10(a)), within ten business days after such holder so directs the Corporation, at a price per share equal to the Share Limitation Redemption Price. If a holder of shares of Series A Convertible Preferred Stock directs the Corporation to redeem outstanding shares of Series A Convertible Preferred Stock and, prior to the date the Corporation is required to redeem such shares of Series A Convertible Preferred Stock, the Corporation would have been able, within the limitations set forth in Section 7(a)(1), to convert all of such holder's shares of Series A Convertible Preferred Stock (determined without regard to the limitation, if any, on beneficial ownership of shares of Common Stock by such holder contained in the proviso to the second sentence of Section 10(a)) on any ten Trading Days within any period of 15 consecutive Trading Days commencing after the period of 20 consecutive Trading Days which gave rise to the applicable Inconvertibility Notice from the Corporation or such holder of shares of Series A Convertible Preferred Stock, as the case may be, had such holder exercised its right to convert all of such holder's shares of Series A Convertible Preferred Stock into Common Stock on each of such ten Trading Days within such 15 Trading Day period, then the Corporation shall not be required to redeem any shares of Series A Convertible Preferred Stock by reason of such Inconvertibility Notice. (3) Notwithstanding the giving of any Inconvertibility Notice by the Corporation to the holders of Series A Convertible Preferred Stock pursuant to Section 7(a)(2) or the giving or the absence of any notice by the holders of the Series A Convertible Preferred Stock in response thereto or any redemption of shares of Series A Convertible Preferred Stock pursuant to Section 7(a)(2), thereafter the provisions of Section 7(a)(2) shall continue to be applicable on any occasion unless the Stockholder Approval shall have been obtained from the stockholders of the Corporation or waived by the Nasdaq. (4) On each Share Limitation Redemption Date (or such later date as a holder of shares of Series A Convertible Preferred Stock shall surrender to the Corporation the certificate(s) for the shares of Series A Convertible Preferred Stock being redeemed pursuant to this Section 7(a)), the Corporation shall make payment in immediately available funds of the applicable Share Limitation Redemption Price to such holder of shares of Series A Convertible Preferred Stock to be redeemed to or upon the order of such holder as specified by such holder in writing to the Corporation at least one business day prior to such Share Limitation Redemption Date. Upon redemption of less than all of the shares of Series A Convertible Preferred Stock evidenced by a particular certificate, promptly, but in no event later than three business days after surrender of such certificate to the Corporation, the Corporation shall issue a replacement certificate for the 22 shares of Series A Convertible Preferred Stock evidenced by such certificate which have not been redeemed. Only whole shares of Series A Convertible Preferred Stock may be redeemed. (b) NO OTHER MANDATORY REDEMPTION. The shares of Series A Convertible Preferred Stock shall not be subject to mandatory redemption by the Corporation except as provided in Section 7(a). SECTION 8. NO SINKING FUND. The shares of Series A Convertible Preferred Stock shall not be subject to the operation of a purchase, retirement or sinking fund. SECTION 9. OPTIONAL REDEMPTION. (a) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall be in compliance in all material respects with its obligations to the holders of shares of Series A Convertible Preferred Stock (including, without limitation, its obligations under the Amendment Agreement, the Registration Rights Agreement and the provisions of this Statement of Resolution), (2) on the date the Corporation Optional Redemption Notice is given and at all times until the Redemption Date, the Registration Statement is effective and available for use by each holder of shares of Series A Convertible Preferred Stock for the resale of shares of Common Stock acquired by such holder upon conversion of all shares of Series A Convertible Preferred Stock held by such holder and (3) no Optional Redemption Event shall have occurred with respect to which, on the date a Corporation Optional Redemption Notice is given or on the Redemption Date, any holder of shares of Series A Convertible Preferred Stock shall have exercised optional redemption rights under Section 11 by reason of such Optional Redemption Event and the Corporation shall not have paid the Optional Redemption Price to such holder, then the Corporation shall have the right, exercisable by giving a Corporation Optional Redemption Notice not less than 30 days or more than 60 days prior to the Redemption Date to all holders of record of the shares of Series A Convertible Preferred Stock, at any time to redeem all or from time to time to redeem any part of the outstanding shares of Series A Convertible Preferred Stock in accordance with this Section 9(a). If the Corporation shall redeem less than all outstanding shares of Series A Convertible Preferred Stock, such redemption shall be made as nearly as practical pro rata from all holders of shares of Series A Convertible Preferred Stock. Any Corporation Optional Redemption Notice under this Section 9(a) shall be given to the holders of record of the shares of Series A Convertible Preferred Stock at their addresses appearing on the records of the Corporation; provided, however, that any failure or defect in the giving of such notice to any such holder shall not affect the validity of notice to or the redemption of shares of Series A Convertible Preferred Stock of any other holder. On the Redemption Date (or such later date as a holder of shares of Series A Convertible Preferred Stock surrenders to the Corporation the certificate(s) for shares of Series A Convertible Preferred Stock to be redeemed pursuant to this Section 9(a)), the Corporation shall make payment of the applicable Redemption Price to each holder of shares of Series A Convertible Preferred Stock to be redeemed in immediately available funds to such account as specified by such holder in writing to the Corporation at least one business day prior to the Redemption Date. A 23 holder of shares of Series A Convertible Preferred Stock to be redeemed pursuant to this Section 9(a) shall be entitled to convert such shares of Series A Convertible Preferred Stock in accordance with Section 10(a) through the day prior to the Redemption Date and (2) if the Corporation shall fail to pay the Redemption Price of any share of Series A Convertible Preferred Stock when due, at any time after the due date thereof until such date as the Corporation pays the Redemption Price of such share of Series A Convertible Preferred Stock. No share of Series A Convertible Preferred Stock as to which the holder exercises the right of conversion pursuant to Section 10 or the optional redemption right pursuant to Section 11 may be redeemed by the Corporation pursuant to this Section 9(a) on or after the date of exercise of such conversion right or optional redemption right, as the case may be, regardless of whether the Corporation Optional Redemption Notice shall have been given prior to, or on or after, the date of exercise of such conversion right or optional redemption right, as the case may be. (b) FINAL REDEMPTION. The Corporation shall have the right to redeem all, but not less than all, outstanding shares of Series A Convertible Preferred Stock at any time on or after the date which is 1,080 days after the Issuance Date so long as (1) the Corporation shall be in compliance in all material respects with its obligations to the holders of the Series A Convertible Preferred Stock (including, without limitation, its obligations under the Amendment Agreement, the Registration Rights Agreement and this Statement of Resolution) and (2) no Optional Redemption Event shall have occurred with respect to which on the date a Final Redemption Notice is to be given or on the Final Redemption Date, any holder of shares of Series A Convertible Preferred Stock shall have exercised optional redemption rights under Section 11 by reason of such Optional Redemption Event and the Corporation shall not have paid the Optional Redemption Price to such holder. In order to exercise its rights under this Section 9(b), the Corporation shall give a Final Redemption Notice not less than 20 or more than 40 Trading Days prior to the Final Redemption Date to all holders of record of the shares of Series A Convertible Preferred Stock. Any Final Redemption Notice shall be given to the holders of record of the shares of Series A Convertible Preferred Stock by telephone line facsimile transmission to such number as shown on the records of the Corporation for such purpose; provided, however, that any failure or defect in the giving of such notice to any such holder shall not affect the validity of notice to or the redemption of shares of Series A Convertible Preferred Stock of any other holder. On the Final Redemption Date (or such later date as a holder of shares of Series A Convertible Preferred Stock surrenders to the Corporation the certificate(s) for shares of Series A Convertible Preferred Stock to be redeemed pursuant to this Section 9(b)), the Corporation shall make payment of the applicable Final Redemption Price to each holder of shares of Series A Convertible Preferred Stock to be redeemed in immediately available funds to such account as specified by such holder in writing to the Corporation at least one business day prior to the Final Redemption Date. A holder of shares of Series A Convertible Preferred Stock to be redeemed pursuant to this Section 9(b) shall be entitled to convert such shares of Series A Convertible Preferred Stock in accordance with Section 10 through the day prior to the Final Redemption Date and (2) if the Corporation shall fail to pay the Final Redemption Price of any share of Series A Convertible Preferred Stock when due, at any time after the due date thereof until such date as the Corporation pays the Final Redemption Price of such share of Series A 24 Convertible Preferred Stock to such holder. No share of Series A Convertible Preferred Stock as to which a holder exercises the right of conversion pursuant to Section 10 or the optional redemption right pursuant to Section 11 may be redeemed by the Corporation pursuant to this Section 9(b) on or after the date of exercise of such conversion right or optional redemption right, as the case may be, regardless of whether the Final Redemption Notice shall have been given prior to, or on or after, the date of exercise of such conversion right or optional redemption right, as the case may be. So long as during the period from the Issuance Date through the date the Corporation pays the Final Redemption Price the Corporation shall not have commenced a voluntary case or other proceeding, and no person shall have commenced an involuntary case or other proceeding against the Corporation, in any such case seeking liquidation, reorganization or other relief with respect to the Corporation or its debts under any bankruptcy, insolvency, receivership, moratorium, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of the Corporation or any substantial part of the Corporation's property, the Corporation shall not have consented to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, and the Corporation shall not have made a general assignment for the benefit of creditors, then the Corporation shall have the right, exercisable by a statement to such effect in the Final Redemption Notice, to pay the Final Redemption Price by the issuance to the holders of shares of Series A Convertible Preferred Stock to be redeemed of shares of Common Stock, valued for this purpose at the Conversion Price on the Final Redemption Date, in lieu of payment of cash, so long as all shares of Common Stock to be so issued would, if issued as dividends on shares of Series A Convertible Preferred Stock, meet the criteria in clauses (i) through (vi) of Section 5(b). (c) NO OTHER OPTIONAL REDEMPTION. The shares of Series A Convertible Preferred Stock shall not be subject to redemption at the option of the Corporation except as provided in Sections 9(a) and 9(b). SECTION 10. CONVERSION. (a) CONVERSION AT OPTION OF HOLDER. The holders of the Series A Convertible Preferred Stock may at any time on or after the earlier of (x) the SEC Effective Date and (y) the date which is 90 days after the Issuance Date convert at any time all or from time to time any part of their shares of Series A Convertible Preferred Stock into fully paid and nonassessable shares of Common Stock and such other securities and property as herein provided. Each share of Series A Convertible Preferred Stock may be converted at the office of the Transfer Agent or at such other additional office or offices, if any, as the Board of Directors may designate, into such number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) determined by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued but unpaid dividends to the applicable Conversion Date on the share of Series A Convertible Preferred Stock being converted, and (iii) accrued but unpaid interest on the dividends on the share of Series A Convertible Preferred Stock being converted in arrears to the applicable Conversion Date at the rate provided in Section 5 by (y) the Conversion Price for such Conversion Date (the "Conversion Rate"); 25 provided, however, that in no event shall any holder of shares of Series A Convertible Preferred Stock be entitled to convert any shares of Series A Convertible Preferred Stock in excess of that number of shares of Series A Convertible Preferred Stock upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by such holder and all Aggregated Persons of such holder (other than shares of Common Stock deemed beneficially owned through the ownership of unconverted shares of Series A Convertible Preferred Stock) and (2) the number of shares of Common Stock issuable upon the conversion of the number of shares of Series A Convertible Preferred Stock with respect to which the determination in this proviso is being made, would result in beneficial ownership by such holder and all Aggregated Persons of such holder of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in clause (1) of the proviso to the immediately preceding sentence. (b) OTHER PROVISIONS. (1) Notwithstanding anything in this Section 10(b) to the contrary, no change in the Conversion Amount pursuant to this Section 10(b) shall actually be made until the cumulative effect of the adjustments called for by this Section 10(b) since the date of the last change in the Conversion Amount would change the Conversion Amount by more than 1%. However, once the cumulative effect would result in such a change, then the Conversion Amount shall actually be changed to reflect all adjustments called for by this Section 10(b) and not previously made. Notwithstanding anything in this Section 10(b), no change in the Conversion Amount shall be made that would result in the price at which a share of Series A Convertible Preferred Stock is converted being less than the par value of the Common Stock into which shares of Series A Convertible Preferred Stock are at the time convertible. (2) The holders of shares of Series A Convertible Preferred Stock at the close of business on the record date for any dividend payment to holders of Series A Convertible Preferred Stock shall be entitled to receive the dividend payable on such shares on the corresponding dividend payment date notwithstanding the conversion thereof after such dividend payment record date or the Corporation's default in payment of the dividend due on such dividend payment date; provided, however, that the holder of shares of Series A Convertible Preferred Stock surrendered for conversion during the period between the close of business on any record date for a dividend payment and the opening of business on the corresponding dividend payment date must pay to the Corporation, within five days after receipt by such holder, an amount equal to the dividend payable on such shares on such dividend payment date if such dividend is paid by the Corporation to such holder. A holder of shares of Series A Convertible Preferred Stock on a record date for a dividend payment who (or whose transferee) tenders any of such shares for conversion into shares of Common Stock on or after such dividend payment date will receive the dividend payable by the Corporation on such shares of Series A Convertible Preferred Stock on such date, and the converting holder need not make any payment of the amount of such dividend in connection with such conversion of shares of Series A Convertible Preferred Stock. Except as provided above, no adjustment shall be made in respect of cash dividends on Common Stock or Series A Convertible 26 Preferred Stock that may be accrued and unpaid at the date of surrender of shares of Series A Convertible Preferred Stock. (3) (A) The right of the holders of Series A Convertible Preferred Stock to convert their shares shall be exercised by giving (which may be done by telephone line facsimile transmission) a Conversion Notice to the Transfer Agent. If a holder of Series A Convertible Preferred Stock elects to convert any shares of Series A Convertible Preferred Stock in accordance with Section 10(a), such holder shall not be required to surrender the certificate(s) representing such shares of Series A Convertible Preferred Stock to the Corporation unless all of the shares of Series A Convertible Preferred Stock represented thereby are so converted. Each holder of shares of Series A Convertible Preferred Stock and the Corporation shall maintain records showing the number of shares so converted and the dates of such conversions or shall use such other method, satisfactory to such holder and the Corporation, so as to not require physical surrender of such certificates upon each such conversion. In the event of any dispute or discrepancy, such records of the Corporation shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any shares of Series A Convertible Preferred Stock evidenced by a particular certificate therefor are converted as aforesaid, the holder of Series A Convertible Preferred Stock may not transfer the certificate(s) representing such shares of Series A Convertible Preferred Stock unless such holder first physically surrenders such certificate(s) to the Corporation, whereupon the Corporation will forthwith issue and deliver upon the order of such holder of shares of Series A Convertible Preferred Stock new certificate(s) of like tenor, registered as such holder of shares of Series A Convertible Preferred Stock (upon payment by such holder of shares of Series A Convertible Preferred Stock of any applicable transfer taxes) may request, representing in the aggregate the remaining number of shares of Series A Convertible Preferred Stock represented by such certificate(s). Each holder of shares of Series A Convertible Preferred Stock, by acceptance of a certificate for such shares, acknowledges and agrees that (1) by reason of the provisions of this paragraph, following conversion of any shares of Series A Convertible Preferred Stock represented by such certificate, the number of shares of Series A Convertible Preferred Stock represented by such certificate may be less than the number of shares stated on such certificate, and (2) the Corporation may place a legend on the certificates for shares of Series A Convertible Preferred Stock which refers to or describes the provisions of this paragraph. (B) The Corporation shall pay any transfer tax arising in connection with any conversion of shares of Series A Convertible Preferred Stock except that the Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery upon conversion of shares of Common Stock or other securities or property in a name other than that of the holder of the shares of the Series A Convertible Preferred Stock being converted, and the Corporation shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. The number of shares of Common Stock to be issued upon each conversion of shares of Series A Convertible Preferred Stock shall be the number set forth in the applicable Conversion Notice which 27 number shall be conclusive absent manifest error. The Corporation shall notify a holder who has given a Conversion Notice of any claim of manifest error within one Trading Day after such holder gives such Conversion Notice and no such claim of error shall limit or delay performance of the Corporation's obligation to issue upon such conversion the number of shares of Common Stock which are not in dispute. A Conversion Notice shall be deemed for all purposes to be in proper form unless the Corporation notifies a holder of shares of Series A Convertible Preferred Stock being converted within one Trading Day after a Conversion Notice has been given (which notice shall specify all defects in the Conversion Notice) and any Conversion Notice containing any such defect