-----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, K5kVekqr9PTisC5fjPIR3okUSdmxWRAMwnNVRRIJ2T7RM/15JoZWlyMJAEnWjoZq o4GuscElayZ6S98s+d6w7Q== 0000912057-00-025622.txt : 20000522 0000912057-00-025622.hdr.sgml : 20000522 ACCESSION NUMBER: 0000912057-00-025622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECEPT BUSINESS SERVICES INC CENTRAL INDEX KEY: 0001051285 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 752487353 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23735 FILM NUMBER: 640080 BUSINESS ADDRESS: STREET 1: 1909 WOODALL ROGERS FREEWAY STREET 2: STE 500 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2147546000 MAIL ADDRESS: STREET 1: PO BOX 219008 CITY: DALLAS STATE: TX ZIP: 75201 10-Q 1 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2000 Commission file number: 000-23735 --------- PRECEPT BUSINESS SERVICES, INC. (Exact name of registrant as specified in its charter) Texas 75-2487353 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1909 Woodall Rodgers Freeway, Suite 500 75201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 754-6600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of May 12, 2000, there were 10,191,925 outstanding shares of Class A Common Stock and 592,142 outstanding shares of Class B Common Stock. ================================================================================
PRECEPT BUSINESS SERVICES, INC. INDEX TO FORM 10-Q DESCRIPTION PAGE - ----------- ---- PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Balance Sheets as of March 31, 2000 and June 30, 1999.................................. 3 Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended March 31, 2000 and 1999........................................... 4 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended March 31, 2000 and 1999.................. 5 Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine-month periods ended March 31, 2000 and 1999..................................... 6 Notes to Condensed Consolidated Financial Statements.................. 7 Item 2 Management's discussion and analysis of financial condition and results of operations............................... 14 Item 3 Quantitative and Qualitative Disclosure for Market Risk............... 22 PART II OTHER INFORMATION Item 1 Legal Proceedings..................................................... 22 Item 2 Changes in Securities and Use of Proceeds............................. 22 Item 3 Defaults Upon Senior Securities....................................... 23 Item 4 Submission of Matters to a Vote of Security Holders................... 23 Item 6 Exhibits and Reports on Form 8-K...................................... 23 Signature............................................................. 23
2 PART I - FINANCIAL INFORMATION - ITEM 1 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share amounts)
March 31, June 30 2000 1999 ------------ ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents .............................................. $ -- $ -- Trade accounts receivable, net ......................................... 19,999 17,071 Accounts receivable from affiliates .................................... 929 1,054 Inventory .............................................................. 7,595 4,782 Other current assets ................................................... 2,705 1,335 Deferred income taxes and income taxes receivable ...................... 4,012 1,734 Net assets of discontinued operations .................................. 20,699 30,546 ------------ ------------ Total current assets ............................................... 55,939 56,522 Property and equipment, net ............................................... 2,781 2,518 Intangible assets, net .................................................... 19,734 16,854 Deferred income taxes ..................................................... 1,010 1,010 Other assets .............................................................. 20 613 ------------ ------------ Total assets ....................................................... $ 79,484 $ 77,517 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable ................................................. $ 14,042 $ 7,985 Accrued expenses ....................................................... 2,219 3,007 Accrued compensation ................................................... 2,286 1,705 Current portion of long-term debt ...................................... 1,383 1,364 ------------ ------------ Total current liabilities .......................................... 19,930 14,061 Long-term debt ............................................................ 43,726 34,334 Mandatory redeemable convertible preferred stock .......................... 2,592 194 Commitments and contingencies Shareholders' equity: Preferred stock, $1.00 par value; 3,000 authorized shares, none issued ........................................................ -- -- Class A Common Stock, $0.01 par value; 100,000 shares authorized and 9,748 and 8,877 shares issued in 2000 and 1999, respectively ..................................... 97 89 Class B Common Stock, $0.01 par value; 10,500 shares authorized and 592 shares issued .............................................. 6 6 Additional paid-in capital ............................................. 39,757 39,717 Retained earnings (accumulated deficit) ................................ (25,413) (9,673) ------------ ------------ 14,447 30,139 Class A treasury stock - 149 shares .................................... (1,211) (1,211) ------------ ------------ Total shareholders' equity ......................................... 13,236 28,928 ------------ ------------ Total liabilities and shareholders' equity ..................... $ 79,484 $ 77,517 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts)
Three months Nine months Ended Ended March 31, March 31, 2000 1999 2000 1999 --------- --------- --------- --------- (Unaudited) CONTINUING OPERATIONS Revenue - Business Products ................. $ 36,728 $ 35,096 $ 106,815 $ 103,874 Costs and expenses: Cost of goods sold ....................... 24,844 23,424 71,701 70,010 Sales commissions ........................ 5,195 4,881 14,712 14,005 Selling, general and administrative ...... 5,919 6,051 15,839 16,551 Goodwill write-down and other non-recurring charges .......... - 6,727 - 6,727 Depreciation and amortization ............ 599 363 1,612 1,019 --------- --------- --------- --------- 36,557 41,446 103,864 108,312 --------- --------- --------- --------- Operating income (loss) ..................... 171 (6,350) 2,951 (4,438) Interest expense ............................ 552 201 2,322 1,148 --------- --------- --------- --------- Income (loss) before income taxes ........... (381) (6,551) 629 (5,586) Income tax provision (benefit) .............. (171) (3,038) 284 (2,526) --------- --------- --------- --------- Net income (loss) from continuing operations (210) (3,513) 345 (3,060) DISCONTINUED OPERATIONS Net income (loss) from discontinued operations, net of income tax provision (benefit) ................................ (588) (6,886) 546 (6,000) Net loss from sale of discontinued operations (16,500) - (16,500) - --------- --------- --------- --------- Net loss from discontinued operations ....... (17,088) (6,886) (15,954) (6,000) --------- --------- --------- --------- Net income (loss) ........................... $ (17,298) $ (10,399) $ (15,609) $ (9,060) ========= ========= ========= ========= Basic net income (loss) per share: Continuing operations .................... $ (0.02) $ (0.41) $ 0.04 $ (0.37) Discontinued operations .................. (1.68) (0.81) (1.62) (0.73) --------- --------- --------- --------- Net income (loss) per share .............. $ (1.70) $ (1.22) $ (1.58) $ (1.10) ========= ========= ========= ========= Weighted average shares outstanding ...... 10,153 8,512 9,859 8,208 Diluted net income (loss) per share: Continuing operations .................... $ (0.02) $ (0.41) $ 0.04 $ (0.37) Discontinued operations .................. (1.68) (0.81) (1.55) (0.73) --------- --------- --------- --------- Net income (loss) per share .............. $ (1.70) $ (1.22) $ (1.51) $ (1.10) ========= ========= ========= ========= Weighted average shares outstanding ...... 10,153 8,512 10,325 8,208
See accompanying notes to condensed consolidated financial statements. 4 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Nine Months Ended March 31, --------------------------- 2000 1999 -------- -------- (Unaudited) Continuing operations: Cash flows from operating activities: ............................................ $ 5,433 $ 9,073 Cash flows provided by (used in) investing activities: Acquisitions of businesses, including earnout payments ....................... (5,798) (8,851) Acquisition of property and equipment, net ................................... (106) (325) Sale of assets of discontinued operations .................................... - 1,115 -------- -------- Net cash used in investing activities .................................... (5,904) (8,061) -------- -------- Cash flows provided by (used in) financing activities: Payments on long-term debt and other long-term liabilities, net .............. (1,149) (1,034) Preferred stock redemption and dividend payments ............................. (809) - Borrowings (repayments) on revolving line of credit, net ..................... 9,566 8,535 -------- -------- Net cash provided by financing activities ................................ 7,608 7,501 -------- -------- Net change in cash and cash equivalents - continuing operations .................. 7,137 8,513 Discontinued operations: Cash flows used in operating activities .......................................... (145) (2,156) Cash flows used in investing activities - primarily acquisitions of businesses ... (4,982) (7,181) Cash flows used financing activities - net repayments of debt .................... (2,010) (957) -------- -------- Net change in cash and cash equivalents - discontinued operations ................ (7,137) (10,294) -------- -------- Net change in cash and cash equivalents ............................................. - (1,781) Cash and cash equivalents at beginning of period .................................... - 2,291 -------- -------- Cash and cash equivalents at end of period .......................................... $ - $ 510 ======== ======== Supplemental disclosure: Cash paid for: Interest ..................................................................... $ 3,439 $ 1,420 Income taxes ................................................................. $ 651 $ 213
See accompanying notes to condensed consolidated financial statements 5 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands)
RETAINED CLASS A CLASS B ADDITIONAL EARNINGS TOTAL COMMON COMMON PAID-IN (ACCUMULATED SHAREHOLDERS' STOCK STOCK CAPITAL DEFICIT) OTHER EQUITY --------- --------- ------------ ---------------- ---------- ---------------- (Unaudited) Balance, June 30, 1998 ..... $ 69 $ 6 $ 23,515 $ (1,396) $ (192) $ 22,002 Issuance of shares to acquire businesses ...... 11 - 12,533 - - 12,544 Exercise of stock options .. - - 20 - (20) - Repurchase of Class A common shares .............. - (999) (999) Conversion of seller notes . - - 383 - 383 Net loss ................... - - - (9,060) - (9,060) --------- --------- ------------ ---------------- ---------- ---------------- Balance, March 31, 1999 .... $ 80 $ 6 $ 36,451 $ (10,456) $ (1,211) $ 24,870 ========= ========= ============ ================ ========== ================ Balance, June 30, 1999 ..... $ 89 $ 6 $ 39,717 $ (9,673) $ (1,211) $ 28,928 Issuance of shares to acquire businesses and conversion of seller note payable ............ 8 - 40 - - 48 Dividends on preferred stock ................... - - - (131) - (131) Net loss ................... - - - (15,609) - (15,609) --------- --------- ------------ ---------------- ---------- ---------------- Balance, March 31, 2000 .... $ 97 $ 6 $ 39,757 $ (25,413) $ (1,211) $ 13,236 ========= ========= ============ ================ ========== ================
See accompanying notes to condensed consolidated financial statements. 6 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 1. BUSINESS Precept Business Services, Inc. and its subsidiaries ("Precept" or the "Company") primarily engage in business products distribution management and services. The Business Products Division arranges for the manufacture, storage, and distribution of business forms, computer supplies, advertising information and other related business products for medium- to large-sized corporate customers. Precept operates from offices throughout the United States. DISCONTINUED OPERATIONS - TRANSPORTATION SERVICES DIVISION The Transportation Services Division provides chauffeured corporate transportation, livery and courier services from locations in the tri-state New York metropolitan area and in the states of Texas, Michigan, Kentucky and Ohio. During the quarter ended March 31, 2000, our Board of Directors approved a plan to sell the Transportation Division, and we signed a revised letter of intent to sell substantially all the assets and liabilities of the Transportation Division to a company funded by a group of investors, led by Holding Capital Group and certain members of the Transportation Division's executive management. The sale of the Transportation Division, which is subject to a number of conditions including the execution of a definitive purchase agreement, is expected to be completed by the end of September 2000. The revised letter of intent contemplates the Transportation Division is to be sold for five times the annual pro forma free cash flow of the division and for an earnout based on future earnings of the new company. Free cash flow would be defined as the earnings before interest, income taxes, depreciation and amortization less the annual debt service for the division. Under the foregoing, the purchase price for the Transportation Division would be approximately $20.0 million. In addition, the new company would assume the debt of the Transportation Division. PUBLICLY TRADED COMPANY Our Class A common stock trades under the Nasdaq symbol "PBSI". CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements comprise the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. PRO FORMA INFORMATION The pro forma information included in these financial statements and notes is unaudited. FISCAL YEAR END AND QUARTERLY REPORTING PERIODS We maintain a June 30 fiscal year end and report our quarterly operating results for the periods that end on September 30, December 31, and March 31, respectively. For purposes of the Company's current report on Form 10-Q, references to 2000 and 1999 are meant to be the three-month and nine-month reporting periods ended March 31, 2000 and 1999, respectively. References to fiscal years 2000 and 1999 are meant to be for the fiscal year ending June 30, 2000 and the fiscal year ended June 30, 1999, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of the consolidated financial statements are consistent with the accounting policies described in the Company's notes to consolidated financial statements included in the Company's Annual Report to Shareholders and Form 10-K for the fiscal year ended June 30, 1999. 7 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 INTERIM FINANCIAL INFORMATION The accompanying interim financial statements and information are unaudited. We have omitted or condensed certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, although we believe that the disclosures included herein are adequate to make the information presented not misleading. You should read these interim financial statements in conjunction with the Company's consolidated financial statements for the year ended June 30, 1999. We have included in the interim financial statements all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, its results of operations and its cash flows. We do not believe that the operating results for any particular interim period are necessarily indicative of the operating results for a full fiscal year. We derived the financial information for the year ended June 30, 1999 from our audited financial statements for the same year that are included in the Company's Annual Report to Shareholders and Form 10-K for fiscal year 1999. DISCONTINUED OPERATIONS We reported the historical operating results for the Transportation Division as "Discontinued operations" on the accompanying condensed consolidated statements of operations for all periods presented. We have aggregated and separately identified the Transportation Division's related assets and liabilities on the condensed consolidated balance sheets as "Net assets of discontinued operations." We also separated the cash flow from discontinued operations on the condensed consolidated statements of cash flows. We have recognized the net income (loss) from these operations during the three and nine-month periods ended March 31, 2000 in the statement of operations. Based on the current letter of intent between the Company and Holding Capital Group, Inc., we have recorded an estimated loss on the sale of the Transportation Division. The loss on the sale of the discontinued operations does not include the expected future net income or loss expected to be generated by the Transportation Division. Since we are endeavoring to sell the Transportation Division within the next six months, we do not expect that the amount of such net income would have a material effect on the size of the net loss from discontinued operations. As a result, the expected future net income of the Transportation Division is not included in the net loss from discontinued operations. We did not include a provision for tax benefit in the loss on the sale of the discontinued operations. We expect that the majority of the loss from the sale of the Transportation Division will not be able to be deducted for tax purposes. We estimate that the tax basis of the Transportation Division will be close to the amount of the taxable sales price for the division. If there is a taxable loss, the future tax benefit of such loss will be evaluated at the time of the completion of the sale. If there is a taxable gain, we expect that the Company's tax net operating loss carryforward amounts will be used to offset the taxable gain. We have included in the net income (loss) from the Transportation Division an allocation of our interest expense on the outstanding debt under our Credit Agreement. We based the allocation of this interest expense on the operating results of the Transportation Division, on its capital expenditures, on its contribution towards corporate expenses and on its changes in working capital. We did not allocate any corporate selling, general and administrative expenses to the net income (loss) from the Transportation Division. 3. ACQUISITIONS During the first quarter of fiscal year 2000 we acquired two business products distribution companies with combined annual revenues of $10.2 million. We accounted for these acquisitions using the purchase method of accounting. For each of these purchase acquisitions, we allocated the aggregate 8 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 acquisition cost to the net assets acquired based on the fair market value of such net assets. We have included the operating results of such companies in our historical results of operations for all periods following the acquisition. The aggregate acquisition cost for such purchased businesses amounted to $5.0 million and consisted of $1.0 million in cash, funded by the Company's revolving line of credit, $3.0 million in redemption value of mandatory redeemable convertible preferred stock and $1.0 million in assumed debt and deal costs. During the first quarter of fiscal year 1999, we acquired four business products distribution companies with combined annual revenues of $34.3 million. We accounted for these acquisitions using the purchase method of accounting. For each of these purchase acquisitions, we allocated the aggregate acquisition cost to the net assets acquired based on the fair market value of such net assets. We included the operating results of such companies in our historical results of operations for all periods following the acquisitions. The aggregate acquisition cost for such purchased businesses amounted to $18.6 million and consisted of $5.7 million in cash, funded by working capital and the Company's revolving line of credit, 0.7 million shares of Class A common stock with an aggregate fair market value of $9.6 million, and $3.3 million in seller notes, assumed debt and deal costs.
Nine months ended March 31, ------------------------ 2000 1999 ---------- ---------- Purchase consideration: Cash paid..................................................... $ 1,000 $ 5,736 Amounts due sellers of acquired businesses.................... - 1,380 Common stock and mandatory preferred stock issued............. 3,000 9,604 Liabilities assumed........................................... 900 1,777 Other......................................................... 75 107 ---------- ---------- Fair value of net assets acquired.................................. $ 4,975 $ 18,604 ========== ==========
Nine months ended March 31, ------------------------ 2000 1999 ---------- ---------- Allocation of fair value of net assets acquired: Goodwill and intangible assets................................ $ 3,474 $ 13,323 Accounts receivable........................................... 1,237 3,704 Inventory and other, net...................................... 264 1,577 ---------- ---------- $ 4,975 $ 18,604 ========== ==========
The following table presents the pro forma results of continuing operations as if all the acquisitions described above had occurred at the beginning of each period presented. Pro forma adjustments reflect additional amortization expense since the excess of acquisition cost over the fair value of the assets acquired is amortized for a full period. Pro forma adjustments also reflect additional interest expense due to the related debt being outstanding for a full period. The income tax effect of the pro forma adjustments has also been reflected. These pro forma results are presented for comparative purposes only and do not purport to be indicative of what would have occurred had the businesses actually been acquired as of those dates or of results which may occur in the future.
Nine months ended Three months ended March 31, March 31, --------------------------- -------------------------- 1999 2000 1999 2000 ----------- ----------- ---------- ---------- Total revenues ....................... $ 111,427 $ 121,196 $ 36,728 $ 38,984 Income (loss) before income taxes .... $ 1,461 $ 2,009 $ (381) $ 311 Net income (loss)..................... $ 760 $ 1,045 $ (210) $ 162 Diluted net income (loss) per share... $ 0.07 $ 0.12 $ (0.02) $ 0.02
9 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 The following table presents the same information as the table above except that the information below includes the goodwill write-down and other non recurring charges recorded during the quarter ended March 31, 1999.
Nine months ended Three months ended March 31, March 31, ---------------------------- ------------------------- 2000 1999 2000 1999 ---------- ---------- --------- --------- Total revenues $ 111,427 $ 121,196 $ 36,728 $ 38,984 Income (loss) before income taxes .... $ 1,461 $ (4,859) $ (381) $ (6,537) Net income (loss)..................... $ 760 $ (5,823) $ (210) $ (6,687) Diluted net income (loss) per share... $ 0.07 $ (0.69) $ (0.02) $ (0.77)
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
March 31, June 30, Estimated Lives 2000 1999 --------------- ----------- ----------- Land $ - $ - Buildings 15 to 40 years 106 733 Leasehold improvements 1 to 10 years 1,479 1,296 Equipment and vehicles 3 to 5 years 5,484 4,416 Capitalized leasehold rights 3 to 5 years 440 440 ----------- ----------- 7,509 6,885 Accumulated depreciation and amortization.................... 4,728 4,367 ----------- ----------- $ 2,781 $ 2,518 =========== ===========
5. INTANGIBLE ASSETS Intangible assets consist of the following:
March 31, June 30, 2000 1999 ----------- ----------- Goodwill..................................................... $ 24,215 $ 20,378 Other........................................................ 570 570 ----------- ----------- 24,785 20,948 Accumulated amortization..................................... 5,051 4,094 ----------- ----------- $ 19,734 $ 16,854 =========== ===========
6. LONG-TERM DEBT Long-term debt consists of the following:
March 31, June 30, 2000 1999 ----------- ----------- Revolving line of credit..................................... $ 40,666 $ 31,100 Convertible notes payable to sellers......................... 1,123 3,285 Mortgage and equipment notes payable......................... 2,652 292 Capitalized lease obligations................................ 194 777 Other........................................................ 474 244 ----------- ----------- 45,109 36,698 Less current portion due within one year..................... 1,383 1,364 ----------- ----------- Long-term debt............................................... $ 43,726 $ 34,334 =========== ===========
In April 2000, our Credit Agreement with our banking group was amended to increase the amount available for borrowing to $42.3 million. To satisfy a lender condition to this amendment, the Company's Chairman and controlling shareholder guaranteed $2.3 million of bank debt, and we agreed to use our best 10 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 efforts to sell our Transportation Division or our Business Products Division with the proceeds to be applied to our bank debt. If we sell the Transportation Division for more than $17.5 million by October 24, 2000, the guaranty will be removed. If the Transportation Division is not sold by October 24, 2000, the banking group has the option to request the Company's Chairman to provide common stock of Affiliated Computer Services, Inc. as collateral for the guaranty. If such a request is made, then the Chairman has the right to request Precept to provide the requested collateral. Since all of Precept's assets are pledged as collateral to the banking group and other lenders, we would not be able to provide the collateral. In consideration of the personal guaranty provided by our Chairman, Precept has agreed to reimburse the Chairman for any amounts he may have to pay under the guaranty and, if he is required by the bank to collateralize the guaranty, Precept has agreed to deliver to him as a guaranty fee securities equal to what he would have received if the guaranteed amount had been invested in preferred stock and warrants on the same terms as the recent investment by the Shaar Fund described elsewhere in this report or, at his election, consideration of reasonably equivalent value. As part of the amendment to the Credit Agreement, the banking group changed the total debt to pro forma EBTIDA (earnings before interest, income taxes, depreciation and amortization) ratio to 3.53 to 1 for the measurement period ended December 31, 1999. The mandatory redeemable convertible preferred stock that was issued by the Company in April, July and September of calendar year 1999 will be included in the total debt amount for the ratio. As of March 31, 2000, we did not comply with three of the financial covenants in the Credit Agreement: specifically, the total debt to pro forma EBITDA, the historical EBITDA to interest and the net worth financial covenants. Our banking group has indicated in writing that they are willing to amend or waive the applicable covenants as of March 31, 2000. As a result of such written agreement, we have continued to present the outstanding debt under the Credit Agreement as long-term debt. 7. PREFERRED STOCK In April 2000, we sold $2.0 million in convertible preferred stock to The Shaar Fund Ltd. and used the net proceeds to pay vendors. The preferred stock is convertible into Class A Common Stock at a rate of $2.75 or 85% of the market price of the Class A Common Stock, defined as the average of the five days closing price of the stock prior to the conversion. No conversion is permitted for the first five months. In addition, we may redeem the preferred stock at 120% of the face value during the first five months. We will pay a quarterly dividend of 8% of the face value in cash or Class A Common Stock. As part of the transaction, we issued warrants to purchase 125,000 shares of Class A Common Stock at an exercise price of $2.50 per share. We also provided registration rights to The Shaar Fund Ltd. for the shares of Class A Common Stock which may be issued upon conversion and for the dividends to be paid. In consideration of the personal guaranty provided by our Chairman, we have agreed to reimburse the Chairman for any amounts he may have to pay under the guaranty, and if he is required by the bank to collateralize the guaranty, Precept has agreed to deliver to him as a guaranty fee securities equal to what he would have received if the guaranteed amount had been invested in preferred stock and warrants on the same terms as the investment by the Shaar Fund described above or, at his election, consideration of reasonably equivalent value. 8. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK As part of its acquisition of two businesses during the first quarter of fiscal year 2000 and one acquisition during the third quarter of fiscal year 1999, the Company issued 3,200 shares of mandatory redeemable preferred stock in three series with an aggregate initial redemption value of $3,260,000. The preferred stock pays dividends at annual rates ranging from 6.0% to 9.0% on a monthly and quarterly basis. The preferred stock includes a mandatory redemption in the following annual amounts: $0.1 million for the remainder of fiscal year 2000; $0.3 million in 2001; $0.3 million in 2002; $1.8 million in 2003; and $0.1 11 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 million in 2004. The preferred stock is generally convertible at the option of the holder at a range of $8.00 to $30.00 for one share of Class A Common Stock. Dividends on the mandatory redeemable preferred stock of $0.1 million for fiscal year 2000 are not reflected on the face of the condensed consolidated statement of operations as the amount was not considered significant to the net loss for the three- and nine-month periods ended March 31, 2000. 9. DISCONTINUED OPERATIONS The net assets for the discontinued operations of the Transportation Division as of March 31, 2000 and June 30, 1999 are shown below:
March 31, June 30, 2000 1999 ----------- ----------- Trade accounts receivable, net............................... $ 2,674 $ 2,720 Other current assets......................................... 1,686 1,260 ----------- ----------- Total current assets......................................... 4,360 3,980 Property and equipment, net.................................. 7,945 8,491 Intangible and other assets, primarily goodwill, net......... 31,054 26,801 ----------- ----------- Total assets................................................. 43,359 39,272 Accounts payable, accrued expenses and other current liabilities................................ (1,261) (3,562) Current portion of long-term debt............................ (2,521) (2,554) ----------- ----------- Total current liabilities.................................... (3,782) (6,116) Long-term debt............................................... (2,378) (2,610) Loss on sale of discontinued operations...................... (16,500) - ----------- ----------- Net assets of discontinued operations........................ $ 20,699 $ 30,546 =========== ===========
The condensed results of operations for the discontinued operations of the Transportation Division are shown below for the three-month and the nine month periods ended March 31, 2000 and 1999.
Three months ended Nine months ended March 31, March 31, ---------------------------- --------------------------- 2000 1999 2000 1999 ---------- ---------- --------- --------- Revenue............................. $ 7,502 $ 7,115 $ 23,609 $ 17,992 Cost of goods sold.................. 4,997 4,059 14,682 10,474 Other operating expenses............ 1,821 8,639 4,335 10,374 Depreciation and amortization....... 811 570 2,377 1,441 Interest expense.................... 932 463 1,222 709 Income (loss) before income tax provision (benefit)........ (1,059) (6,616) 993 (5,006) Net income (loss)................... (588) (6,886) 546 (6,000)
The results of operations for the discontinued operations include an allocation of interest expense on the Company's debt outstanding under the Credit Agreement. The allocation is based on the amount of debt used by the Transportation Division for acquisitions, capital expenditures and working capital, offset by the cash flow generated from its operations. During the second quarter of fiscal year 1999, we acquired one corporate transportation services company located in North Arlington, New Jersey, which provides executive limousine and town car service to the tri-state New York metropolitan area and had annual revenues of $14.0 million. We accounted for this acquisition using the purchase method of accounting. We allocated the aggregate acquisition cost to the net assets acquired based on the fair market value of such net assets. We have included the operating results of this company in our historical results of operations for all periods following the acquisition. The 12 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 aggregate acquisition cost for this purchased business amounted to $9.0 million and consisted of $3.4 million in cash, funded by working capital and the Company's revolving line of credit, 0.3 million shares of Class A common stock with an aggregate fair market value of $2.9 million, and $4.4 million in assumed debt and transaction costs. 10. WEIGHTED AVERAGE SHARES OUTSTANDING The following table provides information to reconcile the basic and diluted weighted average shares outstanding for the three-month and nine-month periods ended March 31, 2000 and 1999.
Three months ended Nine months ended March 31, March 31, ---------------------------- --------------------------- 2000 1999 2000 1999 ---------- ---------- --------- --------- Basic weighted average shares outstanding: Common shares, Class A and Class B, outstanding at the beginning of the period.............. 9,944 8,459 9,320 7,394 Common shares repurchased......................... - (79) - (79) Common shares issued upon exercise of options..... - 45 - 45 Common shares issued upon conversion of note receivable.................................. 15 47 15 47 Common shares used to acquire businesses during the period.................................. 233 251 857 1,066 ---------- ---------- --------- --------- Common shares, Class A and Class B, outstanding at the end of the period.................... 10,192 8,723 10,192 8,473 ========== ========== ========= ========= Weighted average number of common shares outstanding during the period based on the number of days outstanding (A).............. 10,153 8,512 9,859 8,208 ========== ========== ========= ========= Diluted weighted average shares outstanding: Common stock options: Number of outstanding options.................. 1,331 Number of options which would be exercised based on average market value of common stock during the period..................... 853 Proceeds from exercise of options.............. $ 3,119 Common shares repurchased with proceeds........ 803 Common shares issued from exercise of options, net (B)..................................... 50 ========= Warrants to purchase common stock: Number of warrants outstanding................. 43 Number of warrants which would be exercised based on average market value of common stock during the period..................... - Net proceeds from exercise of warrants......... $ - Common shares repurchased with proceeds........ - Common shares issued from exercise of warrants (C)......................................... - ========= Convertible notes payable: Face value of notes which would be converted based on average market value of common stock during the period..................... $ 1,614 Interest expense savings, net of tax effect, on notes which would be converted........... $ 85 Common shares issued upon conversion (D)....... 416 ========= Diluted weighted average common shares outstanding (A + B + C + D)................ 10,153 8,512 10,325 8,208 ========== ========== ========= =========
13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS. OVERVIEW Precept is an independent distributor of custom and stock business products and is a provider of document management services ("Business Products Division") to businesses in a variety of industries throughout the United States. We were one of the first distribution companies to begin nationwide consolidation of operating companies in the Business Products industry. We also operate corporate transportation services ("Transportation Services Division") companies in the United States. As discussed more fully below under "Discontinued Operations" we have signed a letter of intent to sell the operating assets and liabilities of the Transportation Services Division. Unless otherwise indicated, discussion of the operating results of the Company relates only to continuing operations. STRATEGIC ALTERNATIVES REVIEW In July 1999, the Company announced its engagement of Southwest Securities as financial advisor to the Company as it evaluated its strategic alternatives. Southwest Securities and Precept have worked together on the sale of the Transportation Division discussed elsewhere in this Report. Currently, the Company has directed Southwest Securities to continue to investigate future sources of equity and debt financing, as well as acquisition and disposition transactions. ACQUISITIONS Our results of operations and the comparability of our results of operations from period to period have been affected significantly by businesses acquired in each period. From 1991 through the date of this report, we completed 21 acquisitions of Business Products distribution companies. In the three-month period ended September 30, 1999, we completed the acquisition of two Business Products companies located in North Carolina with aggregate annual revenues of $10.2 million. We paid for such acquisitions with $1.0 million in cash, financed by the Company's working capital and its revolving line of credit, $3.0 million in mandatory redeemable convertible preferred stock and $1.0 million in assumed debt and deal costs. In the three-month period ended September 30, 1998, we completed the acquisition of four Business Products companies located in Salt Lake City, Utah; Houston, Texas; Bangor, Maine; and Florence, South Carolina with combined annual revenues of $34.3 million. We paid for such acquisitions with an aggregate of $5.7 million in cash, financed by the Company's working capital and revolving line of credit, $1.4 million in seller notes, 0.7 million shares of Class A common stock with a fair market value of $9.6 million and $1.9 million in assumed debt and deal costs. PURCHASE ACCOUNTING EFFECTS We have accounted for our acquisitions using the purchase accounting method. We have included the historical results of operations for our acquisitions in our results of operations from the dates of acquisition. The acquisitions have affected, and will prospectively affect, the Company's results of operations in certain significant respects. Our revenues and operating expenses have been directly affected 14 by the timing of the acquisitions. We have allocated the aggregate acquisition costs, including assumption of debt, to the net assets acquired based on the fair market value of such net assets. The allocation of the purchase price results in an increase in the historical book value of certain assets, including property and equipment, and will generally result in the allocation of a portion of the purchase price to goodwill, which results in incremental annual and quarterly amortization expense. RESULTS OF CONTINUING OPERATIONS The following table sets forth various items from continuing operations as a percentage of revenues for the three-month and nine-month periods ended March 31, 2000 and 1999.
