-----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, MkQZbIf8MtO3A3HATcyHU1GFj9SS4BNrb2+JaI4dpzGjKZe7as12OagAk2c9RnDJ mksPDHOtyAm11Wezsrahcw== /in/edgar/work/20000626/0000912057-00-029765/0000912057-00-029765.txt : 20000920 0000912057-00-029765.hdr.sgml : 20000920 ACCESSION NUMBER: 0000912057-00-029765 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000626 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECEPT BUSINESS SERVICES INC CENTRAL INDEX KEY: 0001051285 STANDARD INDUSTRIAL CLASSIFICATION: [5110 ] IRS NUMBER: 752487353 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-23735 FILM NUMBER: 660950 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/A 1 a10-qa.txt 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q/A (Amendment No. 1) 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 Identification No.) incorporation or organization 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. Explanatory Note This Form 10-Q/A is filed to amend the Form 10-Q for the period ended March 31, 2000 (the "Original Form 10-Q") to (i) restate the fourth paragraph under Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2), (ii) restate the seventh paragraph under Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2), (iii) restate the second paragraph under Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999 in Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2), (iv) attach the Company's Certificate of Designation of Series 8% Convertible Preferred Stock as an Exhibit, (v) restate the Exhibit List (Item 6), (vi) attach the Waiver and Consent No. 4 to Credit Agreement referenced in the seventh paragraph under Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2), and (vii) disclose the recent departure of William W. Solomon, Jr. as the Company's Chief Financial Officer. INDEX
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 2 Management's discussion and analysis of financial condition and results of operations 3 PART II OTHER INFORMATION Item 5 Other Information 15 Item 6 Exhibits and Reports on Form 8-K 15 Signature 17
2 PART I FINANCIAL INFORMATION 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. 3 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 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% 4 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. 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. 5 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 2000. 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). 6 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. 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. 7 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. 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 8 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, 9 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 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 conversion price which is the lesser 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 expiring April 19, 2003 to purchase 125,000 shares of Class A Common Stock at an exercise price of $2.50 per share. The governing documents provide that unless shareholder approval is obtained, Precept may not issue shares of Class A Common Stock (i) upon conversion of any shares of Series A Preferred Stock, (ii) upon the conversion of shares of the Series A Preferred Stock, (iii) upon the exercise of the Warrants issued pursuant to the terms of the Sercurities Purchase Agreement, and (iv) in payment of dividends on the Series A Preferred Stock, which, when added to the number of shares of Common Stock previously issued by Precept, would equal or exceed 20% of the number of shares of Precept's common stock which were issued and outstanding on the issue date. 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 10 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. One June 14, 2000, our banking group executed a Waiver and Consent No. 4 to Credit Agreement and waived our noncompliance with the three applicable covenants. The waiver is effective through June 29, 2000. As a result of such waiver, 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. 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. 11 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 12 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 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 13 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. 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. 14. 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. 15. 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. 14 PART II OTHER INFORMATION ITEM 5 - OTHER INFORMATION Subsequent to the Company's filing the Original Form 10-Q on May 19, 2000, William W. Solomon, Jr., the Company's executive vice president and chief financial officer resigned to pursue other business opportunities. The position of chief financial officer has not yet been permanently filled.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Securities Purchase Agreement, dated as of April 19, 2000, by and between Precept Business Services, Inc. and The Shaar Fund Ltd. (1) 3.1 Amended and Restated Articles of Incorporation (3) 3.2 Bylaws (4) 4.1 Certificate of Designation of Series 8% Convertible Preferred Stock of Precept Business Services, Inc. filed with the Secretary of State of Texas on April 19, 2000. (2) 4.2 Common Stock Warrant for The Shaar Fund Ltd. to purchase 125,000 shares of Class A Common Stock. (1) 4.3 Registration Rights Agreement, dated as of April 19, 2000, by and between Precept Business Services, Inc. and The Shaar Fund Ltd. (1) 10.1 Letter agreement dated April 25, 2000 among Precept Business Services, Inc. and Darwin Deason, Chairman (1) 10.2 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) 10.3 Waiver and Consent No. 4, dated June 14, 2000 among Precept Business Services, Inc., Bank One, N.A., individually and as agent and Wells Fargo Bank (Texas), N.A., as a Lender (2) 27.1 Financial Data Schedule (1)