shall nonetheless be effective on the date given if the converting holder promptly undertakes to correct all such defects. If the Corporation shall have notified the Transfer Agent and such holder of any such manifest error, and the Corporation and such holder do not agree as to a resolution of such manifest error on or before the date of such notice by the Corporation of an error in such Conversion Notice, the Corporation shall on the date such notice is given submit the dispute to Ernst & Young LLP or another firm of independent public accountants of recognized national standing (the "Auditors") for determination and shall instruct the Auditors to resolve such dispute and to notify the Corporation, the Transfer Agent and such holder within one Trading Day after such dispute is submitted to the Auditors. Immediately after receipt of timely notice of the Auditors' determination (but in any event within three Trading Days after the applicable Conversion Notice is given to the Transfer Agent), the Transfer Agent shall issue to the converting Holder any additional shares of Common Stock to which such holder is entitled based on the determination of the Auditors. The Transfer Agent is authorized and directed to rely on the Auditors' determination. If the Auditors shall fail to notify the Transfer Agent of their determination within three Trading Days after the applicable Conversion Notice is given to the Transfer Agent, then the Transfer Agent shall, within three Trading Days after receipt of the applicable Conversion Notice, issue to the converting holder any additional shares of Common Stock to which such Holder is entitled based on the applicable Conversion Notice. (4) The Corporation shall reserve from its authorized, unissued and otherwise unreserved Common Stock free from preemptive and similar rights 666,667 shares in addition to the 2,000,000 shares of Common Stock previously reserved for issuance upon conversion of the Series A Convertible Preferred Stock (such amount to be subject to equitable adjustment from time to time on terms reasonably acceptable to the Holder for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring on or after the Issuance Date) to provide for the issuance of Common Stock upon the conversion in full of the Series A Convertible Preferred Stock, subject to reduction from time to time by the number of shares of Common Stock issued on conversion of the Series A Convertible Stock. The Corporation (and any successor corporation) shall take all action necessary so that a number of shares of the authorized but unissued Common Stock (or common stock in the case of any successor corporation) sufficient to provide for the conversion of the Series A Convertible Preferred Stock outstanding upon the basis hereinbefore provided are at all times reserved by the Corporation (or any successor corporation), free from preemptive rights, for such conversion, subject to the provisions of the next succeeding paragraph. If the Corporation shall issue any securities or make any change in its capital structure 28 which would change the number of shares of Common Stock into which each share of the Series A Convertible Preferred Stock shall be convertible as herein provided, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series A Convertible Preferred Stock on the new basis. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all of the outstanding shares of Series A Convertible Preferred Stock, the Corporation promptly shall seek, and use its best efforts to obtain and complete, such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (5) In case of any consolidation or merger of the Corporation with any other corporation (other than a wholly-owned subsidiary of the Corporation) in which the Corporation is not the surviving corporation, or in case of any sale or transfer of all or substantially all of the assets of the Corporation, or in the case of any share exchange pursuant to which all of the outstanding shares of Common Stock are converted into other securities or property, the Corporation shall make appropriate provision or cause appropriate provision to be made so that each holder of shares of Series A Convertible Preferred Stock then outstanding shall have the right thereafter to convert such shares of Series A Convertible Preferred Stock into the kind of shares of stock and other securities and property receivable upon such consolidation, merger, sale, transfer, or share exchange by a holder of shares of Common Stock into which such shares of Series A Convertible Preferred Stock could have been converted immediately prior to the effective date of such consolidation, merger, sale, transfer, or share exchange and on a basis which preserves the economic benefits of the conversion rights of the holders of shares of Series A Convertible Preferred Stock on a basis as nearly as practical as such rights exist hereunder prior thereto. If, in connection with any such consolidation, merger, sale, transfer, or share exchange, each holder of shares of Common Stock is entitled to elect to receive securities, cash, or other assets upon completion of such transaction, the Corporation shall provide or cause to be provided to each holder of Series A Convertible Preferred Stock the right to elect the securities, cash, or other assets into which the Series A Convertible Preferred Stock held by such holder shall be convertible after completion of any such transaction on the same terms and subject to the same conditions applicable to holders of the Common Stock (including, without limitation, notice of the right to elect, limitations on the period in which such election shall be made, and the effect of failing to exercise the election). The Corporation shall not effect any such transaction unless the provisions of this paragraph have been complied with. The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers, or share exchanges. (6) If a holder shall have given a Conversion Notice for shares of Series A Convertible Preferred Stock, the Corporation shall issue and deliver to such person certificates for the Common Stock issuable upon such conversion within three Trading Days after such Conversion Notice is given and the person converting shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, and all rights with respect to the shares surrendered shall forthwith terminate except the 29 right to receive the Common Stock or other securities, cash, or other assets as herein provided. If a holder shall have given a Conversion Notice as provided herein, the Corporation's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of any action or inaction by the converting holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Corporation to such holder, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by such holder or any other person of any obligation to the Corporation or any violation or alleged violation of law by such holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to the holder in connection with such conversion. If the Corporation fails to issue and deliver the certificates for the Common Stock to the holder converting shares of Series A Convertible Preferred Stock pursuant to the first sentence of this paragraph as and when required to do so, in addition to any other liabilities the Corporation may have hereunder and under applicable law (1) the Corporation shall pay or reimburse such holder on demand for all out-of-pocket expenses including, without limitation, reasonable fees and expenses of legal counsel incurred by such holder as a result of such failure, (2) the Conversion Percentage used to determine the Conversion Price applicable to such conversion shall be reduced by one percentage point from the Conversion Percentage otherwise used to calculate the Conversion Price applicable to such conversion or, if such conversion is based on the Ceiling Price, the Ceiling Price used to determine the Conversion Price applicable to such conversion shall be reduced by one percentage point from the amount that the Conversion Price otherwise would have been without reduction pursuant hereto, in either such case, for each Trading Day after such third Trading Day until such shares of Common Stock are delivered to such holder and (3) such holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing) given at any time prior to delivery to such holder of the certificates for the shares of Common Stock issuable upon such conversion of shares of Series A Convertible Preferred Stock, rescind such conversion, whereupon such holder shall have the right to convert such shares of Series A Convertible Preferred Stock thereafter in accordance herewith. (7) No fractional shares of Common Stock shall be issued upon conversion of Series A Convertible Preferred Stock but, in lieu of any fraction of a share of Common Stock to purchase fractional shares of Common Stock which would otherwise be issuable in respect of the aggregate number of such shares surrendered for conversion at one time by the same holder, the Corporation shall pay in cash an amount equal to the product of (i) the arithmetic average of the Market Price of one share of Common Stock on the three consecutive Trading Days ending on the Trading Day immediately preceding the Conversion Date times (ii) such fraction of a share. (8) The Conversion Amount shall be adjusted from time to time under certain circumstances, subject to the provisions of Section 10(b)(1), as follows: (i) In case the Corporation shall issue rights or warrants on a pro rata basis to all holders of the Common Stock entitling such holders to subscribe for or 30 purchase Common Stock on the record date referred to below at a price per share less than the Current Price for such record date, then in each such case the Conversion Amount in effect on such record date shall be adjusted in accordance with the formula C\\1\\ = C x O + N ------ O + N x P ----- M where C\\1\\ = the adjusted Conversion Amount C = the current Conversion Amount O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock issuable pursuant to the exercise of such rights or warrants. P = the offering price per share of the additional shares (which amount shall include amounts received by the Corporation in respect of the issuance and the exercise of such rights or warrants). M = the Current Price per share of Common Stock on the record date. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. If any or all such rights or warrants are not so issued or expire or terminate before being exercised, the Conversion Amount then in effect shall be readjusted appropriately. (ii) In case the Corporation shall, by dividend or otherwise, distribute to all holders of its Junior Stock (as hereinafter defined) evidences of its indebtedness or assets (including securities, but excluding any warrants or subscription rights referred to in subparagraph (i) above and any dividend or distribution paid in cash out of the retained earnings of the Corporation), then in each such case the Conversion Amount then in effect shall be adjusted in accordance with the formula C\\1\\ = C x M ----- M - F where C\\1\\ = the adjusted Conversion Amount C = the current Conversion Amount M = the Current Price per share of Common Stock on the record date mentioned below. 31 F = the aggregate amount of such cash dividend and/or the fair market value on the record date of the assets or securities to be distributed divided by the number of shares of Common Stock outstanding on the record date. The Board of Directors shall determine such fair market value, which determination shall be conclusive. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution. For purposes of this subparagraph (ii), "Junior Stock" shall include any class of capital stock ranking junior as to dividends or upon liquidation to the Series A Convertible Preferred Stock. (iii) All calculations hereunder shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. (iv) If at any time as a result of an adjustment made pursuant to Section 10(b)(5), the holder of any Series A Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive securities, cash, or assets other than Common Stock, the number or amount of such securities or property so receivable upon conversion shall be subject to adjustment from time to time in a manner and on terms nearly equivalent as practicable to the provisions with respect to the Common Stock contained in subparagraphs (i) to (iii) above. (9) Except as otherwise provided above in this Section 10, no adjustment in the Conversion Amount shall be made in respect of any conversion for share distributions or dividends theretofore declared and paid or payable on the Common Stock. (10) Whenever the Conversion Amount is adjusted as herein provided, the Corporation shall send to each holder and each transfer agent, if any, for the Series A Convertible Preferred Stock and the transfer agent for the Common Stock, a statement signed by the Chairman of the Board, the President, or any Vice President of the Corporation and by its Treasurer or its Secretary or an Assistant Secretary stating the adjusted Conversion Amount determined as provided in this Section 10, and any adjustment so evidenced, given in good faith, shall be binding upon all stockholders and upon the Corporation. Whenever the Conversion Amount is adjusted, the Corporation will give notice by mail to the holders of record of Series A Convertible Preferred Stock, which notice shall be made within 15 days after the effective date of such adjustment and shall state the adjustment and the Conversion Amount. Notwithstanding the foregoing notice provisions, failure by the Corporation to give such notice or a defect in such notice shall not affect the binding nature of such corporate action of the Corporation. (11) Whenever the Corporation shall propose to take any of the actions specified in Section 10(b)(5) or in subparagraphs (i) or (ii) of Section 10(b)(8) which would result in any adjustment in the Conversion Amount under this Section 10(b), the Corporation shall cause a notice to be mailed at least 20 days prior to the date on which the books of the Corporation will close or on which a record will be taken for such action, 32 to the holders of record of the outstanding Series A Convertible Preferred Stock on the date of such notice. Such notice shall specify the action proposed to be taken by the Corporation and the date as of which holders of record of the Common Stock shall participate in any such actions or be entitled to exchange their Common Stock for securities or other property, as the case may be. Failure by the Corporation to mail the notice or any defect in such notice shall not affect the validity of the transaction. SECTION 11. REDEMPTION AT OPTION OF HOLDERS. (a) REDEMPTION RIGHT. If an Optional Redemption Event occurs, then, in addition to any other right or remedy of any holder of shares of Series A Convertible Preferred Stock, each holder of shares of Series A Convertible Preferred Stock shall have the right, at such holder's option, to require the Corporation to redeem all of such holder's shares of Series A Convertible Preferred Stock, or any portion thereof, on the date that is 10 business days after the date such holder gives the Corporation an Optional Redemption Notice with respect to such Optional Redemption Event at any time while any of such holder's shares of Series A Convertible Preferred Stock are outstanding, at a price equal to the Optional Redemption Price. (b) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS, ETC. (1) On or before the fifth business day after the occurrence of an Optional Redemption Event, the Corporation shall give to each holder of outstanding shares of Series A Convertible Preferred Stock a notice of the occurrence of such Optional Redemption Event and of the redemption right set forth herein arising as a result thereof. Such notice from the Corporation shall set forth: (i) the date by which the optional redemption right must be exercised, and (ii) a description of the procedure (set forth below) which each such holder must follow to exercise such holder's optional redemption right. No failure of the Corporation to give such notice or defect therein shall limit the right of any holder of shares of Series A Convertible Preferred Stock to exercise the optional redemption right or affect the validity of the proceedings for the redemption of such holder's shares of Series A Convertible Preferred Stock. (2) To exercise its optional redemption right, each holder of outstanding shares of Series A Convertible Preferred Stock shall deliver to the Corporation on or before the thirtieth day after the notice required by Section 11(b)(1) is given to such holder (or if no such notice has been given by the Corporation to such holder, within forty days after such holder first learns of such Optional Redemption Event) an Optional Redemption Notice to the Corporation. An Optional Redemption Notice may be revoked by such holder giving such Optional Redemption Notice by giving notice of such revocation to the Corporation at any time prior to the time the Corporation pays the Optional Redemption Price to such holder. 33 (3) If a holder of shares of Series A Convertible Preferred Stock shall have given an Optional Redemption Notice, on the date which is three business days after the date such Optional Redemption Notice is given (or such later date as such holder surrenders such holder's certificates for the shares of Series A Convertible Preferred Stock redeemed) the Corporation shall make payment in immediately available funds of the applicable Optional Redemption Price to such account as specified by such holder in writing to the Corporation at least one business day prior to the applicable redemption date. (c) OTHER. (1) In connection with a redemption pursuant to this Section 11 of less than all of the shares of Series A Convertible Preferred Stock evidenced by a particular certificate, promptly, but in no event later than three Trading Days after surrender of such certificate to the Corporation, the Corporation shall issue and deliver to such holder a replacement certificate for the shares of Series A Convertible Preferred Stock evidenced by such certificate which have not been redeemed. (2) An Optional Redemption Notice given by a holder of shares of Series A Convertible Preferred Stock shall be deemed for all purposes to be in proper form unless the Corporation notifies such holder in writing within three business days after such Optional Redemption Notice has been given (which notice shall specify all defects in such Optional Redemption Notice), and any Optional Redemption Notice containing any such defect shall nonetheless be effective on the date given if such holder promptly undertakes to correct all such defects. No such claim of error shall limit or delay performance of the Corporation's obligation to redeem all shares of Series A Convertible Preferred Stock not in dispute whether or not such holder makes such undertaking. SECTION 12. VOTING RIGHTS; CERTAIN RESTRICTIONS. (a) VOTING RIGHTS. Except as otherwise required by law or expressly provided herein, shares of Series A Convertible Preferred Stock shall not be entitled to vote on any matter. (b) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote or consent of the holders of a majority of the outstanding shares of the Series A Convertible Preferred Stock, voting separately as a class, will be required for (1) any amendment, alteration, or repeal, whether by merger or consolidation or otherwise, of the Corporation's Articles of Incorporation if the amendment, alteration, or repeal materially and adversely affects the powers, preferences, or special rights of the Series A Convertible Preferred Stock, or (2) the creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock; provided, however, that any increase in the authorized Preferred Stock of the Corporation or the creation and issuance of any stock which is both Junior Dividend Stock and Junior Liquidation Stock shall not be deemed to affect materially and adversely such powers, preferences, or special rights and any such increase or creation and issuance may be made without any such vote by the holders of Series A Convertible Preferred Stock except as otherwise required by law. 34 (c) REPURCHASES OF SERIES A CONVERTIBLE PREFERRED STOCK. The Corporation shall not repurchase or otherwise acquire any shares of Series A Convertible Preferred Stock (other than pursuant to Sections 7(a), 9(a), 9(b) or 11) unless the Corporation offers to repurchase or otherwise acquire simultaneously a pro rata portion of each holder's shares of Series A Convertible Preferred Stock for cash at the same price per share. (d) OTHER. So long as any shares of Series A Convertible Preferred Stock are outstanding: (1) PAYMENT OF OBLIGATIONS. The Corporation will pay and discharge, and will cause each subsidiary of the Corporation other than EqualNet Corporation and EqualNet Wholesale Services, Inc., to the extent not required or permitted to do so in connection with their respective bankruptcy proceedings, to pay and discharge, when due all their respective obligations and liabilities which are material to the Corporation