Three months ended Nine months ended March 31, March 31, 2000 1999 2000 1999 ------ ------ ------ ------ Revenue: 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Costs and operating expenses: Cost of goods sold........................................... 67.6% 66.7% 67.1% 67.4% Sales commissions............................................ 14.1% 13.9% 13.8% 13.5% Selling, general and administrative.......................... 16.2% 17.2% 14.8% 15.9% Goodwill write-down and other non-recurring charges.......... 0.0% 19.3% 0.0% 6.5% Depreciation and amortization................................ 1.6% 1.0% 1.5% 1.0% ------ ------ ------ ------ 99.5% 118.1% 97.2% 104.3% ------ ------ ------ ------ Operating income (loss)........................................... 0.5% (18.1)% 2.8% (4.3)% Interest and other expense........................................ 1.5% 0.6% 2.2% 1.1% ------ ------ ------ ------ Income (loss) from continuing operations before income taxes...... (1.0)% (18.7)% 0.6% (5.4)% Income tax provision (benefit).................................... (0.4)% (8.7)% 0.3% (2.5)% ------ ------ ------ ------ Net income (loss) from continuing operations...................... (0.6)% (10.0)% 0.3% (2.9)% ====== ====== ====== ======
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 REVENUE for 2000 increased by $1.6 million, or 4.7%, from $35.1 million in 1999 to $36.7 million in 2000. Our revenue increased by $2.9 million due to the effect of two companies acquired during the first quarter of fiscal year 2000. The Business Products internal growth rate of 4.4%, or $1.4 million, excludes the effect of $2.7 million of lost revenue from MBF Corporation ("MBF"). On February 16, 1999 substantially all of the management, sales force and employees of MBF resigned to join a competitor that had been founded by the same individuals. We are in litigation with the competitor and former MBF officers over this matter. COST OF GOODS SOLD during 2000 increased by $1.4 million, or 6.1%, from $23.4 million to $24.8 million. The dollar change was due to the effects of the companies acquired ($2.0 million) and internal growth of the Company ($1.2 million), offset by lower cost of goods related to the lower MBF revenue ($1.8 million). As a percentage of revenue, cost of goods sold increased from 66.7% in 1999 to 67.6% in 2000. Changes in the mix of products sold, changes in the geographic markets served and vendor pricing all contributed to this change. As a percentage of revenue, the effect of cost of goods sold from companies acquired was offset by the effect of the cost of goods sold from the lost MBF revenue. SALES COMMISSIONS for 2000 increased by $0.3 million, or 6.4%, from $4.9 million, or 13.9% of revenue in 1999, to $5.2 million, or 14.1% of revenue in 2000. The increase in both the dollar amount and percentage of revenue for sales commissions was due to a greater proportion of the sales revenue being generated by salespersons with higher commission rates. The higher level of gross profit also contributed to the increase in sales commissions as our sales force is compensated on a percentage of gross profit. 15 Increases in commission expense from the companies acquired were offset by lower commission expense as a result of the lost MBF revenue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE for 2000 decreased by $0.1 million, or 2.2%, from $6.1 million in 1999 to $5.9 million in 2000. As a percentage of revenue, such expense decreased from 17.2% in 1999 to 16.2% in 2000. The Company reduced its selling, general and administrative expense from existing operations due to integration and cost control efforts. Increased selling, general and administrative expenses of $0.5 million from companies acquired were offset by $0.5 million of expenses from MBF that did not recur. DEPRECIATION AND AMORTIZATION EXPENSE increased $0.2 million in 2000 from $0.4 million in 1999 to $0.6 million in 2000 due largely to the size and timing of the acquisitions completed since October 1, 1998. INTEREST EXPENSE increased $0.4 million, or 174.6%, from $0.2 million in 1999 to $0.6 million in 2000 due to the additional debt used to finance acquisitions and fund the working capital needs of the Company. NET LOSS was reduced by $3.3 million in 2000 due primarily to the non-recurrence of $6.7 million in goodwill write-down and non-recurring charges recorded during the third quarter of 1999. The loss per basic share was lowered from $0.41 in 1999 to $0.02 in 2000 for the same reasons. NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999 REVENUE for 2000 increased by $2.9 million, or 2.8%, from $103.9 million in 1999 to $106.8 million in 2000. During the first nine months of fiscal year 2000, Business Products revenue increased from internal growth by $9.7 million or 10.7%. In addition, revenue increased by $5.7 million due to the effect of two companies acquired during the first quarter of fiscal year 2000 and two companies acquired during the first quarter of fiscal year 1999. The internal growth rate excludes the effect of $12.5 million of lost revenue from MBF. COST OF GOODS SOLD for 2000 increased by $1.7 million, or 2.4%, from $70.0 million in 1999 to $71.7 million in 1999. In dollar amounts, such change was due to the effects of the companies acquired ($3.8 million) and the internal growth of the Company ($6.3 million) offset the effect of the lower cost of goods sold from the lost MBF revenue ($8.4 million). As a percentage of revenue, cost of goods sold improved from 67.4% in 1999 to 67.1% in 2000 due primarily to the effects of changes in product mix, geographic markets served and vendor pricing. As a percent of revenue, the effect of cost of goods sold from companies acquired was offset by the effect of the lower cost of goods sold from the lost MBF revenue. SALES COMMISSIONS for 1999 increased by $0.7 million, or 5.0%, from $14.0 million, or 13.5% of revenue in 1999, to $14.7 million, or 13.8% of revenue in 2000. The change in the percentage of revenue is due primarily to the higher dollar amount of commissions paid to existing salespersons due to improved gross profit levels. The increase in the dollar amount is due to internal growth ($1.8 million), and to companies acquired ($0.6 million), offset by lower commissions due to the lost MBF revenue ($1.7 million). SELLING, GENERAL AND ADMINISTRATIVE EXPENSE decreased by $0.7 million, or 4.3%, in 2000 from $16.6 million in 1999 to $15.8 million in 2000. The Company increased its selling, general and administrative expense from existing operations by $0.3 million to support the revenue growth. Increased selling, general and administrative expenses of $1.0 million from companies acquired were offset by $2.0 million of expenses from MBF that did not recur. As a percentage of revenue, selling, general and administrative expenses have decreased from 15.9% in 1999 to 14.8% in 2000. The percentage decrease reflects the results of the Company's continued revenue growth while controlling costs and continuing its integration efforts. 16 DEPRECIATION AND AMORTIZATION EXPENSE increased $0.6 million in 2000 from $1.0 million in 1999 to $1.6 million in 2000 due largely to acquisitions completed since July 1, 1998. INTEREST EXPENSE increased by $1.2 million or 102.3% during 2000, from $1.1 million in 1999 to $2.3 million in 2000 principally due to additional debt incurred by us in fiscal years 1999 and 2000 to finance our business acquisitions and our investment in working capital. NET INCOME increased by $3.4 million, or 111.3% in 2000, from a net loss of $3.1 million in 1999 to net income of $0.3 million in 2000, as the goodwill write-down and non recurring charges did not recur. The improvement in the net income per share is due primarily to the same reason. DISCONTINUED OPERATIONS The discontinued operations consist of the Transportation Division. During March 2000, we signed a revised letter of intent to sell substantially all the assets and liabilities of the Transportation Division to a company funded by a group of investors, led by Holding Capital Group and certain members of the Transportation Division's executive management. The sale of the Transportation Division, which is subject to a number of conditions including the execution of a definitive purchase agreement, is expected be completed by the end of September 2000. The revised letter of intent contemplates the Transportation Division is to be sold for five times the annual pro forma free cash flow of the division and for an earnout based on future earnings of the new company. Free cash flow would be defined as the earnings before interest, income taxes, depreciation and amortization less the annual debt service for the division. Under the foregoing, the purchase price for the Transportation Division would be approximately $20.0 million. In addition, the new company would assume the debt of the Transportation Division. Revenue for the three months ended March 31, 2000 increased by $0.4 million, or 5.4%, to $7.5 million in 2000 as compared to $7.1 million in 1999. Companies acquired since September 30, 1998 accounted for $2.0 million of the revenue increase. Revenue from existing operations declined by $1.6 million due principally to the loss of a bus service contract with Ford which was not renewed after June 30, 1999 ($0.6 million) and to lower ride volume and lower ride rates for the town car and limousine operations in the tri-state New York market ($1.0 million). Revenue for the nine months ended March 31, 2000 increased by $5.6 million, or 31.2%, to $23.6 million in 2000 as compared to $18.0 million in 1999. Companies acquired since September 30, 1998 accounted for $9.7 million of the revenue change. Revenue from existing operations declined by $2.4 million due principally to the loss of a bus service contract with Ford which was not renewed after June 30, 1999 ($1.7 million) and to lower ride volume and lower ride rates for the town car and limousine operations in the tri-state New York market. Cost of goods sold for the Transportation Division for the three months ended March 31, 2000 increased by $0.9 million, or 23.1%, from $4.1 million in 1999 to $5.0 million in 2000, primarily as a result of companies acquired since September 30, 1998. Cost of goods sold for the Transportation Division for the nine months ended March 31, 2000 increased by $4.2 million, or 40.2%, from $10.5 million in 1999 to $14.7 million in 2000. Companies acquired since September 30, 1998 accounted for $5.4 million of this change. Cost of goods sold from existing operations decreased by $1.2 million due primarily to the loss of the Ford bus contract at the end of June 1999 ($0.4 million), to lower ride volume at the town car and limousine operations in the tri-state New York markets ($1.1 million) offset by increases in ride volume from the Transportation Division's bus operations in Kentucky and Ohio and town car and limousine operations in Texas. Selling, general and administrative expenses for the three months ended March 31, 2000 increased by $0.8 million, or 78.4%, from $1.0 million in 1999 to $1.8 million in 2000. Selling, general and administrative expenses for the nine months ended March 31, 2000 increased by $1.5 million, or 14.9%, from $2.7 million in 1999 to $4.2 million in 2000. The increases in selling, general and administrative expenses are primarily related to the acquisitions completed since September 30, 1998. 17 Depreciation and amortization expense for the three months ended March 31, 2000 increased by $0.2 million, or 33.3%, from $0.6 million in 1999 to $0.8 million in 2000. Depreciation and amortization expense for the nine months ended March 31, 2000 increased by $1.0 million, or 71.4%, from $1.4 million in 1999 to $2.4 million in 2000. Interest expense for the three months ended March 31, 2000 increased by $0.4 million, or 83.0%, from $0.5 million in 1999 to $0.9 million in 2000. Interest expense for the nine months ended March 31, 2000 increased by $0.5 million, or 72.4%, from $0.7 million in 1999 to $1.2 million in 2000. The increase in interest expense is primarily due to the additional debt incurred to finance acquisitions after September 30, 1999. Interest expense for the Transportation Division includes an allocation of interest expense on the outstanding debt under the Company's Credit Agreement. The net loss for the Transportation Division decreased by $6.3 million for the three months ended March 31, 2000 from $6.9 million in 1999 to $0.6 million in 2000. Excluding the goodwill and asset write-downs of $7.6 million recorded in the third quarter of 1999, the division's operating results declined by $1.7 million during the third quarter of 2000. This deterioration is primarily due to three reasons. The division's town car and limousine operations in the tri-state New York market have not performed as well in 2000 due to price competition and higher fuel costs. Secondly, the division did not benefit from the Ford contract during 2000. Lastly, during the third quarter of 2000, the division recorded $0.6 million in adjustments to revenue and operating expenses for its town car and limousine operation based in N. Arlington, New Jersey. Such adjustments relate to matters which became evident after the middle of the third quarter of fiscal year 2000 and after a change in management at the operation. Net income for the nine months ended March 31, 2000 improved by $6.5 million, from a loss of $6.0 million in 1999 to net income of $0.5 million in 2000. Excluding the goodwill and asset write-downs of $7.6 million recorded in the third quarter of 1999, the division's operating results declined by $1.6 million during 2000. This deterioration is primarily due to two reasons. The division's town car and limousine operations in the tri-state New York market have not performed as well in 2000 due to price competition and higher fuel costs. Secondly, the division did not benefit from the Ford contract during 2000. LIQUIDITY AND CAPITAL RESOURCES - CONTINUING OPERATIONS DEBT AND EQUITY FINANCING. Since October 1999, the Company has been at or near its borrowing limit under its Credit Agreement. The Company's cash flow from its operations, both continuing and discontinued, has been sufficient to service the Company's debt and mandatory redeemable preferred stock and finance its capital expenditures; however, the cash flow from its operations has not been sufficient to lower the accounts payable financing provided by the Company's vendors. Prior to October 1999, the Company's policy was to take advantage of prompt payment discounts offered by the Company's vendors and pay vendors who did not offer discounts within 30 to 45 days. Since October 1999, the Company has, for the most part, not been able to take advantage of prompt pay discounts and has been paying its vendors within 50 to 65 days. We estimate that on an annual basis, we have lost approximately $1.5 million to $2.0 million in prompt pay discounts due to a lack of adequate working capital, debt and equity financing to support the operating needs of our operations. During the month of April, we experienced a reduction in the monthly collections of accounts receivable of approximately $2.0 million. We have recently added collections personnel to improve the timeliness of the collection of accounts receivable from our customers. If we are able to improve the collection of accounts receivable, then we will be able to reduce the level of vendor financing which is provided by accounts payable. Should the timeliness of the collections not improve, we will not be able to reduce the level of vendor financing unless we are able to raise additional cash through equity or debt financing transactions. Management of the Company believes that our current level of debt financing and our expected cash flows from operations will be sufficient during the next twelve to twenty four months to service our debt, meet capital expenditure requirements and maintain adequate employee and vendor relations. However, if we are not able to obtain additional equity or debt financing and we are not able to improve the 18 timeliness of the collection of our trade accounts receivable, our relations with our vendors could suffer somewhat and this could lead to reduced revenue and operating income in the next twelve to twenty four months. In April 2000, we sold $2.0 million in convertible preferred stock to The Shaar Fund Ltd. and used the net proceeds to pay vendors. The preferred stock is convertible into Class A Common Stock at a rate of $4.00 or 85% of the market price of the Class A Common Stock, defined as the average of the five days closing price of the stock prior to the conversion. No conversion is permitted for the first five months. In addition, we may redeem the preferred stock at 120% of the face value during the first five months. We will pay a quarterly dividend of 8% of the face value in cash or Class A Common Stock. As part of the transaction, we issued warrants to purchase 125,000 shares of Class A Common Stock at an exercise price of $2.50 per share. We also provided registration rights to The Shaar Fund Ltd. for the shares of Class A Common Stock which may be issued upon conversion and for the dividends to be paid. In April 2000, our Credit Agreement with our banking group was amended to increase the amount available for borrowing to $42.3 million. To satisfy a lender condition to this amendment, the Company's Chairman and controlling shareholder guaranteed $2.3 million of bank debt, and we agreed to use our best efforts to sell our Transportation Division or our Business Products Division with the proceeds to be applied to our bank debt. If we sell the Transportation Division for more than $17.5 million by October 24, 2000, the guaranty will be removed. If the Transportation Division is not sold by October 24, 2000, the banking group has the option to request the Company's Chairman to provide common stock of Affiliated Computer Services, Inc. as collateral for the guaranty. If such a request is made, then the Chairman has the right to request Precept to provide the requested collateral. Since all of Precept's assets are pledged as collateral to the banking group and other lenders, we would not be able to provide the collateral. In consideration of the personal guaranty provided by our Chairman, Precept has agreed to reimburse the Chairman for any amounts he may have to pay under the guaranty and, if he is required by the bank to collateralize the guaranty, Precept has agreed to deliver to him as a guaranty fee securities equal to what he would have received if the guaranteed amount had been invested in preferred Stock and warrants on the same terms as the recent investment by the Shaar Fund described elsewhere in this report or, at his election, consideration of reasonably equivalent value. As part of the amendment to the Credit Agreement, the banking group changed the total debt to pro forma EBTIDA (earnings before interest, income taxes, depreciation and amortization) ratio to 3.53 to 1. The mandatory redeemable convertible preferred stock that was issued by the Company in April, July and September of calendar year 1999 is included in the total debt amount for the ratio. As of March 31, 2000, we did not comply with three of the financial covenants in the Credit Agreement: specifically, the total debt to pro forma EBITDA, the historical EBITDA to interest and the net worth financial covenants. Our banking group has indicated in writing that they are willing to amend or waive the applicable covenants as of March 31, 2000. As a result of such written agreement, we have continued to present the outstanding debt under the Credit Agreement as long-term debt. NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first nine months of fiscal year 2000, the Company generated $5.4 million of cash for operating needs. During this period, the Company's net income, adjusted for non-cash charges of $1.6 million, amounted to $2.0 million. We used an increase in accounts payable vendor financing of $5.6 million to fund an increase in inventory of $1.9 million and an increase in trade accounts receivable of $1.2 million. Overall, we reduced our investment in working capital by $3.4 million during the nine months ended March 31, 2000. During the nine months ended March 31, 1999, we generated $9.1 million in cash from operations. Despite incurring a loss of $2.0 million, excluding non-cash charges such as depreciation, amortization and goodwill write-down, the Company significantly lowered its investment in working capital during this period. We reduced the level of trade accounts receivable by $1.5 million and lowered our carrying level of inventory by $0.9 million. During the same period, we increased the level of vendor financing in accounts payable and accrued expenses by $8.2 million. 19 NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first nine months of fiscal year 2000, Precept used $5.9 million in cash for investing activities as compared to a use of $8.1 million for investing activities in the first nine months of fiscal year 1999. During 2000, the Company acquired two Business Products distribution companies. During the first nine months of 1999, the Company acquired four Business Products distribution businesses for a total of $8.9 million, acquired $0.3 million of equipment and received $1.1 million in proceeds from the sale of land, building and an investment in a restaurant company. NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first nine months of fiscal year 2000, $7.6 million of cash was generated by financing activities as compared to $7.5 million of cash generated by financing activities in the first nine months of fiscal year 1999. During the first nine months of 2000, Precept increased its outstanding revolving line of credit balance by approximately $9.6 million, primarily to finance acquisitions, service existing debt ($1.1 million), redeem preferred stock and pay preferred dividends ($0.8 million) and provide cash to fund operating cash flow needs of the Transportation Division. During the first nine months of 1999, the Company decreased its long-term debt and capital lease obligations by $1.0 million and increased its outstanding revolving line of credit balance by $8.5 million to fund acquisitions. NET CASH FLOWS FROM DISCONTINUED OPERATIONS. For the nine months ended March 31, 2000, the Transportation Division used $0.1 million of cash to fund its operating activities. Excluding non cash charges of $2.4 million during this period for depreciation and amortization, $2.9 million was generated by operating activities, before changes in working capital. This was used primarily to reduce accounts payable and accrued expenses ($3.0 million). For the nine months ended March 31, 1999, the Transportation Division used $2.2 million of cash to fund its operating activities. Excluding non cash charges of $8.7 million during this period for depreciation, amortization and goodwill write-down, $2.7 million was generated by operating activities, before changes in working capital. During the same period, the Transportation Division financed an increase in trade accounts receivable ($2.4 million) primarily from its town car and limousine operations. In addition, the Transportation Division reduced its accounts payable by $1.0 million and its accrued expenses by $1.4 million as it paid for liabilities assumed as part of its acquisitions. During the nine months ended March 31, 1999, the Transportation repaid $1.0 million in other debt, primarily vehicle notes and capitalized leases. The Transportation Division's net use of $10.3 million in cash was funded by the continuing operations of the Company and by advances under the Company's Credit Agreement. OTHER INFLATION Certain of Precept's Business Products offerings, particularly paper products, have been and are expected to continue to be subject to significant price fluctuations due to inflationary and other market conditions. In the last five to ten years, prices for commodity grades of paper have shown considerable volatility. Precept generally is able to pass such increased costs on to its customers through price increases, although it may not be able to adjust its prices immediately. Significant increases in paper and other costs in the future could materially affect Precept's profitability if these costs cannot be passed on to customers. In addition, Precept Transportation Division's operating results may be affected by increases in the prices of fuel if the division is not able to pass along such increases to its customers on a timely basis. In general, Precept does not believe that inflation has had a material effect on its results of operations in recent years. However, there can be no assurance that Precept's business will not be affected by inflation, the price of paper and the price of fuel in the future. IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of these planning and implementation efforts, the Company experienced no significant disruptions in mission 20 critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its services and products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. FINANCIAL ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, that is effective for reporting periods beginning after June 15, 2000. Precept is required to adopt this standard for its fiscal year ending June 30, 2001. The Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION, that is required to be adopted beginning with the quarterly reporting period ending June 30, 2000. Management is in the process of evaluating the effects, if any, of adopting these two new pronouncements. FORWARD-LOOKING STATEMENTS The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. This section should be read in conjunction with the "Risk Factors Affecting the Company's Prospects" located in Item I of the Company's annual report on Form 10-K for the year ended June 30, 1999 and in the "Risk Factors" included in the Company's Prospectus dated November 12, 1999. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein are forward-looking statements and accordingly involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to the other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements. 1. Changes in economic conditions, in particular those that affect the end users of business products and transportation services, primarily corporations. 2. Changes in the availability and/or price of paper, fuel and labor, in particular if increases in the costs of these resources are not passed along to the Company's customers. 3. Changes in executive and senior management or control of the Company. 4. Inability to obtain new customers or retain existing customers and contracts. 5. Significant changes in the composition of the Company's sales force. 6. Significant changes in competitive factors, including product-pricing conditions, affecting the company. 7. Governmental and regulatory actions and initiatives, including those affecting financing. 8. Significant changes from expectations in operating revenues and expenses. 9. Occurrences affecting the Company's ability to obtain funds from operations, debt, or equity to finance needed capital acquisitions and other investments, including the inability to formalize our oral agreement with our banking group discussed elsewhere in this report. 10. Significant changes in rates of interest, inflation, or taxes. 21 11. Significant changes in the Company's relationship with its employees and the potential adverse effects if labor disputes or grievances were to occur. 12. Changes in accounting principles and/or the application of such principles to the Company. 13. The ability of Precept to sell one or both of its divisions or raise additional capital. The foregoing factors could affect the Company's actual results and could cause the Company's actual results during fiscal year 2000 and beyond to be materially different from any anticipated results expressed in any forward-looking statement made by or on behalf of the Company. The Company disclaims any obligation to update any forward-looking statements to reflect events or other circumstances after the date of this report on Form 10-Q. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE FOR MARKET RISK The Company's revolving line of credit provides for interest to be charged at the prime rate or at a LIBOR rate plus a margin of 3.75%. Based on the Company's current level of outstanding revolving line of credit, a 1.0% increase in interest rate would result in a $0.5 million annual change in interest expense. The remainder of the Company's debt is at fixed interest rates that are not subject to changes in interest rates. The Company currently has outstanding $1.6 million in notes payable and $2.0 million in preferred stock, all of which may be converted to Class A Common Stock at the prevailing market prices for the Company's Class A Common Stock. Based on a market price of $2.00 for a share of Class A Common Stock, the current shareholders would be diluted approximately 18%. Based on a hypothetical market price of $1.00 for a share of Class A Common Stock, the current shareholders would be diluted approximately 35%. The Company does not own, nor is the Company obligated under, other significant debt or equity securities that would be affected by fluctuations in market risk. The Company does not hold or issue derivative financial instruments for speculation or trading purposes. PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS There have been no significant changes to ongoing litigation matters during the quarter ended March 31, 2000. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS As of March 31, 2000, there were no changes in securities and use of proceeds. As disclosed more fully in Note 7 to the consolidated condensed financial statements and in Part I Item 2, Precept Business Services, Inc. sold $2.0 million of convertible preferred stock on April 19, 2000 to The Shaar Fund Ltd. and used the net proceeds of $1.8 million to pay vendors. 22 ITEM 3 DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES As of March 31, 2000 and subject to the oral agreement with our banking group discussed under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and capital resources - -continuing operations," the Company was not in default of any of its debt or equity securities. ITEM 4 RESULTS OF VOTES OF HOLDERS No matters were submitted to a vote of security holders during the quarter ended March 31, 2000. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ITEM 6(a) EXHIBITS
Exhibit No. Description - ----------- ----------- 3.1 Securities Purchase Agreement, dated as of April 19, 2000, by and between Precept Business Services, Inc. and The Shaar Fund Ltd. (1) 3.2 Common Stock Warrant for The Shaar Fund Ltd. to purchase 125,000 shares of Class A Common Stock. (1) 3.3 Registration Rights Agreement, dated as of April 19, 2000, by and between Precept Business Services, Inc. and The Shaar Fund Ltd. (1) 5.1 Letter agreement dated April 25, 2000 among Precept Business Services, Inc. and Darwin Deason, Chairman (1) 5.2 Amendment and Waiver No. 3 dated as of April 27, 2000 to Credit Agreement dated as of March 22, 1999 and related Limited Guaranty by Darwin Deason. (1) 27.1 Financial Data Schedule (1) (1) Included as an exhibit to this report. ITEM 6(b) REPORTS ON FORM 8-K FILED DURING THE PERIOD FROM JANUARY 1, 2000 THROUGH MAY 17, 2000
The Company has not filed any reports on Form 8-K for the period from January 1, 2000 through May 17, 2000. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, as of May 17, 2000. PRECEPT BUSINESS SERVICES, INC. /s/ William W. Solomon, Jr. - --------------------------- William W. Solomon, Jr. Executive Vice President and Chief Financial Officer 23 EX-3.1 2 EXHIBIT 3.1 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement, dated as of April 19, 2000 (this "AGREEMENT"), by and between Precept Business Services, Inc., a Texas corporation, with principal executive offices located at 1909 Woodall Rodgers Freeway, Suite 500, Dallas, TX 75201 (the "COMPANY"), and The Shaar Fund Ltd. ("BUYER"). Whereas, Buyer desires to purchase from the Company, and the Company desires to issue and sell to Buyer, upon the terms and subject to the conditions of this Agreement, (i) 200,000 shares of the Company's Series A 8% Convertible Preferred Stock, par value $1.00 per share (collectively, the "PREFERRED SHARES"), and (ii) Common Stock Purchase Warrants in the form attached hereto as Exhibit A to purchase 125,000 shares of Common Stock (as defined below) (collectively, the "Warrants"); Whereas, upon the terms and subject to the designations, preferences and rights set forth in the Company's Certificate of Designation of Series A 8% Convertible Preferred Stock in the form attached hereto as Exhibit B (the "CERTIFICATE OF DESIGNATION"), the Preferred Shares are convertible into shares of the Company's class A common stock, par value $.01 per share (the "COMMON STOCK"); and Whereas, the Warrants, upon the terms and subject to the conditions specified in the Warrants, will be exercisable for a period of three years; Now, Therefore, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: I. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS A. TRANSACTION. Buyer hereby agrees to purchase from the Company, and the Company has offered and hereby agrees to issue and sell to Buyer in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), the Preferred Shares and the Warrants. B. PURCHASE PRICE; FORM OF PAYMENT. The purchase price for the Preferred Shares and the Warrants to be purchased by Buyer hereunder shall be $2,000,000 (the "PURCHASE PRICE"). Simultaneously with the execution of this Agreement, Buyer shall pay the Purchase Price by wire transfer of immediately available funds to the escrow agent (the "ESCROW AGENT") identified in those certain Escrow Instructions of even date herewith, a copy of which is attached hereto as Exhibit C (the "ESCROW INSTRUCTIONS"). Simultaneously with the execution of this Agreement, the Company shall deliver one or more duly authorized, issued and executed certificates (I/N/O Buyer or, if the Company otherwise has been notified, I/N/O Buyer's nominee) evidencing the Preferred Shares and the Warrants which Buyer is purchasing, to the Escrow Agent or its designated depository. By executing and delivering this Agreement, Buyer and the Company each hereby agree to observe the terms and conditions of the Escrow Instructions, all of which are incorporated herein by reference as if fully set forth herein. C. METHOD OF PAYMENT. Payment into escrow of the Purchase Price shall be made as set forth in the Escrow Instructions. II. BUYER'S REPRESENTATIONS AND WARRANTIES Buyer represents and warrants to and covenants and agrees with the Company as follows: A. Buyer is purchasing the Preferred Shares, the Warrants, the Common Stock issuable upon exercise of the Warrants (the "WARRANT SHARES"), the Common Stock, if any, issuable in payment of dividends on the Preferred Shares (the "DIVIDEND SHARES"), and the Common Stock issuable upon conversion or redemption of the Preferred Shares (the "CONVERSION SHARES" and, collectively with the Preferred Shares, the Warrants, the Warrant Shares and the Dividend Shares, the "SECURITIES") for its own account, for investment purposes only and not with a view towards or in connection with the public sale or distribution thereof in violation of the Securities Act. B. Buyer is (i) an "ACCREDITED INVESTOR" within the meaning of Rule 501 of Regulation D under the Securities Act, (ii) experienced in making investments of the kind contemplated by this Agreement, (iii) capable, by reason of its business and financial experience, of evaluating the relative merits and risks of an investment in the Securities, and (iv) able to afford the loss of its investment in the Securities. C. Buyer understands that the Securities are being offered and sold by the Company in reliance on an exemption from the registration requirements of the Securities Act and equivalent state securities and "blue sky" laws, and that the Company is relying upon the accuracy of, and Buyer's compliance with, Buyer's representations, warranties and covenants set forth in this Agreement to determine the availability of such exemption and the eligibility of Buyer to purchase the Securities; D. Buyer understands that the Securities have not been approved or disapproved by the Securities and Exchange Commission (the "COMMISSION") or any state securities commission. E. This Agreement has been duly and validly authorized, executed and delivered by Buyer and is a valid and binding agreement of Buyer enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. F. Neither Buyer nor its affiliates nor any person acting on its or their behalf shall enter into, prior to the Closing or at any other time while any of the Preferred Shares remain outstanding, any put option, short position or other similar instrument or position with respect to the Common Stock and neither Buyer nor any of its affiliates nor any person acting on its or their behalf will use at any time shares of Common Stock acquired pursuant to this Agreement to settle any put option, short position or other similar instrument or position that may have been entered into prior to the execution of this Agreement; PROVIDED, HOWEVER, that nothing in this Section II.F. shall operate to forbid Buyer or any of its affiliates or any person acting on its or their behalf from selling, or entering into any other transaction with respect to, the Common Stock contemporaneously with or following such date and time as the person or persons in whose name or names the Common Stock delivered at conversion of Preferred Shares, as provided in the Certificate of Designation, shall be issuable shall be deemed to have become the holder or holders of record of the Common Shares represented thereby and all voting and other rights associated with the beneficial ownership of such Common Shares shall have vested with such person or persons. III. THE COMPANY'S REPRESENTATIONS The Company represents and warrants to Buyer that: A. CAPITALIZATION. 