(1) Previously filed as Exhibit to the Original Form 10-Q for the quarterly period ended March 31, 2000, initially filed with the Securities and Exchange Commission on May 19, 2000. (2) Filed herewith. (3) Previously filed as an exhibit to the Company's Form 10-Q for the period ended December 31, 1998. (4) Previously filed as an exhibit to the Company's registration statement on Form S-4 (file no. 333-42689) and incorporated herein by reference. 15 (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. 16 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 June 26, 2000. PRECEPT BUSINESS SERVICES, INC. /s/ Doug Deason - ----------------------------------------- Douglas R. Deason, President, Chief Executive Officer and Acting Chief Financial Officer 17 EX-4.1 2 ex-4_1.txt EXHIBIT 4.1 Exhibit 4.1 CERTIFICATE OF DESIGNATION OF SERIES A 8% CONVERTIBLE PREFERRED STOCK OF PRECEPT BUSINESS SERVICES, INC. - ------------------------------------------------------------------------------- Pursuant to Article 2.13 of the Texas Business Corporation Act - ------------------------------------------------------------------------------- Precept Business Services, Inc., a corporation organized and existing under the Texas Business Corporation Act (the "CORPORATION"), hereby certifies that the following resolutions were adopted by the Board of Directors of the Corporation on April 19, 2000 pursuant to authority of the Board of Directors as required by Article 2.13 of the Texas Business Corporation Act: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD") in accordance with the provisions of its Articles of Incorporation, the Board of Directors hereby authorizes a series of the Corporation's previously authorized Preferred Stock, par value $1.00 per share (the "PREFERRED STOCK"), and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows: Series A 8% Convertible Preferred Stock: ARTICLE 1 DEFINITIONS The terms defined in this Article whenever used in this Certificate of Designation have the following respective meanings: (a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section 6.1. (b) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. (c) "AMEX" means the American Stock Exchange. (d) "BUSINESS DAY" means a day other than Saturday, Sunday or any day on which banks located in the State of New York are authorized or obligated to close. (e) "CAPITAL SHARES" means the Common Shares and any other shares of any other class or series of capital stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Corporation. (f) "CEILING PRICE" has the meaning set forth in Section 6.1. (g) "COMMON SHARES" or "COMMON STOCK" means shares of class A common stock, par value $.01 per share, of the Corporation. (h) "COMMON STOCK ISSUED AT CONVERSION", when used with reference to the securities issuable upon conversion of the Series A Preferred Stock, means all Common Shares now or hereafter Outstanding and securities of any other class or series into which the Series A Preferred Stock hereafter shall have been changed or substituted, whether now or hereafter created and however designated. (i) "CONVERSION DATE" means any day on which all or any portion of shares of the Series A Preferred Stock is converted in accordance with the provisions hereof. (j) "CONVERSION NOTICE" means a written notice of conversion substantially in the form annexed hereto as Annex I. (k) "CONVERSION PRICE" means on any date of determination the applicable price for the conversion of shares of Series A Preferred Stock into Common Shares on such day as set forth in Section 6.1. (l) "CORPORATION" means Precept Business Services, Inc., a Texas corporation, and any successor or resulting corporation by way of merger, consolidation, sale or exchange of all or substantially all of the Corporation's assets, or otherwise. (m) "CURRENT MARKET PRICE" means 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. (n) "DEFAULT DIVIDEND RATE" is equal to the Dividend Rate plus an additional 4% per annum. (o) "DIVIDEND PERIOD" means the quarterly period commencing on and including the Issue Date or, if a dividend has previously been paid, the day after the immediately preceding Dividend Payment Due Date and ending on and including the immediately subsequent Dividend Payment Due Date. (p) "DIVIDEND PAYMENT DUE DATE" means March 31, June 30, September 30 and December 31 of each year. (q) "DIVIDEND RATE" means 8% per annum, computed on the basis of a 360-day year. -2- (r) "HOLDER" means The Shaar Fund Ltd., any successor thereto, or any Person or Persons to whom the Series A Preferred Stock is subsequently transferred in accordance with the provisions hereof. (s) "INVESTMENT AMOUNT" means $2,000,000. (t) "ISSUE DATE" means, as to any share of Series A Preferred Stock, the date of issuance of such share. (u) "JUNIOR SECURITIES" means all capital stock of the