and its subsidiaries taken as a whole, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings. (2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will keep, and will cause each subsidiary of the Corporation to keep, all material property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (B) The Corporation will maintain, and will cause each subsidiary of the Corporation to maintain, with financially sound and responsible insurance companies, insurance against loss or damage by fire or other casualty and such other insurance, including but not limited to, product liability insurance, in such amounts and covering such risks as is reasonably adequate for the conduct of their businesses and the value of their properties. (3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Corporation will continue, and will cause each subsidiary of the Corporation other than EqualNet Corporation and EqualNet Wholesale Services, Inc. to continue, to engage in business of the same general type as conducted by the Corporation and its operating subsidiaries at the time this Statement of Resolution is filed with the Secretary of State of the State of Texas, and will preserve, renew and keep in full force and effect, and will cause each subsidiary of the Corporation other than EqualNet Corporation and EqualNet Wholesale Services, Inc., to the extent not required or permitted to do so in connection with their respective bankruptcy proceedings, to preserve, renew and keep in full force and effect, their respective corporate existence and their respective material rights, privileges and franchises necessary or desirable in the normal conduct of business. (4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause each subsidiary of the Corporation to comply, in all material respects with all applicable laws, ordinances, rules, regulations, decisions, orders and requirements of governmental authorities and courts (including, without limitation, environmental laws) except (i) where compliance therewith is contested in good faith by appropriate 35 proceedings or (ii) where non-compliance therewith could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Corporation and its subsidiaries, taken as a whole. (5) INVESTMENT COMPANY ACT. The Corporation will not be or become an open- end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended, or any successor provision. (6) TRANSACTIONS WITH AFFILIATES. The Corporation will not, and will not permit any subsidiary of the Corporation, directly or indirectly, to pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement with, any Affiliate of the Corporation, except, on terms to the Corporation or such subsidiary no less favorable than terms that could be obtained by the Corporation or such subsidiary from a person that is not an Affiliate of the Corporation, as determined in good faith by the Board of Directors. (7) COMPLIANCE. The Corporation shall (a) use its commercially reasonable best efforts to obtain knowledge of any failure or default by the Corporation in the timely performance of any material obligation to the holders of the Series A Convertible Preferred Stock under the terms of this Statement of Resolution, the Amendment Agreement, the Registration Rights Agreement or any other document or instrument executed and delivered by the Corporation in connection herewith or therewith and (b) shall notify the holders of the Series A Convertible Preferred Stock promptly, but in no event later than three Business Days after the Corporation first learns of any such failure or default. 36 SECTION 13. OUTSTANDING SHARES. For purposes of this Statement of Resolution, all shares of Series A Convertible Preferred Stock shall be deemed outstanding except (i) from the applicable Conversion Date, each share of Series A Convertible Preferred Stock converted into Common Stock, unless the Corporation shall default in its obligation to issue and deliver shares of Common Stock upon such conversion as and when required by Section 10; (ii) from the date of registration of transfer, all shares of Series A Convertible Preferred Stock held of record by the Corporation or any subsidiary or Affiliate of the Corporation (other than any original holder of shares of Series A Convertible Preferred Stock) and (iii) from the applicable Redemption Date, Share Limitation Redemption Date, Final Redemption Date or date of redemption pursuant to Section 11, all shares of Series A Convertible Preferred Stock which are redeemed or repurchased, so long as in each case the Redemption Price, the Share Limitation Redemption Price, the Final Redemption Price, the Optional Redemption Price or other repurchase price, as the case may be, of such shares of Series A Convertible Preferred Stock shall have been paid by the Corporation as and when due hereunder. SECTION 14. MISCELLANEOUS. (a) NOTICES. Any notices required or permitted to be given under the terms of this Statement of Resolution shall be in writing and shall be sent by mail or delivered personally (which shall include telephone line facsimile transmission) or by courier and shall be deemed given five days after being placed in the mail, if mailed, or upon receipt, if delivered personally or by courier (a) in the case of the Corporation, addressed to the Corporation at 1250 Wood Branch Park Drive, Houston, Texas, 77079, Attention: Chief Executive Officer (telephone line facsimile transmission number (281) 529-4650), or, in the case of any holder of shares of Series A Convertible Preferred Stock, at such holder's address or telephone line facsimile transmission number shown on the stock books maintained by the Corporation with respect to the Series A Convertible Preferred Stock or such other address as the Corporation shall have provided by notice to the holders of shares of Series A Convertible Preferred Stock in accordance with this Section or any holder of shares of Series A Convertible Preferred Stock shall have provided to the Corporation in accordance with this Section. (b) REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation of evidence reasonably satisfactory to the Corporation of the ownership of and the loss, theft, destruction or mutilation of any certificate for shares of Series A Convertible Preferred Stock and (1) in the case of loss, theft or destruction, of indemnity from the record holder of the certificate for such shares of Series A Convertible Preferred Stock reasonably satisfactory in form to the Corporation (and without the requirement to post any bond or other security) or (2) in the case of mutilation, upon surrender and cancellation of the certificate for such shares of Series A Convertible Preferred Stock, the Corporation will execute and deliver to such holder a new certificate for such shares of Series A Convertible Preferred Stock without charge to such holder. (c) OVERDUE AMOUNTS. Except as otherwise specifically provided in Section 5 with respect to dividends in arrears on the Series A Convertible Preferred 37 Stock, whenever any amount which is due to any holder of shares of Series A Convertible Preferred Stock is not paid to such holder when due, such amount shall bear interest at the rate of 14% per annum ( or such other rate as shall be the maximum rate allowable by applicable law) until paid in full. IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment as of March __, 1999. EQUALNET COMMUNICATIONS CORP. By: /s/ Mitchell H. Bodian ------------------------------ Mitchell H. Bodian President and Chief Executive Officer 38 Annex I to Articles of Amendment NOTICE OF CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK OF EQUALNET COMMUNICATIONS CORP. TO: American Stock Transfer & Trust Company, as Transfer Agent and Registrar 6201 Fifteenth Avenue Third Floor Brooklyn, New York 11219 Attention: Mr. Barry Rosenthal Facsimile No.: (718) 259-1144 (1) Pursuant to the terms of the Series A Convertible Preferred Stock (the "Preferred Stock") of Equalnet Communications Corp., a Texas corporation (the "Company"), the undersigned hereby elects to convert ________________ shares of the Preferred Stock together with accrued and unpaid dividends thereon in the amount of $_______________ and interest on dividends in arrears in the amount of $________________ into shares of Common Stock, $.01 par value (the "Common Stock"), of the Company, or such other securities into which the Preferred Stock is currently convertible. Capitalized terms used in this Notice and not otherwise defined herein have the respective meanings provided in the Amended Statement of Resolution of the Board of Directors Establishing and Designating Series A Convertible Preferred Stock and Fixing the Rights and Preferences of Such Series (the "Amended Statement of Resolution"). (2) Please issue a certificate or certificates for ________________ shares of Common Stock or other securities into which such number of shares of Preferred Stock is convertible in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: --------------------- --------------------- Name Name --------------------- --------------------- Address Address --------------------- --------------------- SS or Tax ID Number SS or Tax ID Number (3) The Conversion Date is _______________________. Check and complete one of the following: The undersigned elects to convert based on the Average Market Price of the Common Stock. The Market Price of the Common Stock on each of the five Trading Days (whether or not consecutive) during the 25 consecutive Trading Days preceding the Conversion Date having the lowest Market Prices, and the arithmetic average thereof are as follows: Date Market Price ---------- ------------------ ---------- ------------------ ---------- ------------------ ---------- ------------------ ---------- ------------------ Arithmetic Average: $ ----------- OR The undersigned elects to convert based on the Ceiling Price of the Common Stock of $__________ applicable to conversions of Preferred Stock. (4) If the shares of Common Stock issuable upon conversion of the Preferred Stock have not been registered for resale under the Securities Act of 1933, as amended (the "Act"), and this Notice is submitted prior to the date which is two years after the Issuance Date, the undersigned represents and warrants that (i) the shares of Common Stock not so registered are being acquired for the account of the undersigned for investment, and not with a view to, or for resale in connection with, the public distribution thereof other than pursuant to registration under the Act, and that the undersigned has no present intention of distributing or reselling the shares of Common Stock not so registered other than pursuant to registration under the Act and (ii) the undersigned is an "accredited investor" as defined in Regulation D under the Act. The undersigned further agrees that (A) the shares of Common Stock not so registered shall not be sold or transferred unless either (i) they first shall have been registered under the 2 Act and applicable state securities laws or (ii) the Company first shall have been furnished with an opinion of legal counsel reasonably satisfactory to the Company to the effect that such sale or transfer is exempt from the registration requirements of the Act and (B) the Company may place a legend on the certificate(s) for the shares of Common Stock not so registered to that effect and place a stop-transfer restriction in its records relating to the shares of Common Stock not so registered. Date _________________________ ____________________________________ Signature of Holder (Must be signed exactly as name appears on the Preferred Stock Certificate.) 3 EX-4.5 3 STATEMENT OF RESOLUTION-SERIES D STOCK EXHIBIT 4.5 EQUALNET COMMUNICATIONS CORP. STATEMENT OF RESOLUTION OF BOARD OF DIRECTORS ESTABLISHING AND DESIGNATING SERIES D CONVERTIBLE PREFERRED STOCK AND FIXING THE RIGHTS AND PREFERENCES OF SUCH SERIES ---------------------- TO THE SECRETARY OF STATE OF THE STATE OF TEXAS: Equalnet Communications Corp., pursuant to the provisions of Articles 2.13 and 2.19B of the Texas Business Corporation Act, submits the following statement for the purpose of establishing and designating a series of shares and fixing and determining the relative rights and preferences thereof: 1. The name of the Corporation is Equalnet Communications Corp. 2. The following is a true and correct copy of an extract from the minutes of a meeting of the Board of Directors of the Corporation held on March 9, 1999, and includes a true and correct copy of certain resolutions duly adopted thereat. RESOLVED, that pursuant to authority vested in the Board of Directors by the Articles of Incorporation of the Corporation, the Board of Directors does hereby provide that the Statement of Resolution of Board of Directors Establishing and Designating Series D Convertible Preferred Stock and Fixing the Rights and Preferences of Such Series that was filed with the Secretary of State of the State of Texas on September 1, 1998 is cancelled and deleted in its entirety and shall be replaced with the following: SERIES D CONVERTIBLE PREFERRED STOCK SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following meanings: "Affiliate" means, with respect to any person, any other person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject person; for purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. "Aggregated Person" means, with respect to any person, any person whose beneficial ownership of shares of Common Stock would be aggregated with the beneficial ownership of shares of Common Stock by such person for purposes of Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder. "AMEX" means the American Stock Exchange, Inc. "Average Market Price" for any date means the arithmetic average of the Market Price on each of the five Trading Days, whether or not consecutive, during the applicable Measurement Period having the lowest Market Prices. "Board of Directors" or "Board" means the Board of Directors of the Corporation. "Ceiling Price" means $1.228 (subject to equitable adjustments from time to time on terms reasonably acceptable to the Majority Holders for stock splits, stock dividends, combinations, recapitalizations, reclassifications and similar events occurring or with respect to which "ex-" trading commences on or after the date of filing of this Statement of Resolution with the Secretary of State of the State of Texas); provided, however, that, notwithstanding any other provision hereof, the Ceiling Price applicable to a particular conversion shall be subject to reduction as provided in Section 10(b)(6); provided further, however, that if a Registration Event occurs, then, in addition to any other right or remedy of any holder of shares of Series D Convertible Preferred Stock thereafter the Ceiling Price shall be permanently reduced on each Computation Date by an amount equal to two percent of the amount that the Ceiling Price otherwise would have been without any reduction pursuant to this proviso (pro rated in the case of any Computation Date which is less than 30 days after a Registration Event occurs or less than 30 days after another Computation Date). "Common Stock" means the Common Stock, $.01 par value, of the Corporation. "Computation Date" means, if a Registration Event occurs, any of (1) the date which is 30 days after such Registration Event occurs, if any Registration Event is continuing on such date, (2) each date which is 30 days after a Computation Date, if any Registration Event is continuing on such date, and (3) the date on which all Registration Events cease to continue. "Conversion Agent" means American Stock Transfer & Trust Company, or its duly appointed successor, as conversion agent for the Series D Convertible Preferred Stock pursuant to the Transfer Agent Instruction. "Conversion Amount" initially shall be equal to $1,000.00, subject to adjustment as herein provided. "Conversion Date" means, with respect to each conversion of shares of Series D Convertible Preferred Stock pursuant to Section 10, the date on which the Conversion Notice relating to such conversion is actually received by the Conversion 2 Agent, whether by mail, courier, personal service, telephone line facsimile transmission or other means. "Conversion Notice" means a written notice, duly signed by or on behalf of a holder of shares of Series D Convertible Preferred Stock, stating the number of shares of Series D Convertible Preferred Stock to be converted in the form specified in the Exchange Agreements. "Conversion Percentage" means 85%; provided, however, that, notwithstanding any other provision hereof, if a Registration Event occurs, then such percentage stated above shall be permanently reduced by two percentage points on each Computation Date (pro rated in the case of any Computation Date which is less than 30 days after a Registration Event occurs or less than 30 days after another Computation Date). "Conversion Price" means the lesser of: (1) the product of (a) the Average Market Price for such date times (b) the applicable Conversion Percentage; and (2) the Ceiling Price; provided, however, that the Conversion Price applicable to a particular conversion shall be subject to reduction as provided in Section 10(b)(6); provided, further, however, that as long as (x) the Common Stock is listed or quoted on the Nasdaq, the Nasdaq Small Cap, the NYSE or the AMEX and (y) the Corporation is in compliance in all material respects with its obligations to the holders of the Series D Convertible Preferred Stock, the Conversion Price shall be no less than $0.75. "Conversion Rate" shall have the meaning provided in Section 10(a). "Converted Market Price" means, for any share of Series D Convertible Preferred Stock as of any date of determination, an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock which would, at the time of such determination, be issuable on conversion in accordance with Section 10(a) of one share of Series D Convertible Preferred Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears if a Conversion Notice were given by the holder of such share of Series D Convertible Preferred Stock on the date of such determination (determined without regard to any limitation on conversion based on beneficial ownership contained in Section 10(a)) times (y) the arithmetic average of the Market Price of the Common Stock for the five consecutive Trading Days ending on the Trading Day prior to the date of such determination. "Corporation Optional Redemption Notice" means a notice given by the Corporation to the holders of shares of Series D Convertible Preferred Stock pursuant to 3 Section 9(a) which notice shall state (1) that the Corporation is exercising its right to redeem all or a portion of the outstanding shares of Series D Convertible Preferred Stock pursuant to Section 9(a), (2) the number of shares of Series D Convertible Preferred Stock held by such holder which are to be redeemed, (3) the Redemption Price per share of Series D Convertible Preferred Stock to be redeemed or the formula for determining the same, determined in accordance herewith, and (4) the applicable Redemption Date. "Current Price" means with respect to any date the arithmetic average of the Market Price of the Common Stock on the 30 consecutive Trading Days commencing 45 Trading Days before such date. "Dividend Shares" means shares of Series D Convertible Preferred Stock issued as dividends on outstanding shares of Series D Convertible Preferred Stock in accordance with Section 5(b). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Agreements" means the several Note Purchase and Exchange Agreements by and between the Corporation and the original holders of shares of Series D Convertible Preferred Stock pursuant to which the shares of Series D Convertible Preferred Stock were issued. "Final Redemption Date" means the date of redemption of shares of Series D Convertible Preferred Stock pursuant to Section 9(b), determined in accordance therewith. "Final Redemption Notice" means a notice given by the Corporation to each holder of Series D Convertible Preferred Stock pursuant to Section 9(b), which notice shall state (1) that the Corporation is exercising its right to redeem all outstanding shares of Series D Convertible Preferred Stock pursuant to Section 9(b), (2) the number of shares of Series D Convertible Preferred Stock held by such holder which are to be redeemed, (3) the Final Redemption Price per share of Series D Convertible Preferred Stock held by such holder which are to be redeemed, determined in accordance herewith, and (4) the Final Redemption Date. "Final Redemption Price" on any date means an amount equal to the product obtained by multiplying (a) the sum of (1) $1,000 plus (2) an amount equal to the accrued but unpaid dividends on the share of Series D Convertible Preferred Stock to be redeemed to the Final Redemption Date, plus (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share of Series D Convertible Preferred Stock to the Final Redemption Date (determined as provided in Section 5) times (b) the Premium Percentage. "Inconvertibility Notice" shall have the meaning provided in Section 7(a)(2). "Issuance Date" means the first date of original issuance of any shares of Series D Convertible Preferred Stock. 