1. The authorized capital stock of the Company consists solely of: (x) 100,000,000 shares of class A common stock, of which 9,599,780 shares are issued and outstanding on the date hereof; (y) 10,500,000 shares of class B common stock, of which 592,142 shares are issued and outstanding on the date hereof; and (z) 3,000,000 shares of preferred stock, of which 3,224 shares are issued and outstanding on the date hereof. As of the date hereof, the Company has outstanding stock options to purchase 1,378,500 shares of Common Stock and has no warrants to purchase shares of Common Stock outstanding. The exercise price for each of such outstanding options and warrants is accurately set forth on Schedule III.A.1. hereto. 2. The Conversion Shares, the Dividend Shares and the Warrant Shares have been duly and validly authorized and reserved for issuance by the Company, and when issued by the Company upon conversion of, or in lieu of cash dividends on, the Preferred Shares and on exercise of the Warrants will be duly and validly issued, fully paid and nonassessable and will not subject the holder thereof to personal liability by reason of being such holder. 3. Except as disclosed on Schedule III.A.3. hereto, there are no preemptive, subscription, "call," right of first refusal or other similar rights to acquire any capital stock of the Company or any of its Subsidiaries or other voting securities of the Company that have been issued or granted by the Company to any person and no other obligations of the Company or any of its Subsidiaries to issue, grant, extend or enter into any security, option, warrant, "call," right, commitment, agreement, arrangement or undertaking with respect to any of their respective capital stock. 4. Schedule III.A.4. hereto lists all the subsidiaries of the Company (the "SUBSIDIARIES"). Except as disclosed on Schedule III.A.4. hereto, the Company does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, unincorporated business organization, association, trust or other business entity. 5. The Company has delivered to Buyer complete and correct copies of the Articles of Incorporation and the By-Laws of each of the Company and the Subsidiaries, in each case as amended to the date of this Agreement. Except as set forth on Schedule III.A.5., the Company has delivered to Buyer true and complete copies of all minutes of the Board of Directors of the Company (the "BOARD OF DIRECTORS") since April, 1997. B. ORGANIZATION; REPORTING COMPANY STATUS. 1. Each of the Company and the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state or jurisdiction in which it is incorporated and is duly qualified as a foreign corporation in all jurisdictions in which the failure so to qualify would reasonably be expected to have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations of the Company and the Subsidiaries taken as a whole or on the consummation of any of the transactions contemplated by this Agreement (a "MATERIAL ADVERSE EFFECT"). 2. The Company has registered the Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). The Common Stock is listed and traded on the Nasdaq SmallCap Market ("NASDAQ") and the Company has not received any notice regarding, and to its knowledge there is no threat of, the termination or discontinuance of the eligibility of the Common Stock for such listing. C. AUTHORIZATION. The Company (i) has duly and validly authorized and reserved for issuance 2,000,000 shares of Common Stock, which is a number sufficient for the conversion of and the payment of dividends (in lieu of cash payments) on the 200,000 Preferred Shares and the exercise of the Warrants in full, and (ii) at all times from and after the date hereof shall have a sufficient number of shares of Common Stock duly and validly authorized and reserved for issuance to satisfy the conversion of Preferred Shares, the payment of dividends (in lieu of cash payments) on the Preferred Shares and the exercise of the Warrants in full. The Company understands and acknowledges the potentially dilutive effect on the Common Stock of the issuance of the Preferred Shares and of the Conversion Shares, the Dividend Shares and the Warrant Shares upon the conversion of, and payment of dividends on, the Preferred Shares and the exercise of the Warrants, respectively. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants in accordance with this Agreement, the Certificate of Designation and the Warrants is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company and notwithstanding the commencement of any case under 11 U.S.C. Section 101 ET SEQ. (the "BANKRUPTCY CODE"). In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. Section 362 in respect of the conversion of the Preferred Shares and the exercise of the Warrants. The Company agrees, without cost or expense to Buyer, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. Section 362. Schedule III.C. hereto sets forth (i) all issuances and sales by the Company since June 30, 1999 of its capital stock, and other securities convertible into or exercisable or exchangeable for capital stock of the Company, (ii) the amount of such securities sold, including the amount of any underlying shares of capital stock, (iii) the purchaser thereof, (iv) the amount paid therefor, and (v) the material terms of all outstanding capital stock of the Company (other than the Common Stock). D. AUTHORITY; VALIDITY AND ENFORCEABILITY. The Company has the requisite corporate power and authority to file, and perform its obligations under, the Certificate of Designation and to enter into the Documents (as hereinafter defined) and to perform all of its obligations hereunder and thereunder (including the issuance, sale and delivery to Buyer of the Securities). The execution, delivery and performance by the Company of the Documents and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the filing of the Certificate of Designation with the Texas Secretary of State's office, the issuance of the Preferred Shares and the Warrants and the issuance and reservation for issuance of the Conversion Shares, the Dividend Shares and the Warrant Shares) have been duly and validly authorized by all necessary corporate action on the part of the Company. Each of the Documents has been duly and validly executed and delivered by the Company and the Certificate of Designation has been duly filed with the Texas Secretary of State's office by the Company, and each Document constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. The Securities have been duly and validly authorized for issuance by the Company and, when executed and delivered by the Company, will be valid and binding obligations of the Company enforceable against it in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally. For purposes of this Agreement, the term "DOCUMENTS" means (i) this Agreement; (ii) the Registration Rights Agreement of even date herewith between the Company and Buyer, a copy of which is annexed hereto as Exhibit D (the "REGISTRATION RIGHTS AGREEMENT"); (iii) the Certificate of Designation; (iv) the Warrants; and (v) the Escrow Instructions. E. VALIDITY OF ISSUANCE OF THE SECURITIES. The Preferred Shares and the Warrants as of the Closing Date, and the Conversion Shares, the Dividend Shares and the Warrant Shares upon their issuance in accordance with the Certificate of Designation and the Warrants, respectively, will be validly issued and outstanding, fully paid and nonassessable, and not subject to any preemptive rights, rights of first refusal, tag-along rights, drag-along rights or other similar rights. F. NON-CONTRAVENTION. Except as set forth on Schedule III.F., the execution and delivery by the Company of the Documents, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated hereby and thereby, including, without limitation, the filing of the Certificate of Designation with the Texas Secretary of State's office, do not, and compliance with the provisions of this Agreement and other Documents will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or result in the creation of any Lien (as defined in Section III.V.) upon any of the properties or assets of the Company or any of its Subsidiaries under, or result in the termination of, or require that any consent be obtained or any notice be given with respect to, (i) the Articles of Incorporation or By-Laws of the Company or the comparable charter or organizational documents of any of its Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease, contract or other agreement, instrument or permit applicable to the Company or any of its Subsidiaries or their respective properties or assets, or (iii) any Law (as defined in Section III.N.) applicable to, or any judgment, decree or order of any court or government body having jurisdiction over, the Company or any of its Subsidiaries or any of their respective properties or assets. G. APPROVALS. No authorization, approval or consent of any court or public or governmental authority is required to be obtained by the Company for the issuance and sale of the Preferred Shares or the Warrants (or the Conversion Shares, the Dividend Shares or Warrant Shares) to Buyer as contemplated by this Agreement, except such authorizations, approvals and consents as have been obtained by the Company prior to the date hereof. H. COMMISSION FILINGS. The Company has properly and timely filed with the Commission all reports, proxy statements, forms and other documents required to be filed with the Commission under the Securities Act and the Exchange Act since March, 1998 (the "COMMISSION FILINGS"). As of their respective dates, (i) the Commission Filings complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the Commission promulgated thereunder applicable to such Commission Filings, and (ii) none of the Commission Filings contained at the time of its filing any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Commission Filings, as of the dates of such documents, were true and complete in all material respects and complied with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto, were prepared in accordance with generally accepted accounting principles in the United States ("GAAP") (except in the case of unaudited statements permitted by Form 10-Q under the Exchange Act) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments that in the aggregate are not material and to any other adjustment described therein). I. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date (as defined in Section III.M.), there has not occurred any change, event or development in the business, financial condition, prospects or results of operations of the Company and the Subsidiaries, there has not existed any condition having or reasonably likely to have a Material Adverse Effect, and the Company and the Subsidiaries have conducted their respective businesses only in the ordinary course. J. FULL DISCLOSURE. There is no fact known to the Company (other than general economic or industry conditions known to the public generally) that has not been fully disclosed in writing to Buyer that (i) reasonably could be expected to have a Material Adverse Effect or (ii) reasonably could be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to the Documents. K. ABSENCE OF LITIGATION. Except as set forth on Schedule III.K., there are (i) no material suits, actions or proceedings pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, (ii) no material complaints, lawsuits, charges or other proceedings pending or, to the knowledge of the Company, threatened in any forum by or on behalf of any present or former employee of the Company or any of its Subsidiaries, any applicant for employment or classes of the foregoing alleging breach of any express or implied contract of employment, any applicable law governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with the employment relationship, and (iii) no material judgments, decrees, injunctions or orders of any court or other governmental entity or arbitrator outstanding against the Company or any Subsidiary. L. ABSENCE OF EVENTS OF DEFAULT. 1. No event of default under the Revolving Line of Credit Agreement between the Company and Bank One, Texas, N.A. ("CREDIT AGREEMENT EVENT OF DEFAULT") and no event which, with notice, lapse of time or both, would constitute a Credit Agreement Event of Default, has occurred and is continuing. 2. Except as set forth in Schedule III.L.2., no "EVENT OF DEFAULT" (as defined in any agreement or instrument to which the Company is a party) and no event which, with notice, lapse of time or both, would constitute an Event of Default (as so defined), has occurred and is continuing, except for those, individually or in the aggregate, which are not reasonably likely to result in a Material Adverse Effect. M. FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. The Company has delivered to Buyer true and complete copies of the (i) audited balance sheet of the Company and the Subsidiaries as at June 30, 1999, 1998 and 1997, respectively, and the related audited statements of income, changes in stockholders' equity and cash flows for the three fiscal years ended June 30, 1999, 1998 and 1997 including the related notes and schedules thereto and (ii) unaudited balance sheets of the Company and the Subsidiaries and the statements of income, changes in stockholders' equity and cash flows as at the end of and for each fiscal quarter ended since June 30, 1999 including the related notes and schedules thereto, all certified by the chief financial officer of the Company (collectively, the "FINANCIAL STATEMENTS"), and all management letters, if any, from the Company's independent auditors relating to the dates and periods covered by the Financial Statements. Each of the Financial Statements is complete and correct in all material respects, has been prepared in accordance with GAAP (subject, in the case of the interim Financial Statements, to normal year end adjustments and the absence of footnotes), and fairly presents the financial position, results of operations and cash flows of the Company as at the dates and for the periods indicated. For purposes hereof, the audited balance sheet of the Company as at June 30, 1999 is hereinafter referred to as the "BALANCE SHEET" and June 30, 1999 is hereinafter referred to as the "BALANCE SHEET DATE". The Company has no indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due), which is not fully reflected in, reserved against or otherwise described in the Balance Sheet or the notes thereto or incurred in the ordinary course of business consistent with the Company's past practices since the Balance Sheet Date. N. COMPLIANCE WITH LAWS; PERMITS. Each of the Company and its Subsidiaries is in compliance with all material laws, rules, regulations, codes, ordinances and statutes (collectively, "LAWS") applicable to IT or to the conduct of its business. The Company possesses all material permits, approvals, authorizations, licenses, certificates and consents from all public and governmental authorities which are necessary to conduct its business. O. RELATED PARTY TRANSACTIONS. Except as set forth on Schedule III.O. hereto, neither the Company nor any of its officers, directors or "AFFILIATES" (as such term is defined in Rule 12b-2 under the Exchange Act) nor any family member of any officer, director or Affiliate of the Company has borrowed any moneys from or has outstanding any indebtedness or other similar obligations to the Company or any of the Subsidiaries. Except as set forth on Schedule III.O. hereto, neither the Company nor any of its officers, directors or Affiliates nor any family member of any officer, director or Affiliate of the Company (i) owns any direct or indirect interest constituting more than a 1% equity (or similar profit participation) interest in, or controls or is a director, officer, partner, member or employee of, or consultant or lender to or borrower from, or has the right to participate in the profits of, any person or entity which is (x) a competitor, supplier, customer, landlord, tenant, creditor or debtor of the Company or any Subsidiary, (y) engaged in a business related to the business of the Company or any Subsidiary, or (z) a participant in any transaction to which the Company or any Subsidiary is a party or (ii) is a party to any contract, agreement, commitment or other arrangement with the Company or any Subsidiary. P. INSURANCE. Each of the Company and the Subsidiaries maintains property and casualty, general liability, workers' compensation, environmental hazard, personal injury and other similar types of insurance with financially sound and reputable insurers that is consistent with industry standards and the Company's historical claims experience. None of the Company or the Subsidiaries has received notice from, and none of them has knowledge of any threat by, any insurer (that has issued any insurance policy to the Company or any Subsidiary) that such insurer intends to deny coverage under or cancel, discontinue or not renew any insurance policy presently in force. Q. SECURITIES LAW MATTERS. Assuming the accuracy of the representations and warranties of Buyer set forth in Article II hereof, the offer and sale by the Company of the Securities is exempt from (i) the registration and prospectus delivery requirements of the Securities Act and the rules and regulations of the Commission thereunder and (ii) the registration and/or qualification provisions of all applicable state securities and "blue sky" laws. Other than pursuant to an effective registration statement under the Securities Act, the Company has not issued, offered or sold the Preferred Shares or any shares of Common Stock (including for this purpose any securities of the same or a similar class as the Preferred Shares or Common Stock, or any securities convertible into or exchangeable or exercisable for the Preferred Shares or Common Stock or any such other securities) within the one-year period next preceding the date hereof, except as disclosed on Schedule III.Q. hereto, and the Company shall not directly or indirectly take, and shall not permit any of its directors, officers or Affiliates directly or indirectly to take, any action (including, without limitation, any offering or sale to any person or entity of the Preferred Shares or shares of Common Stock) which will make unavailable the exemption from Securities Act registration being relied upon by the Company for the offer and sale to Buyer of the Preferred Shares and the Warrants (and the Conversion Shares, the Dividend Shares and the Warrant Shares) as contemplated by this Agreement. No form of general solicitation or advertising has been used or authorized by the Company or any of its officers, directors or Affiliates in connection with the offer or sale of the Preferred Shares and the Warrants (and the Conversion Shares, the Dividend Shares and the Warrant Shares) as contemplated by this Agreement or any other agreement to which the Company is a party. R. ENVIRONMENTAL MATTERS. Except as set forth on Schedule III.R. hereto: 1. The Company, the Subsidiaries and their respective operations are in compliance with all applicable Environmental Laws and all permits (including terms, conditions, and limitations therein) issued pursuant to Environmental Laws or otherwise; 2. Each of the Company and the Subsidiaries has all permits, licenses, waivers, exceptions, and exemptions required under all applicable Environmental Laws necessary to operate its business; 3. None of the Company or the Subsidiaries is the subject of any outstanding written order of or agreement with any governmental authority or person respecting (i) Environmental Laws or permits, (ii) Remedial Action or (iii) any Release or threatened Release of Hazardous Materials; 4. None of the Company or the Subsidiaries has received any written communication alleging that it may be in violation of any Environmental Law or any permit issued pursuant to any Environmental Law, or may have any liability under any Environmental Law; 5. None of the Company or the Subsidiaries has any liability, contingent or otherwise, in connection with any presence, treatment, storage, disposal or Release of any Hazardous Materials whether on property owned or operated by the Company or any Subsidiary or property of third parties, and none of the Company or the Subsidiaries has transported, or arranged for transportation of, any Hazardous Materials for treatment or disposal on any property; 6. There are no investigations of the business, operations, or currently or previously owned, operated or leased property of the Company or any Subsidiary pending or threatened which could lead to the imposition of any case or liability pursuant to any Environmental Law; 7. There is not located at any of the properties owned or operated by the Company or any Subsidiary any (A) underground storage tanks, (B) asbestos-containing material or (C) equipment containing polychlorinated biphenyls; 8. Each of the Company and the Subsidiaries has provided to Buyer all environmentally related assessments, audits, studies, reports, analyses, and results of investigations that have been performed with respect to the currently or previously owned, leased or operated properties or activities of the Company and such Subsidiaries; 9. There are no liens arising under or pursuant to any Environmental Law on any real property owned, operated, or leased by the Company or any Subsidiary, and no action of any governmental authority has been taken or, to the knowledge of the Company, is in process of being taken which could subject any of such properties to such liens, and none of the Company or the Subsidiaries has been or is expected to be required to place any notice or restriction relating to the presence of Hazardous Material at any real property owned, operated, or leased by it in any deed to such property; 10. Neither the Company nor any of the Subsidiaries owns, operates, or leases any hazardous waste generation, treatment, storage, or disposal facility, as such terms are used pursuant to the RCRA and related or analogous state, local, or foreign law. None of the properties owned, operated, or leased by the Company, any of the Subsidiaries or any predecessor thereof are now, or were in the past, used in any part as a dump, landfill, or disposal site, and neither the Company, any of the Subsidiaries nor any predecessor of any of them has filled any wetlands; 11. The purchase that is the subject of this Agreement will not require any governmental approvals under Environmental Laws, including those that are triggered by sales or transfers of businesses or real property, including, as examples and without limitation, the New Jersey Industrial Site Recovery Act, N.J. Stat. 13:1K-7 ET SEQ., and the Connecticut Transfer of Establishments Act, Conn. Gen. Stat. Section 22a-134 ET SEQ.; 12. There is no currently existing requirement or requirement to be imposed in the future by any Environmental Law or Environmental Permit which could result in the incurrence of a cost that could be reasonably expected to have a Material Adverse Effect; and 13. Each of the Company and each of the Subsidiaries has disclosed to Buyer all other acts or conditions that could result in any costs or liabilities under Environmental Laws. For purposes of this Section III.R.: "ENVIRONMENTAL LAW" means any foreign, federal, state or local statute, regulation, ordinance, or common law as now or hereafter in effect in any way relating to the protection of human health, safety or welfare or the environment including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act ("RCRA"), the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, the Federal Insecticide, Fungicide, and Rodenticide Act and the Occupational Safety and Health Act, and the regulations promulgated pursuant to any of them; "HAZARDOUS MATERIAL" means any substance that is listed, classified or regulated pursuant to any Environmental Law, including petroleum, gasoline, and any other petroleum product, by-product, fraction or derivative, asbestos or asbestos-containing material, lead-containing paint, water, or plumbing, polychlorinated biphenyls, radioactive materials and radon; "RELEASE" means any placement, release, spill, filtration, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, migration, or leaching to, through, or under the indoor or outdoor environment, or into, through, under, or out of any property; and "REMEDIAL ACTION" means any action to (x) clean up, remove, remediate, treat or in any other way address any Hazardous Material; (y) prevent or contain the Release of any Hazardous Material; or (z) perform studies and investigations or post-remedial monitoring and care in relation to (x) or (y) above. S. LABOR MATTERS. Except as set forth in Schedule III.S., neither the Company nor any of the Subsidiaries is party to any labor or collective bargaining agreement, and there are no labor or collective bargaining agreements which pertain to any employees of the Company or any Subsidiary. No employees of the Company or any of the Subsidiaries are represented by any labor organization and none of such employees has made a pending demand for recognition, and there are no representation proceedings or petitions seeking a representation proceeding presently pending or, to the Company's knowledge, threatened to be brought or filed, with the National Labor Relations Board or other labor relations tribunal. There is no organizing activity involving the Company or any Subsidiary pending or to the Company's knowledge, threatened by any labor organization or group of employees of the Company or any of the Subsidiaries. There are no (i) strikes, work stoppages, slowdowns, lockouts or arbitrations or (ii) material grievances or other labor disputes pending or, to the knowledge of the Company, threatened against or involving the Company or any of the Subsidiaries. There are no unfair labor practice charges, grievances or complaints pending or, to the knowledge of the Company, threatened by or on behalf of any employee or group of employees of the Company or any of the Subsidiaries. T. ERISA MATTERS. All Plans maintained by the Company or any of its Subsidiaries and ERISA Affiliates are listed in Schedule III.T. and copies of all documentation relating to such Plans (including, but not limited to, copies of written Plans, written descriptions of oral Plans, summary plan descriptions, trust agreements, the three most recent annual returns, employee communications and IRS determination letters) have been delivered to or made available for review by the Buyer. Each Plan has at all times been maintained and administered in all material respects in accordance with its terms and the requirements of applicable law, including ERISA and the Code, and each Plan intended to qualify under section 401(a) of the Code has at all times since its adoption been so qualified, and each trust which forms a part of any such plan has at all times since its adoption been tax-exempt under section 501(a) of the Code. The Company and each of its Subsidiaries and ERISA Affiliates are in compliance in all material respects with all provisions of ERISA applicable to it. No Reportable Event has occurred, been waived or exists as to which the Company or any of its Subsidiaries and ERISA Affiliates was required to file a report with the PBGC, and the present value of all liabilities under each Pension Plan (based on those assumptions used to fund such Plans) listed in Schedule III.T. did not, as of the most recent annual valuation date applicable thereto, exceed the value of the assets of such Pension Plan. None of the Company, its Subsidiaries and ERISA Affiliates has incurred, or reasonably expects to incur, any Withdrawal Liability with respect to any Multi-employer Plan that could result in a Material Adverse Effect. None of the Company, its Subsidiaries and ERISA Affiliates has received any notification that any Multi-employer Plan is in reorganization or has been terminated within the meaning of Title IV of ERISA, and no Multi-employer Plan is reasonably expected to be in reorganization or termination where such reorganization or termination has resulted or could reasonably be expected to result in increases to the contributions required to be made to such Plan or otherwise. No direct, contingent or secondary liability has been incurred or is expected to be incurred by the Company or any of its Subsidiaries under Title IV of ERISA to any party with respect to any Plan, or with respect to any other Plan presently or heretofore maintained or contributed to by any ERISA Affiliate. Neither the Company nor any of its Subsidiaries and ERISA Affiliates has incurred any liability for any tax imposed under sections 4971 through 4980B of the Code or civil liability under section 502(i) or (l) of ERISA. No suit, action or other litigation or any other claim which could reasonably be expected to result in a material liability or expense to the Company or any of its Subsidiaries or ERISA Affiliates (excluding claims for benefits incurred in the ordinary course of plan activities) has been brought or, to the knowledge of the Company, threatened against or with respect to any Plan and there are no facts or circumstances known to the Company or any of its Subsidiaries or ERISA Affiliates that could reasonably be expected to give rise to any such suit, action or other litigation. All contributions to Plans that were required to be made under such Plans have been made, and all benefits accrued under any unfunded Plan have been paid, accrued or otherwise adequately reserved in accordance with GAAP, all of which accruals under unfunded Plans are as disclosed in Schedule III.T., and the Company, its Subsidiaries and ERISA Affiliates have each performed all material obligations required to be performed under all Plans. The execution, delivery and performance of this Agreement and the other Documents and the consummation of the transactions contemplated hereby and thereby (including, without limitation, the offer, issue and sale by the Company, and the purchase by the Buyer, of the Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares and Dividend Shares) will not involve any "prohibited transaction" within the meaning of ERISA or the Code with respect to any Plan. As used in this Agreement: "CODE" means the Internal Revenue Code of 1986, as amended. "ERISA" means the Employee Retirement Income Security Act of 1974, or any successor statute, together with the regulations thereunder, as the same may be amended from time to time. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that was, is or hereafter may become, a member of a group of which the Company is a member and which is treated as a single employer under section 414 of the Code. "MULTI-EMPLOYER PLAN" means a multi-employer plan as defined in section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of section 414 of the Code) is making or accruing an obligation to make contributions, or has within any of the preceding six plan years made or accrued an obligation to make contributions. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "PENSION PLAN" means any pension plan (other than a Multi-employer Plan) subject to the provision of Title IV of ERISA or section 412 of the Code that is maintained for employees of the Company or any of its Subsidiaries, or any ERISA Affiliate. "PLAN" means any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, accident, disability, workmen's compensation or other insurance, severance, separation or other employee benefit plan, practice, policy or arrangement of any kind, whether written or oral, or whether for the benefit of a single individual or more than one individual including, but not limited to, any "employee benefit plan" within the meaning of section 3(3) of ERISA, including any Pension Plan. "REPORTABLE EVENT" means any reportable event as defined in section 4043(b) of ERISA or the regulations issued thereunder with respect to a Plan. "WITHDRAWAL LIABILITY" means liability to a Multi-employer Plan as a result of a complete or partial withdrawal from such Multi-employer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. U. TAX MATTERS. 1. Except as set forth in Schedule III.U., the Company has filed all material Tax Returns which it is required to file under applicable Laws; all such Tax Returns are true and accurate in all material respects and have been prepared in compliance with all applicable Laws; the Company has paid all Taxes due and owing by it (whether or not such Taxes are required to be shown on a Tax Return) and has withheld and paid over to the appropriate taxing authorities all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third parties; and since the Balance Sheet Date, the charges, accruals and reserves for Taxes with respect to the Company (including any provisions for deferred income taxes) reflected on the books of the Company are adequate to cover any Tax liabilities of the Company if its current tax year were treated as ending on the date hereof. 