4 "Junior Dividend Stock" means, collectively, the Common Stock and any other class or series of capital stock of the Corporation ranking junior as to dividends to the Series D Convertible Preferred Stock. "Junior Liquidation Stock" means the Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series D Convertible Preferred Stock. "Liquidation Preference" means, for each share of Series D Convertible Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the date of final distribution to such holders, (ii) accrued and unpaid interest on dividends in arrears (computed in accordance with Section 5(a)) to the date of such distribution, and (iii) $1,000.00. "Majority Holders" means at any time the holders of shares of Series D Preferred Stock which shares constitute a majority of the outstanding shares of Series D Preferred Stock. "Market Price" of the Common Stock on any date means the lowest sale price (regular way) for one share of Common Stock on such date on the first applicable among the following: (a) the national securities exchange on which the shares of Common Stock are listed which constitutes the principal securities market for the Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the principal market for the Common Stock on such date, or (c) the Nasdaq SmallCap, if the Nasdaq SmallCap constitutes the principal securities market for the Common Stock on such date, in any such case as reported by Bloomberg, L.P.; provided, however, that if during any Measurement Period or other period during which the Market Price is being determined: (i) The Corporation shall declare or pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock or fix any record date for any such action, then the Market Price for each day in such Measurement Period or such other period which day is prior to the earlier of (1) the date fixed for the determination of stockholders entitled to receive such dividend or other distribution and (2) the date on which ex-dividend trading in the Common Stock with respect to such dividend or distribution begins shall be reduced by multiplying the Market Price (determined without regard to this proviso) for each such day in such Measurement Period or such other period by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the earlier of (1) the record date fixed for such determination and (2) the date on which ex-dividend trading in the Common Stock with respect to such dividend or distribution begins and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution; (ii) The Corporation shall issue rights or warrants to all holders of its outstanding shares of Common Stock, or fix a record date for such issuance, which rights or warrants entitle such holders (for a period expiring within 5 forty-five (45) days after the date fixed for the determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Market Price (determined without regard to this proviso) for any day in such Measurement Period or such other period which day is prior to the end of such 45-day period, then the Market Price for each such day shall be reduced so that the same shall equal the price determined by multiplying the Market Price (determined without regard to this proviso) by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the record date fixed for the determination of stockholders entitled to receive such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Market Price, and the denominator of which shall be the number of shares of Common Stock outstanding on the close of business on such record date plus the total number of additional shares of Common Stock so offered for subscription or purchase. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than the Market Price (determined without regard to this proviso), and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined in good faith by a resolution of the Board of Directors of the Corporation; (iii) The outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock or a record date for any such subdivision shall be fixed, then the Market Price of the Common Stock for each day in such Measurement Period or such other period which day is prior to the earlier of (1) the day upon which such subdivision becomes effective and (2) the date on which ex-dividend trading in the Common Stock with respect to such subdivision begins shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Market Price each trade (regular way) on for each day in such Measurement Period or such other period which day is prior to the earlier of (1) the date on which such combination becomes effective and (2) the date on which trading in the Common Stock on a basis which gives effect to such combination begins, shall be proportionately increased; (iv) The Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Corporation (other than any dividends or distributions to which clause (i) of this proviso applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants referred to in clause (ii) of this proviso and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation) (the foregoing hereinafter in this clause (iv) of this proviso called the "Securities"), or fix a record date for any such distribution, then, in each such case, the Market Price for each day in such Measurement 6 Period or such other period which day is prior to the earlier of (1) the record date for such distribution and (2) the date on which ex-dividend trading in the Common Stock with respect to such distribution begins shall be reduced so that the same shall be equal to the price determined by multiplying the Market Price (determined without regard to this proviso) by a fraction, the numerator of which shall be the Market Price (determined without regard to this proviso) for such date less the fair market value (as determined in good faith by resolution of the Board of Directors of the Corporation) on such date of the portion of the Securities so distributed or to be distributed applicable to one share of Common Stock and the denominator of which shall be the Market Price (determined without regard to this proviso) for such date; provided, however, that in the event the then fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Market Price (determined without regard to this clause (iv) of this proviso) for any such Trading Day, in lieu of the foregoing adjustment, adequate provision shall be made so that the holders of shares of Series D Preferred Stock shall have the right to receive upon conversion of the shares of Series D Preferred Stock the amount of Securities the holders of shares of Series D Preferred Stock would have received had the holders of shares of Series D Preferred Stock converted the shares of Series D Preferred Stock immediately prior to the record date for such distribution. If the Board of Directors of the Corporation determines the fair market value of any distribution for purposes of this clause (iv) by reference to the actual or when issued trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market on the same day for which an adjustment in the Market Price is being determined. For purposes of this clause (iv) and clauses (i) and (ii) of this proviso, any dividend or distribution to which this clause (iv) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock to which clause (i) or (ii) of this proviso applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock or rights or warrants to which clause (i) or (ii) of this proviso applies (and any Market Price reduction required by this clause (iv) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Market Price reduction required by clauses (i) and (ii) of this proviso with respect to such dividend or distribution shall then be made), except that any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of clause (i) of this proviso; (v) The Corporation or any subsidiary of the Corporation shall (x) by dividend or otherwise, distribute to all holders of its Common Stock cash in (or fix any record date for any such distribution), or (y) repurchase or reacquire shares of its Common Stock (other than an Option Share Surrender) for, in either case, an aggregate amount that, combined with (1) the aggregate amount of any 7 other such distributions to all holders of its Common Stock made exclusively in cash after the Issuance Date and within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this clause (v) has been made, (2) the aggregate amount of any cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation) of consideration paid in respect of any repurchase or other reacquisition by the Corporation or any subsidiary of the Corporation of any shares of Common Stock (other than an Option Share Surrender) made after the Issuance Date and within the 12 months preceding the date of payment of such distribution or making of such repurchase or reacquisition, as the case may be, and in respect of which no adjustment pursuant to this clause (v) has been made, and (3) the aggregate of any cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation) of consideration payable in respect of any Tender Offer by the Corporation or any of its subsidiaries for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution or completion of such repurchase or reacquisition, as the case may be, and in respect of which no adjustment pursuant to clause (vi) of this proviso has been made (such aggregate amount combined with the amounts in clauses (1), (2) and (3) above being the "Combined Amount"), exceeds 10% of the product of the Market Price (determined without regard to this proviso) for any day in such Measurement Period or such other period which day is prior to the earlier of (A) the record date with respect to such distribution and (B) the date on which ex-dividend trading in the Common Stock with respect to such distribution begins or the date of such repurchase or reacquisition, as the case may be, times the number of shares of Common Stock outstanding on such date, then, and in each such case, the Market Price for each such day shall be reduced so that the same shall equal the price determined by multiplying the Market Price (determined without regard to this proviso) for such day by a fraction (i) the numerator of which shall be equal to the Market Price (determined without regard to this proviso) for such day less an amount equal to the quotient of (x) the excess of such Combined Amount over such 10% and (y) the number of shares of Common Stock outstanding on such day and (ii) the denominator of which shall be equal to the Market Price (determined without regard to this proviso) for such day; provided, however, that in the event the portion of the cash so distributed or paid for the repurchase or reacquisition of shares (determined per share based on the number of shares of Common Stock outstanding) applicable to one share of Common Stock is equal to or greater than the Market Price (determined without regard to this clause (v) of this proviso) of the Common Stock for any such day, then in lieu of the foregoing adjustment with respect to such day, adequate provision shall be made so that the holders of shares of Series D Preferred Stock shall have the right to receive upon conversion of shares of Series D Preferred Stock the amount of cash the holders of shares of Series D Preferred Stock would have received had the holders of shares of Series D Preferred Stock converted shares of Series D Preferred Stock immediately prior to the record date for such distribution or the payment date of such repurchase, as applicable; or 8 (vi) A Tender Offer made by the Corporation or any of its subsidiaries for all or any portion of the Common Stock shall expire and such Tender Offer (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the Tender Offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined in good faith by resolution of the Board of Directors of the Corporation) that combined together with (1) the aggregate of the cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation), as of the expiration of such Tender Offer, of consideration payable in respect of any other Tender Offers, by the Corporation or any of its subsidiaries for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such Tender Offer and in respect of which no adjustment pursuant to this clause (vi) has been made, (2) the aggregate amount of any cash plus the fair market value (as determined in good faith by a resolution of the Board of Directors of the Corporation) of consideration paid in respect of any repurchase or other reacquisition by the Corporation or any subsidiary of the Corporation of any shares of Common Stock (other than an Option Share Surrender) made after the Issuance Date and within the 12 months preceding the expiration of such Tender Offer and in respect of which no adjustment pursuant to clause (v) of this proviso has been made, and (3) the aggregate amount of any distributions to all holders of Common Stock made exclusively in cash within 12 months preceding the expiration of such Tender Offer and in respect of which no adjustment pursuant to clause (v) of this proviso has been made, exceeds 10% of the product of the Market Price (determined without regard to this proviso) for any day in such period times the number of shares of Common Stock outstanding on such day, then, and in each such case, the Market Price for such day shall be reduced so that the same shall equal the price determined by multiplying the Market Price (determined without regard to this proviso) for such day by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on such day multiplied by the Market Price (determined without regard to this proviso) for such day and the denominator of which shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the Tender Offer) of all shares validly tendered and not withdrawn as of the last time tenders could have been made pursuant to such Tender Offer (the "Expiration Time") (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on such day times the Market Price (determined without regard to this proviso) of the Common Stock on the Trading Day next succeeding the Expiration Time. If the application of this clause (vi) to any Tender Offer would result in an increase in the Market Price (determined without regard to this proviso) for any trade, no adjustment shall be made for such Tender Offer under this clause (vi) for such day. 9 "Maximum Share Amount" means 1,932,562 shares, (such amount to be subject to equitable adjustment from time to time on terms reasonably acceptable to the Majority Holders for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring or with respect to which "ex-" trading commences after the date of filing this Statement of Resolution with the Secretary of State of the State of Texas), of Common Stock, or such greater number as permitted by the rules of the Nasdaq; provided, however, that if for purposes of Rule 4460(i) of the Nasdaq (or any successor or replacement provision of any stock exchange or stock market on which the Common Stock is listed or traded) the (x) the issuance of the Notes and the issuance of shares of Common Stock upon conversion thereof or (y) the issuance of the common stock purchase warrants issued in connection with the issuance of the Notes and the issuance of shares of Common Stock upon exercise thereof is not required to be integrated with the issuance of the shares of Series D Convertible Preferred Stock and the issuance of shares of Common Stock upon conversion thereof, then in each such case the "Maximum Share Amount" shall mean such greater number as equals the maximum number of shares of Common Stock permitted by the rules of the Nasdaq (determined by pro rata allocation of any increase thereof among the shares of Series D Convertible Preferred Stock based on the number of shares of Series D Convertible Preferred Stock originally represented by each certificate therefor) (such amount to be subject to equitable adjustment in terms reasonably acceptable to the Majority Holders from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date of filing of this Statement of Resolution with the Secretary of State of the State of Texas). "Measurement Period" means, with respect to any date, the period of 25 consecutive Trading Days ending on the Trading Day prior to such date. "Nasdaq" means the Nasdaq National Market. "Nasdaq SmallCap" means the Nasdaq SmallCap Market. "NYSE" means the New York Stock Exchange, Inc. "Option Share Surrender" means the surrender of shares of Common Stock to the Corporation in payment of the exercise price or tax obligations incurred in connection with the exercise of a stock option granted by the Corporation to any of its employees, directors or consultants. "Optional Redemption Event" means the occurrence on or before August 31, 2001 of any one of the following events: (1) For any period of five consecutive Trading Days there shall be no reported sale price of the Common Stock on the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX; (2) The Common Stock is not listed for trading on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; 10 (3) The inability for 45 or more days (whether or not consecutive) of any holder of shares of Series D Convertible Preferred Stock to sell shares of Common Stock issued or issuable on conversion of shares of Series D Convertible Preferred Stock pursuant to the Registration Statement for any reason on each of such 45 days; (4) The Corporation shall (A) default in the timely performance of the obligation to issue shares of Common Stock upon conversion of shares of Series D Convertible Preferred Stock as and when required by Section 10 or shall default in the timely performance of its obligations under Section 12(d)(7) or (B) the Corporation shall fail or default in the timely performance of any material obligation (other than as specifically set forth elsewhere in this definition) to a holder of shares of Series D Convertible Preferred Stock under the terms of this Statement of Resolution or under the Registration Rights Agreements or any other agreement or document entered into in connection with the issuance of shares of Series D Convertible Preferred Stock, as such instruments may be amended from time to time and such failure or default shall continue for ten business days after notice thereof from any holder of shares of Series D Convertible Preferred Stock to the Corporation; (5) Any consolidation or merger of the Corporation with or into another entity (other than a merger or consolidation of a subsidiary of the Corporation into the Corporation or a wholly-owned subsidiary of the Corporation) where the shareholders of the Corporation immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction or the common stock of such surviving corporation is not listed for trading on the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap or any sale or other transfer of all or substantially all of the assets of the Corporation; (6) The taking of any action, including any amendment to the Corporation's Articles of Incorporation, without the consent of the Majority Holders which materially and adversely affects the rights of any holder of shares of Series D Convertible Preferred Stock; or (7) The Stockholder Approval shall not have been obtained on or before the date which is 120 days after the Issuance Date. "Optional Redemption Notice" means a notice from a holder of shares of Series D Convertible Preferred Stock to the Corporation which states (1) that the holder delivering such notice is thereby requiring the Corporation to redeem shares of Series D Convertible Preferred Stock pursuant to Section 11, (2) in general terms the Optional Redemption Event giving rise to such redemption, and (3) the number of shares of Series D Convertible Preferred Stock held by such holder which are to be redeemed. 11 "Optional Redemption Price" means the Premium Price on the applicable redemption date. "Parity Dividend Stock" means any class or series or the Corporation's capital stock ranking, as to dividends, on a parity with the Series D Convertible Preferred Stock. "Parity Liquidation Stock" means any class or series of the Corporation's capital stock having parity as to liquidation rights with the Series D Convertible Preferred Stock. "Premium Percentage" means 115%. "Premium Price" means, for any share of Series D Convertible Preferred Stock as of any date of determination, the product obtained by multiplying (a) the sum of (1) the Conversion Amount plus (2) an amount equal to the accrued but unpaid dividends on such share of Series D Convertible Preferred Stock to the date of determination, plus (3) an amount equal to the accrued and unpaid interest on dividends in arrears (as provided in Section 5) to the date of determination times (b) the Premium Percentage. "Redemption Date" means the date of a redemption of shares of Series D Convertible Preferred Stock pursuant to Section 9(a) determined in accordance therewith. "Redemption Price" means the greater of: (1) the Premium Price on the applicable Redemption Date; and (2) the Converted Market Price on the applicable Redemption Date; provided, however, that if in connection with any determination of the Redemption Price the amount specified in clause (y) of the definition of the term Converted Market Price is greater than 200% of the Ceiling Price on the date as of which such amount is determined, then for purposes of computing the Redemption Price in such instance, the amount otherwise specified in clause (y) of the definition of the term Converted Market Price shall be reduced by 20% of the amount by which (A) the amount otherwise specified in clause (y) of the definition of the term Converted Market Price exceeds (B) the Ceiling Price on the date as of which such amount is determined. "Registration Event" shall mean (1) the Registration Statement is not effective within 105 days of the Issuance Date, if the Registration Statement is on Form S-3, or 120 days after the Issuance Date, if the Registration Statement is on Form S-1, (2) the Company fails to file the Registration Statement with the SEC within 60 days after the Issuance Date, (3) the Company fails to submit a request for acceleration of the effective date of the Registration Statement in accordance with Section 3(a) of the Registration Rights Agreement, (4) the Registration Statement shall cease to be available for use by any holder of shares of Series D Convertible Preferred Stock who is named therein as a selling stockholder for any reason (including, without limitation, by reason of an SEC stop order, a material misstatement or omission in the Registration Statement or 12 the information contained in the Registration Statement having become outdated); provided, however, that no Registration Event pursuant to this clause (4) shall be deemed to occur prior to the SEC Effective Date, (5) the Common Stock is not listed for trading on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap, or (6) a holder of shares of Series D Preferred Stock having become unable to convert any shares of Series D Preferred Stock in accordance with Section 10(a) for any reason (other than by reason of the 4.9% limitation on beneficial ownership set forth therein or a redemption or repurchase thereof). "Registration Rights Agreements" means the several Registration Rights Agreements entered into between the Corporation and the original holders of the shares of Series D Convertible Preferred Stock, as amended or modified from time to time in accordance with their respective terms. "Registration Statement" means the Registration Statement required to be filed by the Corporation with the SEC pursuant to Section 2(a) of the Registration Rights Agreements. "SEC" means the United States Securities and Exchange Commission. "SEC Effective Date" means the date the Registration Statement is first declared effective by the SEC. "Senior Dividend Stock" means any class or series of capital stock of the Corporation ranking senior as to dividends to the Series D Convertible Preferred Stock. "Senior Liquidation Stock" means any class or series of capital stock of the Corporation ranking senior as to liquidation rights to the Series D Convertible Preferred Stock. "Series D Convertible Preferred Stock" means the Series D Convertible Preferred Stock, $.01 par value, of the Corporation. "Share Limitation Redemption Date" shall mean each date on which the Corporation is required to redeem shares of Series D Convertible Preferred Stock as provided in Section 7(a). "Share Limitation Redemption Price" means the Premium Price on the applicable Share Limitation Redemption Date. "Stockholder Approval" shall mean the approval by a majority of the votes cast by the holders of shares of Common Stock (in person or by proxy) at a meeting of the stockholders of the Corporation (duly convened at which a quorum was present), or a written consent of holders of shares of Common Stock entitled to such number of votes given without a meeting, of the issuance by the Corporation of 20% or more of the Common Stock of the Corporation outstanding on the Issuance Date for less than the greater of the book or market value of such Common Stock on conversion of the Series D 13 Convertible Preferred Stock, as and to the extent required under Rule 4460(i) of the Nasdaq as in effect from time to time or any successor provision. "Tender Offer" means a tender offer or exchange offer. "Trading Day" means a day on whichever of (x) the national securities exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time constitutes the principal securities market for the Common Stock is open for general trading of securities. "Transfer Agent Instruction" means the Transfer Agent Instruction from the Corporation to the Conversion Agent for the benefit of the holders from time to time of shares of Series D Convertible Preferred Stock, provided for in the Exchange Agreements. SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series D Convertible Preferred Stock", and the number of shares constituting the Series D Convertible Preferred Stock shall be 6,500, and shall not be subject to increase. Of the authorized shares of Series D Convertible Preferred Stock, 1,500 shares may be issued only as dividends on the outstanding shares of Series D Convertible Preferred Stock. SECTION 3. SERIES D PREFERRED STOCK CAPITAL. The amount to be represented in the Series D Convertible Preferred Stock capital of the Corporation at all times for each outstanding share of Series D Convertible Preferred Stock shall be the greater of (i) the Premium Price and (ii) the Converted Market Price. The Corporation shall take such action as may be required to maintain the amount required by this Section 3 to be represented in stated capital for the Series D Convertible Preferred Stock capital not less frequently than monthly. SECTION 4. RANK. All Series D Convertible Preferred Stock shall rank (i) senior to the Common Stock, now or hereafter issued, as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, (ii) junior to the Series A Convertible Preferred Stock, Series B Senior Convertible Preferred Stock and Series C Convertible Preferred Stock of the Corporation, both as to payment of dividends and as to distributions of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary and (iii) senior to any additional series of the class of Preferred Stock which series the Board of Directors may from time to time authorize and any additional class of preferred stock (or series of preferred stock of such class) which the Board of Directors or the stockholders may from time to time authorize in accordance herewith. SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series D Convertible Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors out of funds legally available for such purpose, dividends at the rate of $60.00 per annum per share, and no more, which shall be fully cumulative, shall accrue without interest (except as otherwise provided herein as to 14 dividends in arrears) from the date of original issuance of each share of Series D Convertible Preferred Stock and shall be payable quarterly on February 15, May 15, August 15, and November 15 of each year commencing November 15, 1998 (except that if any such date is a Saturday, Sunday, or legal holiday, then such dividend shall be payable on the next succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 20 nor less than 10 days preceding the payment dates for such dividends, as shall be fixed by the Board. Dividends on the Series D Convertible Preferred Stock shall be paid in cash or, subject to the limitations in Section 5(b) hereof, Dividend Shares or any combination of cash and Dividend Shares, at the option of the Corporation as hereinafter provided. The amount of the dividends payable per share of Series D Convertible Preferred Stock for each quarterly dividend period shall be computed by dividing the annual dividend amount by four. The amount of dividends payable for the initial dividend period and any period shorter than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30- day months. Dividends not paid on a payment date, whether or not such dividends have been declared, will bear interest at the rate of 14% per annum until paid (or such lesser rate as shall be the maximum rate allowable by applicable law). No dividends or other distributions, other than the dividends payable solely in shares of any Junior Dividend Stock, shall be paid or set apart for payment on any shares of Junior Dividend Stock, and no purchase, redemption, or other acquisition shall be made by the Corporation of any shares of Junior Dividend Stock (except for Option Share Surrenders), unless and until all accrued and unpaid dividends on the Series D Convertible Preferred Stock and interest on dividends in arrears at the rate specified herein shall have been paid or declared and set apart for payment. If at any time any dividend on any Senior Dividend Stock shall be in arrears, in whole or in part, no dividend shall be paid or declared and set apart for payment on the Series D Convertible Preferred Stock unless and until all accrued and unpaid dividends with respect to the Senior Dividend Stock, including the full dividends for the then current dividend period, shall have been paid or declared and set apart for payment, without interest. No full dividends shall be paid or declared and set apart for payment on any Parity Dividend Stock for any period unless all accrued but unpaid dividends (and interest on dividends in arrears at the rate specified herein) have been, or contemporaneously are, paid or declared and set apart for such payment on the Series D Convertible Preferred Stock. No full dividends shall be paid or declared and set apart for payment on the Series D Convertible Preferred Stock for any period unless all accrued but unpaid dividends have been, or contemporaneously are, paid or declared and set apart for payment on the Parity Dividend Stock for all dividend periods terminating on or prior to the date of payment of such full dividends. When dividends are not paid in full upon the Series D Convertible Preferred Stock and the Parity Dividend Stock, all dividends paid or declared and set apart for payment upon shares of Series D Convertible Preferred Stock (and interest on dividends in arrears at the rate specified herein) and the Parity Dividend Stock shall be paid or declared and set apart for payment pro rata, so that the amount of dividends paid or declared and set apart for payment per share on the Series D Convertible Preferred Stock and the Parity Dividend Stock shall in all cases bear to each 15 other the same ratio that accrued and unpaid dividends per share on the shares of Series D Convertible Preferred Stock and the Parity Dividend Stock bear to each other. Any references to "distribution" contained in this Section 5 shall not be deemed to include any stock dividend or distributions made in connection with any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary. (b) If the Corporation elects in the exercise of its sole discretion to issue Dividend Shares in payment of dividends on the Series D Convertible Preferred Stock in respect of any dividend payment date, the Corporation shall issue and deliver, or cause to be issued and delivered, by the third Trading Day after such dividend payment date to each holder of shares of Series D Convertible Preferred Stock a certificate representing the number of whole Dividend Shares arrived at by dividing (x) the total amount of cash dividends such holder would be entitled to receive if the aggregate dividends on the Series D Convertible Preferred Stock held by such holder which are being paid in Dividend Shares were being paid in cash by (y) $1,000.00; provided, however, that if certificates representing Dividend Shares are issued and delivered to holders of Series D Convertible Preferred Stock subsequent to the third Trading Day after a dividend payment date, the amount so divided into such total amount of cash dividends will be reduced by $10.00 for each Trading Day after the third Trading Day following such dividend payment date to the date of delivery of Dividend Shares. No fractional Dividend Shares shall be issued in payment of dividends. In lieu thereof, the Corporation shall pay cash in an amount equal to the balance of such dividend which is not paid in Dividend Shares. The Corporation shall not exercise its right to issue Dividend Shares in payment of dividends on Series D Convertible Preferred Stock if: (i) the number of shares of Series D Convertible Preferred Stock at the time authorized, unissued and unreserved for all purposes, or held in the Corporation's treasury, is insufficient to permit the conversion of such Dividend Shares into shares of Common Stock; (ii) the issuance or delivery of Dividend Shares as a dividend payment or the issuance of shares of Common Stock upon conversion of such Dividend Shares by the holder thereof would require registration with or approval of any governmental authority under any law or regulation, and such registration or approval has not been effected or obtained or is not in effect or the Registration Statement is unavailable for use by such holder for the resale of such shares of Common Stock; provided, however, that this limitation shall not be deemed to be applicable at any time prior to the date which is 105 days after the Issuance Date, if the Registration Statement is on Form S-3, or 120 days after the Issuance Date, if the Registration Statement is on Form S-1, if this limitation otherwise would be applicable solely because the Registration Statement shall not yet have been declared effective, so long as the Corporation shall be in compliance in all material respects with its obligations under the Registration Rights Agreements; 16 (iii) the shares of Common Stock issuable upon conversion of such Dividend Shares have not been authorized for listing, upon official notice of issuance, on any securities exchange or market on which the Common Stock is then listed; or have not been approved for quotation if the Common Stock is traded in the over-the-counter market; (iv) the number of shares of Common Stock registered pursuant to Section 2(a) of the Registration Rights Agreements for resale upon issuance upon conversion of Dividend Shares shall be sufficient (after taking into account the number of shares of Common Stock issued or issuable upon conversion of Dividend Shares theretofore issued) to prevent the resale pursuant to the Registration Statement of the shares of Common Stock issuable upon conversion of such Dividend Shares; (v) the shares of Common Stock issuable upon conversion of such Dividend Shares (A) cannot be sold or transferred without restriction by unaffiliated holders who receive such Dividend Shares or (B) are no longer listed on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; or (vi) an Optional Redemption Event shall have occurred and any holder of shares of Series D Convertible Preferred Stock shall have exercised optional redemption rights under Section 11 by reason of such Optional Redemption Event and the Corporation shall not have paid the Optional Redemption Price to each holder. Dividend Shares issued in payment of dividends on Series D Convertible Preferred Stock pursuant to this Section and shares of Common Stock issuable upon conversion of such Dividend Shares shall be, and for all purposes shall be deemed to be, validly issued, fully paid and nonassessable shares of the Corporation; the issuance and delivery thereof is hereby authorized; and the delivery will be, and for all purposes shall be deemed to be, payment in full of the cumulative dividends to which holders are entitled on the applicable dividend payment date. (c) Neither the Corporation nor any subsidiary of the Corporation shall redeem, repurchase or otherwise acquire in any one transaction or series of related transactions any shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock if the number of shares so repurchased, redeemed or otherwise acquired in such transaction or series of related transactions (excluding any Option Share Surrender) is more than either (x) 5.0% of the number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions or (y) 1% of the number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions if such transaction or series of related transactions is with any one person or group of affiliated persons, unless the Corporation or such subsidiary offers to purchase for cash from each holder of shares of Series D Convertible Preferred Stock at the time of such redemption, repurchase or acquisition the same percentage of such holder's shares of Series D 17 Convertible Preferred Stock as the percentage of the number of outstanding shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as the case may be, to be so redeemed, repurchased or acquired at a purchase price per share of Series D Convertible Preferred Stock equal to the greater of (i) the Premium Price in effect on the date of purchase pursuant to this Section 5(c) and (ii) the Converted Market Price on the date of purchase pursuant to this Section 5(c); provided, however, that if in connection with any determination of the purchase price payable pursuant to this Section 5(c) the amount specified in clause (y) of the definition of the term Converted Market Price is greater than 200% of the Ceiling Price on the date as of which such amount is determined, then for purposes of computing the purchase price payable pursuant to this Section 5(c) in such instance, the amount otherwise specified in clause (y) of the definition of the term Converted Market Price shall be reduced by 20% of the amount by which (A) the amount otherwise specified in clause (y) of the definition of the term Converted Market Price exceeds (B) the Ceiling Price on the date as of which such amount is determined. (d) Neither the Corporation nor any subsidiary of the Corporation shall (1) make any Tender Offer for outstanding shares of Common Stock, unless the Corporation contemporaneously therewith makes an offer, or (2) enter into an agreement regarding a Tender Offer for outstanding shares of Common Stock by any person other than the Corporation or any subsidiary of the Corporation, unless such person agrees with the Corporation to make an offer, in either such case to each holder of outstanding shares of Series D Convertible Preferred Stock to purchase for cash at the time of purchase in such Tender Offer the same percentage of shares of Series D Convertible Preferred Stock held by such holder as the percentage of outstanding shares of Common Stock offered to be purchased in such Tender Offer at a price per share of Series D Convertible Preferred Stock equal to the greater of (i) the Premium Price in effect on the date of purchase pursuant to this Section 5(d) and (ii) the Converted Market Price on the date of purchase pursuant to this Section 5(d). SECTION 6. LIQUIDATION PREFERENCE. In the event of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series D Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets constitute stated capital or surplus of any nature, an amount per share of Series D Convertible Preferred Stock equal to the Liquidation Preference, and no more, before any payment shall be made or any assets distributed to the holders of Junior Liquidation Stock; provided, however, that such rights shall accrue to the holders of Series D Convertible Preferred Stock only in the event that the Corporation's payments with respect to the liquidation preference of the holders of Senior Liquidation Stock are fully met. After the liquidation preferences of the Senior Liquidation Stock are fully met, the entire assets of the Corporation available for distribution shall be distributed ratably among the holders of the Series D Convertible Preferred Stock and any Parity Liquidation Stock in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the Liquidation Preference of the shares of Series D Convertible Preferred Stock and the liquidation preference of the shares of Parity Liquidation Stock, the holders of such shares shall not be entitled to any further 18 participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities, or other property in and of itself will be considered a liquidation, dissolution or winding up of the Corporation. SECTION 7. MANDATORY REDEMPTION. (a) MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1) Notwithstanding any other provision herein, unless the Stockholder Approval shall have been obtained from the stockholders of the Corporation or waived by the Nasdaq, so long as the Common Stock is listed on the Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX, the Corporation shall not be required to issue upon conversion of shares of Series D Convertible Preferred Stock pursuant to Section 10 more than the Maximum Share Amount. The Maximum Share Amount shall be allocated among the shares of Series D Convertible Preferred Stock at the time of initial issuance thereof pro rata based on the initial issuance of 5,000 shares of Series D Convertible Preferred Stock. Each certificate for shares of Series D Convertible Preferred Stock initially issued shall bear a notation as to the number of shares constituting the portion of the Maximum Share Amount allocated to the shares of Series D Convertible Preferred Stock represented by such certificate