2. No claim has been made by a taxing authority in a jurisdiction where the Company does not file tax returns that the Company is or may be subject to taxation by such jurisdiction. There are no foreign, federal, state or local tax audits or administrative or judicial proceedings pending or being conducted with respect to the Company; no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority; and, except as disclosed above, no written notice indicating an intent to open an audit or other review has been received by the Company from any foreign, federal, state or local taxing authority. There are no material unresolved questions or claims concerning the Company's Tax liability. The Company (A) has not executed or entered into a closing agreement pursuant to section 7121 of the Code or any predecessor provision thereof or any similar provision of state, local or foreign law; or (B) has not agreed to or is required to make any adjustments pursuant to section 481(a) of the Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or any of its subsidiaries or has any knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of the Company. The Company has not been a United States real property holding corporation within the meaning of section 897(c)(2) of the Code during the applicable period specified in section 897(c)(1)(A)(ii) of the Code. 3. The Company has not made an election under section 341(f) of the Code. The Company is not liable for the Taxes of another person that is not a subsidiary of the Company under (A) Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law), (B) as a transferee or successor, (C) by contract or indemnity or (D) otherwise. The Company is not a party to any tax sharing agreement. The Company has not made any payments, is not obligated to make payments and is not a party to an agreement that could obligate it to make any payments that would not be deductible under section 280G of the Code. As used in this Agreement: "IRS" means the United States Internal Revenue Service. "TAX" or "TAXES" means federal, state, county, local, foreign, or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. "TAX RETURN" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. V. PROPERTY. Except as set forth on Schedule III.V., each of the Company and the Subsidiaries has good and valid title to all of its assets and properties material to the conduct of its business, free and clear of any liens, pledges, security interests, claims, encumbrances or other restrictions of any kind (collectively, "LIENS"). With respect to any assets or properties it leases, each of the Company and its Subsidiaries holds a valid and subsisting leasehold interest therein, free and clear of any Liens, is in compliance, in all material respects, with the terms of the applicable lease, and enjoys peaceful and undisturbed possession under such lease. All of the assets and properties of the Company and its Subsidiaries that are material to the conduct of business as presently conducted or as proposed to be conducted by it are in good operating condition and repair, ordinary wear and tear excepted. The inventory of each of the Company and its Subsidiaries is in good and marketable condition, does not include any material quantity of items which are obsolete, damaged or slow moving, and is salable (or may be leased) in the normal course of business as currently conducted by it. W. INTELLECTUAL PROPERTY. The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "INTANGIBLES") reasonably required for the conduct of its business as now being conducted including, but not limited to, those described on Schedule III.W. hereto. Except as set forth on Schedule III.W, the Company has all right, title and interest in all of the Intangibles, free and clear of any and all Liens. To its knowledge, the Company is not infringing upon or in conflict with any right of any other person with respect to any Intangibles. Except as disclosed on Schedule III.W. hereto, (i) no claims have been asserted by any individual, partnership, corporation, unincorporated organization or association, limited liability company, trust or other entity (collectively, a "PERSON") contesting the validity, enforceability, use or ownership of any Intangibles, and the Company has no knowledge of any basis for such claim, and (ii) neither the Company nor the Subsidiaries has any knowledge of infringement or misappropriation of the Intangibles by any third party. X. CONTRACTS. All contracts, agreements, notes, instruments, franchises, leases, licenses, commitments, arrangements or understandings, written or oral (collectively, "CONTRACTS") which are material to the business and operations of the Company and the Subsidiaries are in full force and effect and constitute legal, valid and binding obligations of the Company and the Subsidiaries and, to the best knowledge of the Company, the other parties thereto; the Company and the Subsidiaries and, to the best knowledge of the Company, each other party thereto, have performed in all material respects all obligations required to be performed by them under the Contracts, and no material violation or default exists in respect thereof, nor any event that with notice or lapse of time, or both, would constitute a default thereof, on the part of the Company and the Subsidiaries or, to the best knowledge of the Company, any other party thereto; none of the Contracts is currently being renegotiated; and the validity, effectiveness and continuation of all Contracts will not be materially adversely affected by the transactions contemplated by this Agreement. Y. REGISTRATION RIGHTS. Except as set forth on Schedule III.Y., no Person has, and as of the Closing (as defined in Article VII), no Person shall have, any demand, "piggy-back" or other rights to cause the Company to file any registration statement under the Securities Act, relating to any of its securities or to participate in any such registration statement. Z. DIVIDENDS. Except as set forth on Schedule III.Z., the timely payment of dividends on the Preferred Shares as specified in the Certificate of Designation is not prohibited by the Articles of Incorporation or By-Laws of the Company or any agreement, Contract, document or other undertaking to which the Company or any of the Subsidiaries is a party. AA. INVESTMENT COMPANY ACT. Neither the Company nor any of the Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"), nor is the Company nor any of the Subsidiaries directly or indirectly controlled by or acting on behalf of any Person which is an "investment company" within the meaning of the Investment Company Act. AB. BUSINESS PLAN. Any business information of the Company previously submitted to Buyer in any form, including the projections contained therein, was prepared by the senior management of the Company in good faith and is based on assumptions that the Company believed to be reasonable when prepared. The Company is not aware of any fact or condition that could reasonably be expected to result in the Company not achieving the results described in such business plan. AC. YEAR 2000 COMPLIANCE. The Company has reviewed its products, business and operations that could be adversely affected by the risk that computer applications used by the Company and the Subsidiaries may be unable to recognize, and properly perform date-sensitive functions involving, dates prior to and after December 31, 1999 (the "YEAR 2000 PROBLEM"). The Company believes its internal information and business systems will be able to perform properly date-sensitive functions for all dates before and after January 1, 2000. In addition, the Company has surveyed those vendors, suppliers and other third parties (collectively, the "OUTSIDE PARTIES") with which the Company or any of the Subsidiaries do business and whose failure to adequately address the Year 2000 Problem could reasonably be expected to adversely affect the business and operations of the Company or any of the Subsidiaries. Based upon the aforementioned internal review and surveys of the Outside Parties as of the date of this Agreement, the Year 2000 Problem has not resulted in, and is not reasonably expected to have, a Material Adverse Effect. AD. INTERNAL CONTROLS AND PROCEDURES. The Company maintains accurate books and records and internal accounting controls that provide reasonable assurance that (i) all transactions to which the Company or each of the Subsidiaries is a party or by which its properties are bound are executed with management's authorization; (ii) the reported accountability of the Company's and the Subsidiaries' assets is compared with existing assets at regular intervals; (iii) access to the Company's and the Subsidiaries' assets is permitted only in accordance with management's authorization; and (iv) all transactions to which any of the Company and the Subsidiaries is a party or by which its properties are bound are recorded as necessary to permit preparation of the financial statements of the Company in accordance with GAAP. AE. PAYMENTS AND CONTRIBUTIONS. Neither the Company nor any of its Subsidiaries nor any of their respective directors, officers or, to their respective knowledge, other employees has (i) used any company funds for any unlawful contribution, endorsement, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment of company funds to any foreign or domestic government official or employee, (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other similar payment to any person with respect to Company matters. AF. NO MISREPRESENTATION. No representation or warranty of the Company contained in this Agreement or any of the other Documents, any schedule, annex or exhibit hereto or thereto or any agreement, instrument or certificate furnished by the Company to Buyer pursuant to this Agreement contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. AG. FINDER'S FEE. There is no finder's fee, brokerage commission or like payment in connection with the transactions contemplated by this Agreement for which Buyer is liable or responsible. IV. CERTAIN COVENANTS AND ACKNOWLEDGMENTS A. RESTRICTIVE LEGEND. Buyer acknowledges and agrees that, upon issuance pursuant to this Agreement, the Securities (including any Dividends Shares, Conversion Shares or the Warrant Shares) shall have endorsed thereon a legend in substantially the following form (and a stop-transfer order may be placed against transfer of the Preferred Shares, the Warrant Shares and the Conversion Shares until such legend has been removed): "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." B. FILINGS. The Company shall make all necessary Commission Filings and "blue sky" filings required to be made by the Company in connection with the sale of the Securities to Buyer as required by all applicable Laws, and shall provide a copy thereof to Buyer promptly after such filing. C. REPORTING STATUS. So long as Buyer beneficially owns any of the Securities, the Company shall timely file all reports required to be filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. D. USE OF PROCEEDS. The Company shall use the proceeds from the sale of the Securities (net of amounts paid by the Company for Buyer's out-of-pocket costs and expenses, whether or not accounted for or incurred in connection with the transactions contemplated by this Agreement (including the fees and disbursements of Buyer's legal counsel), and finder's fees in connection with such sale) solely for general corporate and working capital purposes. E. LISTING. Except to the extent the Company lists its Common Stock on The New York Stock Exchange or The Nasdaq National Market, the Company shall use its best efforts to maintain its listing of the Common Stock on Nasdaq. If the Common Stock is delisted from Nasdaq, the Company will use its best efforts to list the Common Stock on the most liquid national securities exchange or quotation system that the Common Stock is qualified to be listed on. F. RESERVED CONVERSION SHARES. The Company at all times from and after the date hereof shall have such number of shares of Common Stock duly and validly authorized and reserved for issuance as shall be sufficient for the conversion in full of, and the payment of dividends on, the Preferred Shares and the exercise in full of the Warrants. G. RIGHT OF FIRST REFUSAL. If, during the period commencing on the date hereof and ending three years after the Closing Date (the "RIGHT OF FIRST REFUSAL PERIOD"), the Company should propose (the "PROPOSAL") to issue Common Stock or securities convertible into Common Stock at a price less than the Current Market Price (as defined in the Certificate of Designation), or debt at less than par value or having an effective annual interest rate in excess of 9.9% (each a "RIGHT OF FIRST REFUSAL SECURITY" and collectively, the "RIGHT OF FIRST REFUSAL SECURITIES"), in each case on the date of issuance the Company shall be obligated to offer such Right of First Refusal Securities to Buyer on the terms set forth in the Proposal (the "OFFER") and Buyer shall have the right, but not the obligation, to accept such Offer on such terms. The Company shall provide written notice to Buyer of any Proposal, setting forth in full the terms and conditions thereof, and Buyer shall then have 10 business days to accept or reject the Offer in writing. If the Company issues any Right of First Refusal Securities during the Right of First Refusal Period but fails to: (i) notify Buyer of the Proposal, (ii) offer Buyer the opportunity to complete the transaction as set forth in the Proposal, or (iii) enter into and consummate an agreement to issue such Right of First Refusal Securities to Buyer on the terms and conditions set forth in the Proposal, after Buyer has accepted the Offer, then the Company shall pay to Buyer, as liquidated damages, an amount equal to 10% of the amount paid to the Company for the Right of First Refusal Securities. The foregoing Right of First Refusal is and shall be senior in right to any other right of first refusal issued by the Company to any other Person. H. INFORMATION. Each of the parties hereto acknowledges and agrees that, after the date hereof, Buyer shall not be provided with, nor be given access to, any material non-public information relating to the Company or any of the Subsidiaries. I. EXEMPTION FROM INVESTMENT COMPANY ACT. The Company shall conduct its business, and shall cause the Subsidiaries to conduct their businesses, in such a manner that neither the Company nor any Subsidiary shall become an "investment company" within the meaning of the Investment Company Act. J. ACCOUNTING AND RESERVES. The Company shall maintain a standard and uniform system of accounting and shall keep proper books and records and accounts in which full, true and correct entries shall be made of its transactions, all in accordance with GAAP applied on a consistent basis through all periods, and shall set aside on such books for each fiscal year all such reserves for depreciation, obsolescence, amortization, bad debts and other purposes in connection with its operations as are required by such principles so applied. K. TRANSACTIONS WITH AFFILIATES. Neither the Company nor any of its Subsidiaries shall, directly or indirectly, enter into any transaction or agreement with any stockholder, officer, director or Affiliate of the Company or family member of any officer, director or Affiliate of the Company, unless the transaction or agreement is (i) annually reviewed by a majority of Disinterested Directors (as defined below) and (ii) is reasonably believed by the Company to be on terms no less favorable to the Company or the applicable Subsidiary than those obtainable from a non-affiliated person. A "DISINTERESTED DIRECTOR" shall mean a director of the Company who is not and has not been an officer or employee of the Company and who is not a member of the family of, controlled by or under common control with, any such officer or employee. L. ISSUANCES OF ADDITIONAL CONVERTIBLE PREFERRED SHARES OR CONVERTIBLE DEBENTURES. So long as Buyer beneficially owns any of the Preferred Shares, the Company shall not issue any additional convertible preferred stock or convertible debt securities, in each case, convertible into Common Stock at a floating conversion price, without the prior written consent of Buyer. M. CERTAIN RESTRICTIONS. So long as any Preferred Shares are outstanding, no dividends shall be declared or paid or set apart for payment nor shall any other distribution be declared or made upon Junior Securities (as defined in the Certificate of Designation), nor shall any Junior Securities be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee incentive or benefit plan (including a stock option plan) of the Company or any Subsidiary, for any consideration by the Company, directly or indirectly, nor shall any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock. N. TRANSFER AGENT. If reasonably requested by Buyer, the Company shall replace the then Transfer Agent for the Common Stock with a Transfer Agent designated by Buyer. V. TRANSFER AGENT INSTRUCTIONS A. The Company undertakes and agrees that no instruction other than the instructions referred to in this Article V and customary stop transfer instructions prior to the registration and sale of the Common Stock pursuant to an effective Securities Act registration statement shall be given to its transfer agent for the Common Stock and that the Conversion Shares, the Dividend Shares and the Warrant Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement and applicable law. Nothing contained in this Section V.A. shall affect in any way Buyer's obligations and agreement to comply with all applicable securities laws upon resale of such Common Stock. If, at any time, Buyer provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of the resale by Buyer of such Common Stock is not required under the Securities Act and that the removal of restrictive legends is permitted under applicable law, the Company shall permit the transfer of such Common Stock and promptly instruct the Company's transfer agent to issue one or more certificates for Common Stock without any restrictive legends endorsed thereon. B. Buyer shall have the right to convert the Preferred Shares by telecopying an executed and completed Notice of Conversion (as defined in the Certificate of Designation) to the Company. Each date on which a Notice of Conversion is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a Conversion Date (as defined in the Certificate of Designation). The Company shall transmit the certificates evidencing the shares of Common Stock issuable upon conversion of any Preferred Shares (together with certificates evidencing any Preferred Shares not being so converted) to Buyer via express courier, by electronic transfer or otherwise, within five business days after receipt by the Company of the Notice of Conversion (the "DELIVERY DATE"). Within 30 days after Buyer delivers the Notice of Conversion to the Company, Buyer shall deliver to the Company a certificate or certificates evidencing the Preferred Shares being converted. C. Buyer shall have the right to purchase shares of Common Stock pursuant to exercise of the Warrants in accordance with its applicable terms of the Warrants. The last date that the Company may deliver shares of Common Stock issuable upon any exercise of Warrants is referred to herein as the "WARRANT DELIVERY DATE." D. The Company understands that a delay in the issuance of the shares of Common Stock issuable in lieu of cash dividends on the Preferred Shares or upon the conversion of the Preferred Shares or exercise of the Warrants beyond the applicable Dividend Payment Due Date (as defined in the Certificate of Designation), Delivery Date or Warrant Delivery Date could result in economic loss to Buyer. As compensation to Buyer for such loss (and not as a penalty), the Company agrees to pay to Buyer for late issuance of Common Stock issuable in lieu of cash dividends on the Preferred Shares or upon conversion of the Preferred Shares or exercise of the Warrants in accordance with the following schedule (where "NO. BUSINESS DAYS" is defined as the number of business days beyond five days from the Dividend Payment Due Date, the Delivery Date or the Warrant Delivery Date, as applicable):
COMPENSATION FOR EACH 10 SHARES OF PREFERRED SHARES NOT CONVERTED TIMELY OR 500 SHARES OF COMMON STOCK ISSUABLE IN PAYMENT OF DIVIDENDS OR UPON EXERCISE OF NO. BUSINESS DAYS WARRANTS NOT ISSUED TIMELY 1 $ 25 2 50 3 75 4 100 5 125 6 150 7 175 8 200 9 225 10 250 more than 10 $250 + $100 for each Business Day Late beyond 10 days
The Company shall pay to Buyer the compensation described above by the transfer of immediately available funds upon Buyer's demand. Nothing herein shall limit Buyer's right to pursue actual damages for the Company's failure to issue and deliver Common Stock to Buyer. In addition to any other remedies which may be available to Buyer, in the event the Company fails for any reason to deliver such shares of Common Stock within five business days after the relevant Dividend Payment Due Date, Delivery Date or Warrant Delivery Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of Conversion or exercise of Warrants by delivering a notice to such effect to the Company whereupon the Company and Buyer shall each be restored to their respective original positions immediately prior to delivery of such Notice of Conversion on delivery. VI. DELIVERY INSTRUCTIONS The Securities shall be delivered by the Company to the Escrow Agent pursuant to Section I.B. hereof on a "delivery-against-payment basis" at the Closing. VII. CLOSING DATE The date and time (the "CLOSING DATE") of the issuance and sale of the Preferred Shares and the Warrants (the "CLOSING") shall be the date hereof or such other date as shall be mutually agreed upon in writing. The issuance and sale of the Securities shall occur on the Closing Date at the offices of the Escrow Agent. Notwithstanding anything to the contrary contained herein, the Escrow Agent shall not be authorized to release to the Company the Purchase Price or to Buyer the certificate(s) (I/N/O Buyer or I/N/O Buyer's nominee) evidencing the Securities being purchased by Buyer unless the conditions set forth in Sections VIII.C. and IX.H. hereof have been satisfied. VIII. CONDITIONS TO THE COMPANY'S OBLIGATIONS Buyer understands that the Company's obligation to sell the Securities on the Closing Date to Buyer pursuant to this Agreement is conditioned upon: A. Delivery by Buyer to the Escrow Agent of the Purchase Price; B. The accuracy on the Closing Date of the representations and warranties of Buyer contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by Buyer in all material respects on or before the Closing Date of all covenants and agreements of Buyer required to be performed by it pursuant to this Agreement on or before the Closing Date; and C. There shall not be in effect any Law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement. IX. CONDITIONS TO BUYER'S OBLIGATIONS The Company understands that Buyer's obligation to purchase the Securities on the Closing Date pursuant to this Agreement is conditioned upon: A. Delivery by the Company to Buyer of evidence that the Certificate of Designation has been filed and is effective; B. Delivery by the Company to the Escrow Agent of one or more certificates (I/N/O Buyer or I/N/O Buyer's nominee) evidencing the Securities to be purchased by Buyer pursuant to this Agreement; C. The accuracy on the Closing Date of the representations and warranties of the Company contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by the Company in all respects on or before the Closing Date of all covenants and agreements of the Company required to be performed by it pursuant to this Agreement on or before the Closing Date, all of which shall be confirmed to Buyer by delivery of the certificate of the chief executive officer of the Company to that effect; D. Buyer having received an opinion of counsel for the Company, dated the Closing Date, in form, scope and substance reasonably satisfactory to Buyer as to the matters set forth in Annex A; E. There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock on Nasdaq, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States or any of its territories, protectorates or possessions, or (iv) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof; F. There not having occurred any event or development, and there being in existence no condition, having or which reasonably and foreseeably could have a Material Adverse Effect; G. The Company shall have delivered to Buyer (as provided in the Escrow Instructions) reimbursement of Buyer's out-of-pocket costs and expenses, whether or not accounted for or incurred in connection with the transactions contemplated by this Agreement (including the fees and disbursements of Buyer's legal counsel), of $50,000; H. There shall not be in effect any Law, order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement; I. Delivery by the Company of irrevocable instructions to the Company's transfer agent to reserve 2,000,000 shares of Common Stock for issuance of the Conversion Shares and the Warrant Shares; J. The Company shall have obtained all consents, approvals or waivers from governmental authorities and third persons necessary for the execution, delivery and performance of the Documents and the transactions contemplated thereby, all without material cost to the Company; and K. Buyer shall have received such additional documents, certificates, payment, assignments, transfers and other delivers, as it or its legal counsel may reasonably request and as are customary to effect a closing of the matters herein contemplated. L. Buyer shall have received a binding written commitment from Mr. Doug Deason, in form, scope and substance satisfactory to Buyer, to guarantee up to an additional $1,000,000 of obligations of the Company. X. TERMINATION A. TERMINATION BY MUTUAL WRITTEN CONSENT. This Agreement may be terminated and the transactions contemplated hereby may be abandoned, for any reason and at any time prior to the Closing Date, by the mutual written consent of the Company and Buyer. B. TERMINATION BY THE COMPANY OR BUYER. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by action of the Company or Buyer if (i) the Closing shall not have occurred at or prior to 5:00 p.m., New York City time, on April 24, 2000 (the "LATEST CLOSING DATE"); PROVIDED, HOWEVER, that the right to terminate this Agreement pursuant to this Section X.B. shall not be available to any party whose failure to fulfill any of its obligations under this Agreement has been the cause of or has resulted in the failure of the Closing to occur at or before such time and date; PROVIDED, FURTHER, HOWEVER, that if the Closing shall not have occurred on or prior to the Latest Closing Date, the Closing may only occur after the Latest Closing Date with the written consent of Buyer. C. TERMINATION BY BUYER. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by Buyer at any time prior to the Closing Date, if (i) the Company shall have failed to comply with any of its covenants or agreements contained in this Agreement, (ii) there shall have been a breach by the Company of any representation or warranty made by it in this Agreement, (iii) there shall have occurred any event or development, or there shall be in existence any condition, having or reasonably likely to have a Material Adverse Effect or (iv) the Company shall have failed to satisfy the conditions provided in Article IX hereof. D. TERMINATION BY THE COMPANY. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by the Company at any time prior to the Closing Date, if (i) Buyer shall have failed to comply with any of its covenants or agreements contained in this Agreement or (ii) there shall have been a breach by Buyer of any representation or warranty made by it in this Agreement. E. EFFECT OF TERMINATION. In the event of the termination of this Agreement pursuant to this Article X, this Agreement shall thereafter become void and have no effect, and no party hereto shall have any liability or obligation to any other party hereto in respect of this Agreement, except that the provisions of Article XI, this Section X.E and Section X.F shall survive any such termination; PROVIDED, HOWEVER, that no party shall be released from any liability hereunder if this Agreement is terminated and the transactions contemplated hereby abandoned by reason of (i) willful failure of such party to perform its obligations hereunder or (ii) any intentional, material misrepresentation made by such party of any matter set forth herein. F. FEES AND EXPENSES OF TERMINATION. If this Agreement is terminated for any reason other than pursuant to Section X.D., the Company shall promptly reimburse Buyer for all of Buyer's out-of-pocket costs and expenses incurred in connection with the transactions contemplated by this Agreement and the other Documents (including, without limitation, the fees and disbursements of Buyer's legal counsel). XI. SURVIVAL; INDEMNIFICATION A. The representations, warranties and covenants made by each of the Company and Buyer in this Agreement, the annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. B. The Company hereby agrees to indemnify and hold harmless Buyer, its Affiliates and their respective officers, directors, partners and members (collectively, the "BUYER INDEMNITEES") from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, "LOSSES") and agrees to reimburse Buyer Indemnitees for all out of-pocket expenses (including the fees and expenses of legal counsel), in each case promptly as incurred by Buyer Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact or breach of any of the Company's representations or warranties contained in this Agreement or the other Documents, or the annexes, schedules or exhibits hereto or thereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement or the other Documents; 2. any failure by the Company to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or the other Documents or any instrument, certificate or agreement entered into or delivered by the Company pursuant to this Agreement or the other Documents; 3. the purchase of the Preferred Shares and the Warrants, the conversion of the Preferred Shares and the exercise of the Warrants and the consummation of the transactions contemplated by this Agreement and the other Documents, the use of any of the proceeds of the Purchase Price by the Company, the purchase or ownership of any or all of the Securities, the performance by the parties hereto of their respective obligations hereunder and under the Documents or any claim, litigation, investigation, proceedings or governmental action relating to any of the foregoing, whether or not Buyer is a party thereto; or 4. resales of the Common Shares by Buyer in the manner and as contemplated by this Agreement and the Registration Rights Agreement. C. Buyer hereby agrees to indemnify and hold harmless the Company, its Affiliates and their respective officers, directors, partners and members (collectively, the "COMPANY INDEMNITEES") from and against any and all Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses (including the fees and expenses of legal counsel) in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with: 1. any misrepresentation, omission of fact or breach of any of Buyer's representations or warranties contained in this Agreement or the other Documents, or the annexes, schedules or exhibits hereto or thereto or any instrument, agreement or certificate entered into or delivered by Buyer pursuant to this Agreement or the other Documents; or 2. any failure by Buyer to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or the other Documents or any instrument, certificate or agreement entered into or delivered by Buyer pursuant to this Agreement or the other Documents. D. Promptly after receipt by either party hereto seeking indemnification pursuant to this Article XI (an "INDEMNIFIED PARTY") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "CLAIM"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Article XI is being sought (the "INDEMNIFYING PARTY") of the commencement thereof; but the omission so to notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights or defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. E. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. F. Notwithstanding any provisions of this Agreement to the contrary, the representations and warranties made in or pursuant to this Agreement by the Company will survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby for a period of eighteen (18) months after the Closing Date and the right to indemnification with respect thereto shall expire on such date (unless there is a claim pending on such date, in which case the indemnification obligations hereunder shall continue until final resolution of such claim). The Company shall have no indemnification obligations hereunder with respect to breaches of representations, warranties, or covenants unless and until the Losses incurred by the Buyer Indemnitees exceeds $50,000; provided that Buyer Indemnitees shall then be entitled to indemnification only to the extent the Losses exceed $50,000. The maximum amount of Losses for which Buyer Indemnitees shall be entitled to indemnification hereunder shall be an amount equal to $5,000,000. XII. GOVERNING LAW This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, without regard to the conflicts of law principles of such state. XIII. SUBMISSION TO JURISDICTION Each of the parties hereto consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and the other Documents. Each party hereto hereby irrevocably and unconditionally waives, to the fullest extent it may effectively do so, any defense of an inconvenient forum or improper venue to the maintenance of such action or proceeding in any such court and any right of jurisdiction on account of its place of residence or domicile. Each party hereto irrevocably and unconditionally consents to the service of any and all process in any such action or proceeding in such courts by the mailing of copies of such process by certified or registered airmail at its address specified in Article XIX. Each party hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. XIV. WAIVER OF JURY TRIAL TO THE FULLEST EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND OTHER DOCUMENTS. EACH PARTY HERETO (i) CERTIFIES THAT NEITHER OF THEIR RESPECTIVE REPRESENTATIVES, AGENTS OR ATTORNEYS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (ii) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS HEREIN. XV. COUNTERPARTS; EXECUTION This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute one and the same instrument. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. XVI. HEADINGS The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. XVII. SEVERABILITY In the event any one or more of the provisions contained in this Agreement or in the other Documents should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. XVIII. ENTIRE AGREEMENT; REMEDIES, AMENDMENTS AND WAIVERS This Agreement and the Documents constitute the entire agreement among the parties pertaining to the subject matter hereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by all parties. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. XIX. NOTICES Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: A. if to the Company, to: Precept Business Services, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, TX 75201 Attention: President (214) 754-6600 (214) 220-1082 (Fax) with a copy to: Precept Business Services, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, TX 75201 Attention: General Counsel (214) 754-6600 (214) 754-6909 (Fax) B. if to Buyer, to: The Shaar Fund Ltd. c/o Levinson Capital Management 2 World Trade Center, Suite 1820 New York, NY 10048 Attention: Samuel Levinson (212) 432-7711 (212) 432-7771 (Fax) with a copy to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) C. if to the Escrow Agent, to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) The Company, Buyer or the Escrow Agent may change the foregoing address by notice given pursuant to this Article XIX. XX. CONFIDENTIALITY Each of the Company and Buyer agrees to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; PROVIDED, HOWEVER, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law (including, without limitation, pursuant to Item 601(b)(10) of Regulation S-K under the Securities Act and the Exchange Act). XXI. ASSIGNMENT This Agreement shall not be assignable by either of the parties hereto prior to the Closing without the prior written consent of the other party, and any attempted assignment contrary to the provisions hereby shall be null and void; PROVIDED, HOWEVER, that Buyer may assign its rights and obligations hereunder, in whole or in part, to any Affiliate of Buyer. [SIGNATURE PAGE FOLLOWS.] In Witness Whereof, the parties hereto have duly executed and delivered this Agreement on the date first above written. Precept Business Services, Inc. By: Name: Title: The Shaar Fund Ltd. By: Intercaribbean Services By: Name: Title: EXHIBIT A COMMON STOCK PURCHASE WARRANTS EXHIBIT B CERTIFICATE OF DESIGNATION EXHIBIT C ESCROW INSTRUCTIONS EXHIBIT D REGISTRATION RIGHTS AGREEMENT SCHEDULE III.A.1. EXERCISE PRICES OF OPTIONS AND WARRANTS SCHEDULE III.A.3. PREEMPTIVE, SUBSCRIPTION, "CALL," RIGHT OF FIRST REFUSAL OR SIMILAR RIGHTS SCHEDULE III.A.4. SUBSIDIARIES SCHEDULE III.A.5. MINUTES SCHEDULE III.C. ISSUANCES AND SALES OF SECURITIES SCHEDULE III.F. CONTRAVENTION SCHEDULE III.K. LITIGATION SCHEDULE III.L.2. EVENTS OF DEFAULT SCHEDULE III.O. RELATED PARTY TRANSACTIONS SCHEDULE III.Q. SECURITIES LAW MATTERS SCHEDULE III.R. ENVIRONMENTAL MATTERS SCHEDULE III.S. LABOR MATTERS SCHEDULE III.T. ERISA MATTERS SCHEDULE III.U. TAX MATTERS SCHEDULE III.V. PROPERTY SCHEDULE III.W. INTELLECTUAL PROPERTY SCHEDULE III.Y. REGISTRATION RIGHTS SCHEDULE III.Z. DIVIDENDS ANNEX A FORM OF OPINION (OUTSIDE COUNSEL) 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Texas and has all requisite corporate power and authority to own its properties and conduct its business as described in the Commission Filings. 2. The authorized capital stock of the Company consists of (i) 100,000,000 shares of Class A Common Stock, par value $0.01 per share (the "CLASS A COMMON STOCK"), (ii) 10,500,000 shares of Class B Common Stock, par value $0.01 per share (the "CLASS B COMMON STOCK") and (iii) 3,000,000 shares of Preferred Stock, par value $1.00 per share. 3. When delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of the Documents, the Securities will be duly authorized and validly issued, fully paid and nonassessable. 4. The Company has the requisite corporate power and authority to enter into the Documents and to sell and deliver the Securities as described in the Documents; each of the Documents has been duly and validly authorized by all necessary corporate action by the Company; each of the Documents has been duly and validly executed and delivered by and on behalf of the Company, and is valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other laws affecting creditors rights generally. 5. Except as set forth on the Schedules to the Securities Purchase Agreement, the execution and delivery by the Company of the Documents, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated thereby, including, without limitation, the filing of the Certificate of Designation with the Texas Secretary of State's office, do not, and compliance with the provisions of the Documents will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries under, or result in the termination of, or require that any consent be obtained or any notice be given with respect to, (i) the Articles of Incorporation or By-Laws of the Company, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease, contract or other agreement, instrument or permit known to us and applicable to the Company or its properties or assets, or (iii) any Law applicable to, or, to the best of our knowledge, any judgment, decree or order of any court or government body having jurisdiction over, the Company or any of its Subsidiaries or any of their respective properties or assets. Except as set forth in the Securities Purchase Agreement, to our knowledge, no consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its properties or assets is required for the execution, delivery and performance by the Company of the Documents or the consummation by the Company of the transactions contemplated thereby. 6. When issued, the Preferred Shares and the Warrants shall be free and clear of all encumbrances and restrictions, except for restrictions on transfer imposed by applicable securities laws or those created by, through, or under Buyer. The Conversion Shares and Warrant Shares issuable upon conversion or exercise, respectively, of the Preferred Shares and the Warrants, respectively, will be free and clear of all encumbrances and restrictions, except for restrictions on transfer imposed by applicable securities laws or those created by, through, or under Buyer. 7. Based on Buyer's representations contained in this Agreement, the offer and sale of the Preferred Shares and the Warrants are exempt from the registration requirements of the Securities Act. 8. To our knowledge, there is no action, suit, claim, inquiry or investigation pending or threatened by or before any court or public or governmental authority which, if determined adversely to the Company, would have a Material Adverse Effect. 9. The Company is not, and, after the consummation of the transactions contemplated by this Agreement and the other Documents and the use of the proceeds from the sale of the Securities, will not be an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. FORM OF OPINION (INSIDE COUNSEL) 1. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions where the Company owns or leases properties or conducts business, except for jurisdictions in which the failure to so qualify would not have a Material Adverse Effect. 2. Except as set forth on the Schedules to the Securities Purchase Agreement, the execution and delivery by the Company of the Documents, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated thereby, including, without limitation, the filing of the Certificate of Designation with the Texas Secretary of State's office, do not, and compliance with the provisions of the Documents will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries under, or result in the termination of, or require that any consent be obtained or any notice be given with respect to, (i) the Articles of Incorporation or By-Laws or the comparable charter or organizational documents of any Subsidiary of the Company or (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease, contract or other agreement, instrument or permit known to us and applicable to any Subsidiary of the Company or its properties or assets. 3. To the best of our knowledge, other than as described in the Commission Filings, there are no outstanding options, warrants or other securities exercisable or convertible into Common Stock of the Company. 