for purposes of conversion thereof. The Corporation shall maintain records which show the number of shares of Series D Convertible Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on the shares of Series D Convertible Preferred Stock represented by each certificate, which records shall be controlling in the absence of manifest error. Each such additional share of Series D Convertible Preferred Stock shall be allocated a portion of the Maximum Share Amount allocated to the shares of Series D Convertible Preferred Stock in respect of which such additional shares of Series D Convertible Preferred Stock are issued as a dividend and the certificate for such additional shares of Series D Convertible Preferred Stock shall bear a notation as to the certificate number of the share of Series D Convertible Preferred Stock in respect of which such additional share of Series D Convertible Preferred Stock is issued as a dividend. Upon surrender of any certificate for shares of Series D Convertible Preferred Stock for transfer or re-registration thereof (or, at the option of the holder, for conversion pursuant to Section 10(a) of less than all of the shares of Series D Convertible Preferred Stock represented thereby), the Corporation shall make a notation on the new certificate issued upon such transfer or re-registration or evidencing such unconverted shares, as the case may be, as to the remaining number of shares of Common Stock from the Maximum Share Amount remaining available for conversion of the shares of Series D Convertible Preferred Stock evidenced by such new certificate. If any certificate for shares of Series D Convertible Preferred Stock is surrendered for split-up into two or more certificates representing an aggregate number of shares of Series D Convertible Preferred Stock equal to the number of shares of Series D Convertible Preferred Stock represented by the certificate so surrendered (as reduced by any contemporaneous conversion of shares of Series D Convertible Preferred Stock represented by the certificate so surrendered), each certificate issued on such split-up shall bear a notation of the portion of the Maximum Share Amount allocated thereto determined by pro rata allocation from among the remaining portion of the Maximum Share Amount allocated to the certificate so surrendered. If any shares of Series D Convertible Preferred Stock 19 represented by a single certificate are converted in full pursuant to Section 10, all of the portion of the Maximum Share Amount allocated to such shares of Series D Convertible Preferred Stock which remains unissued after such conversion shall be re-allocated pro rata to the outstanding shares of Series D Convertible Preferred Stock held of record by the holder of record at the close of business on the date of such conversion of the shares of Series D Convertible Preferred Stock so converted, and if there shall be no other shares of Series D Convertible Preferred Stock held of record by such holder at the close of business on such date, then such portion of the Maximum Share Amount shall be allocated pro rata among the shares of Series D Convertible Preferred Stock outstanding on such date. (2) The Corporation shall promptly, but in no event later than five business days after the occurrence, give notice to each holder of shares of Series D Convertible Preferred Stock (by telephone line facsimile transmission at such number as such holder has specified in writing to the Corporation for such purposes or, if such holder shall not have specified any such number, by overnight courier or first class mail, postage prepaid, at such holder's address as the same appears on the stock books of the Corporation) and any holder of shares of Series D Convertible Preferred Stock may at any time after the occurrence give notice to the Corporation, in either case, if at any time on or after December 16, 1998 and on or prior to August 31, 2001 on any ten Trading Days within any period of 20 consecutive Trading Days the Corporation would not have been required to convert shares of Series D Convertible Preferred Stock of such holder in accordance with Section 10(a) as a consequence of the limitations set forth in Section 7(a)(1) had the shares of Series D Convertible Preferred Stock held by such holder been converted in full into Common Stock on each such day, determined without regard to the limitation, if any, on such holder contained in the proviso to the second sentence of Section 10(a) (any such notice, whether given by the Corporation or a holder, an "Inconvertibility Notice"). If the Corporation shall have given or been required to give any Inconvertibility Notice, or if a holder shall have given any Inconvertibility Notice, then within ten Trading Days after such Inconvertibility Notice is given or was required to be given, the holder receiving or giving, as the case may be, such Inconvertibility Notice shall have the right by written notice to the Corporation (which written notice may be contained in the Inconvertibility Notice given by such holder) to direct the Corporation to redeem the portion of such holder's outstanding shares of Series D Convertible Preferred Stock (which, if applicable, shall be all of such holder's outstanding shares of Series D Convertible Preferred Stock) as shall not, on the business day prior to the date of such redemption, be convertible into shares of Common Stock by reason of the limitations set forth in Section 7(a)(1) (determined without regard to the limitation, if any, on beneficial ownership of Common Stock by such holder contained in the proviso to the second sentence of Section 10(a)), within ten business days after such holder so directs the Corporation, at a price per share equal to the Share Limitation Redemption Price. If a holder of shares of Series D Convertible Preferred Stock directs the Corporation to redeem outstanding shares of Series D Convertible Preferred Stock and, prior to the date the Corporation is required to redeem such shares of Series D Convertible Preferred Stock, the Corporation would have been able, within the limitations set forth in Section 7(a)(1), to convert all of such holder's shares of Series D Convertible Preferred Stock (determined without regard to the limitation, if any, on 20 beneficial ownership of shares of Common Stock by such holder contained in the proviso to the second sentence of Section 10(a)) on any ten Trading Days within any period of 15 consecutive Trading Days commencing after the period of 20 consecutive Trading Days which gave rise to the applicable Inconvertibility Notice from the Corporation or such holder of shares of Series D Convertible Preferred Stock, as the case may be, had such holder exercised its right to convert all of such holder's shares of Series D Convertible Preferred Stock into Common Stock on each of such ten Trading Days within such 15 Trading Day period, then the Corporation shall not be required to redeem any shares of Series D Convertible Preferred Stock by reason of such Inconvertibility Notice. (3) Notwithstanding the giving of any Inconvertibility Notice by the Corporation to the holders of Series D Convertible Preferred Stock pursuant to Section 7(a)(2) or the giving or the absence of any notice by the holders of the Series D Convertible Preferred Stock in response thereto or any redemption of shares of Series D Convertible Preferred Stock pursuant to Section 7(a)(2), thereafter the provisions of Section 7(a)(2) shall continue to be applicable on any occasion unless the Stockholder Approval shall have been obtained from the stockholders of the Corporation or waived by the Nasdaq. (4) On each Share Limitation Redemption Date (or such later date as a holder of shares of Series D Convertible Preferred Stock shall surrender to the Corporation the certificate(s) for the shares of Series D Convertible Preferred Stock being redeemed pursuant to this Section 7(a)), the Corporation shall make payment in immediately available funds of the applicable Share Limitation Redemption Price to such holder of shares of Series D Convertible Preferred Stock to be redeemed to or upon the order of such holder as specified by such holder in writing to the Corporation at least one business day prior to such Share Limitation Redemption Date. Upon redemption of less than all of the shares of Series D Convertible Preferred Stock evidenced by a particular certificate, promptly, but in no event later than three business days after surrender of such certificate to the Corporation, the Corporation shall issue a replacement certificate for the shares of Series D Convertible Preferred Stock evidenced by such certificate which have not been redeemed. Only whole shares of Series D Convertible Preferred Stock may be redeemed. (B) NO OTHER MANDATORY REDEMPTION. The shares of Series D Convertible Preferred Stock shall not be subject to mandatory redemption by the Corporation except as provided in Section 7(a). SECTION 8. NO SINKING FUND. The shares of Series D Convertible Preferred Stock shall not be subject to the operation of a purchase, retirement or sinking fund. SECTION 9. OPTIONAL REDEMPTION. (A) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall be in compliance in all material respects with its obligations to the holders of shares of Series D Convertible Preferred Stock (including, without limitation, its obligations under 21 the Exchange Agreement, the Registration Rights Agreements and the provisions of this Statement of Resolution), (2) on the date the Corporation Optional Redemption Notice is given and at all times until the Redemption Date, the Registration Statement is effective and available for use by each holder of shares of Series D Convertible Preferred Stock for the resale of shares of Common Stock acquired by such holder upon conversion of all shares of Series D Convertible Preferred Stock held by such holder and (3) no Optional Redemption Event shall have occurred with respect to which, on the date a Corporation Optional Redemption Notice is given or on the Redemption Date, any holder of shares of Series D Convertible Preferred Stock shall have exercised optional redemption rights under Section 11 by reason of such Optional Redemption Event and the Corporation shall not have paid the Optional Redemption Price to such holder, then the Corporation shall have the right, exercisable by giving a Corporation Optional Redemption Notice not less than 30 days or more than 60 days prior to the Redemption Date to all holders of record of the shares of Series D Convertible Preferred Stock, at any time to redeem all or from time to time to redeem any part of the outstanding shares of Series D Convertible Preferred Stock in accordance with this Section 9(a). If the Corporation shall redeem less than all outstanding shares of Series D Convertible Preferred Stock, such redemption shall be made as nearly as practical pro rata from all holders of shares of Series D Convertible Preferred Stock. Any Corporation Optional Redemption Notice under this Section 9(a) shall be given to the holders of record of the shares of Series D Convertible Preferred Stock at their addresses appearing on the records of the Corporation; provided, however, that any failure or defect in the giving of such notice to any such holder shall not affect the validity of notice to or the redemption of shares of Series D Convertible Preferred Stock of any other holder. On the Redemption Date (or such later date as a holder of shares of Series D Convertible Preferred Stock surrenders to the Corporation the certificate(s) for shares of Series D Convertible Preferred Stock to be redeemed pursuant to this Section 9(a)), the Corporation shall make payment of the applicable Redemption Price to each holder of shares of Series D Convertible Preferred Stock to be redeemed in immediately available funds to such account as specified by such holder in writing to the Corporation at least one business day prior to the Redemption Date. A holder of shares of Series D Convertible Preferred Stock to be redeemed pursuant to this Section 9(a) shall be entitled to convert such shares of Series D Convertible Preferred Stock in accordance with Section 10(a) through the day prior to the Redemption Date and (2) if the Corporation shall fail to pay the Redemption Price of any share of Series D Convertible Preferred Stock when due, at any time after the due date thereof until such date as the Corporation pays the Redemption Price of such share of Series D Convertible Preferred Stock. No share of Series D Convertible Preferred Stock as to which the holder exercises the right of conversion pursuant to Section 10 or the optional redemption right pursuant to Section 11 may be redeemed by the Corporation pursuant to this Section 9(a) on or after the date of exercise of such conversion right or optional redemption right, as the case may be, regardless of whether the Corporation Optional Redemption Notice shall have been given prior to, or on or after, the date of exercise of such conversion right or optional redemption right, as the case may be. (B) FINAL REDEMPTION. The Corporation shall have the right to redeem all, but not less than all, outstanding shares of Series D Convertible Preferred Stock at any time on or after the date which is 1,080 days after the Issuance Date so long 22 as (1) the Corporation shall be in compliance in all material respects with its obligations to the holders of the Series D Convertible Preferred Stock (including, without limitation, its obligations under the Exchange Agreements, the Registration Rights Agreements and this Statement of Resolution) and (2) no Optional Redemption Event shall have occurred with respect to which on the date a Final Redemption Notice is to be given or on the Final Redemption Date, any holder of shares of Series D Convertible Preferred Stock shall have exercised optional redemption rights under Section 11 by reason of such Optional Redemption Event and the Corporation shall not have paid the Optional Redemption Price to such holder. In order to exercise its rights under this Section 9(b), the Corporation shall give a Final Redemption Notice not less than 20 or more than 40 Trading Days prior to the Final Redemption Date to all holders of record of the shares of Series D Convertible Preferred Stock. Any Final Redemption Notice shall be given to the holders of record of the shares of Series D Convertible Preferred Stock by telephone line facsimile transmission to such number as shown on the records of the Corporation for such purpose; provided, however, that any failure or defect in the giving of such notice to any such holder shall not affect the validity of notice to or the redemption of shares of Series D Convertible Preferred Stock of any other holder. On the Final Redemption Date (or such later date as a holder of shares of Series D Convertible Preferred Stock surrenders to the Corporation the certificate(s) for shares of Series D Convertible Preferred Stock to be redeemed pursuant to this Section 9(b)), the Corporation shall make payment of the applicable Final Redemption Price to each holder of shares of Series D Convertible Preferred Stock to be redeemed in immediately available funds to such account as specified by such holder in writing to the Corporation at least one business day prior to the Final Redemption Date. A holder of shares of Series D Convertible Preferred Stock to be redeemed pursuant to this Section 9(b) shall be entitled to convert such shares of Series D Convertible Preferred Stock in accordance with Section 10 through the day prior to the Final Redemption Date and (2) if the Corporation shall fail to pay the Final Redemption Price of any share of Series D Convertible Preferred Stock when due, at any time after the due date thereof until such date as the Corporation pays the Final Redemption Price of such share of Series D Convertible Preferred Stock to such holder. No share of Series D Convertible Preferred Stock as to which a holder exercises the right of conversion pursuant to Section 10 or the optional redemption right pursuant to Section 11 may be redeemed by the Corporation pursuant to this Section 9(b) on or after the date of exercise of such conversion right or optional redemption right, as the case may be, regardless of whether the Final Redemption Notice shall have been given prior to, or on or after, the date of exercise of such conversion right or optional redemption right, as the case may be. So long as during the period from the Issuance Date through the date the Corporation pays the Final Redemption Price the Corporation shall not have commenced a voluntary case or other proceeding, and no person shall have commenced an involuntary case or other proceeding against the Corporation, in any such case seeking liquidation, reorganization or other relief with respect to the Corporation or its debts under any bankruptcy, insolvency, receivership, moratorium, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of the Corporation or any substantial part of the Corporation's property, the Corporation shall not have consented to any such relief or to the appointment of or taking 23 possession by any such official in an involuntary case or other proceeding commenced against it, and the Corporation shall not have made a general assignment for the benefit of creditors, then the Corporation shall have the right, exercisable by a statement to such effect in the Final Redemption Notice, to pay the Final Redemption Price by the issuance to the holders of shares of Series D Convertible Preferred Stock to be redeemed of shares of Common Stock, valued for this purpose at the Conversion Price on the Final Redemption Date, in lieu of payment of cash, so long as all shares of Common Stock to be so issued would, if issued as dividends on shares of Series D Convertible Preferred Stock, meet the criteria in clauses (i) through (vi) of Section 5(b). (C) NO OTHER OPTIONAL REDEMPTION. The shares of Series D Convertible Preferred Stock shall not be subject to redemption at the option of the Corporation except as provided in Sections 9(a) and 9(b). SECTION 10. CONVERSION. (A) CONVERSION AT OPTION OF HOLDER. The holders of the Series D Convertible Preferred Stock may at any time on or after the earlier of (x) the SEC Effective Date and (y) the date which is 90 days after the Issuance Date convert at any time all or from time to time any part of their shares of Series D Convertible Preferred Stock into fully paid and nonassessable shares of Common Stock and such other securities and property as herein provided. Each share of Series D Convertible Preferred Stock may be converted at the office of the Conversion Agent or at such other additional office or offices, if any, as the Board of Directors may designate, into such number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) determined by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued but unpaid dividends to the applicable Conversion Date on the share of Series D Convertible Preferred Stock being converted, and (iii) accrued but unpaid interest on the dividends on the share of Series D Convertible Preferred Stock being converted in arrears to the applicable Conversion Date at the rate provided in Section 5 by (y) the Conversion Price for such Conversion Date (the "Conversion Rate"); provided, however, that in no event shall any holder of shares of Series D Convertible Preferred Stock be entitled to convert any shares of Series D Convertible Preferred Stock in excess of that number of shares of Series D Convertible Preferred Stock upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by such holder and all Aggregated Persons of such holder (other than shares of Common Stock deemed beneficially owned through the ownership of unconverted shares of Series D Convertible Preferred Stock) and (2) the number of shares of Common Stock issuable upon the conversion of the number of shares of Series D Convertible Preferred Stock with respect to which the determination in this proviso is being made, would result in beneficial ownership by such holder and all Aggregated Persons of such holder of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in clause (1) of the proviso to the immediately preceding sentence. 24 (B) OTHER PROVISIONS. (1) Notwithstanding anything in this Section 10(b) to the contrary, no change in the Conversion Amount pursuant to this Section 10(b) shall actually be made until the cumulative effect of the adjustments called for by this Section 10(b) since the date of the last change in the Conversion Amount would change the Conversion Amount by more than 1%. However, once the cumulative effect would result in such a change, then the Conversion Amount shall actually be changed to reflect all adjustments called for by this Section 10(b) and not previously made. Notwithstanding anything in this Section 10(b), no change in the Conversion Amount shall be made that would result in the price at which a share of Series D Convertible Preferred Stock is converted being less than the par value of the Common Stock into which shares of Series D Convertible Preferred Stock are at the time convertible. (2) The holders of shares of Series D Convertible Preferred Stock at the close of business on the record date for any dividend payment to holders of Series D Convertible Preferred Stock shall be entitled to receive the dividend payable on such shares on the corresponding dividend payment date notwithstanding the conversion thereof after such dividend payment record date or the Corporation's default in payment of the dividend due on such dividend payment date; provided, however, that the holder of shares of Series D Convertible Preferred Stock surrendered for conversion during the period between the close of business on any record date for a dividend payment and the opening of business on the corresponding dividend payment date must pay to the Corporation, within five days after receipt by such holder, an amount equal to the dividend payable on such shares on such dividend payment date if such dividend is paid by the Corporation to such holder. A holder of shares of Series D Convertible Preferred Stock on a record date for a dividend payment who (or whose transferee) tenders any of such shares for conversion into shares of Common Stock on or after such dividend payment date will receive the dividend payable by the Corporation on such shares of Series D Convertible Preferred Stock on such date, and the converting holder need not make any payment of the amount of such dividend in connection with such conversion of shares of Series D Convertible Preferred Stock. Except as provided above, no adjustment shall be made in respect of cash dividends on Common Stock or Series D Convertible Preferred Stock that may be accrued and unpaid at the date of surrender of shares of Series D Convertible Preferred Stock. (3) (A) The right of the holders of Series D Convertible Preferred Stock to convert their shares shall be exercised by giving (which may be done by telephone line facsimile transmission) a Conversion Notice to the Conversion Agent. If a holder of Series D Convertible Preferred Stock elects to convert any shares of Series D Convertible Preferred Stock in accordance with Section 10(a), such holder shall not be required to surrender the certificate(s) representing such shares of Series D Convertible Preferred Stock to the Corporation unless all of the shares of Series D Convertible Preferred Stock represented thereby are so converted. Each holder of shares of Series D Convertible Preferred Stock and the Corporation shall maintain records showing the number of shares so converted and the dates of such conversions or shall use such other method, satisfactory to such holder and the Corporation, so as to not require physical surrender of such certificates upon each such conversion. In the event of any dispute or discrepancy, such records of the Corporation shall be controlling and determinative in the 25 absence of manifest error. Notwithstanding the foregoing, if any shares of Series D Convertible Preferred Stock evidenced by a particular certificate therefor are converted as aforesaid, the holder of Series D Convertible Preferred Stock may not transfer the certificate(s) representing such shares of Series D Convertible Preferred Stock unless such holder first physically surrenders such certificate(s) to the Corporation, whereupon the Corporation will forthwith issue and deliver upon the order of such holder of shares of Series D Convertible Preferred Stock new certificate(s) of like tenor, registered as such holder of shares of Series D Convertible Preferred Stock (upon payment by such holder of shares of Series D Convertible Preferred Stock of any applicable transfer taxes) may request, representing in the aggregate the remaining number of shares of Series D Convertible Preferred Stock represented by such certificate(s). Each holder of shares of Series D Convertible Preferred Stock, by acceptance of a certificate for such shares, acknowledges and agrees that (1) by reason of the provisions of this paragraph, following conversion of any shares of Series D Convertible Preferred Stock represented by such certificate, the number of shares of Series D Convertible Preferred Stock represented by such certificate may be less than the number of shares stated on such certificate, and (2) the Corporation may place a legend on the certificates for shares of Series D Convertible Preferred Stock which refers to or describes the provisions of this paragraph. (B) The Corporation shall pay any transfer tax arising in connection with any conversion of shares of Series D Convertible Preferred Stock except that the Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery upon conversion of shares of Common Stock or other securities or property in a name other than that of the holder of the shares of the Series D Convertible Preferred Stock being converted, and the Corporation shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. The number of shares of Common Stock to be issued upon each conversion of shares of Series D Convertible Preferred Stock shall be the number set forth in the applicable Conversion Notice which number shall be conclusive absent manifest error. The Corporation shall notify a holder who has given a Conversion Notice of any claim of manifest error within one Trading Day after such holder gives such Conversion Notice and no such claim of error shall limit or delay performance of the Corporation's obligation to issue upon such conversion the number of shares of Common Stock which are not in dispute. A Conversion Notice shall be deemed for all purposes to be in proper form unless the Corporation notifies a holder of shares of Series D Convertible Preferred Stock being converted within one Trading Day after a Conversion Notice has been given (which notice shall specify all defects in the Conversion Notice) and any Conversion Notice containing any such defect shall nonetheless be effective on the date given if the converting holder promptly undertakes to correct all such defects. (4) The Corporation shall reserve from its authorized, unissued and otherwise unreserved Common Stock free from preemptive and similar rights 5,933,332 shares (such amount to be subject to equitable adjustment from time to time on terms reasonably acceptable to the Holder for stock splits, stock dividends, combinations, 26 capital reorganizations and similar events relating to the Common Stock occurring on or after the Issuance Date) to provide for the issuance of Common Stock upon the conversion in full of the Series D Convertible Preferred Stock, subject to reduction from time to time by the number of shares of Common Stock issued on conversion of the Series D Convertible Preferred Stock. The Corporation (and any successor corporation) shall take all action necessary so that a number of shares of the authorized but unissued Common Stock (or common stock in the case of any successor corporation) sufficient to provide for the conversion of the Series D Convertible Preferred Stock outstanding upon the basis hereinbefore provided are at all times reserved by the Corporation (or any successor corporation), free from preemptive rights, for such conversion, subject to the provisions of the next succeeding paragraph. If the Corporation shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which each share of the Series D Convertible Preferred Stock shall be convertible as herein provided, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series D Convertible Preferred Stock on the new basis. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all of the outstanding shares of Series D Convertible Preferred Stock, the Corporation promptly shall seek, and use its best efforts to obtain and complete, such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (5) In case of any consolidation or merger of the Corporation with any other corporation (other than a wholly-owned subsidiary of the Corporation) in which the Corporation is not the surviving corporation, or in case of any sale or transfer of all or substantially all of the assets of the Corporation, or in the case of any share exchange pursuant to which all of the outstanding shares of Common Stock are converted into other securities or property, the Corporation shall make appropriate provision or cause appropriate provision to be made so that each holder of shares of Series D Convertible Preferred Stock then outstanding shall have the right thereafter to convert such shares of Series D Convertible Preferred Stock into the kind of shares of stock and other securities and property receivable upon such consolidation, merger, sale, transfer, or share exchange by a holder of shares of Common Stock into which such shares of Series D Convertible Preferred Stock could have been converted immediately prior to the effective date of such consolidation, merger, sale, transfer, or share exchange and on a basis which preserves the economic benefits of the conversion rights of the holders of shares of Series D Convertible Preferred Stock on a basis as nearly as practical as such rights exist hereunder prior thereto. If, in connection with any such consolidation, merger, sale, transfer, or share exchange, each holder of shares of Common Stock is entitled to elect to receive securities, cash, or other assets upon completion of such transaction, the Corporation shall provide or cause to be provided to each holder of Series D Convertible Preferred Stock the right to elect the securities, cash, or other assets into which the Series D Convertible Preferred Stock held by such holder shall be convertible after completion of any such transaction on the same terms and subject to the same conditions applicable to holders of the Common Stock (including, without limitation, notice of the right to 27 elect, limitations on the period in which such election shall be made, and the effect of failing to exercise the election). The Corporation shall not effect any such transaction unless the provisions of this paragraph have been complied with. The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers, or share exchanges. (6) If a holder shall have given a Conversion Notice for shares of Series D Convertible Preferred Stock, the Corporation shall issue and deliver to such person certificates for the Common Stock issuable upon such conversion within three Trading Days after such Conversion Notice is given and the person converting shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, and all rights with respect to the shares surrendered shall forthwith terminate except the right to receive the Common Stock or other securities, cash, or other assets as herein provided. If a holder shall have given a Conversion Notice as provided herein, the Corporation's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of any action or inaction by the converting holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Corporation to such holder, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by such holder or any other person of any obligation to the Corporation or any violation or alleged violation of law by such holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to the holder in connection with such conversion. If the Corporation fails to issue and deliver the certificates for the Common Stock to the holder converting shares of Series D Convertible Preferred Stock pursuant to the first sentence of this paragraph as and when required to do so, in addition to any other liabilities the Corporation may have hereunder and under applicable law (1) the Corporation shall pay or reimburse such holder on demand for all out-of-pocket expenses including, without limitation, reasonable fees and expenses of legal counsel incurred by such holder as a result of such failure, (2) the Conversion Percentage used to determine the Conversion Price applicable to such conversion shall be reduced by one percentage point from the Conversion Percentage otherwise used to calculate the Conversion Price applicable to such conversion or, if such conversion is based on the Ceiling Price, the Ceiling Price used to determine the Conversion Price applicable to such conversion shall be reduced by one percentage point from the amount that the Conversion Price otherwise would have been without reduction pursuant hereto, in either such case, for each Trading Day after such third Trading Day until such shares of Common Stock are delivered to such holder and (3) such holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing) given at any time prior to delivery to such holder of the certificates for the shares of Common Stock issuable upon such conversion of shares of Series D Convertible Preferred Stock, rescind such conversion, whereupon such holder shall have the right to convert such shares of Series D Convertible Preferred Stock thereafter in accordance herewith. (7) No fractional shares of Common Stock shall be issued upon conversion of Series D Convertible Preferred Stock but, in lieu of any fraction of a share 28 of Common Stock to purchase fractional shares of Common Stock which would otherwise be issuable in respect of the aggregate number of such shares surrendered for conversion at one time by the same holder, the Corporation shall pay in cash an amount equal to the product of (i) the arithmetic average of the Market Price of one share of Common Stock on the three consecutive Trading Days ending on the Trading Day immediately preceding the Conversion Date times (ii) such fraction of a share. (8) The Conversion Amount shall be adjusted from time to time under certain circumstances, subject to the provisions of Section 10(b)(1), as follows: (i) In case the Corporation shall issue rights or warrants on a pro rata basis to all holders of the Common Stock entitling such holders to subscribe for or purchase Common Stock on the record date referred to below at a price per share less than the Current Price for such record date, then in each such case the Conversion Amount in effect on such record date shall be adjusted in accordance with the formula C\\1\\ = C x O + N ----- O + N x P ----- M where C\\1\\ = the adjusted Conversion Amount C = the current Conversion Amount O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock issuable pursuant to the exercise of such rights or warrants. P = the offering price per share of the additional shares (which amount shall include amounts received by the Corporation in respect of the issuance and the exercise of such rights or warrants). M = the Current Price per share of Common Stock on the record date. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. If any or all such rights or warrants are not so issued or expire or terminate before being exercised, the Conversion Amount then in effect shall be readjusted appropriately. (ii) In case the Corporation shall, by dividend or otherwise, distribute to all holders of its Junior Stock (as hereinafter defined) evidences of its indebtedness or assets (including securities, but excluding any warrants or subscription rights referred to in subparagraph (i) above and any dividend or distribution paid in cash out of the retained earnings of the Corporation), then in each such case the Conversion Amount then in effect shall be adjusted in accordance with the formula 29 C\\1\\ = C x M ---- M - F where C\\1\\ = the adjusted Conversion Amount C = the current Conversion Amount M = the Current Price per share of Common Stock on the record date mentioned below. F = the aggregate amount of such cash dividend and/or the fair market value on the record date of the assets or securities to be distributed divided by the number of shares of Common Stock outstanding on the record date. The Board of Directors shall determine such fair market value, which determination shall be conclusive. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution. For purposes of this subparagraph (ii), "Junior Stock" shall include any class of capital stock ranking junior as to dividends or upon liquidation to the Series D Convertible Preferred Stock. (iii) All calculations hereunder shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. (iv) If at any time as a result of an adjustment made pursuant to Section 10(b)(5), the holder of any Series D Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive securities, cash, or assets other than Common Stock, the number or amount of such securities or property so receivable upon conversion shall be subject to adjustment from time to time in a manner and on terms nearly equivalent as practicable to the provisions with respect to the Common Stock contained in subparagraphs (i) to (iii) above. (9) Except as otherwise provided above in this Section 10, no adjustment in the Conversion Amount shall be made in respect of any conversion for share distributions or dividends theretofore declared and paid or payable on the Common Stock. (10) Whenever the Conversion Amount is adjusted as herein provided, the Corporation shall send to each holder and each transfer agent, if any, for the Series D Convertible Preferred Stock and the transfer agent for the Common Stock, a statement signed by the Chairman of the Board, the President, or any Vice President of the Corporation and by its Treasurer or its Secretary or an Assistant Secretary stating the adjusted Conversion Amount determined as provided in this Section 10, and any adjustment so evidenced, given in good faith, shall be binding upon all stockholders and upon the Corporation. Whenever the Conversion Amount is adjusted, the Corporation will give notice by mail to the holders of record of Series D Convertible Preferred Stock, 30 which notice shall be made within 15 days after the effective date of such adjustment and shall state the adjustment and the Conversion Amount. Notwithstanding the foregoing notice provisions, failure by the Corporation to give such notice or a defect in such notice shall not affect the binding nature of such corporate action of the Corporation. (11) Whenever the Corporation shall propose to take any of the actions specified in Section 10(b)(5) or in subparagraphs (i) or (ii) of Section 10(b)(8) which would result in any adjustment in the Conversion Amount under this Section 10(b), the Corporation shall cause a notice to be mailed at least 20 days prior to the date on which the books of the Corporation will close or on which a record will be taken for such action, to the holders of record of the outstanding Series D Convertible Preferred Stock on the date of such notice. Such notice shall specify the action proposed to be taken by the Corporation and the date as of which holders of record of the Common Stock shall participate in any such actions or be entitled to exchange their Common Stock for securities or other property, as the case may be. Failure by the Corporation to mail the notice or any defect in such notice shall not affect the validity of the transaction. SECTION 11. REDEMPTION AT OPTION OF HOLDERS. (A) REDEMPTION RIGHT. If an Optional Redemption Event occurs, then, in addition to any other right or remedy of any holder of shares of Series D Convertible Preferred Stock, each holder of shares of Series D Convertible Preferred Stock shall have the right, at such holder's option, to require the Corporation to redeem all of such holder's shares of Series D Convertible Preferred Stock, or any portion thereof, on the date that is 10 business days after the date such holder gives the Corporation an Optional Redemption Notice with respect to such Optional Redemption Event at any time while any of such holder's shares of Series D Convertible Preferred Stock are outstanding, at a price equal to the Optional Redemption Price. (B) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS, ETC. (1) On or before the fifth business day after the occurrence of an Optional Redemption Event, the Corporation shall give to each holder of outstanding shares of Series D Convertible Preferred Stock a notice of the occurrence of such Optional Redemption Event and of the redemption right set forth herein arising as a result thereof. Such notice from the Corporation shall set forth: (i) the date by which the optional redemption right must be exercised, and (ii) a description of the procedure (set forth below) which each such holder must follow to exercise such holder's optional redemption right. No failure of the Corporation to give such notice or defect therein shall limit the right of any holder of shares of Series D Convertible Preferred Stock to exercise the optional redemption right or affect the validity of the proceedings for the redemption of such holder's shares of Series D Convertible Preferred Stock. 