4. Each Subsidiary of the Company is not and, after the consummation of the transactions contemplated by this Agreement and the other Documents and the use of the proceeds from the sale of the Securities, will not be an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. EX-3.2 3 EXHIBIT 3.2 THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT. Number of Shares of Common Stock: 125,000 Warrant No. W-A-[__] COMMON STOCK PURCHASE WARRANT To Purchase Class A Common Stock of Precept Business Services, Inc. THIS IS TO CERTIFY THAT The Shaar Fund Ltd., or registered assigns, is entitled, at any time from the Closing Date (as hereinafter defined) to the Expiration Date (as hereinafter defined), to purchase from Precept Business Services, Inc., a Texas corporation (the "COMPANY"), 125,000 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, including fractional parts, at a purchase price per share equal to 110% of the Market Price, subject to adjustment as provided herein, all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1. DEFINITIONS As used in this Common Stock Purchase Warrant (this "WARRANT"), the following terms shall have the respective meanings set forth below: "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued by the Company after the Closing Date, other than Warrant Stock. "BOOK VALUE" shall mean, in respect of any share of Common Stock on any date herein specified, the consolidated book value of the Company as of the last day of any month immediately preceding such date, divided by the number of Fully Diluted Outstanding shares of Common Stock as determined in accordance with GAAP (assuming the payment of the exercise prices for such shares) by Ernst & Young LLP or any other firm of independent certified public accountants of recognized national standing selected by the Company and reasonably acceptable to the Holder. "BUSINESS DAY" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York. "CLOSING DATE" shall have the meaning set forth in the Securities Purchase Agreement. "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "COMMON STOCK" shall mean (except where the context otherwise indicates) the class A common stock, par value $.01 per share, of the Company as constituted on the Closing Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.4. "CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "CURRENT MARKET PRICE" shall mean on any date of determination the closing bid price of a Common Share on such day as reported on Nasdaq; PROVIDED, if such security bid is not listed or admitted to trading on Nasdaq, as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be. "CURRENT WARRANT PRICE" shall mean, in respect of a share of Common Stock at any date herein specified, the price at which a share of Common Stock may be purchased pursuant to this Warrant on such date, as set forth in the first paragraph hereof. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "EXERCISE PERIOD" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1. "EXPIRATION DATE" shall mean April 19, 2003. "FULLY DILUTED OUTSTANDING" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding at such date and all shares of Common Stock issuable in respect of this Warrant, outstanding on such date, and other options or warrants to purchase, or securities convertible into, shares of Common Stock outstanding on such date which would be deemed outstanding in accordance with GAAP for purposes of determining Book Value or net income per share. "FUNDAMENTAL CORPORATE CHANGE" shall have the meaning set forth in Section 4.4. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "HOLDER" shall mean the Person in whose name the Warrant or Warrant Stock set forth herein is registered on the books of the Company maintained for such purpose. "MARKET PRICE" per Common Share means the average of the closing bid prices of the Common Shares as reported on the Nasdaq SmallCap Market ("NASDAQ") for the five trading days immediately preceding the Closing Date. "OTHER PROPERTY" shall have the meaning set forth in Section 4.4. "OUTSTANDING" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "PERSON" shall mean any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement dated as of a date even herewith between the Company and The Shaar Fund Ltd., as it may be amended from time to time. "RESTRICTED COMMON STOCK" shall mean shares of Common Stock which are, or which upon their issuance on their exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SECURITIES PURCHASE AGREEMENT" shall mean the Securities Purchase Agreement dated as of a date even herewith between the Company and The Shaar Fund Ltd., as it may be amended from time to time. "TRANSFER" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act. "TRANSFER NOTICE" shall have the meaning set forth in Section 9.2. "WARRANT PRICE" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such exercise. "WARRANT STOCK" shall mean the shares of Common Stock purchased by the holders of the Warrants upon the exercise thereof. "WARRANTS" shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. 2. EXERCISE OF WARRANT 2.1 MANNER OF EXERCISE From and after 90 days after the Closing Date (the "Special Date") and until 5:00 p.m., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder. In the event that the Company consolidates or merges with or into another Person (where the Company is not the survivor or where there is a change in or distribution with respect to the Common Stock of the Company), sells, conveys, transfers or otherwise dispose of all or substantially all its property, assets or business to another Person, or effectuates a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of on or prior to the Special Date, this Warrant shall expire. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 1909 Woodall Rodgers Freeway, Suite 500, Dallas, TX 75201, or at the office or agency designated by the Company pursuant to Section 12, (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (ii) to the extent such exercise is not being effected through a Cashless Exercise, payment of the Warrant Price in cash or wire transfer or cashier's check drawn on a United States bank and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt of the items referred to in clauses (i), (ii) and (iii) above, the Company shall, as promptly as practicable, and in any event within five Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder or, subject to Section 9, such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the cash or check or checks and this Warrant, is received by the Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. Notwithstanding any provision herein to the contrary, the Company shall not be required to register shares in the name of any Person who acquired this Warrant (or part hereof) or any Warrant Stock otherwise than in accordance with this Warrant. Simultaneously with the exercise of this Warrant, payment in full of the Warrant Price shall be made, at the option of the Holder, (i) by payment of the Warrant Price in cash or by wire transfer or cashier's check drawn on a United States bank, (ii) through a net exercise without payment of the Warrant Price in cash by providing notice to the Company of the Holder's election to receive a number of shares of Common Stock in a Cashless Exercise equal to the product of (1) the number of shares for which such Warrant is exercisable with payment in cash of the Warrant Price as of the date of exercise and (2) the Cashless Exercise Ratio or (iii) by any combination of clauses (i) and (ii). For purposes of this Agreement, the "CASHLESS EXERCISE RATIO" shall equal a fraction, the numerator of which is the excess of the Current Market Price per share of the Common Stock on the date of exercise over the Current Warrant Price as of the date of exercise, and the denominator of which is the Current Market Price per share of the Common Stock on the date of exercise. An exercise of a Warrant in accordance with clause (ii) above is herein called a "CASHLESS EXERCISE." Following a Cashless Exercise, this Warrant shall be canceled in all respects with regard to (a) the number of shares of Common Stock issued in accordance with the Cashless Exercise PLUS (b) the number of shares used as consideration for the Cashless Exercise. 2.2 PAYMENT OF TAXES AND CHARGES All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable, freely tradable and without any preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issuance or delivery thereof, unless such tax or charge is imposed by law upon Holder, in which case such taxes or charges shall be paid by Holder. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of the Company that no such tax or other charge is due. 2.3 FRACTIONAL SHARES The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the Market Price per share of Common Stock as of the Closing Date. 2.4 CONTINUED VALIDITY A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part (other than a holder who acquires such shares after the same have been publicly sold pursuant to a Registration Statement under the Securities Act or sold pursuant to Rule 144 thereunder) shall continue to be entitled with respect to such shares to all rights to which it would have been entitled as Holder under Sections 9, 10 and 14 of this Warrant. The Company will, at the time of exercise of this Warrant, in whole or in part, upon the request of Holder, acknowledge in writing, in form reasonably satisfactory to Holder, its continuing obligation to afford Holder all such rights; PROVIDED, HOWEVER, that if Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to Holder all such rights. 3. TRANSFER, DIVISION AND COMBINATION 3.1 TRANSFER Subject to compliance with Section 9, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company referred to in Section 2.1 or the office or agency designated by the Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new warrant issued. 3.2 DIVISION AND COMBINATION Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Sections 3.1 and 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 3.3 EXPENSES The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrants or Warrants under this Section 3. 3.4 MAINTENANCE OF BOOKS The Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. 4. ADJUSTMENTS The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event. 4.1 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS If at any time the Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock; (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock; or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock; then (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 4.2 CERTAIN OTHER DISTRIBUTIONS If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: (a) cash; (b) any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock); or (c) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock); then Holder shall be entitled to receive such dividend or distribution as if Holder had exercised the Warrant. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4.1. 4.3 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price provided for in this Section 4: (a) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (b) FRACTIONAL INTERESTS. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share. (c) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (d) CHALLENGE TO GOOD FAITH DETERMINATION. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any item under this Section 4, such determination may be challenged in good faith by the Holder, and any dispute shall be resolved by an investment banking firm of recognized national standing (or otherwise competent to make the determination) selected by the Company and reasonably acceptable to Holder. 4.4 REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another Person (where the Company is not the survivor or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, convey, transfer or otherwise dispose of all or substantially all its property, assets or business to another Person, or effectuate a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of (each, a "FUNDAMENTAL CORPORATE CHANGE") and, pursuant to the terms of such Fundamental Corporate Change, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed to the holders of Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of the Warrant, such number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property as is receivable upon or as a result of such Fundamental Corporate Change by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Corporate Change. In case of any such Fundamental Corporate Change, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.4, "COMMON STOCK OF THE SUCCESSOR OR ACQUIRING CORPORATION" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.4 shall similarly apply to successive Fundamental Corporate Change. 4.5 OTHER ACTION AFFECTING COMMON STOCK In case at any time or from time to time the Company shall take any action in respect of its Common Stock, other than any action described in this Section 4, which would have a materially adverse effect upon the rights of Holder, the number of shares of Common Stock and/or the purchase price thereof shall be adjusted in such manner as may be equitable in the circumstances, as determined in good faith by the Board of Directors of the Company. 4.6 CERTAIN LIMITATIONS Notwithstanding anything herein to the contrary, the Company agrees not to enter into any transaction which, by reason of any adjustment hereunder, would cause the Current Warrant Price to be less than the par value per share of Common Stock. 5. NOTICES TO HOLDER 5.1 NOTICE OF ADJUSTMENTS Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Company determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.2), specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.4 or 4.5) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to the Holder in accordance with Section 14.2. The Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by the Holder or any prospective purchaser of a Warrant designated by Holder. 5.2 NOTICE OF CORPORATE ACTION If at any time: (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right; or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation; or (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 20 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 14.2. 6. NO IMPAIRMENT The Company shall not by any action, including, without limitation, amending its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK From and after the Closing Date, the Company shall at all times reserve and keep available for issuance upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable and not subject to preemptive rights. Before taking any action which would cause an adjustment reducing the Current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of record of such holders, the Company will in each case take such a record and will take such record as of the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 9. RESTRICTIONS ON TRANSFERABILITY The Warrants and the Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. 9.1 RESTRICTIVE LEGEND (a) Holder, by accepting this Warrant and any Warrant Stock agrees that this Warrant and the Warrant Stock issuable upon exercise hereof may not be assigned or otherwise transferred unless and until (i) the Company has received an opinion of counsel for Holder (reasonably satisfactory to the Company) that such securities may be sold pursuant to an exemption from registration under the Securities Act or (ii) a registration statement relating to such securities has been filed by the Company and declared effective by the Commission. Each certificate for Warrant Stock issuable hereunder shall bear a legend as follows until such securities have been sold pursuant to an effective registration statement under the Securities Act: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT THESE SECURITIES MAY BE SOLD PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS." (b) Except as otherwise provided in this Section 9, the Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT." 9.2 NOTICE OF PROPOSED TRANSFERS Prior to any Transfer or attempted Transfer of any Warrants or any shares of Restricted Common Stock, the Holder shall give ten days' prior written notice (a "TRANSFER NOTICE") to the Company of Holder's intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to Holder who shall be reasonably satisfactory to the Company, an opinion that the proposed Transfer of such Warrants or such Restricted Common Stock may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, the Company shall, within five days thereof, notify the Holder as to whether such opinion is reasonably satisfactory and, if so, such holder shall thereupon be entitled to Transfer such Warrants or such Restricted Common Stock, in accordance with the terms of the Transfer Notice. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(b), unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. Holder shall not be entitled to Transfer such Warrants or such Restricted Common Stock until receipt of notice from the Company under this Section 9.2 that such opinion is reasonably satisfactory. 9.3 REQUIRED REGISTRATION Pursuant to the terms and conditions set forth in Registration Rights Agreement, the Company shall prepare and file with the Commission not later than the 90th day after the Closing Date, a Registration Statement relating to the offer and sale of the Common Stock issuable upon exercise of the Warrants and shall use commercially reasonable efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but no later than 150 days after the Closing Date. 9.4 TERMINATION OF RESTRICTIONS Notwithstanding the foregoing provisions of Section 9, the restrictions imposed by this Section upon the transferability of the Warrants, the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) and the legend requirements of Section 9.1 shall terminate as to any particular Warrant or share of Warrant Stock or Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act. Whenever the restrictions imposed by Section 9 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company upon written request of the Holder, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN WARRANT CONTAINED IN SECTION 9 HEREOF TERMINATED ON __________, _____, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 9.1(a). 9.5 LISTING ON SECURITIES EXCHANGE If the Company shall list any shares of Common Stock on any securities exchange or quotation system, it will, at its expense, list thereon, maintain and, when necessary, increase such listing of, all shares of Common Stock issued or, to the extent permissible under the applicable securities exchange rules, issuable upon the exercise of this Warrant so long as any shares of Common Stock shall be so listed during any such Exercise Period. 10. SUPPLYING INFORMATION The Company shall cooperate with Holder in supplying such information as may be reasonably necessary for Holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrant or Restricted Common Stock. 11. LOSS OR MUTILATION Upon receipt by the Company from Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of the Holder shall be sufficient indemnity), and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to Holder at Holder's sole cost and expense; PROVIDED, in the case of mutilation no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 12. OFFICE OF THE COMPANY As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency (which may be the principal executive offices of the Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. 13. LIMITATION OF LIABILITY No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 14. NO RIGHTS AS SHAREHOLDER Except as otherwise provided in the Securities Purchase Agreement and in the provisions of this Warrant, solely as a result of this Warrant, Holder shall not be considered a holder of Common Stock and shall not be entitled to the rights given to holders of Common Stock unless and until Holder exercises any portion of this Warrant. 15. MISCELLANEOUS 15.1 NONWAIVER AND EXPENSES No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. If the Company fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, without limitation, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. 15.2 NOTICE GENERALLY Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three days after the date of deposit in the United States mails, as follows: (a) if to the Company, to: Precept Business Services, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, TX 75201 Attention: President (214) 754-6600 (214) 220-1082 (Fax) with a copy to: Precept Business Services, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, TX 75201 Attention: General Counsel (214) 754-6600 (214) 754-6909 (Fax) (b) if to the Holder, to: The Shaar Fund Ltd., c/o Levinson Capital Management 2 World Trade Center, Suite 1820 New York, NY 10048 Attention: Samuel Levinson (212) 432-7711 (212) 432-7771 (Fax) with a copy to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) The Company or the Holder may change the foregoing address by notice given pursuant to this Section 14.2. 15.3 INDEMNIFICATION The Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of any failure by the Company to perform or observe in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Warrant; PROVIDED, HOWEVER, that the Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements are found in a final nonappealable judgment by a court to have resulted from Holder's gross negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of the Company. 15.4 REMEDIES Holder in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under Section 9 of this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of Section 9 of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 15.5 SUCCESSORS AND ASSIGNS Subject to the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and, with respect to Section 9 hereof, holders of Warrant Stock, and shall be enforceable by any such Holder or holder of Warrant Stock. 15.6 AMENDMENT This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and Holder. 15.7 SEVERABILITY Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall only be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 15.8 HEADINGS The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 15.9 GOVERNING LAW This Warrant shall be governed by the laws of the State of New York, without regard to the provisions thereof relating to conflicts of law. [SIGNATURE PAGE FOLLOWS.] In Witness Whereof, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: April 19, 2000 Precept Business Services, Inc. By: Name: Title: EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of __________ shares of Common Stock of Precept Business Services, Inc. and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to whose address is and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. (Name of Registered Owner) (Signature of Registered Owner) (Street Address) (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: No. of Shares of Name and Address of Assignee Common Stock - ---------------------------- ------------ and does hereby irrevocably constitute and appoint attorney-in-fact to register such transfer on the books of Precept Business Services, Inc. maintained for the purpose, with full power of substitution in the premises. Dated: (Print Name) (Signature) (Print Name of Witness) (Witness's Signature) NOTICE: The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-3.3 4 EXHIBIT 3.3 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement, dated as of April 19, 2000 (this "AGREEMENT"), by and between Precept Business Services, Inc., a Texas corporation, with principal executive offices located at 1909 Woodall Rodgers Freeway, Suite 500, Dallas, TX 75201 (the "COMPANY"), and The Shaar Fund Ltd. (the "INITIAL INVESTOR"). Whereas, upon the terms and subject to the conditions of the Securities Purchase Agreement dated as of April 19, 2000, by and between the Initial Investor and the Company (the "SECURITIES PURCHASE AGREEMENT"), the Company has agreed to issue and sell to the Initial Investor (i) 200,000 shares of Series A 8% Convertible Preferred Stock, par value $1.00 per share (the "PREFERRED SHARES") which, upon the terms of and subject to the conditions of the Company's Certificate of Designation of Series A 8% Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATION"), are convertible into shares of the Company's class A common stock, par value $.01 per share (the "COMMON STOCK") and (ii) Common Stock Purchase Warrants (the "WARRANTS") to purchase 125,000 shares of Common Stock; and Whereas, to induce the Initial Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued or issuable in lieu of cash dividend payments on the Preferred Shares, upon conversion of the Preferred Shares and exercise of the Warrants certain registration rights under the Securities Act; Now, Therefore, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS (a) As used in this Agreement, the following terms shall have the meanings: (i) "AFFILIATE," of any specified Person means any other Person who directly, or indirectly through one or more intermediaries, is in control of, is controlled by, or is under common control with, such specified Person. For purposes of this definition, control of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract, securities, ownership or otherwise; and the terms "CONTROLLING" and "CONTROLLED" have the respective meanings correlative to the foregoing. (ii) "CLOSING DATE" means the date and time of the issuance and sale of the Preferred Shares and the Warrants. (iii) "COMMISSION" means the Securities and Exchange Commission. (iv) "CURRENT MARKET PRICE" on any date of determination means the closing bid price of a share of the Common Stock on such day as reported on the Nasdaq SmallCap Market ("NASDAQ"); PROVIDED, if such security is not listed or admitted to trading on the Nasdaq, as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be. (v) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (vi) "INVESTOR" means each of the Initial Investor and any transferee or assignee of Registrable Securities which agrees to become bound by all of the terms and provisions of this Agreement in accordance with Section 8 hereof. (vii) "PERSON" means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. (viii) "PROSPECTUS" means the prospectus (including, without limitation, any preliminary prospectus and any final prospectus filed pursuant to Rule 424(b) under the Securities Act, including any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein. (ix) "PUBLIC OFFERING" means an offer registered with the Commission and the appropriate state securities commissions by the Company of its Common Stock and made pursuant to the Securities Act. (x) "REGISTRABLE SECURITIES" means the Common Stock issued or issuable (i) in lieu of cash dividend payments on the Preferred Shares, (ii) upon conversion or redemption of the Preferred Shares or (iii) upon exercise of the Warrants; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security. (xi) "REGISTRATION STATEMENT" means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits to and other material incorporated by reference in such registration statement and Prospectus. (xii) "RESTRICTED SECURITY" means any share of Common Stock issued or issuable in lieu of cash dividend payments on the Preferred Shares, upon conversion or redemption of the Preferred Shares or exercise of the Warrants except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the prospectus included in such registration statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto), or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company. (xiii) "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (b) All capitalized terms used and not defined herein have the respective meaning assigned to them in the Securities Purchase Agreement. 2. REGISTRATION (a) FILING AND EFFECTIVENESS OF REGISTRATION STATEMENT. The Company shall prepare and file with the Commission not later than 90 days after the Closing Date, a Registration Statement relating to the offer and sale of the Registrable Securities and shall use commercially reasonable efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but in no event later than 150 days after the Closing Date, assuming for purposes hereof a Conversion Price under the Certificate of Designation of $1.00 per share. The Company shall promptly (and, in any event, no more than 24 hours after it receives comments from the Commission), notify the Buyer when and if it receives any comments from the Commission on the Registration Statement and promptly forward a copy of such comments, if they are in writing, to the Buyer. At such time after the filing of the Registration Statement pursuant to this Section 2(a) as the Commission indicates, either orally or in writing, that it has no further comments with respect to such Registration Statement or that it is willing to entertain appropriate requests for acceleration of effectiveness of such Registration Statement, the Company shall promptly, and in no event later than two business days after receipt of such indication from the Commission, request that the effectiveness of such Registration Statement be accelerated within 48 hours of the Commission's receipt of such request. The Company shall not include any other securities in the Registration Statement relating to the offer and sale of the Registrable Securities. The Company shall notify the Initial Investor by written notice that such Registration Statement has been declared effective by the Commission within 24 hours of such declaration by the Commission. (b) REGISTRATION DEFAULT. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a), is not (i) filed with the Commission within 90 days after the Closing Date for any reason whatsoever or (ii) declared effective by the Commission within 150 days after the Closing Date for any reason whatsoever (either of which, without duplication, an "INITIAL DATE"), then the Company shall make the payments to the Initial Investor as provided in the next sentence as liquidated damages and not as a penalty. The amount to be paid by the Company to the Initial Investor shall be determined as of each Computation Date (as defined below), and such amount shall be equal to 2% (the "LIQUIDATED DAMAGE RATE") of the Purchase Price (as defined in the Securities Purchase Agreement) from the Initial Date to the first Computation Date and for each Computation Date thereafter, calculated on a pro rata basis to the date on which the Registration Statement is filed with (in the event of an Initial Date pursuant to clause (i) above) or declared effective by (in the event of an Initial Date pursuant to clause (ii) above) the Commission (the "PERIODIC AMOUNT") PROVIDED, HOWEVER, that in no event shall the liquidated damages be less than $25,000; PROVIDED, FURTHER, HOWEVER, that if the Registration Statement is not declared effective by the Commission within 210 days after the Initial Date set forth in clause (ii) above, then the Liquidated Damage Rate shall increase to 4%; PROVIDED, FURTHER, HOWEVER, that the Liquidated Damage Rate shall increase by 1% for each 30 day period after the 210th day after the Initial Date set forth in clause (ii) above that the Registration Statement is not declared effective by the Commission. The full Periodic Amount shall be paid by the Company to the Initial Investor by wire transfer of immediately available funds within three days after each Computation Date. As used in this Section 2(b), "COMPUTATION DATE" means the date which is 30 days after the Initial Date and, if the Registration Statement required to be filed by the Company pursuant to Section 2(a) has not theretofore been declared effective by the Commission, each date which is 30 days after the previous Computation Date until such Registration Statement is so declared effective. (c) ELIGIBILITY FOR USE OF FORM S-3. The Company agrees that at such time as it meets all the requirements for the use of Securities Act Registration Statement on Form S-3 it shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form. (d) ADDITIONAL REGISTRATION STATEMENT. In the event the Current Market Price declines to $1.25 per share or less and each time thereafter that the Current Market Price declines by 10% (each such date, a "DECLINE DATE"), the Company shall, to the extent required by the Securities Act (because the additional shares were not covered by the Registration Statement filed pursuant to Section 2(a)), as reasonably determined by the Initial Investor, file an additional Registration Statement with the Commission for such additional number of Registrable Securities as would be issuable upon conversion of the Preferred Shares and exercise of the Warrants (the "ADDITIONAL REGISTRABLE SECURITIES") in addition to those previously registered, assuming (x) with respect to the first Additional Registration Statement, a Conversion Price of $0.50 per share and (y) with respect to each succeeding Additional Registration Statement, a Conversion Price of 10% less than the Conversion Price assumed with respect to the immediately preceding Additional Registration Statement. The Company shall, to the extent required by the Securities Act, as reasonably determined by the Initial Investor, prepare and file with the Commission not later than the 30th day thereafter, a Registration Statement relating to the offer and sale of such Additional Registrable Securities and shall use commercially reasonable efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but not later than 60 days thereafter. The Company shall not include any other securities in the Registration Statement relating to the offer and sale of such Additional Registrable Securities. If the Additional Registration Statement is not (i) filed with the Commission within 30 days after the Decline Date for any reason whatsoever or (ii) declared effective by the Commission within 90 days after the Decline Date for any reason whatsoever (either of which, without duplication, an "ADDITIONAL REGISTRATION DATE"), then the Company shall make the payments to the Initial Investor at the Liquidated Damage Rate from the Additional Registration Date to the first Additional Computation Date and for each Additional Computation Date thereafter, calculated on a pro rata basis to the date on which the Additional Registration Statement is filed with (in the event of an Additional Registration Date pursuant to clause (i) above) or declared effective by (in the event of an Additional Registration Date pursuant to clause (ii) above) the Commission (the "ADDITIONAL PERIODIC AMOUNT") PROVIDED, HOWEVER, that in no event shall the liquidated damages be less than $25,000; PROVIDED, FURTHER, HOWEVER, that if the Additional Registration Statement is not declared effective by the Commission within 120 days after the Additional Registration Date set forth in clause (ii) above, then the Liquidated Damage Rate shall increase to 4%; PROVIDED, FURTHER, HOWEVER, that the Liquidated Damage Rate shall increase by 1% for each 30 day period after the 120th day after the Additional Registration Date set forth in clause (ii) above that the Additional Registration Statement is not declared effective by the Commission. The full Additional Periodic Amount shall be paid by the Company to the Initial Investor by wire transfer of immediately available funds within three days after each Additional Computation Date. As used in this Section 2(d), "ADDITIONAL COMPUTATION DATE" means the date which is 30 days after the Additional Registration Date and, if the Additional Registration Statement required to be filed by the Company pursuant to this Section 2(d) has not theretofore been declared effective by the Commission, each date which is 30 days after the previous Additional Computation Date until such Additional Registration Statement is so declared effective. (e) (i) If the Company proposes to register any of its warrants, Common Stock or any other shares of common stock of the Company under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Stock or any other shares of common stock of the Company issuable upon exercise of employee share options or in connection with any employee benefit or similar plan of the Company or (C) in connection with a direct or indirect acquisition by the Company of another Person or any transaction with respect to which Rule 145 (or any successor provision) under the Securities Act applies), whether or not for sale for its own account, it will each such time, give prompt written notice at least 10 days prior to the anticipated filing date of the registration statement relating to such registration to each Investor, which notice shall set forth such Investor's rights under this Section 2(e) and shall offer such Investor the opportunity to include in such registration statement such number of Registrable Securities as such Investor may request. Upon the written request of any Investor made within 5 days after the receipt of notice from the Company (which request shall specify the number of Registrable Securities intended to be disposed of by such Investor), the Company will use commercially reasonable efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by each Investor, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that (A) if such registration involves a Public Offering, each Investor must sell its Registrable Securities to any underwriters selected by the Company with the consent of such Investor on the same terms and conditions as apply to the Company and (B) if, at any time after giving written notice of its intention to register any Registrable Securities pursuant to this Section 2 and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such Registrable Securities, the Company shall give written notice to each Investor and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. The Company's obligations under this Section 2(e) shall terminate on the date that the registration statement to be filed in accordance with Section 2(a) is declared effective by the Commission. (ii) If a registration pursuant to this Section 2(e) involves a Public Offering and the managing underwriter thereof advises the Company that, in its view, the number of shares of Common Stock, Warrants or other shares of Common Stock that the Company and the Investors intend to include in such registration exceeds the largest number of shares of Common Stock or Warrants (including any other shares of Common Stock or Warrants of the Company) that can be sold without having an adverse effect on such Public Offering (the "MAXIMUM OFFERING SIZE"), the Company will include in such registration only such number of shares of Common Stock or Warrants, as applicable, as does not exceed the Maximum Offering Size, and the number of shares in the Maximum Offering Size shall be allocated among the Company, the Investors and any other sellers of Common Stock or Warrants in such Public Offering ("THIRD-PARTY SELLERS"), FIRST, to the Company, SECOND, pro rata among the Investors until all the shares of Common Stock or Warrants originally proposed to be offered for sale by the Investors have been allocated, and THIRD, pro rata among any Third-Party Sellers, in each case on the basis of the relative number of shares of Common Stock or Warrants originally proposed to be offered for sale under such registration by each of the Company, the Investors and the Third-Party Sellers, as the case may be. If as a result of the proration provisions of this Section 2(e)(ii), any Investor is not entitled to include all such Registrable Securities in such registration, such Investor may elect to withdraw its request to include any Registrable Securities in such registration. With respect to registrations pursuant to this Section 2(e), the number of securities required to satisfy any underwriters' over-allotment option shall be allocated among the Company, the Investors and any Third Party Seller pro rata on the basis of the relative number of securities offered for sale under such registration by each of the Company, the Investors and any such Third Party Sellers before the exercise of such over-allotment option. 3. OBLIGATIONS OF THE COMPANY In connection with the registration of the Registrable Securities, the Company shall: (a) Promptly (i) prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and supplements to the Prospectus as may be necessary to keep the Registration Statement continuously effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by Investors for resales of the Registrable Securities for a period of five years from the date on which the Registration Statement is first declared effective by the Commission (the "EFFECTIVE TIME") or such shorter period that will terminate when all the Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the "REGISTRATION PERIOD") and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and (B) the Prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) During the Registration Period, comply with the provisions of the Securities Act with respect to the Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investors as set forth in the Prospectus forming part of the Registration Statement; (c) (i) Prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any Prospectus (including any supplements thereto), provide (A) draft copies thereof to the Investors and reflect in such documents all such comments as the Investors (and their counsel) reasonably may propose and (B) to the Investors a copy of the accountant's consent letter to be included in the filing and (ii) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (A) promptly after the same is prepared and publicly distributed, filed with the Commission, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto, and (B) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) (i) Register or qualify the Registrable Securities covered by the Registration Statement under such securities or "blue sky" laws of such jurisdictions as the Investors who hold a majority-in-interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; PROVIDED, HOWEVER, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction; (e) As promptly as practicable after becoming aware of such event, notify each Investor of the occurrence of any event, as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Investor as such Investor may reasonably request; (f) As promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension; (g) Cause all the Registrable Securities covered by the Registration Statement to be listed on the principal national securities exchange, and included in an inter-dealer quotation system of a registered national securities association, on or in which securities of the same class or series issued by the Company are then listed or included; (h) Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (i) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the registration statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investor may request; and, within three business days after a registration statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such registration statement) an appropriate instruction and, to the extent necessary, an opinion of such counsel; (j) Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances; (k) Make generally available to its security holders as soon as practicable, but in any event not later than three (3) months after (i) the effective date (as defined in Rule 158(c) under the Securities Act) of the Registration Statement, and (ii) the effective date of each post-effective amendment to the Registration Statement, as the case may be, an earnings statement of the Company and its subsidiaries complying with Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (l) In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment; (m) (i) Make reasonably available for inspection by Investors, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by such Investors or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company's officers, directors and employees to supply all information reasonably requested by such Investors or any such underwriter, attorney, accountant or agent in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; PROVIDED, HOWEVER, that all records, information and documents that are designated in writing by the Company, in good faith, as confidential, proprietary or containing any material nonpublic information shall be kept confidential by such Investors and any such underwriter, attorney, accountant or agent (pursuant to an appropriate confidentiality agreement in the case of any such holder or agent), unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and PROVIDED, FURTHER, that, if the foregoing inspection and information gathering would otherwise disrupt the Company's conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated on behalf of the Investors and the other parties entitled thereto by one firm of counsel designed by and on behalf of the majority in interest of Investors and other parties; (n) In connection with any underwritten offering, make such representations and warranties to the Investors participating in such underwritten offering and to the managers, in form, substance and scope as are customarily made by the Company to underwriters in secondary underwritten offerings; (o) In connection with any underwritten offering, obtain opinions of counsel to the Company (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managers) addressed to the underwriters, covering such matters as are customarily covered in opinions requested in secondary underwritten offerings (it being agreed that the matters to be covered by such opinions shall include, without limitation, as of the date of the opinion and as of the Effective Time of the Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Registration Statement and the Prospectus, including any documents incorporated by reference therein, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, subject to customary qualifications, assumptions and limitations); (p) In connection with any underwritten offering, obtain "cold comfort" letters and updates thereof from the independent public accountants of the Company (and, if necessary, from the independent public accountants of any subsidiary of the Company or of any business acquired by the Company, in each case for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each underwriter participating in such underwritten offering (if such underwriter has provided such letter, representations or documentation, if any, required for such cold comfort letter to be so addressed), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with secondary underwritten offerings; (q) In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the managers, if any; and (r) In the event that any broker-dealer registered under the Exchange Act shall be an "AFFILIATE" (as defined in Rule 2729(b)(1) of the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD RULES") (or any successor provision thereto)) of the Company or has a "CONFLICT OF INTEREST" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision thereto)) and such broker-dealer shall underwrite, participate as a member of an underwriting syndicate or selling group or assist in the distribution of any Registrable Securities covered by the Registration Statement, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of the NASD Rules, including, without limitation, by (A) engaging a "QUALIFIED INDEPENDENT UNDERWRITER" (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to participate in the preparation of the Registration Statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereof and to recommend the public offering price of such Registrable Securities, (B) indemnifying such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 6 hereof, and (C) providing such information to such broker- dealer as may be required in order for such broker-dealer to comply with the requirements of the NASD Rules. 4. OBLIGATIONS OF THE INVESTORS In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. As least seven days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "REQUESTED INFORMATION") if such Investor elects to have any of its Registrable Securities included in the Registration Statement. If at least two business days prior to the anticipated filing date the Company has not received the Requested Information from an Investor (a "NON-RESPONSIVE INVESTOR"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor and have no further obligations to the Non-Responsive Investor; (b) Each Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement; and (c) Each Investor agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 3(e) or 3(f), it shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(e) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. EXPENSES OF REGISTRATION All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company, and the reasonable fees of one firm of counsel to the holders of a majority in interest of the Registrable Securities shall be borne by the Company; PROVIDED, HOWEVER, that in no event shall the Company be responsible for expenses greater than $20,000. 6. INDEMNIFICATION AND CONTRIBUTION (a) The Company shall indemnify and hold harmless each Investor and each underwriter, if any, which facilitates the disposition of Registrable Securities, and each of their respective officers and directors and each person who controls such Investor or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "INDEMNIFIED PERSON") from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 3(e), the use by the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability. (b) INDEMNIFICATION BY THE INVESTORS AND UNDERWRITERS. Each Investor agrees, as a consequence of the inclusion of any of its Registrable Securities in a Registration Statement, and each underwriter, if any, which facilitates the disposition of Registrable Securities shall agree, as a consequence of facilitating such disposition of Registrable Securities, severally and not jointly, to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers who sign any Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made, in the case of the Prospectus), not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter expressly for use therein; PROVIDED, HOWEVER, that no Investor or underwriter shall be liable under this Section 6(b) for any amount in excess of the net proceeds paid to such Investor or underwriter in respect of shares sold by it, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) NOTICE OF CLAIMS, ETC. Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an "INDEMNIFIED PARTY") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "CLAIM"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the "INDEMNIFYING PARTY") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, costs and expenses, (y) the Indemnified Party and the Indemnifying Party shall reasonably have concluded that representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together with appropriate local counsel). The Indemnified Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment. (d) CONTRIBUTION. If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnifying Party or by such Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation (even if the Investors or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Investors and any underwriters in this Section 6(d) to contribute shall be several in proportion to the percentage of Registrable Securities registered or underwritten, as the case may be, by them and not joint. (e) Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds to be received by such Investor from the sale of such Investor's Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are to be registered under the Securities Act and (ii) underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement. (f) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company. The remedies provided in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity. 7. RULE 144 With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration ("RULE 144"), the Company agrees to use its best efforts to: (a) comply with the provisions of paragraph (c) (1) of Rule 144; and (b) file with the Commission in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Investor, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144. 8. ASSIGNMENT The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any permitted transferee of all or any portion of such Registrable Securities (or all or any portion of any Preferred Shares or Warrant of the Company which is convertible into such securities) only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assigned to the transferee or assignee constitute Restricted Securities, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. 9. AMENDMENT AND WAIVER Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority-in-interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company. 10. CHANGES IN COMMON STOCK If, and as often as, there are any changes in the Common Stock by way of stock split, stock dividend, reverse split, combination or reclassification, or through merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof, as may be required, so that the rights and privileges granted hereby shall continue with respect to the Common Stock as so changed. 11. MISCELLANEOUS (a) A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) If, after the date hereof and prior to the Commission declaring the Registration Statement to be filed pursuant to Section 2(a) effective under the Securities Act, the Company grants to any Person any registration rights with respect to any Company securities which are more favorable to such other Person than those provided in this Agreement, then the Company forthwith shall grant (by means of an amendment to this Agreement or otherwise) identical registration rights to all Investors hereunder. (c) Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: Precept Business Services, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, TX 75201 Attention: President (214) 754-6600 (214) 220-1082 (Fax) with a copy to: Precept Business Services, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, TX 75201 Attention: General Counsel (214) 754-6600 (214) 754-6909 (Fax) (ii) if to the Initial Investor, to: The Shaar Fund Ltd., c/o Levinson Capital Management 2 World Trade Center, Suite 1820 New York, NY 10048 Attention: Samuel Levinson (212) 432-7711 (212) 432-7771 (Fax) with a copy to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Dennis J. Block, Esq. (212) 504-5555 (212) 504-5557 (Fax) (iii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company. The Company, the Initial Investor or any Investor may change the foregoing address by notice given pursuant to this Section 11(c). (d) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (e) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (f) The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (g) The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The Company is not currently a party to any agreement granting any registration rights with respect to any of its securities to any person which conflicts with the Company's obligations hereunder or gives any other party the right to include any securities in any Registration Statement filed pursuant hereto, except for such rights and conflicts as have been irrevocably waived. Without limiting the generality of the foregoing, without the written consent of the holders of a majority in interest of the Registrable Securities, the Company shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are subject in all respect to the prior rights of the holders of Registrable Securities set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. The restrictions on the Company's rights to grant registration rights under this paragraph shall terminate on the date the Registration Statement to be filed pursuant to Section 2(a) is declared effective by the Commission. (h) This Agreement, the Securities Purchase Agreement, the Escrow Instructions, dated as of a date even herewith (the "ESCROW INSTRUCTIONS"), between the Company, the Initial Investor and Cadwalader, Wickersham & Taft, the Preferred Shares and the Warrants constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement, the Securities Purchase Agreement, the Escrow Instructions, the Certificate of Designation and the Warrants supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. (i) Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (j) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (k) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (l) The Company acknowledges that any failure by the Company to perform its obligations under Section 3, or any delay in such performance could result in direct damages to the Investors and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct damages caused by such failure or delay. (m) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. [SIGNATURE PAGE FOLLOWS.] In Witness Whereof, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. Precept Business Services, Inc. By: Name: Title: The Shaar Fund Ltd. By: Intercaribbean Services By: Name: Title: EX-5.1 5 EXHIBIT 5.1 April 25, 2000 Mr. Darwin Deason c/o Affiliated Computer Services, Inc. 2828 North Haskell Avenue 10th Floor Dallas, Texas 75201 Re: CREDIT AGREEMENT (THE "CREDIT AGREEMENT") DATED MARCH 22, 1999, BY AND AMONG PRECEPT BUSINESS SERVICES, INC. ("PRECEPT"), BANK ONE, TEXAS, N.A. AS CONTRACTUAL REPRESENTATIVE ("AGENT") FOR ITSELF AND THE OTHER LENDERS (COLLECTIVELY, THE "LENDERS"), AS HERETOFORE AMENDED AND AS AMENDED BY THAT CERTAIN AMENDMENT AND WAIVER NO. 3 (THE "AMENDMENT") DATED AS OF APRIL 27, 2000, AMONG PRECEPT, AGENT AND THE LENDERS (CAPITALIZED TERMS USED BUT NOT OTHERWISE DEFINED SHALL HAVE THE MEANING GIVEN TO SUCH TERMS IN THE CREDIT AGREEMENT AND THE AMENDMENT) Dear Mr. Deason: As a condition to the Amendment and the extension of additional credit to Precept, Lenders have requested that you guarantee payment when due of all "Secured Obligations" (as defined in the Credit Agreement) up to the principal amount of $2,266,000, plus interest and expenses of enforcement, pursuant to that certain Limited Guaranty dated as of April 27, 2000 to be executed by you and accepted by Agent on behalf of the Lenders (the "Additional Guaranty"). In consideration of your executing and delivering the Additional Guaranty, Precept agrees as follows: (1) In the event demand is made upon you to pay any amounts under the Additional Guaranty (the "Payment Obligation"), Precept shall pay such amount to Bank One for the benefit of the Lenders. If Precept does not pay such amount directly and you are required to make any payment under the Additional Guaranty, Precept agrees to reimburse you on demand for the amount of such payment, together with interest from the date of payment at the Default Rate (which amount Precept hereby promises to pay). In the event demand is made upon you to provide collateral security for the Additional Indebtedness as provided in Section 2(b) of the Additional Guaranty (the "Collateral Obligation"), Precept shall provide such collateral security (or other collateral security acceptable to Lenders) to Agent for the benefit of the Lenders. If Precept does not provide such collateral security and you are required to provide it as therein Page 1 required, Precept agrees to reimburse you on demand for the value of such collateral security, together with interest from the date that such security is provided at the Default Rate (which amount Precept hereby promises to pay). IN ADDITION TO THE AFOREMENTIONED REIMBURSEMENT OBLIGATIONS, PRECEPT AGREES TO PAY AND INDEMNIFY YOU AND HOLD YOU FREE AND HARMLESS FROM AND AGAINST (A) ANY LOSS, COST, LIABILITY OR EXPENSE (INCLUDING ATTORNEYS' FEES AND EXPENSES) INCURRED IN CONNECTION WITH ANY OF THE FOREGOING, INCLUDING, WITHOUT LIMITATION, THE DEFENSE OF THE ADDITIONAL GUARANTY, PERFORMANCE OF THE PAYMENT OBLIGATION, PERFORMANCE OF THE COLLATERAL OBLIGATION, ENFORCEMENT OF THE AGREEMENTS HEREIN CONTAINED, OR OTHERWISE, AND (B) ALL EXPENSES (INCLUDING ATTORNEYS' FEES AND EXPENSES) INCURRED IN CONNECTION WITH THE MAKING OR PERFORMANCE OF THE ADDITIONAL GUARANTY OR THIS AGREEMENT. (2) Furthermore, if the Guaranteed Amount (as determined pursuant to Section 3 of the Additional Guaranty) (the "Guaranteed Amount") is not paid in full in cash and the Letters of Credit issued under the Credit Agreement are not terminated or expired, or a Release Event (as defined in the Additional Guaranty) has not occurred, by October 22, 2000, Precept agrees to pay or deliver to you at your option either (A) a number of shares of Precept's Series A Convertible Preferred Stock, par value $1.00 per share ("Preferred Shares"), and Common Stock Purchase Warrants in the form attached as Exhibit A (the "Warrants") to the Securities Purchase Agreement dated as of or about April 19, 2000 between Precept and the Shaar Fund Ltd. ("Shaar" and the "Shaar Agreement") equal to the number of Preferred Shares and Warrants that would have been issued if the Guaranteed Amount then outstanding had been applied to the purchase of Preferred Shares and Warrants for the same price and otherwise on the same terms and conditions specified in the Shaar Agreement, such Preferred Shares and Warrants to be entitled to the benefit of all representations, warranties, covenants, rights and other benefits provided to Shaar under the Shaar Agreement and all related undertakings and agreements or (B) such mutually acceptable consideration to you having a value equivalent to the instruments you would have received pursuant to (A) above; PROVIDED you shall exercise your rights hereunder in a manner that does not contravene NASD Rule 4310(c)(25)(G). (3) The term of this Agreement shall commence as of the date hereof and continue in effect until all Guaranteed Obligations (as defined in the Additional Guaranty) are terminated or extinguished (but not by reason of the payment of the obligations by you). (4) Precept represents and warrants to you that the making and performance of this Agreement (a) have been duly approved by the Board of Directors of Precept and any other necessary corporate action on the part of Precept and (b) do not, and will not, subject to the terms of the Credit Agreement, conflict with any agreement, order or obligation to which Precept is a party or is otherwise bound. You acknowledge that your enforcement of the terms of paragraph 1 above are subject to the terms of the Additional Guaranty. Until the Secured Obligations have been indefeasibly paid in full in cash, you have no right to enforce any of the reimbursement or Page 2 indemnification obligations of Precept set forth in paragraph 1 above. Should you have the right, notwithstanding the foregoing, to exercise any such rights in paragraph 1 or to receive consideration other than securities pursuant to paragraph 2, you hereby expressly and irrevocably (a) subordinate any and all such rights at law or in equity that you may have to the indefeasible payment in full in cash of the Secured Obligations, and (b) agree to turn over to the Agent for application to the Secured Obligations any and all amounts, or payments (other than the securities received pursuant to paragraph 2 above or reimbursement of attorneys fees pursuant to paragraph 1(B) above) received by you in connection with this Agreement until the Secured Obligations are indefeasibly paid in full in cash. You acknowledge and agree that the provisions of this paragraph are intended to benefit the Agent and the "Holders of Secured Obligations" (as defined in the Credit Agreement) and that the Agent, the Holders of Secured Obligations and their respective successors and assigns are intended third party beneficiaries of the provisions set forth in this paragraph. (5) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and verbal, between the parties hereto with respect to the subject matter hereof. (6) This Agreement shall be construed in accordance with and governed by the laws of the State of Texas, without regard to choice of law principles of such laws. (7) The parties hereto may execute this Agreement in multiple counterparts, all of which taken together shall constitute one and the same instrument and each of which shall be deemed to be an original instrument as against any party who as signed it. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. PRECEPT: PRECEPT BUSINESS SERVICES, INC. By: -------------------------------------- Printed Name: ---------------------------- Title: ----------------------------------- ACCEPTED as of this _____ day of ____________________, 2000: - --------------------------- Page 3 DARWIN DEASON Page 4 EX-5.2 6 EXHIBIT 5.2 EXECUTION COPY AMENDMENT AND WAIVER NO. 3 DATED AS OF APRIL 27, 2000 TO CREDIT AGREEMENT DATED AS OF MARCH 22, 1999 THIS AMENDMENT AND WAIVER NO. 3 TO CREDIT AGREEMENT ("AMENDMENT") is made as of the 27th day of April, 2000 by and among PRECEPT BUSINESS SERVICES, INC. (the "BORROWER"), the financial institutions parties thereto as lenders (the "LENDERS"), BANK ONE, TEXAS, NA, as Agent (the "AGENT") under that certain Credit Agreement dated as of March 22, 1999 by and among the Borrower, the Lenders and the Agent, as previously amended by Amendment and Waiver No. 1 thereto dated as of May 14, 1999 and Amendment and Waiver No. 2 thereto dated as of November 12, 1999 (as so amended and as further amended, modified, supplements and or restated from time to time, the "CREDIT AGREEMENT"). Capitalized terms used herein and not otherwise defined herein shall have the meaning given to them in the Credit Agreement. WITNESSETH WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit Agreement; and WHEREAS, the Borrower has requested certain amendments to the Credit Agreement; WHEREAS, the Borrower has further requested that the Agent and the Lenders waive the "Specified Default" (as defined below) under the Credit Agreement; WHEREAS, the Borrower, the Lenders and the Agent have agreed to enter into this Amendment on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the Agent have agreed to the following amendments to the Credit Agreement. 1. AMENDMENT TO CREDIT AGREEMENT. Effective as of the date hereof, and subject to the satisfaction of the conditions precedent set forth in Section 3 below, the Credit Agreement is hereby amended as follows: 1.1. SECTION 1.1 OF THE CREDIT AGREEMENT IS AMENDED TO ADD THE FOLLOWING DEFINITIONS IN THE APPLICABLE ALPHABETICAL LOCATIONS: "LIMITED GUARANTY AGREEMENT" MEANS THAT CERTAIN LIMITED GUARANTY DATED AS OF APRIL 27, 2000 ENTERED INTO BY DARWIN DEASON IN FAVOR OF THE AGENT, AS THE SAME MAY FROM TIME TO TIME BE AMENDED, MODIFIED, SUPPLEMENTED AND/OR RESTATED. 1.2. SECTION 1.1 OF THE CREDIT AGREEMENT IS FURTHER AMENDED TO DELETE THE DEFINITIONS OF "CONTINGENT LIMITED GUARANTY" AND "PROVISIONAL LOAN COMMITMENT" IN THEIR ENTIRETY AND TO SUBSTITUTE, IF APPLICABLE, THE FOLLOWING THEREFOR: "PROVISIONAL LOAN COMMITMENT" MEANS (a) FOR BANK ONE, $1,416,250 AND (b) FOR WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, $849,750. 1.3. THE CREDIT AGREEMENT IS FURTHER AMENDED TO DELETE SECTION 2.1A IN ITS ENTIRETY AND TO SUBSTITUTE THE FOLLOWING THEREFOR: 2.1A PROVISIONAL LOAN. UPON THE SATISFACTION OF THE CONDITIONS TO EFFECTIVENESS SET FORTH IN SECTION 3 OF AMENDMENT AND WAIVER NO. 3 TO THIS AGREEMENT, FROM AND INCLUDING SUCH DATE UNTIL OCTOBER 27, 2000, EACH LENDER SEVERALLY AND NOT JOINTLY AGREES, ON THE TERMS AND CONDITIONS SET FORTH IN THIS AGREEMENT, TO MAKE A LOAN HEREUNDER (THE "PROVISIONAL LOAN") TO THE BORROWER FROM TIME TO TIME, IN DOLLARS, IN AN AMOUNT NOT TO EXCEED SUCH LENDER'S PRO RATA SHARE (DETERMINED BY REFERENCE TO THE PROVISIONAL LOAN COMMITMENTS OF THE LENDERS) OF $2,266,000. THE PROVISIONAL LOAN SHALL BE IN ADDITION TO AND NOT PART OF THE REVOLVING LOAN FACILITY, BUT OTHERWISE SHALL NOT BE AVAILABLE UNLESS THE OTHER CONDITIONS PRECEDENT TO THE MAKING OF A REVOLVING LOAN HAVE BEEN SATISFIED. THE PROVISIONAL LOAN SHALL BE SUBJECT TO THE GENERAL PROVISIONS APPLICABLE TO REVOLVING LOANS GENERALLY; PROVIDED, HOWEVER, THE PROVISIONAL LOAN SHALL BE REPAID IN FULL ON OR PRIOR TO THE EARLIEST TO OCCUR OF (x) OCTOBER 27, 2000, (y) THE TERMINATION DATE AND (z) THE OCCURRENCE OF ANY SALE EVENT. THE PROVISIONAL LOAN UNDER THIS SECTION 2.1A SHALL CONSIST OF LOANS MADE BY EACH LENDER RATABLY IN PROPORTION TO SUCH LENDER'S RESPECTIVE PRO RATA SHARE DETERMINED SOLELY BY REFERENCE TO SUCH LENDER'S PROVISIONAL LOAN COMMITMENT. EACH LENDER WITH A PROVISIONAL LOAN COMMITMENT SHALL MAINTAIN IN ACCORDANCE WITH ITS USUAL PRACTICE AN ACCOUNT OR ACCOUNTS EVIDENCING THE INDEBTEDNESS OF THE BORROWER TO SUCH LENDER OWING TO SUCH LENDER FROM TIME TO TIME UNDER THIS SECTION 2.1A, INCLUDING THE AMOUNTS OF PRINCIPAL AND INTEREST PAYABLE AND PAID TO SUCH LENDER FROM TIME TO TIME HEREUNDER. ANY LENDER MAY REQUEST THAT THE PROVISIONAL LOANS MADE BY IT EACH BE EVIDENCED BY A PROMISSORY NOTE. IN SUCH EVENT, THE BORROWER SHALL PREPARE, EXECUTE AND DELIVER TO SUCH LENDER A PROMISSORY NOTE FOR SUCH LOANS PAYABLE TO THE ORDER OF SUCH LENDER AND IN A FORM APPROVED BY THE AGENT AND CONSISTENT WITH THE TERMS OF THIS AGREEMENT. THEREAFTER, THE LOANS EVIDENCED BY SUCH PROMISSORY NOTE AND INTEREST THEREON SHALL AT ALL TIMES (INCLUDING AFTER ASSIGNMENT PURSUANT TO SECTION 13.3) BE REPRESENTED BY ONE OR MORE PROMISSORY NOTES IN SUCH FORM PAYABLE TO THE ORDER OF THE PAYEE NAMED THEREIN. 1.4. SECTION 7.2(J) OF THE CREDIT AGREEMENT IS AMENDED TO DELETE THE FINAL SENTENCE THEREOF IN ITS ENTIRETY. 1.5. THE CREDIT AGREEMENT IS AMENDED TO DELETE CLAUSE (P) THEREOF IN ITS ENTIRETY AND TO SUBSTITUTE ADD THE FOLLOWING AT THE END OF SECTION 7.3: (P) SALE COVENANTS. THE BORROWER SHALL AND SHALL CONTINUE TO USE ITS BEST EFFORTS TO EFFECT A SALE OF EITHER OR BOTH OF THE BORROWER'S AND ITS SUBSIDIARIES' TRANSPORTATION BUSINESS OR BUSINESS FORMS BUSINESS (WHETHER THROUGH A SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF SUCH BUSINESS OR A SALE, DIRECTLY OR INDIRECTLY, OF THE EQUITY CONTROL OF THE SUBSIDIARIES ENGAGED IN SUCH BUSINESS) IN A TRANSACTION WHERE THE NET CASH PROCEEDS ARE IN AN AMOUNT SATISFACTORY TO THE LENDERS (CONSUMMATION OF SUCH A SALE AND RECEIPT OF SUCH PROCEEDS BEING HEREIN A "SALE EVENT"). THE BORROWER SHALL AND SHALL CONTINUE TO USE ITS BEST EFFORTS TO EFFECT SUCH A SALE EVENT AS SOON AS REASONABLY PRACTICABLE. IN CONNECTION THEREWITH, THE BORROWER SHALL PROVIDE TO THE AGENT AND THE LENDERS A WRITTEN REPORT EVERY TWO WEEKS, CONTAINING SUCH DETAILED INFORMATION AS SHALL BE REASONABLY ACCEPTABLE TO THE AGENT AND THE LENDERS AND WHICH REPORT SHALL BE IN A FORM AND SCOPE REASONABLY ACCEPTABLE TO THE AGENT AND THE LENDERS, WHICH INFORMATION SHALL INCLUDE, WITHOUT LIMITATION, A GENERAL REPORT ON THE PROGRESS OF SUCH SALE INITIATIVE, A COMPREHENSIVE LIST IDENTIFYING CONTACTS MADE AND INQUIRIES RECEIVED AND A SUMMARY OF THE CONTENT OF SUCH COMMUNICATIONS. IN ADDITION, PROMPTLY UPON RECEIVING A REQUEST THEREFOR FROM THE AGENT OR ANY LENDER, THE BORROWER SHALL PREPARE AND DELIVER TO THE AGENT AND THE LENDERS SUCH OTHER INFORMATION WITH RESPECT TO THE ABOVE-REFERENCED SALE INITIATIVE AS FROM TIME TO TIME MAY BE REASONABLY REQUESTED BY THE AGENT OR ANY LENDER. THE BORROWER SHALL PROMPTLY NOTIFY THE AGENT AND THE LENDERS OF THE EXISTENCE OF ANY PROPOSALS OR COMMITMENTS IN CONNECTION WITH ANY SUCH SALE (AND THE NATURE AND TERMS THEREOF) AND SHALL, PROMPTLY AFTER RECEIPT THEREOF, PROVIDE COPIES TO THE AGENT AND THE LENDERS OF ANY WRITTEN PROPOSALS. LETTERS OF INTENT OR COMMITMENTS IN CONNECTION WITH ANY SUCH SALE. NOTHING HEREIN SHALL BE DEEMED TO CONSTITUTE THE CONSENT OF THE AGENT OR ANY OF THE LENDERS TO CONSUMMATION OF ANY SUCH REFERENCED SALE. TO THE EXTENT ANY SUCH SALE IS CONTEMPLATED HEREAFTER, THE TERMS OF ANY SUCH SALE SHALL BE SUBJECT TO THE AGREEMENT OF THE AGENT AND THE LENDERS PROVIDED NO SUCH AGREEMENT OF THE LENDERS SHALL BE REQUIRED IF THE PROCEEDS OF SUCH SALE ARE SUFFICIENT FOR AND ARE USED FOR THE REPAYMENT IN FULL IN CASH OF THE OBLIGATIONS AND IN CONNECTION WITH SUCH SALE THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS HAVE BEEN TERMINATED. THE LENDERS AGREE THAT INFORMATION RECEIVED BY THEM PURSUANT TO THE TERMS OF THIS SECTION 7.3(P) SHALL BE SUBJECT TO THE CONFIDENTIALITY PROVISIONS SET FORTH IN SECTION 13.4 OF THE AGREEMENT; PROVIDED, HOWEVER, IN THE EVENT THAT THE AGENT OR ANY OF THE LENDERS COMMENCES ENFORCEMENT OF THEIR RIGHTS AND REMEDIES AGAINST THE BORROWER OR ANY OF THE SUBSIDIARIES IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, THE AGENT AND THE LENDERS SHALL NOT BE PRECLUDED FROM CONTACTING PERSONS CONTACTED BY THE BORROWER IN CONNECTION WITH SUCH SALE INITIATIVE AND UTILIZING THE INFORMATION PROVIDED TO THE LENDERS IN CONNECTION WITH THEIR POTENTIAL NEGOTIATIONS WITH SUCH PERSONS. 1.6. SECTION 8.1(q) OF THE CREDIT AGREEMENT IS AMENDED TO DELETE THE TERMS THEREOF IN THEIR ENTIRETY AND TO SUBSTITUTE THE FOLLOWING THEREFOR: (q) LIMITED GUARANTY DEFAULT OR REVOCATION. THE LIMITED GUARANTY AGREEMENT SHALL FAIL TO REMAIN IN FULL FORCE OR EFFECT OR ANY ACTION SHALL BE TAKEN BY DARWIN DEASON TO DISCONTINUE OR TO ASSERT THE INVALIDITY OR UNENFORCEABILITY OF THE LIMITED GUARANTY AGREEMENT, OR DARWIN DEASON SHALL FAIL TO COMPLY WITH ANY OF THE TERMS OR PROVISIONS OF THE LIMITED GUARANTY AGREEMENT, OR DARWIN DEASON DENIES THAT HE HAS ANY FURTHER LIABILITY UNDER THE LIMITED GUARANTY AGREEMENT OR GIVES NOTICE TO SUCH EFFECT. 1.7. SECTION 12.3 OF THE CREDIT AGREEMENT IS AMENDED TO DELETE THE FINAL SENTENCE THEREOF IN ITS ENTIRETY. 2. WAIVERS. Effective as of the date of this Amendment and subject to the satisfaction of the conditions precedent set forth in SECTION 3 below, the parties hereby agree that the Defaults arising as a result of the Borrower's noncompliance with the provisions of SECTION 7.4(B) for the quarter ended December 31, 1999 are hereby waived; provided the Leverage Ratio for such quarter did not exceed 3.53 to 1.00 (such Default being herein, the "SPECIFIED DEFAULT"). 3. CONDITIONS OF EFFECTIVENESS. The provisions of SECTION 1 of this Amendment shall not become effective unless: (a) this Amendment shall have been executed by the Borrower, the Agent and the Lenders on or before May 1, 2000; (b) the Borrower shall have paid to the Agent for the account of the Lenders a waiver fee of 12.5 basis points (0.125%) of the Aggregate Commitment; (c) the Borrower shall have repaid all amounts outstanding under SECTION 2.1A as of the date of this Amendment; (d) the Agent shall have received from each of the Borrower's Subsidiaries parties to the Loan Documents a reaffirmation in the form attached as EXHIBIT A hereto; together with information evidencing the mergers and name changes which have occurred in the Borrower's Subsidiaries since the date of Amendment and Waiver No. 2 and prior to the date hereof, together with appropriate UCC amendments in connection therewith; (e) the Agent shall have received from Darwin Deason an original of the executed Limited Guaranty Agreement in the form attached as EXHIBIT B hereto together with an opinion of counsel in connection therewith in form and substance acceptable to the Agent and the Lenders; and (f) the Agent shall have received from counsel to the Borrower an opinion of counsel in connection herewith in form and substance reasonably acceptable to the Agent and the Lenders together with corporate authorization documents with respect hereto. 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower represents and warrants as follows: (a) The Borrower has the legal power and authority to execute and deliver this Amendment and the officers of the Borrower executing this Amendment have been duly authorized to execute and deliver the same and bind the Borrower with respect to the provisions hereof. (b) This Amendment and the Credit Agreement as previously executed and as amended hereby constitute legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their terms (except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditor's rights generally). (c) Upon the effectiveness of this Amendment, the Borrower hereby reaffirms all covenants, representations and warranties made in the Credit Agreement and the other Loan Documents to the extent the same are not amended hereby, agrees that all such representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. (d) The Borrower has caused to be conducted a thorough review of the terms of the Credit Agreement and the other Loan Documents and the Borrower's and its Subsidiaries operations since the Closing Date and there are no Defaults or Unmatured Defaults thereunder other than the Specified Default. (d) The entities listed on EXHIBIT A constitute all of the Borrower's subsidiaries. 5. REFERENCE TO THE EFFECT ON THE CREDIT AGREEMENT. (a) Upon the effectiveness of Section 1, on and after the date hereof, each reference in the Credit Agreement to "this Credit Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended or waived above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power of remedy of the Agent or the Lenders, nor constitute a waiver of any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith. 6. COSTS AND EXPENSES. The Borrower agrees to pay all reasonable costs, fees and out-of-pocket expenses (including attorneys' fees and expenses charged to the Agent) incurred by the Agent in connection with the preparation, arrangement, execution and enforcement of this Amendment. 7. GOVERNING LAW. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN DALLAS, TEXAS, AND THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AMENDMENT AND THE CREDIT AGREEMENT AS AMENDED HEREBY. ANY DISPUTE BETWEEN THE BORROWER AND THE AGENT, ANY LENDER, OR ANY INDEMNITEE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AMENDMENT OR THE CREDIT AGREEMENT AS AMENDED HEREBY, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 8. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9. COUNTERPARTS. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. A facsimile signature page hereto sent to the Agent or the Agent's counsel shall be effective as a counterpart signature provided each party executing such a facsimile counterpart agrees, if requested, to deliver originals to the Agent thereof. 10. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Amendment, the Credit Agreement and the other Loan Documents. In the event an ambiguity or question of intent or interpretation arises, this Amendment, the Credit Agreement and the other Loan Documents shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Amendment, the Credit Agreement or any of the other Loan Documents. - - - - Remainder of this page intentionally blank - - - - IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written. PRECEPT BUSINESS SERVICES, INC. AS THE BORROWER By: Name: William W. Solomon, Jr. Title: Chief Financial Officer BANK ONE, TEXAS, NA, INDIVIDUALLY AND AS AGENT By: Print Name: Title: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, AS A LENDER By: Print Name: Title: EXHIBIT A TO AMENDMENT AND WAIVER NO. 3 REAFFIRMATION OF LOAN DOCUMENTS Attached REAFFIRMATION Each of the undersigned acknowledges receipt of a copy of Amendment and Waiver No. 3 to the Credit Agreement dated as of March 22, 1999, as previously amended by Amendment and Waiver No. 1 thereto dated as of May 14, 1999 and Amendment and Waiver No. 2 thereto dated as of November 12, 1999, by and among Precept Business Services, Inc., the Lenders and the Agent (as so amended thereby and as further amended, modified, supplemented and/or restated from time to time, the "Credit Agreement") which Amendment and Waiver No. 3 is dated as of April 27, 2000 (the "Amendment"). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Without in any way establishing a course of dealing by the Agent or any Lender, each of the undersigned reaffirms the terms and conditions of the Loan Documents executed by it and acknowledges and agrees that such Loan Documents remain in full force and effect and are hereby ratified, reaffirmed and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be a reference to the Credit Agreement as so amended by the Amendment and as the same may from time to time hereafter be amended, modified or restated. - ------------------------------------------------------ --------------------------------------------------------------- PRECEPT BUSINESS PRODUCTS, INC. PRECEPT-CREATIVE, INC. (formerly known as Creative Acquisition Corp.) - ------------------------------------------------------ --------------------------------------------------------------- WINGTIP COURIERS, INC. PRECEPT TRANSPORTATION SERVICES OF TEXAS, INC. - ------------------------------------------------------ --------------------------------------------------------------- GARDEN STATE LIMOUSINE, INC. (formerly known ARTCRAFT PRINTING, INC. as Garden State Acquisition Corp. and successor by merger to Transportation Systems Corp.) - ------------------------------------------------------ --------------------------------------------------------------- SHORTWAY RIVER ROUGE, INC. COMPUTER FORMS & PRODUCTS, INC. - ------------------------------------------------------ --------------------------------------------------------------- JETPORT EXPRESS INC. PRECEPT-SOUTHERN SYSTEMS, INC. (formerly known as Precept Acquisition Corporation) - ------------------------------------------------------ --------------------------------------------------------------- In each case: In each case: By: By: William W. Solomon, Jr. William W. Solomon, Jr. Chief Financial Officer Chief Financial Officer