31 (2) To exercise its optional redemption right, each holder of outstanding shares of Series D Convertible Preferred Stock shall deliver to the Corporation on or before the thirtieth day after the notice required by Section 11(b)(1) is given to such holder (or if no such notice has been given by the Corporation to such holder, within forty days after such holder first learns of such Optional Redemption Event) an Optional Redemption Notice to the Corporation. An Optional Redemption Notice may be revoked by such holder giving such Optional Redemption Notice by giving notice of such revocation to the Corporation at any time prior to the time the Corporation pays the Optional Redemption Price to such holder. (3) If a holder of shares of Series D Convertible Preferred Stock shall have given an Optional Redemption Notice, on the date which is three business days after the date such Optional Redemption Notice is given (or such later date as such holder surrenders such holder's certificates for the shares of Series D Convertible Preferred Stock redeemed) the Corporation shall make payment in immediately available funds of the applicable Optional Redemption Price to such account as specified by such holder in writing to the Corporation at least one business day prior to the applicable redemption date. (C) OTHER. (1) In connection with a redemption pursuant to this Section 11 of less than all of the shares of Series D Convertible Preferred Stock evidenced by a particular certificate, promptly, but in no event later than three Trading Days after surrender of such certificate to the Corporation, the Corporation shall issue and deliver to such holder a replacement certificate for the shares of Series D Convertible Preferred Stock evidenced by such certificate which have not been redeemed. (2) An Optional Redemption Notice given by a holder of shares of Series D Convertible Preferred Stock shall be deemed for all purposes to be in proper form unless the Corporation notifies such holder in writing within three business days after such Optional Redemption Notice has been given (which notice shall specify all defects in such Optional Redemption Notice), and any Optional Redemption Notice containing any such defect shall nonetheless be effective on the date given if such holder promptly undertakes to correct all such defects. No such claim of error shall limit or delay performance of the Corporation's obligation to redeem all shares of Series D Convertible Preferred Stock not in dispute whether or not such holder makes such undertaking. Section 12. VOTING RIGHTS; CERTAIN RESTRICTIONS. (A) VOTING RIGHTS. Except as otherwise required by law or expressly provided herein, shares of Series D Convertible Preferred Stock shall not be entitled to vote on any matter. (B) ARTICLES OF INCORPORATION; CERTAIN STOCK. The affirmative vote or consent of the holders of a majority of the outstanding shares of the Series D Convertible Preferred Stock, voting separately as a class, will be required for (1) any amendment, alteration, or repeal, whether by merger or consolidation or otherwise, of the 32 Corporation's Articles of Incorporation if the amendment, alteration, or repeal materially and adversely affects the powers, preferences, or special rights of the Series D Convertible Preferred Stock, or (2) the creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock; provided, however, that any increase in the authorized Preferred Stock of the Corporation or the creation and issuance of any stock which is both Junior Dividend Stock and Junior Liquidation Stock shall not be deemed to affect materially and adversely such powers, preferences, or special rights and any such increase or creation and issuance may be made without any such vote by the holders of Series D Convertible Preferred Stock except as otherwise required by law. (C) REPURCHASES OF SERIES D CONVERTIBLE PREFERRED STOCK. The Corporation shall not repurchase or otherwise acquire any shares of Series D Convertible Preferred Stock (other than pursuant to Sections 7(a), 9(a), 9(b) or 11) unless the Corporation offers to repurchase or otherwise acquire simultaneously a pro rata portion of each holder's shares of Series D Convertible Preferred Stock for cash at the same price per share. (D) OTHER. So long as any shares of Series D Convertible Preferred Stock are outstanding: (1) PAYMENT OF OBLIGATIONS. The Corporation will pay and discharge, and will cause each subsidiary of the Corporation to pay and discharge, when due all their respective obligations and liabilities which are material to the Corporation and its subsidiaries taken as a whole, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings. (2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will keep, and will cause each subsidiary of the Corporation to keep, all material property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (B) The Corporation will maintain, and will cause each subsidiary of the Corporation to maintain, with financially sound and responsible insurance companies, insurance against loss or damage by fire or other casualty and such other insurance, including but not limited to, product liability insurance, in such amounts and covering such risks as is reasonably adequate for the conduct of their businesses and the value of their properties. (3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Corporation will continue, and will cause each subsidiary of the Corporation to continue, to engage in business of the same general type as conducted by the Corporation and its operating subsidiaries at the time this Statement of Resolution filed with the Secretary of State of the State of Texas, and will preserve, renew and keep in full force and effect, and will cause each subsidiary of the Corporation to preserve, renew and keep in full force and effect, their respective corporate existence and their respective material rights, privileges and franchises necessary or desirable in the normal conduct of business. 33 (4) COMPLIANCE WITH LAWS. The Corporation will comply, and will cause each subsidiary of the Corporation to comply, in all material respects with all applicable laws, ordinances, rules, regulations, decisions, orders and requirements of governmental authorities and courts (including, without limitation, environmental laws) except (i) where compliance therewith is contested in good faith by appropriate proceedings or (ii) where non-compliance therewith could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Corporation and its subsidiaries, taken as a whole. (5) INVESTMENT COMPANY ACT. The Corporation will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended, or any successor provision. (6) TRANSACTIONS WITH AFFILIATES. The Corporation will not, and will not permit any subsidiary of the Corporation, directly or indirectly, to pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement with, any Affiliate of the Corporation, except, on terms to the Corporation or such subsidiary no less favorable than terms that could be obtained by the Corporation or such subsidiary from a person that is not an Affiliate of the Corporation, as determined in good faith by the Board of Directors. (7) COMPLIANCE. The Corporation shall (a) use its commercially reasonable best efforts to obtain knowledge of any failure or default by the Corporation in the timely performance of any material obligation to the holders of the Series D Convertible Preferred Stock under the terms of this Statement of Resolution, the Exchange Agreements, the Registration Rights Agreement, the Transfer Agent Instruction or any other document or instrument executed and delivered by the Corporation in connection herewith or therewith and (b) shall notify the holders of the Series D Convertible Preferred Stock promptly, but in no event later than three Business Days after the Corporation first learns of any such failure or default. SECTION 13. OUTSTANDING SHARES. For purposes of this Statement of Resolution, all shares of Series D Convertible Preferred Stock shall be deemed outstanding except (i) from the applicable Conversion Date, each share of Series D Convertible Preferred Stock converted into Common Stock, unless the Corporation shall default in its obligation to issue and deliver shares of Common Stock upon such conversion as and when required by Section 10; (ii) from the date of registration of transfer, all shares of Series D Convertible Preferred Stock held of record by the Corporation or any subsidiary or Affiliate of the Corporation (other than any original holder of shares of Series D Convertible Preferred Stock) and (iii) from the applicable Redemption Date, Share Limitation Redemption Date, Final Redemption Date or date of 34 redemption pursuant to Section 11, all shares of Series D Convertible Preferred Stock which are redeemed or repurchased, so long as in each case the Redemption Price, the Share Limitation Redemption Price, the Final Redemption Price, the Optional Redemption Price or other repurchase price, as the case may be, of such shares of Series D Convertible Preferred Stock shall have been paid by the Corporation as and when due hereunder. SECTION 14. MISCELLANEOUS. (A) NOTICES. Any notices required or permitted to be given under the terms of this Statement of Resolution shall be in writing and shall be sent by mail or delivered personally (which shall include telephone line facsimile transmission) or by courier and shall be deemed given five days after being placed in the mail, if mailed, or upon receipt, if delivered personally or by courier (a) in the case of the Corporation, addressed to the Corporation at 1250 Wood Branch Park Drive, Houston, Texas, 77079, Attention: Chief Executive Officer (telephone line facsimile transmission number (281) 529-4650), or, in the case of any holder of shares of Series D Convertible Preferred Stock, at such holder's address or telephone line facsimile transmission number shown on the stock books maintained by the Corporation with respect to the Series D Convertible Preferred Stock or such other address as the Corporation shall have provided by notice to the holders of shares of Series D Convertible Preferred Stock in accordance with this Section or any holder of shares of Series D Convertible Preferred Stock shall have provided to the Corporation in accordance with this Section. (B) REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation of evidence reasonably satisfactory to the Corporation of the ownership of and the loss, theft, destruction or mutilation of any certificate for shares of Series D Convertible Preferred Stock and (1) in the case of loss, theft or destruction, of indemnity from the record holder of the certificate for such shares of Series D Convertible Preferred Stock reasonably satisfactory in form to the Corporation (and without the requirement to post any bond or other security) or (2) in the case of mutilation, upon surrender and cancellation of the certificate for such shares of Series D Convertible Preferred Stock, the Corporation will execute and deliver to such holder a new certificate for such shares of Series D Convertible Preferred Stock without charge to such holder. (C) OVERDUE AMOUNTS. Except as otherwise specifically provided in Section 5 with respect to dividends in arrears on the Series D Convertible Preferred Stock, whenever any amount which is due to any holder of shares of Series D Convertible Preferred Stock is not paid to such holder when due, such amount shall bear interest at the rate of 14% per annum (or such other rate as shall be the maximum rate allowable by applicable law) until paid in full. 35 IN WITNESS WHEREOF, Equalnet Communications Corp. has caused this certificate to be signed by Mitchell H. Bodian, its Chief Executive Officer, as of the 12th day of March, 1999. EQUALNET COMMUNICATIONS CORP. By: /s/ Mitchell H. Bodian ----------------------- Mitchell H. Bodian 36 Annex I NOTICE OF CONVERSION OF SERIES D CONVERTIBLE PREFERRED STOCK OF EQUALNET COMMUNICATIONS CORP. TO: American Stock Transfer & Trust Company, as Transfer Agent and Registrar 6201 Fifteenth Avenue Third Floor Brooklyn, New York 11219 Attention: Mr. Barry Rosenthal Facsimile No.: (718) 259-1144 (1) Pursuant to the terms of the Series D Convertible Preferred Stock (the "Preferred Stock") of Equalnet Communications Corp., a Texas corporation (the "Company"), the undersigned hereby elects to convert ________________ shares of the Preferred Stock together with accrued and unpaid dividends thereon in the amount of $_______________ and interest on dividends in arrears in the amount of $________________ into shares of Common Stock, $.01 par value (the "Common Stock"), of the Company, or such other securities into which the Preferred Stock is currently convertible. Capitalized terms used in this Notice and not otherwise defined herein have the respective meanings provided in the Statement of Resolution of the Board of Directors Establishing and Designating Series D Convertible Preferred Stock and Fixing the Rights and Preferences of Such Series (the "Statement of Resolution"). (2) Please issue a certificate or certificates for ________________ shares of Common Stock or other securities into which such number of shares of Preferred Stock is convertible in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: _____________________ _____________________ Name Name _____________________ _____________________ Address Address _____________________ _____________________ SS or Tax ID Number SS or Tax ID Number (3) The Conversion Date is __________________________________. Check and complete one of the following: 37 The undersigned elects to convert based on the Average Market Price of the Common Stock. The Market Price of the Common Stock on each of the five Trading Days (whether or not consecutive) during the 25 consecutive Trading Days preceding the Conversion Date having the lowest Market Prices, and the arithmetic average thereof are as follows: Date Market Price ---- ------------ _________ ____________ _________ ____________ _________ ____________ _________ ____________ _________ ____________ Arithmetic Average: $_______________ OR The undersigned elects to convert based on the Ceiling Price of the Common Stock of $__________ applicable to conversions of Preferred Stock. (4) If the shares of Common Stock issuable upon conversion of the Preferred Stock have not been registered for resale under the Securities Act of 1933, as amended (the "Act"), and this Notice is submitted prior to the date which is two years after the Issuance Date, the undersigned represents and warrants that (i) the shares of Common Stock not so registered are being acquired for the account of the undersigned for investment, and not with a view to, or for resale in connection with, the public distribution thereof other than pursuant to registration under the Act, and that the undersigned has no present intention of distributing or reselling the shares of Common Stock not so registered other than pursuant to registration under the Act and (ii) the undersigned is an "accredited investor" as defined in Regulation D under the Act. The undersigned further agrees that (A) the shares of Common Stock not so registered shall not be sold or transferred unless either (i) they first shall have been registered under the Act and applicable state securities laws or (ii) the Company first shall have been furnished with an opinion of legal counsel reasonably satisfactory to the Company to the effect that such sale or transfer is exempt from the registration requirements of the Act and (B) the Company may place a legend on the certificate(s) for the shares of Common 38 Stock not so registered to that effect and place a stop-transfer restriction in its records relating to the shares of Common Stock not so registered. Date _________________________ ____________________________________ Signature of Holder (Must be signed exactly as name appears on the Preferred Stock Certificate.) 39 EX-5.1 4 OPINION OF WEIL, GOTSHAL & MANGES LLP EXHIBIT 5.1 March 30, 1999 Equalnet Communications Corp. 1250 Wood Branch Park Drive Houston, Texas 77079 Gentlemen: We have acted as counsel to Equalnet Communications Corp., a Texas corporation (the "Company"), in connection with the preparation and filing by the Company of a Registration Statement on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as amended, relating to the proposed offering of up to 23,723,963 shares (the "Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), by certain shareholders of the Company and by certain entities that have rights to acquire shares of Common Stock from the Company. The Shares include (x) (1) 1,000,000 outstanding shares of Common Stock held by LIMIT LLC (d/b/a/ ACMI) ("ACMI") and 1,500,000 shares of Common Stock issuable by the Company pursuant to the terms of an Amended and Restated Asset Purchase Agreement dated effective as of November 6, 1998 (the "Acquisition Agreement") among ACMI Acquisition Corp., the Company, ACMI and the members of ACMI, which Acquisition Agreement provides for the acquisition of the business and assets of ACMI by a wholly owned subsidiary of the Company in exchange for shares of Common Stock, and (2) 300,000, 10,000, 100,000, 226,120, 2,000,000 and 30,000 outstanding shares of Common Stock held by James T. Harris, Bernice Arceneaux, Michael H. Hlinak, Dean H. Fisher, Willis Group LLC and Ronald J. Salazar, respectively, and (y) shares of Common Stock that are issuable by the Company upon (1) the conversion of (a) 2,000 shares of Series A Convertible Preferred Stock of the Company (the "Series A Preferred"), (b) 3,000 shares of Series B Senior Convertible Preferred Stock of the Company (the "Series B Preferred"), (c) 206,707 shares of Series C Convertible Preferred Stock of the Company, (d) $3,081,032 aggregate principal amount of 6% Senior Secured Convertible Notes of the Company (the "Notes"), (e) 3,850 shares of Series D Convertible Preferred Stock of the Company (the "Series D Preferred"), and (f) additional 6% Senior Secured Convertible Notes of the Company issuable as payment-in-kind interest on the Notes (the "Interest Notes") and additional shares of Series D Convertible Preferred Stock of the Company issuable as payment-in-kind dividends on the Series D Preferred (the "Dividend Shares"), and (2) the exercise of certain warrants of the Company (the "Warrants") granting the holders thereof rights to purchase, in the aggregate, 1,260,232 shares of Common Stock. In so acting, we have examined originals or copies, certified or otherwise identified to our satisfaction, of the articles of incorporation of the Company, the resolutions adopted by the Board of Directors of the Company authorizing the issuance of the Shares, and such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. As to all questions of fact material to these opinions that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. The Company is a corporation validly existing and in good standing under the laws of the State of Texas. 2. The Shares that are issued and outstanding on the date hereof (the "Outstanding Shares") are duly authorized, validly issued, fully paid and nonassessable. 3. The Shares other than the Outstanding Shares and the Shares issuable upon conversion of Interest Notes or Dividend Shares have been duly authorized and, when issued, delivered and paid for (a) pursuant to and in accordance with the terms of the Acquisition Agreement or (b) upon the conversion or exercise of, and in accordance with the terms of, the Notes, the Series A, Series B, Series C and Series D Preferred and the Warrants, and assuming that, at the time of issuance of any shares of Series D Preferred issued as payment-in-kind dividends upon other shares of Series D Preferred, an amount of surplus not less than the aggregate par value of such shares was transferred to the Company's stated capital, such Shares will be validly issued, fully paid and nonassessable. 4. Any Shares issued upon the conversion of Interest Notes or Dividend Shares, when duly authorized pursuant to adoption by the Board of Directors of the Company of one or more resolutions in form and content as required by applicable law, and when issued, delivered and paid for (a) in accordance with the terms of such resolution(s) and (b) upon the conversion of, and in accordance with the terms of, the Interest Notes or the Dividend Shares, and assuming that (i) in the case of Dividend Shares, at the time of issuance of any Dividend Shares an amount of surplus not less than the aggregate par value of such Dividend Shares was transferred to the Company's stated capital, and (ii) the Company shall have sufficient authorized but unissued shares of Common Stock to so issue such Shares, such Shares will be validly issued, fully paid and nonassessable. 2 The opinions expressed herein are limited to the corporate laws of the State of Texas, and we express no opinion as to the effect on the matters covered by this letter of the laws of any other jurisdiction. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our Firm under the caption "Legal Matters" in the prospectus contained therein. Very truly yours, /s/ Weil, Gotshal & Manges LLP 3 EX-23.2 5 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference of our firm under the caption "Experts" in the registration statement on Form S-3 and related prospectus of Equalnet Communications Corp. for the registration of 23,693,963 shares of its common stock and to the incorporation by reference therein of our report dated October 8, 1998, with respect to the consolidated financial statements and schedule of Equalnet Communications Corp. included in its Annual Report on Form 10-K for the year ended June 30, 1998, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Ernst & Young LLP Houston, Texas March 31, 1999 -----END PRIVACY-ENHANCED MESSAGE-----