PRECEPT TRANSPORTATION SERVICES, LLC By: Precept Business Services, Inc., as its sole member By: William W. Solomon, Jr. Chief Financial Officer EXHIBIT B TO AMENDMENT AND WAIVER NO. 2 LIMITED GUARANTY AGREEMENT Attached LIMITED GUARANTY THIS LIMITED GUARANTY (this "Guaranty") is made as of the 27th day of April, 2000 by Darwin Deason, an individual residing in Dallas, Texas ("Deason") in favor of the Agent, for the ratable benefit of the Lenders, under (and as defined in) the Credit Agreement referred to below; WITNESSETH: WHEREAS, Precept Business Services, Inc., a Texas corporation (the "Borrower"), Bank One, Texas, NA, as contractual representative (the "Agent"), and certain Lenders have entered into a certain Credit Agreement dated as of March 22, 1999, as previously amended by Amendment and Waiver No. 1 thereto dated as of May 14, 1999 and Amendment and Waiver No. 2 thereto dated as of November 12, 1999 and as simultaneously being amended by Amendment and Waiver No. 3 thereto dated as of the date hereof (as so amended thereby and as further amended, modified, supplemented and/or restated from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Borrower; WHEREAS, it is a condition precedent to execution of Amendment and Waiver No. 3 to the Credit Agreement, the extension of the Provisional Loans contemplated therein and the continuation of the other financial accommodations by the Lenders under the Credit Agreement that Deason execute and deliver this Guaranty, whereby Deason shall guarantee the payment when due of all "Secured Obligations" (as defined in the Credit Agreement), principal, interest, letter of credit reimbursement obligations and other amounts that shall be at any time payable by the Borrower under the Credit Agreement, any "Hedging Agreement" (as defined in the Credit Agreement), the Notes and the other Loan Documents, subject to the dollar limitations and termination provisions set forth herein; and WHEREAS, Deason, owns approximately 14.8% of the outstanding Capital Stock (Class A Common Stock and Class B Common Stock) of the Borrower and Deason acknowledges and agrees that the making of the Loans, including the Provisional Loan, and the extension of the other financial accommodations under the Credit Agreement and the other Loan Documents to the Borrower is, and will continue to be, of direct economic benefit to Deason; WHEREAS, in consideration of the foregoing and in order to induce the Lenders and the Agent to enter into Amendment and Waiver No. 3 to the Credit Agreement, Deason is willing to guarantee the obligations of the Borrower under the Credit Agreement, any Hedging Agreement, the Notes, and the other Loan Documents on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Terms defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) REPRESENTATIONS AND WARRANTIES. Deason represents and warrants (which representations and warranties shall be deemed to have been renewed at the time of the making of any Advance or issuance of any Letter of Credit) that: (i) He has the power, capacity, authority and legal right to execute and deliver this Guaranty and to perform his obligations hereunder. This Guaranty constitutes a legal, valid and binding obligation of Deason enforceable against Deason in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. (ii) Neither the execution and delivery by him of this Guaranty, nor the consummation by him of the transactions herein contemplated, nor compliance by him with the terms and provisions hereof, will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on him or the provisions of any indenture, instrument or material agreement to which he is a party or is subject, or by which he, or his property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on his property pursuant to the terms of any such indenture, instrument or material agreement. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any Governmental Authority, is required to authorize, or is required in connection with the execution, delivery and performance by him of, or the legality, validity, binding effect or enforceability against him of, this Guaranty. (b) COVENANTS. Unless prior to October 24, 2000 all Guaranteed Obligations shall have been paid in full in cash and the Commitments and all Letters of Credit issued under the Credit Agreement shall have terminated or expired or a "Release Event" (as defined below) occurs, then on or before such date Deason shall (i) deliver to the Agent a duly executed Pledge Agreement in the form attached hereto as EXHIBIT A, together with an opinion of counsel to Deason in connection therewith in form and substance acceptable to the Agent and the Lenders, (ii) deliver to the Agent original stock certificates for Class A common stock of Affiliated Computer Services, Inc. (in connection with which all of the representations required to be made under the Pledge Agreement can be made) with a current market value at the time of such initial delivery of not less than $3,021,333.34 (utilizing for purposes of valuation the average closing price over the five (5) immediately preceding trading days for such stock on the New York Stock Exchange) and stock powers duly executed in blank for such shares, (iii) deliver a form U-1 signed by the Borrower and a U-1 signed by Deason with respect to such pledged shares together with such information as shall permit the Agent to complete the provisions of such form U-1, and (iv) thereafter shall comply with each of the covenants and requirements set forth in such Pledge Agreement. SECTION 3. THE LIMITED GUARANTY. (a) (i) GUARANTY TERMS. Deason hereby unconditionally guarantees the full and punctual payment when due (whether at stated maturity, upon acceleration or otherwise) of the Secured Obligations, including, without limitation, (A) the principal of and interest on each Loan under or Note issued by the Borrower pursuant to the Credit Agreement, (B) any Reimbursement Obligations of the Borrower, (C) all Hedging Obligations of the Borrower owing to any Lender or any affiliate of any Lender under any Hedging Agreement, and (D) all other amounts payable by the Borrower under the Credit Agreement, any Hedging Agreement and the other Loan Documents (all of the foregoing being referred to collectively as the "Guaranteed Obligations"); PROVIDED, HOWEVER, notwithstanding anything herein to the contrary, the maximum amount which may be recovered from Deason pursuant to the terms of this Guaranty shall not exceed the sum of (1) $2,266,000 (the "Initial Stated Amount"), as such Initial Stated Amount may be reduced pursuant to the provisions of SECTION 3(a)(ii) below PLUS (2) interest on such sum and expenses of enforcement, if applicable, pursuant to the terms of SECTION 16 below; PROVIDED, FURTHER, no demand for payment under this Guaranty shall be permitted to be made if a "Release Event" (as defined below) has occurred. Upon failure by the Borrower to pay punctually any such Guaranteed Obligations, Deason agrees that he shall forthwith on demand pay such amount at the place and in the manner specified in the Credit Agreement, Hedging Agreements, any Note or the relevant Loan Document, as the case may be. Deason hereby agrees that this Guaranty is an absolute, irrevocable and a guaranty of payment and is not a guaranty of collection. Neither the Agent nor any Lender shall be required to pursue any other remedy prior to invoking the benefits of this Guaranty, including, without limitation, taking any action against the Borrower, exhausting any remedy against any endorser of any instrument issued by the Borrower, foreclosing against any Collateral of the Borrower or any other guarantors, or setting-off against the balance of any deposit account of the Borrower or any other guarantors kept with the Agent or any Lender. (ii) REDUCTIONS OF INITIAL STATED AMOUNT. The Initial Stated Amount will be reduced ratably simultaneously with and in proportion to any permanent reductions of the Aggregate Commitment; PROVIDED, HOWEVER, no such reduction of Initial Stated Amount shall be available if a Sale Event with respect to either the transportation or business products operating divisions of the Borrower are sold and the net cash proceeds (after taking into account all expenses of such transaction) paid to the Lenders in reduction of the Obligations and reduction of the Aggregate Commitment are less than $17,500,000 in the case of a Sale Event with respect to the transportation division or $22,500,000 in the case of a Sale Event with respect to the business products division, in either of which events the Initial Stated Amount will remain unchanged and will remain available for the full Initial Stated Amount as support to the Lenders even after such a Sale Event unless the Guaranty is released in accordance with the terms set forth in clause (iii) below. Without affecting the foregoing, it should be noted that any Sale Event requires the consent of each of the Lenders under the Credit Agreement and nothing herein shall be construed as a consent to any such sale. (iii) RELEASE EVENTS. For purposes hereof, the term "Release Event" means satisfaction of any one or more of the following: (A) LEVERAGE RELATED RELEASE: Satisfaction of each of the following: (1) the receipt by the Agent of financial statements and compliance certificates pursuant to the terms of SECTION 7.1(A) of the Credit Agreement, which financial statements and compliance certificates reflect, to the reasonable satisfaction of the Agent, that the Borrower's Leverage Ratio was less than 2.00 to 1.00 as of the end of four consecutive fiscal quarters (calculated on a trailing 12-month basis as provided in SECTION 7.4(B) of the Credit Agreement), (2) the receipt by the Agent of an unqualified audit of the Borrower's and its Subsidiaries financial statements as required pursuant to the terms of SECTION 7.1(a)(ii) of the Credit Agreement with respect to one of the quarters included in the four-quarters referenced in clause (1) and (3) no Default or Unmatured Default has occurred and is continuing under the Credit Agreement as of the date of satisfaction with such requirements under clauses (1) and (2); or (A) EQUITY RELATED RELEASE: The sale by the Borrower Equity Interests of the Borrower (other than Disqualified Stock) where the net cash proceeds equal or exceed $2,266,000 and the proceeds of which are utilized by the Borrower for the repayment or prepayment (including all interest and fees accrued thereon) and termination of the Provisional Loan facility provided pursuant to SECTION 2.1A of the Credit Agreement in its entirety; or (C) CONSENT BASED RELEASE: Receipt by Deason of a written release and termination of this Guaranty by the Agent and each of the Lenders. (b) ACCELERATED GUARANTY OBLIGATION. Notwithstanding anything in this Guaranty to the contrary, demand for payment from Deason under this Guaranty shall be presumed to have been issued and the entire unpaid amount which can be demanded hereunder, together with accrued interest thereon, if any, shall become immediately due and payable regardless of any payment limitation in the event of the occurrence of any one or more of the following: (1) Deason has commenced a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; consented to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law; consented to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of his property; made any assignment for the benefit of creditors; or taken any action to authorize any of the foregoing; (2) An involuntary case was commenced against Deason; or a court has entered a decree or order for relief in respect of Deason in an involuntary case, under any applicable bankruptcy, insolvency or other similar law now or hereinafter in effect; or similar relief has been granted under any applicable federal, state, local or foreign law; or (3) A decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Deason or over all or a substantial part of his assets has been entered; or an interim receiver, trustee or other custodian of Deason or of all or a substantial part of his property has been appointed or a warrant of attachment, execution or similar process against any substantial part of the property of Deason has been issued. SECTION 4. GUARANTY UNCONDITIONAL. The obligations of Deason hereunder shall be unconditional and absolute (subject to the provisions of SECTION 3 above) and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, indulgence, compromise, waiver or release of or with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto, or with respect to any obligation of any other guarantor of any of the Guaranteed Obligations, whether (in any such case) by operation of law or otherwise, or any failure or omission to enforce any right, power or remedy with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto, or with respect to any obligation of any other guarantor of any of the Guaranteed Obligations; (ii) any modification or amendment of or supplement to the Credit Agreement, any Hedging Agreement, any Note, or any other Loan Document, including, without limitation, any such amendment which may increase the amount of the Secured Obligations guaranteed hereby; (iii) any release, surrender, compromise, settlement, waiver, subordination or modification, with or without consideration, of any collateral securing the Guaranteed Obligations or any part thereof, any other guaranties with respect to the Guaranteed Obligations or any part thereof, or any other obligation of any person or entity with respect to the Guaranteed Obligations or any part thereof, or any nonperfection or invalidity of any direct or indirect security for the Guaranteed Obligations; (iv) any change in the corporate, partnership or other existence, structure or ownership of the Borrower or any other guarantor of any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or any other guarantor of the Guaranteed Obligations, or any of their respective assets or any resulting release or discharge of any obligation of the Borrower or any other guarantor of any of the Guaranteed Obligations; (v) the existence of any claim, setoff or other rights which Deason may have at any time against the Borrower, any other guarantor of any of the Guaranteed Obligations, the Agent, any Holder of Secured Obligations or any other Person, whether in connection herewith or in connection with any unrelated transactions, PROVIDED that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) the enforceability or validity of the Guaranteed Obligations or any part thereof or the genuineness, enforceability or validity of any agreement relating thereto or with respect to any collateral securing the Guaranteed Obligations or any part thereof, or any other invalidity or unenforceability relating to or against the Borrower or any other guarantor of any of the Guaranteed Obligations, for any reason related to the Credit Agreement, any Hedging Agreement, any other Loan Document, or any provision of applicable law or regulation purporting to prohibit the payment by the Borrower or any other guarantor of the Guaranteed Obligations, of any of the Guaranteed Obligations; (vii) the failure of the Agent to take any steps to perfect and maintain any security interest in, or to preserve any rights to, any security or collateral for the Guaranteed Obligations, if any; (viii) the election by, or on behalf of, any one or more of the Holders of Secured Obligations, in any proceeding instituted under Chapter 11 of Title 11 of the United States Code (11 U.S.C. 101 et seq.) (the "Bankruptcy Code"), of the application of Section 1111(b)(2) of the Bankruptcy Code; (ix) any borrowing or grant of a security interest by the Borrower, as debtor-in-possession, under Section 364 of the Bankruptcy Code; (x) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of the claims of any of the Holders of Secured Obligations or the Agent for repayment of all or any part of the Guaranteed Obligations; (xi) the Agent's or any Lender's failure to diligently preserve the Borrower's or any other guarantor's liability under any Loan Document or to bring an action to enforce collection of any amounts owing under any Loan Document; (xii) the Guaranty being deemed invalid or unenforceable as to or against any party hereto; (xiii) the Borrower's entry into any Loan Document is found to be ULTRA VIRES, any Authorized Officer acting on the Borrower's behalf with regard to any Loan Document is found to have acted beyond the scope of such Authorized Officer's authority, or the Loan Documents are found to be unenforceable against the Borrower for any other reason; or (xiv) any other act or omission to act or delay of any kind by the Borrower, any other guarantor of the Guaranteed Obligations, the Agent, any Holder of Secured Obligations or any other Person or any other circumstance whatsoever which might, but for the provisions of this SECTION 4, constitute a legal or equitable discharge of any of Deason's obligations hereunder. SECTION 5. DISCHARGE ONLY UPON PAYMENT IN FULL AND CERTAIN TERMINATION EVENTS: REINSTATEMENT IN CERTAIN CIRCUMSTANCES. Deason' obligations hereunder shall remain in full force and effect until (a) all Guaranteed Obligations shall have been paid in full in cash and the Commitments and all Letters of Credit issued under the Credit Agreement shall have terminated or expired or (b) a Release Event occurs. If at any time any payment of the principal of or interest on any Note, any Reimbursement Obligation or any other amount payable by the Borrower or any other party under the Credit Agreement, any Hedging Agreement or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, Deason' obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 6. GENERAL WAIVERS. Deason irrevocably waives acceptance hereof, presentment, demand or action on delinquency, protest, the benefit of any statutes of limitations and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Borrower, any other guarantor of the Guaranteed Obligations, or any other Person. Without in any way limiting the foregoing, Deason waives the benefits of Chapter 34 of the Texas Business and Commerce Code. SECTION 7. SUBORDINATION OF SUBROGATION. Until the Secured Obligations have been indefeasibly paid in full in cash, Deason (i) shall have no right of subrogation with respect to such Secured Obligations and (ii) waives any right to enforce any remedy which the Holders of Secured Obligations, Issuing Banks or the Agent now have or may hereafter have against the Borrower, any endorser or any guarantor of all or any part of the Secured Obligations or any other Person, and Deason waives any benefit of, and any right to participate in, any security or collateral given to the Holders of Secured Obligations, the Issuing Banks and the Agent to secure the payment or performance of all or any part of the Secured Obligations or any other liability of the Borrower to the Holders of Secured Obligations or Issuing Banks. Should Deason have the right, notwithstanding the foregoing, to exercise his subrogation rights, Deason hereby expressly and irrevocably (a) subordinates any and all rights at law or in equity to subrogation, reimbursement, exoneration, contribution, indemnification or set off that Deason may have to the indefeasible payment in full in cash of the Secured Obligations and (b) waives any and all defenses available to a surety, guarantor or accommodation co-obligor until the Secured Obligations are indefeasibly paid in full in cash. Deason acknowledges and agrees that this subordination is intended to benefit the Agent and the Holders of Secured Obligations and shall not limit or otherwise affect Deason's liability hereunder or the enforceability of this Guaranty, and that the Agent, the Holders of Secured Obligations and their respective successors and assigns are intended third party beneficiaries of the waivers and agreements set forth in this SECTION 7. SECTION 8. STAY OF ACCELERATION. If acceleration of the time for payment of any amount payable by the Borrower under the Credit Agreement, any Hedging Agreement, any Note or any other Loan Document is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement, any Hedging Agreement any Note or any other Loan Document shall nonetheless be payable by Deason hereunder, subject to the limitations set forth herein, forthwith on demand by the Agent. SECTION 9. NOTICES. Except as otherwise expressly provided below, any notice required or desired to be served, given or delivered hereunder shall be in writing and shall be deemed to have been validly served, given or delivered (i) three (3) days after deposit in the United States Mails, with proper postage prepaid or provided for, (ii) when sent after receipt of confirmation or answerback if sent by telecopy, telex or other similar facsimile transmission, (iii) one (1) business day after deposited with a reputable overnight courier with all charges prepaid or (iv) when delivered, if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated as follows: (a) If to the Agent at: Bank One, Texas, NA 1717 Main Street 4th Floor Dallas, Texas 75201 Attn: Rick Rogers Ph: 214/290-2540 Fax: 214/290-2054 (b) If to Deason at: Darwin Deason c/o Affiliated Computer Services Inc. 2828 North Haskell Avenue 10th Floor Dallas, Texas 75204 Attn: General Counsel Telephone No.: (214)841-6152 Facsimile No.: (214) 841-5746 SECTION 10. NO WAIVERS. No failure or delay by the Agent or any Holder of Secured Obligations in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Guaranty, the Credit Agreement, any Hedging Agreement, the Notes, and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 11. SUCCESSORS AND ASSIGNS. This Guaranty is for the benefit of the Agent and the Holders of Secured Obligations and their respective successors and permitted assigns and in the event of an assignment of any amounts payable under the Credit Agreement, any Hedging Agreement, the Notes, or the other Loan Documents in accordance with the respective terms thereof, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Guaranty shall be binding upon Deason and his heirs, successors and assigns. SECTION 12. CHANGES IN WRITING. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Agent with the consent of the Required Lenders, and, if any such change, waiver, discharge or termination directly and adversely affects the rights, duties and obligations of Deason hereunder, Deason. SECTION 13. GOVERNING LAW. THIS GUARANTY IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN DALLAS, TEXAS, AND THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS GUARANTY. ANY DISPUTE BETWEEN DEASON AND THE AGENT OR ANY LENDER ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS GUARANTY, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. SECTION 14. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL. (A) DEASON HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE COURT SITTING IN DALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY AND DEASON HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION HE MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST DEASON IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY DEASON AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS GUARANTY SHALL BE BROUGHT ONLY IN A COURT IN DALLAS, TEXAS. (B) SERVICE OF PROCESS. DEASON WAIVES PERSONAL SERVICE OF ANY PROCESS UPON HIM AND IRREVOCABLY APPOINTS THE GENERAL COUNSEL OF AFFILIATED COMPUTER SERVICES INC. (THE ADDRESS FOR WHICH IS 2828 NORTH HASKELL AVENUE, 10TH FLOOR, DALLAS, TEXAS, 75204) AS HIS AGENT FOR THE PURPOSE OF ACCEPTING SERVICE OF PROCESS ISSUED BY ANY COURT. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF THE AGENT OR THE LENDERS TO SERVE ANY SUCH WRITS, PROCESS OR SUMMONSES IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. DEASON IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE. (C) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (D) WAIVER OF BOND. DEASON WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF ANY PARTY HERETO IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS GUARANTY OR ANY OTHER LOAN DOCUMENT. (E) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS GUARANTY AND, SPECIFICALLY, THE PROVISIONS OF THIS SECTION 14, WITH ITS COUNSEL. SECTION 15. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Guaranty. In the event an ambiguity or question of intent or interpretation arises, this Guaranty shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Guaranty. SECTION 16. TAXES, INTEREST AFTER DEMAND; EXPENSES OF ENFORCEMENT, ETC. All payments required to be made by Deason hereunder shall be made without setoff or counterclaim and free and clear of and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political or taxing authority thereof, PROVIDED, HOWEVER, that if Deason is required by law to make such deduction or withholding, Deason shall forthwith pay to the Agent or any Holder of Secured Obligations, as applicable, such additional amount as results in the net amount received by the Agent or any Holder of Secured Obligations, as applicable, equaling the full amount which would have been received by the Agent or any Holder of Secured Obligations, as applicable, had no such deduction or withholding been made. If any payment hereunder is not paid within two (2) days of demand therefor under the terms hereof, then interest on the unpaid amount shall be computed at a rate per annum equal to ten percent (10%) (calculated on the basis of a 365 day year) or the maximum rate permitted by law, whichever is less, until all past due amounts and such interest thereon have been paid. Deason also agree to reimburse the Agent and the Holders of Secured Obligations for any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent and the Holders of Secured Obligations, which attorneys may be employees of the Agent or the Holders of Secured Obligations) paid or incurred by the Agent or any Holders of Secured Obligation in connection with the collection and enforcement of amounts due under this Guaranty. SECTION 17. SETOFF. At any time after all or any part of the Guaranteed Obligations have become due and payable (by acceleration or otherwise), each Holder of Secured Obligations and the Agent may, without notice to Deason and regardless of the acceptance of any security or collateral for the payment hereof, appropriate and apply toward the payment of all or any part of the Guaranteed Obligations (i) any indebtedness due or to become due from such Holder of Secured Obligations or the Agent to Deason, and (ii) any moneys, credits or other property belonging to Deason, at any time held by or coming into the possession of such Holder of Secured Obligations or the Agent or any of their respective affiliates. SECTION 18. FINANCIAL INFORMATION. Deason hereby assumes responsibility for keeping himself informed of the financial condition of the Borrower and any and all endorsers and/or other guarantor of all or any part of the Guaranteed Obligations, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations, or any part thereof, that diligent inquiry would reveal, and Deason hereby agrees that none of the Holders of Secured Obligations or the Agent shall have any duty to advise Deason of information known to any of them regarding such condition or any such circumstances. In the event any Holder of Secured Obligations or the Agent, in its sole discretion, undertakes at any time or from time to time to provide any such information to Deason, such Holder of Secured Obligations or the Agent shall be under no obligation (i) to undertake any investigation not a part of its regular business routine, (ii) to disclose any information which such Holder of Secured Obligations or the Agent, pursuant to accepted or reasonable commercial finance or banking practices, wishes to maintain confidential or (iii) to make any other or future disclosures of such information or any other information to Deason. SECTION 19. SEVERABILITY. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Guaranty. SECTION 20. ENTIRE AGREEMENT. This Guaranty embodies the final and entire agreement and understanding among Deason, the Agent and the Holders of Secured Obligations and supersedes all prior agreements and understandings among Deason, the Agent and the Holders of Secured Obligations relating to the subject matter hereof. This Guaranty and the other Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties hereto. SECTION 21. HEADINGS. Section headings in this Guaranty are for convenience of reference only and shall not govern the interpretation of any provision of this Guaranty. IN WITNESS WHEREOF, Deason has caused this Contingent Limited Guaranty to be duly executed as of the day and year first above written. DARWIN DEASON STATE OF TEXAS ) ) SS.: COUNTY OF___________ ) On this ___ day of April, 2000, before me personally came Darwin Deason, to me known who, being by me duly sworn, did acknowledge the execution of this Contingent Limited Guaranty. Notary Public (NOTARY STAMP/SEAL) Accepted in Dallas, Texas as of the 27th day of April, 2000 BANK ONE, TEXAS, NA, as Agent By:________________________________ Name: Title: EXHIBIT A TO LIMITED GUARANTY FORM OF PLEDGE AGREEMENT PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (the "Pledge Agreement"), dated as of [_____________], 2000, is entered into by and between Darwin Deason, an individual residing in Dallas, Texas (the "Pledgor"), and Bank One, Texas, NA, as contractual representative (the "Agent") for itself and for the "Holders of Secured Obligations" under (and as defined in) the Credit Agreement defined below. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Credit Agreement (as defined below). WITNESSETH: WHEREAS, Precept Business Services, Inc., a Texas corporation (the "Borrower"), the Agent and certain financial institutions (the "Lenders") have entered into a certain Credit Agreement dated as of March 22, 1999, as previously amended by Amendment and Waiver No. 1 thereto dated as of May 14, 1999, Amendment and Waiver No. 2 thereto dated as of November 12, 1999 and Amendment and Waiver No. 3 thereto dated as of April 27, 2000 (as so amended and as further amended, modified, supplements and or restated from time to time, the "Credit Agreement"), pursuant to which the Lenders have agreed, subject to certain conditions precedent, to make loans and other financial accommodations to the Borrower from time to time; WHEREAS, the Pledgor owns approximately 14.8% of the outstanding Capital Stock (Class A Common Stock and Class B Common Stock) of the Borrower acknowledges and agrees that the making of the Loans, including the Provisional Loan, and the extension of the other financial accommodations under the Credit Agreement and the other Loan Documents to the Borrower is, and will continue to be, of direct economic benefit to the Pledgor; WHEREAS, SCHEDULE I hereto sets forth certain shares of Affiliated Computer Services, Inc. ("ACS") initially being pledged hereunder (the "Initial Pledged Shares"), which Initial Pledged Shares have a current market value of not less than $3,021,333.34 (utilizing for purposes of valuation the average closing price over the five (5) immediately preceding trading days for such stock); WHEREAS, Pledgor may from time to time execute and deliver to the Agent a supplement to this Pledge Agreement substantially in the form of EXHIBIT A hereto (each such supplement, a "Pledge Supplement") setting forth additional shares of ACS (the "Additional Pledged Shares") (the Initial Pledged Shares and the Additional Pledged Shares, collectively referred to herein as the "Pledged Shares"); WHEREAS, the Pledgor has executed and delivered to the Agent that certain Limited Guaranty dated as of April 27, 2000 (the "Limited Guaranty"); and WHEREAS, the Agent and the Lenders have required, as a condition to their continued extension of credit and financial accommodations under the Credit Agreement, that the Pledgor execute and deliver this Pledge Agreement; NOW, THEREFORE, for and in consideration of the foregoing and of any financial accommodations or extensions of credit (including, without limitation, any loan or advance by renewal, refinancing or extension of the agreements described hereinabove or otherwise) heretofore, now or hereafter made to or for the benefit of the Borrower pursuant to the Credit Agreement or any other agreement, instrument or document executed pursuant to or in connection therewith, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor and the Agent hereby agree as follows: 1. PLEDGE. The Pledgor hereby pledges to the Agent, for the benefit of the Agent and the Holders of Secured Obligations, and grants to the Agent for the benefit of the Agent and the Holders of Secured Obligations, a security interest in, the collateral described in SECTIONS 1.1 through 1.3 below (collectively as of the date the same is pledged to the Agent, the "Pledged Collateral"): 1.1 (a) The shares of the capital stock of ACS owned by the Pledgor (such shares being identified on SCHEDULE I attached hereto or on any SCHEDULE I attached to any applicable Pledge Supplement), and the certificates representing the shares of such capital stock (all of said capital stock being hereinafter collectively referred to as the "Pledged Stock"), delivered herewith, or from time to time, delivered to the Agent accompanied by stock powers in the form of EXHIBIT B attached hereto and made a part hereof (the "Powers") duly executed in blank, and all dividends, cash, instruments, investment property and other property from time to time received, receivable or otherwise distributed in respect of, or in exchange for, any or all of the Pledged Stock. (b) The additional shares of capital stock of ACS as required to be delivered pursuant to SECTION 3.2 below, and the certificates, which shall be delivered to the Agent, representing such additional shares (any such additional shares shall constitute part of the Pledged Stock and the Agent is irrevocably authorized to unilaterally amend SCHEDULE I hereto or on any SCHEDULE I to any applicable Pledge Supplement to reflect such additional shares), and all dividends, cash, instruments, investment property and other rights and options from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares. 1.2 The property and interests in property described in SECTION 3 below; and 1.3 All proceeds of the collateral described in SECTIONS 1.1 and 1.2 above. 2. SECURITY FOR OBLIGATIONS. The Pledged Collateral secures the prompt payment, performance and observance of the "Guaranteed Obligations" (as defined in the Limited Guaranty). 3. PLEDGED COLLATERAL ADJUSTMENTS; ADDITIONAL PLEDGED SHARES. 3.1 PLEDGED COLLATERAL ADJUSTMENTS. If, during the term of this Pledge Agreement: (a) Any stock dividend, reclassification, readjustment or other change is declared or made in the capital structure of ACS, or (b) Any subscription warrants or any other rights or options shall be issued in connection with the Pledged Collateral, then all new, substituted and additional certificates, shares, warrants, rights, options, investment property or other securities, issued by reason of any of the foregoing, in connection with Pledged Collateral shall be immediately delivered to and held by the Agent under the terms of this Pledge Agreement and shall constitute Pledged Collateral hereunder. 3.2 ADDITIONAL PLEDGED SHARES. The Pledgor and the Agent agree that on the last business day of each calendar quarter (or more frequently if requested by the Agent), the "Market Value" (as defined below) of the Pledged Stock will be calculated and if, at the time of such calculation, the Market Value of the Pledged Stock is less than an amount equal to 1.33333 multiplied by the Provisional Loan Commitment, then within three (3) Business Days the Pledgor will deliver to the Agent an executed Pledge Supplement together with additional ACS Class A Common Stock (together with Powers with respect thereto) having a Market Value such that when added when added to the Market Value of the previously Pledged Stock is equal to or greater than 1.33333 multiplied by the Provisional Loan Commitment. "Market Value" for the Pledged Stock shall be equal to the average closing price over the five (5) trading days immediately preceding the applicable date of any calculation for such stock on the New York Stock Exchange. 4. SUBSEQUENT CHANGES AFFECTING PLEDGED COLLATERAL. The Pledgor represents and warrants that it has made its own arrangements for keeping itself informed of changes or potential changes affecting the Pledged Collateral (including, but not limited to, rights to convert, rights to subscribe, payment of dividends, cash distributions or other distributions reorganization or other exchanges, tender offers and voting rights), and the Pledgor agrees that neither the Agent nor any of the Holders of Secured Obligations shall have any obligation to inform the Pledgor of any such changes or potential changes or to take any action or omit to take any action with respect thereto. The Agent may, after the occurrence of a default by the Pledgor hereunder or under the Limited Guaranty ( a "Specified Default"), without notice and at its option, transfer or register the Pledged Collateral or any part thereof into its or its nominee's name with or without any indication that such Pledged Collateral is subject to the security interest hereunder. In addition, the Agent may after the occurrence of a Specified Default exchange certificates or instruments representing or evidencing Pledged Shares for certificates or instruments of smaller or larger denominations. 5. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants as follows: (a) The Pledgor is the sole legal and beneficial owner of the Pledged Collateral, free and clear of any pledge, mortgage, hypothecation, Lien, charge, encumbrance or any security interest therein except for the security interest created by this Pledge Agreement; (b) The Pledgor has owned the Pledged Collateral of record and beneficially for at least the two (2) year holding period required under paragraph (k) of Rule 144 as promulgated by the Securities and Exchange Commission under the Securities Act ("RULE 144") and if any of the Pledged Collateral was acquired by the Pledgor by purchase, the purchase price has been paid for in full for at least two (2) years and after the occurrence of a Specified Default, assuming the Agent is not then an affiliate (as defined in Rule 144) of ACS, the sale by the Agent of the Pledged Collateral could be made by or on behalf of the Agent without compliance with Rule 144; (c) There are no restrictions upon the voting rights associated with, or upon the transfer of, any of the Pledged Collateral; (d) The Pledgor has the right to vote, pledge and grant a security interest in or otherwise transfer such Pledged Collateral free of any Liens; (e) The pledge of the Pledged Collateral does not violate (1) any mortgage, bank loan or credit agreement or other agreements to which the Pledgor is a party or by which any of his assets may be bound; or (2) any restriction on such transfer or encumbrance of such Pledged Collateral; (f) The Pledgor agrees to execute and file financing statements pursuant to the Uniform Commercial Code as the Agent may request to perfect the security interest granted hereby; (g) No authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the pledge of the Pledged Collateral pursuant to this Pledge Agreement or for the execution, delivery or performance of this Pledge Agreement by the Pledgor or (ii) for the exercise by the Agent of the remedies in respect of the Pledged Collateral pursuant to this Pledge Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally); (h) Upon delivery of each of the certificates representing the Pledged Collateral, the pledge of the Pledged Collateral pursuant to this Pledge Agreement will create a valid and perfected first priority security interest in the Pledged Collateral, in favor of the Agent for the benefit of the Agent and the Holders of Secured Obligations, securing the payment and performance of the Guaranteed Obligations; (i) The Powers are duly executed and give the Agent the authority they purport to confer; (j) The Pledgor has no obligation to make further capital contributions or make any other payments to ACS with respect to his interest therein; and (k) The information set forth on the questionnaire attached hereto as EXHIBIT C and made a part hereof, and any subsequent questionnaire supplied by the Pledgor (each, a "QUESTIONNAIRE"), is and will be true and complete in all material respects. 6. VOTING RIGHTS. During the term of this Pledge Agreement, and except as provided in this SECTION 6 below, the Pledgor shall have the right to vote the Pledged Stock on all governing questions in a manner not inconsistent with the terms of this Pledge Agreement. After the occurrence of a Specified Default, the Agent or the Agent's nominee may, at the Agent's or such nominee's option and upon written notice from the Agent to the Pledgor, (i) exercise all voting powers pertaining to the Pledged Collateral and (ii) exercise, or direct the Pledgor as to the exercise of any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to the applicable Pledged Collateral, as if the Agent were the absolute owner thereof, all without liability except to account for property actually received by it, but the Agent shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure so to do or delay in so doing. Such authorization shall constitute an irrevocable voting proxy from the Pledgor to the Agent or, at the Agent's option, to the Agent's nominee. 7. DIVIDENDS AND OTHER DISTRIBUTIONS. (a) So long as no Specified Default shall have occurred and is continuing: (i) The Pledgor shall be entitled to receive and retain any and all dividends and cash distributions paid in respect of the Pledged Collateral, PROVIDED, HOWEVER, that any and all (A) distributions and dividends paid or payable other than in cash with respect to, and instruments and other property received, receivable or otherwise distributed with respect to, or in exchange for, any of the Pledged Collateral; (B) dividends and other distributions paid or payable in cash with respect to any of the Pledged Collateral on account of a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus; and (C) cash paid, payable or otherwise distributed with respect to principal of, or in redemption of, or in exchange for, any of the Pledged Collateral; shall be Pledged Collateral, and shall be forthwith delivered to the Agent to hold, for the benefit of the Agent and the Holders of Secured Obligations, as Pledged Collateral and shall, if received by the Pledgor, be received in trust for the Agent, for the benefit of the Agent and the Holders of Secured Obligations, be segregated from the other property or funds of the Pledgor, and be delivered immediately to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsement); and (ii) The Agent shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to receive the dividends or interest payments which it is authorized to receive and retain pursuant to CLAUSE (i) above. (b) After the occurrence and during the continuance of a Specified Default: (i) All rights of the Pledgor to receive the dividends and distributions which it would otherwise be authorized to receive and retain pursuant to SECTION 7(a)(i) hereof shall cease, and all such rights shall thereupon become vested in the Agent, for the benefit of the Agent and the Holders of Secured Obligations, which shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and distributions; (ii) All dividends and distributions which are received by the Pledgor contrary to the provisions of CLAUSE (i) of this SECTION 7(b) shall be received in trust for the Agent, for the benefit of the Agent and the Holders of Secured Obligations, shall be segregated from other funds of the Pledgor and shall be paid over immediately to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsements); (iii) The Pledgor shall, upon the request of the Agent, at Borrower's expense, execute and deliver all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Agent or its counsel, advisable to register the applicable Pledged Collateral under the provisions of the Securities Act of 1933, as amended (the "Securities Act") and to exercise its reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Agent or its counsel, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (iv) The Pledgor shall, upon the request of the Agent, at Borrower's expense, use its reasonable efforts to qualify the Pledged Collateral under state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by the Agent; and (v) The Pledgor shall, upon the request of the Agent, at the Borrower's expense, do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. The Borrower will reimburse the Agent and/or the Holders of Secured Obligations for all expenses incurred by the Agent and/or the Holders of Secured Obligations, including, without limitation, reasonable attorneys' and accountants' fees and expenses in connection with the foregoing. Upon or at any time after the occurrence of a Specified Default, if the Agent determines that, prior to any public offering of any securities constituting part of the Pledged Collateral and Rule 144 under the Securities Act of 1933 is not available for the proposed sale, such securities should be registered under the Securities Act and/or registered or qualified under any other federal or state law and such registration and/or qualification is not practicable, then the Pledgor agrees that it will be commercially reasonable if a private sale, upon at least five (5) Business Days' notice to the Pledgor, is arranged so as to avoid a public offering, even though the sales price established and/or obtained at such private sale may be substantially less then prices which could have been obtained for such security on any market or exchange or in any other public sale. (c) Upon the Agent's request following a determination that due to a change in the interpretation of Rule 144 or otherwise the sale by the Agent of the Pledged Collateral would require compliance with Rule 144, the Pledgor shall: (i) use his reasonable efforts to cause ACS to comply at all times and on a timely basis with the requirements of paragraph (c) of Rule 144 to the extent required to permit a sale of the Pledged Stock in compliance with Rule 144 and promptly notify the Agent if such Pledgor obtains knowledge that ACS has failed at any time to comply with such requirements; (ii) complete and execute one or more Forms 144 or fully cooperate in the completion and execution of one or more Forms 144 if completed and/or executed by the Agent, to the extent required to permit the sale of the Pledged Stock in compliance with Rule 144; and (iii) complete and maintain current a Questionnaire containing such information as the Agent reasonably requests in connection with the Agent's ability to comply with Rule 144 in any sale of Pledged Stock including, without limitation, the delivery of a completed Questionnaire contemporaneously with the delivery of the Pledged Stock. 8. TRANSFERS AND OTHER LIENS. The Pledgor agrees that it will not (i) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral without the prior written consent of the Agent, or (ii) create or permit to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Pledge Agreement. 9. REMEDIES. (a) The Agent shall have, in addition to any other rights given under this Pledge Agreement or by law, all of the rights and remedies with respect to the Pledged Collateral of a secured party under the Uniform Commercial Code as in effect in the State of Texas. The Agent (personally or through an agent) is hereby authorized and empowered to transfer and register in its name or in the name of its nominee the whole or any part of the Pledged Collateral, to exercise all voting rights with respect thereto, to collect and receive all cash dividends or distributions and other distributions made thereon, and to otherwise act with respect to the Pledged Collateral as though the Agent were the outright owner thereof, the Pledgor hereby irrevocably constituting and appointing the Agent as the proxy and attorney-in-fact of the Pledgor, with full power of substitution to do so, provided, however, that the Agent shall have no duty to exercise any such right or to preserve the same and shall not be liable for any failure to do so or for any delay in doing so; PROVIDED, FURTHER, however that the Agent agrees to exercise such proxy and powers contained in this sentence only so long as a Specified Default shall have occurred and is continuing and following written notice thereof. In addition, after the occurrence of a Specified Default, the Agent shall have such powers of sale and other powers as may be conferred by applicable law. With respect to the Pledged Collateral or any part thereof which shall then be in or shall thereafter come into the possession or custody of the Agent or which the Agent shall otherwise have the ability to transfer under applicable law, the Agent may, in its sole discretion, without notice except as specified below, after the occurrence of a Specified Default, sell or cause the same to be sold at any exchange, broker's board or at public or private sale, in one or more sales or lots, at such price as the Agent may deem best, for cash or on credit or for future delivery, without assumption of any credit risk, and the purchaser of any or all of the Pledged Collateral so sold shall thereafter own the same, absolutely free from any claim, encumbrance or right of any kind whatsoever. The Agent and each of the Holders of Secured Obligations may, in its own name, or in the name of a designee or nominee, buy the Pledged Collateral at any public sale and, if permitted by applicable law, buy the Pledged Collateral at any private sale. The Borrower will pay to the Agent all reasonable expenses (including, without limitation, court costs and reasonable attorneys' and paralegals' fees and expenses) of, or incidental to, the enforcement of any of the provisions hereof. The Agent agrees to distribute any proceeds of the sale of the Pledged Collateral in accordance with the Credit Agreement and the Pledgor shall remain liable for any deficiency following the sale of the Pledged Collateral, subject to the limitations or liability set forth in the Limited Guaranty. (b) The Agent will give the Pledgor reasonable notice of the time and place of any public sale thereof, or of the time after which any private sale or other intended disposition is to be made. Any sale of the Pledged Collateral conducted in conformity with reasonable commercial practices of banks, commercial finance companies, insurance companies or other financial institutions disposing of property similar to the Pledged Collateral shall be deemed to be commercially reasonable. Notwithstanding any provision to the contrary contained herein, the Pledgor agrees that any requirements of reasonable notice shall be met if such notice is received by the Pledgor as provided in SECTION 19 below at least five (5) Business Days before the time of the sale or disposition; provided, however, that Agent may give any shorter notice that is commercially reasonable under the circumstances. Any other requirement of notice, demand or advertisement for sale is waived, to the extent permitted by law. (c) In view of the fact that federal and state securities laws may impose certain restrictions on the method by which a sale of the Pledged Collateral may be effected after a Specified Default, the Pledgor agrees that after the occurrence of a Specified Default, the Agent may, from time to time, attempt to sell all or any part of the Pledged Collateral by means of a private placement restricting the bidders and prospective purchasers to those who are qualified and will represent and agree that they are purchasing for investment only and not for distribution. In so doing, the Agent may solicit offers to buy the Pledged Collateral, or any part of it, from a limited number of investors deemed by the Agent, in its reasonable judgment, to be financially responsible parties who might be interested in purchasing the Pledged Collateral. If the Agent solicits such offers from not less than four (4) such investors, then the acceptance by the Agent of the highest offer obtained therefrom shall be deemed to be a commercially reasonable method of disposing of such Pledged Collateral; provided, however, that this Section does not impose a requirement that the Agent solicit offers from four or more investors in order for the sale to be commercially reasonable. 10. AGENT APPOINTED ATTORNEY-IN-FACT. The Pledgor hereby appoints the Agent its attorney-in-fact, coupled with an interest, with full authority, in the name of the Pledgor or otherwise, from time to time in the Agent's sole discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Pledgor representing any dividend, distribution, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same and to arrange for the transfer of all or any part of the Pledged Collateral on the books of ACS to the name of the Agent or the Agent's nominee; PROVIDED, HOWEVER that the Agent agrees to exercise such powers only so long as a Specified Default shall have occurred and is continuing. 11. WAIVERS. (i) The Pledgor waives presentment and demand for payment of any of the Guaranteed Obligations, protest and notice of dishonor or Specified Default with respect to any of the Guaranteed Obligations and all other notices to which the Pledgor might otherwise be entitled except as otherwise expressly provided herein or in the Credit Agreement. (ii) The Pledgor understands and agrees that his obligations and liabilities under this Pledge Agreement shall remain in full force and effect, notwithstanding foreclosure of any real property securing all or any part of the Guaranteed Obligations by trustee sale or any other reason impairing the right of the Pledgor, the Agent or any of the Holders of Secured Obligations to proceed against any other guarantor or such guarantor's property. The Pledgor agrees that all of its obligations under this Pledge Agreement shall remain in full force and effect without defense, offset or counterclaim of any kind, notwithstanding that the Pledgor's rights may be impaired, destroyed or otherwise affected by reason of any action or inaction on the part of the Agent or any Holder of Secured Obligations. 12. TERM. This Pledge Agreement shall remain in full force and effect until (a) all "Guaranteed Obligations" (as defined in the Limited Guaranty) shall have been paid in full in cash and the Commitments and all Letters of Credit issued under the Credit Agreement shall have terminated or expired or (b) a "Release Event" (as defined in the Limited Guaranty) occurs. Upon the termination of this Pledge Agreement as provided above (other than as a result of the sale of the Pledged Collateral), the Agent will release the security interest created hereunder and, if it then has possession of the Pledged Stock, will deliver the Pledged Stock and the Powers to the Pledgor. If at any time any payment of the principal of or interest on any Note, any Reimbursement Obligation or any other amount payable by the Borrower or any other party under the Credit Agreement, any Hedging Agreement or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, and the Pledgor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time and the Pledgor shall redeliver the Pledged Stock and Powers to the Agent. 13. DEFINITIONS. The singular shall include the plural and vice versa and any gender shall include any other gender as the context may require. 14. SUCCESSORS AND ASSIGNS. This Pledge Agreement shall be binding upon and inure to the benefit of the Pledgor, the Agent, for the benefit of itself and the Holders of Secured Obligations, and their respective heirs, successors and assigns. The Pledgor's heirs, successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession of or for the Pledgor. 15. GOVERNING LAW. THIS PLEDGE AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN DALLAS, TEXAS, AND THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS PLEDGE AGREEMENT AND ALL OTHER LOAN DOCUMENTS. ANY DISPUTE BETWEEN THE PLEDGOR AND THE AGENT, ANY LENDER OR ANY HOLDER OF SECURED OBLIGATIONS ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS PLEDGE AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 16. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL. (A) THE PLEDGOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE COURT SITTING IN DALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE PLEDGOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION HE MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE PLEDGOR AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN DALLAS, TEXAS. (B) SERVICE OF PROCESS. DEASON WAIVES PERSONAL SERVICE OF ANY PROCESS UPON HIM AND IRREVOCABLY APPOINTS THE GENERAL COUNSEL OF AFFILIATED COMPUTER SERVICES INC. (THE ADDRESS FOR WHICH IS 2828 NORTH HASKELL AVENUE, 10TH FLOOR, DALLAS, TEXAS, 75204) AS THE PLEDGOR'S AGENT FOR THE PURPOSE OF ACCEPTING SERVICE OF PROCESS ISSUED BY ANY COURT. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF THE AGENT OR THE LENDERS TO SERVE ANY SUCH WRITS, PROCESS OR SUMMONSES IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW THE PLEDGOR IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH HE MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS PLEDGE AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE. (C) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS PLEDGE AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS PLEDGE AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (D) WAIVER OF BOND. THE PLEDGOR WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF ANY PARTY HERETO IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO REALIZE ON THE COLLATERAL ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS PLEDGE AGREEMENT OR ANY OTHER LOAN DOCUMENT. (E) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS PLEDGE AGREEMENT AND, SPECIFICALLY, THE PROVISIONS OF THIS SECTION 16, WITH ITS COUNSEL. 17. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Pledge Agreement. In the event an ambiguity or question of intent or interpretation arises, this Pledge Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Pledge Agreement. 18. SEVERABILITY. Whenever possible, each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but, if any provision of this Pledge Agreement shall be held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. 19. FURTHER ASSURANCES. The Pledgor agrees that he will cooperate with the Agent and will execute and deliver, or cause to be executed and delivered, all such other stock powers, proxies, instruments and documents, and will take all such other actions, including, without limitation, the execution and filing of financing statements, as the Agent may reasonably request from time to time in order to carry out the provisions and purposes of this Pledge Agreement. 20. THE AGENT'S DUTY OF CARE. The Agent shall not be liable for any acts, omissions, errors of judgment or mistakes of fact or law including, without limitation, acts, omissions, errors or mistakes with respect to the Pledged Collateral, except for those arising out of or in connection with the Agent's (i) Gross Negligence or willful misconduct, or (ii) failure to use reasonable care with respect to the safe custody of the Pledged Collateral in the Agent's possession. Without limiting the generality of the foregoing, the Agent shall be under no obligation to take any steps necessary to preserve rights in the Pledged Collateral against any other parties but may do so at its option. All expenses incurred in connection therewith shall be for the sole account of the Pledgor, and shall constitute part of the Guaranteed Obligations secured hereby. THE PARTIES INTEND FOR THE EXCULPATORY PROVISIONS OF THIS SECTION 20 TO APPLY AND PROTECT THE AGENT FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF ANY CLAIM. 21. NOTICES. All notices and other communications required or desired to be served, given or delivered hereunder shall be given in the manner and to the addresses set forth in the Credit Agreement. 22. AMENDMENTS, WAIVERS AND CONSENTS. No amendment or waiver of any provision of this Pledge Agreement nor consent to any departure by the Pledgor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent pursuant to the terms of the Credit Agreement, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 23. SECTION HEADINGS. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 24. EXECUTION IN COUNTERPARTS. This Pledge Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. 25. MERGER. This Pledge Agreement and the other Loan Documents embody the final and entire agreement and understanding among the Pledgor, the Agent and the Holders of Secured Obligations and supersede all prior agreements and understandings among the Pledgor, the Agent and the Holders of Secured Obligations relating to the subject matter thereof. This Pledge Agreement and the other Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties hereto. IN WITNESS WHEREOF, the Pledgor and the Agent have executed this Pledge Agreement as of the date set forth above. DARWIN DEASON --------------------------------- BANK ONE, TEXAS, NA, as agent for itself and the Holders of Secured Obligations By: ------------------------------ Name: Title: SCHEDULE I to PLEDGE AGREEMENT dated as of [_____________], 2000 INITIAL PLEDGED SHARES NUMBER OF SHARES OF ACS CERTIFICATE NUMBER EXHIBIT A to PLEDGE AGREEMENT dated as of [___________], 2000 Form of Pledge Supplement Reference is hereby made to the Pledge Agreement (the "Pledge Agreement") dated as of the [___] day of [________], 2000, by and between Darwin Deason (the "Pledgor") and Bank One, Texas, NA, as contractual representative (the "Agent"), whereby the Pledgor has pledged certain capital stock of Affiliated Computer Services, Inc. ("ACS") as collateral to the Agent, for the ratable benefit of the Holders of Secured Obligations, as more fully described in the Pledge Agreement. This Supplement is a "Pledge Supplement" as defined in the Pledge Agreement and is, together with the certificates and Powers delivered herewith, subject in all respects to the terms and provisions of the Pledge Agreement. Capitalized terms used herein and not defined herein shall have the meanings given to them in the Pledge Agreement. By its execution below, the Pledgor hereby agrees that (i) the capital stock of ACS listed on the SCHEDULE I hereto shall be pledged to the Agent as additional collateral pursuant to SECTION [1.[_]][3.2] of the Pledge Agreement and (ii) such property shall be considered Pledged Stock under the Pledge Agreement and be a part of the Pledged Collateral pursuant to the Pledge Agreement. By its execution below, the Pledgor represents and warrants that the representations and warranties contained in SECTION 5 of the Pledge Agreement are true and correct in all respects as of the date hereof and after taking into account the pledge of the additional Pledged Stock relating hereto. IN WITNESS WHEREOF, the Pledgor has executed and delivered this Pledge Supplement to the Pledge Agreement as of this __________ day of _________, ____. DARWIN DEASON ------------------------ SCHEDULE I TO PLEDGE SUPPLEMENT ADDITIONAL PLEDGED STOCK NUMBER OF SHARES OF ACS CERTIFICATE NUMBER EXHIBIT B to PLEDGE AGREEMENT dated as of [___________], 2000 Form of Stock Power STOCK POWER FOR VALUE RECEIVED, the undersigned does hereby sell, assign and transfer to _____________________________ _____ Shares of Common Stock of Affiliated Computer Services, Inc., a __________ corporation, represented by Certificate No. __ (the "Stock"), standing in the name of the undersigned on the books of said corporation and does hereby irrevocably constitute and appoint ___________________________________ as the undersigned's true and lawful attorney, for it and in its name and stead, to sell, assign and transfer all or any of the Stock, and for that purpose to make and execute all necessary acts of assignment and transfer thereof; and to substitute one or more persons with like full power, hereby ratifying and confirming all that said attorney or substitute or substitutes shall lawfully do by virtue hereof. Dated: _______________ DARWIN DEASON - ------------------------- EXHIBIT C to PLEDGE AGREEMENT dated as of [___________], 2000 Form of Questionnaire INFORMATIONAL EXHIBIT - PLEDGE OF SECURITIES In connection with the undersigned's pledge of the following capital stock of Affiliated Computer Services, Inc. (the "Securities") to Bank One Texas, N.A., as agent (the "Agent"):
CLASS AMOUNT NAME OF ISSUER OF SECURITIES PLEDGED -------------- ------------- ------- Affiliated Computer Services, Inc. Class A Common Stock ________ Shares Par Value $__________
the undersigned warrants and represents that the answers which he is hereby providing to the following questions are to the best of the undersigned's knowledge, complete, true, accurate and not misleading in any way and that if the undersigned, at any time, receives any information which would in any way make such answer incomplete, untrue, inaccurate or misleading (either at the time such answer was given or at some later time), the undersigned will immediately notify the Agent of the existence of such information and, provide the Agent with all such information within ten (10) business days of the undersigned's receipt thereof. Part I 1. How did you acquire the Securities? Were any of the Securities ever registered under the Securities Act of 1933? Are any of the Securities subject to any restrictions on their transferability? Provide details with respect to each class or issue of the Securities in order to substantiate and clarify your answers. [_______________________________] 2. Are any of the Securities part of an issue or class which is regularly traded on one or more securities exchanges or quotation systems? If so, please identify all such exchanges and systems. [_______________________________] 3. Are any of the Securities "restricted securities" within the meaning of Rule 144 of the Securities Act of 1933 -- i.e., securities acquired directly or indirectly from the issuer thereof, or from any affiliate of such issuer, in a transaction or chain of transactions not involving any public offering? [_______________________________] 4. Do you own or have a beneficial interest in any other securities issued by the issuer of the Securities? If so, provide details and set forth the amounts of each such security that you hold. [_______________________________] 5. Do any of the following persons or entities own of record or have a beneficial interest in any securities issued by the issuer of the Securities? If so, provide details and set forth the amounts of each such security that each such person holds. (a) Your spouse or any relative of either you or your spouse who has the same home as you. [_______________________________] (b) Any trust or estate in which you or any person specified in subparagraph (a) above collectively own ten percent (10%) or more of the total beneficial interest or of which any such person serves as trustee, executor or in any similar capacity. [_______________________________] (c) Any corporation or other organization in which you or any person specified in subparagraph (a) are the beneficial owners collectively of ten percent (10%) or more of any class of equity securities of ten percent (10%) or more of the total equity interest. [_______________________________] 6. Are you or any of the persons or entities described in Question 5 above an "affiliate" of the issuer of the Securities -- i.e., are you or any such person directly, or indirectly through one or more intermediaries, controlled by, in control of or under common control with such issuer? If yes, please give all details. [_______________________________] 7. Are you aware of any state or federal securities law which would prevent the Agent from legally selling the Securities? [_______________________________] Part II 8. With respect to the Securities, is the issuer subject to the reporting requirements of either Section 13 or Section 15(d) of the Securities Exchange Act of 1934, and, is the issuer current with respect to all required filings thereunder, including its most recent annual report on Form 10-K? [_______________________________] 9. If you acquired the Securities with the proceeds of any loan, was such loan on a full or partial recourse basis? If yes, answer the following questions: (a) On what date did you fully pay for the Securities? Describe any type of deferred payment arrangement under which any of the Securities were purchased and describe any contingencies regarding the issuance of the Securities. [_______________________________] (b) If any of the Securities were obtained through conversion privileges with respect to other securities of that issuer or through stock dividends, splits or recapitalizations, describe the circumstances surrounding such acquisition and the acquisition of the convertible securities or securities in respect of which the stock dividend, split or recapitalization occurred. [_______________________________] 10. Have you or any of the persons or entities set forth in Question 5 above sold securities of the same class or any securities convertible into securities within the last three (3) months of the same class as the Securities pursuant to Rule 144? If so, provide copies of Form 144. [_______________________________] 11. In the last three months, have you or any of the persons or entities set forth in Question 5 above, sold any securities of the same class as the Securities? [_______________________________] In addition to the foregoing warranties and representations, the undersigned hereby acknowledges that the undersigned understands that the Agent may rely upon the information given in these questions in realizing upon and selling the Securities. IN WITNESS WHEREOF, this instrument has been duly executed by the undersigned this [_______] day of [____________], 2000. DARWIN DEASON By:_________________________ Name: Title: STATE OF ) ) SS. COUNTY OF ) On this [_______] day of [_______________], in the year 2000 before me, the undersigned, a Notary Public in and for said State, personally appeared Darwin Deason, known to me to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same. WITNESS my hand and official seal. ---------------------------------- Notary Public EX-27 7 EXHIBIT 27
5 9-MOS 3-MOS JUN-30-2000 JUN-30-2000 JUL-01-1999 JAN-01-2000 MAR-31-2000 MAR-31-2000 0 0 0 0 20,928,000 20,928,000 347,000 347,000 7,595,000 7,595,000 55,939,000 55,939,000 2,781,000 2,781,000 4,728,000 4,728,000 79,484,000 79,484,000 19,930,000 19,930,000 0 0 2,592,000 2,592,000 0 0 103,000 103,000 13,133,000 13,133,000 79,484,000 79,484,000 106,815,000 36,728,000 106,815,000 36,728,000 71,701,000 24,844,000 103,864,000 36,557,000 0 0 0 0 2,322,000 552,000 629,000 (381,000) 284,000 (171,000) 345,000 (210,000) (15,954,000) (17,088,000) 0 0 0 0 (15,609,000) (17,298,000) (1.58) (1.70) (1.51) (1.70) Amount represents net accounts receivable. Amount includes additional paid-in capital, retained earnings, and treasury stock.
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