Corporation except for the Series A Preferred Stock and up to $2,800,000 of preferred stock outstanding on the date hereof. (v) "LIQUIDATION PREFERENCE" means, with respect to a share of the Series A Preferred Stock, an amount equal to the sum of (i) the Stated Value thereof, PLUS (ii) an amount equal to 30% of such Stated Value, PLUS (iii) the aggregate of all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) on such share of Series A Preferred Stock until the most recent Dividend Payment Due Date; PROVIDED that, in the event of an actual liquidation, dissolution or winding up of the Corporation, the amount referred to in clause (iii) above shall be calculated by including accrued and unpaid dividends to the actual date of such liquidation, dissolution or winding up, rather than the Dividend Payment Due Date referred to above. (w) "MANDATORY CONVERSION DATE" has the meaning set forth in Section 6.8. (x) "MARKET PRICE" per Common Share means the arithmetic mean of the closing bid prices of the Common Shares as reported on Nasdaq for the five consecutive Trading Days during any Valuation Period; PROVIDED, if such security 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, for the five consecutive Trading Days during any Valuation Period. (y) "NASDAQ" means the Nasdaq SmallCap Market. (z) "NYSE" means The New York Stock Exchange. (aa) "OPTIONAL REDEMPTION PRICE" has the meaning set forth in Section 6.5. (bb) "OUTSTANDING", when used with reference to Common Shares or Capital Shares (collectively, "SHARES"), means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; PROVIDED, HOWEVER, that any such Shares directly or indirectly owned or held by or for the account of the Corporation or any Subsidiary of the Corporation shall not be deemed "OUTSTANDING" for purposes hereof. -3- (cc) "PERSON" means an individual, a corporation, a partnership, an association, a limited liability company, an unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof. (dd) "REDEMPTION DATE" has the meaning set forth in Section 6.5. (ee) "REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights Agreement to be dated as of April [__], 2000 between the Corporation and The Shaar Fund Ltd. (ff) "SEC" means the United States Securities and Exchange Commission. (gg) "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as in effect at the time. (hh) "SECURITIES PURCHASE AGREEMENT" means that certain Securities Purchase Agreement to be dated as of April [__], 2000 between the Corporation and The Shaar Fund Ltd. (ii) "SERIES A PREFERRED SHARES" or "SERIES A PREFERRED STOCK" means the shares of Series A 8% Convertible Preferred Stock of the Corporation or such other convertible preferred stock of the Corporation as may be exchanged therefor. (jj) "STATED VALUE" has the meaning set forth in Article 2. (kk) "SUBSIDIARY" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by the Corporation. (ll) "TRADING DAY" means any day on which (a) purchases and sales of securities authorized for quotation on Nasdaq are reported thereon, (b) no event which results in a material suspension or limitation of trading of the Common Shares on Nasdaq has occurred and (c) at least one bid for the trading of Common Shares is reported on Nasdaq. (mm) "VALUATION EVENT" has the meaning set forth in Section 6.1. (nn) "VALUATION PERIOD" means the period of 5 Trading Days immediately preceding the Conversion Date; PROVIDED, HOWEVER, that if a Valuation Event occurs during a Valuation Period on a date less than 5 Trading Days before the Conversion Date, the Valuation Period shall be extended until the date 5 Trading Days after the occurrence of the Valuation Event. All references to "CASH" or "$" herein mean currency of the United States of America. -4- ARTICLE 2 DESIGNATION AND AMOUNT The designation of this series, which consists of 200,000 shares of Preferred Stock, shall be Series A 8% Convertible Preferred Stock (the "SERIES A PREFERRED STOCK") and the stated value shall be $10 per share (the "STATED VALUE"). ARTICLE 3 RANK The Series A Preferred Stock shall rank prior to any other capital stock of the Corporation, other than up to $2,800,000 of preferred stock outstanding on the date hereof. ARTICLE 4 DIVIDENDS (a) (i) The Holder shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends at the Dividend Rate on the Stated Value of each share of Series A Preferred Stock on and as of each Dividend Payment Due Date with respect to each Dividend Period; PROVIDED, HOWEVER, that if any dividend is not paid in full on any Dividend Payment Due Date, dividends shall thereafter accrue and be payable at the Default Dividend Rate on the Stated Value of each share of Series A Preferred Stock until all accrued dividends are paid in full. Dividends on the Series A Preferred Stock shall be cumulative from the date of issue, whether or not declared for any reason, including if such declaration is prohibited under any outstanding indebtedness or borrowings of the Corporation or any of its Subsidiaries, or any other contractual provision binding on the Corporation or any of its Subsidiaries, and whether or not there shall be funds legally available for the payment thereof. (ii) Each dividend shall be payable in equal quarterly amounts on each Dividend Payment Due Date, commencing June 30, 2000, to the Holders of record of shares of the Series A Preferred Stock, as they appear on the stock records of the Corporation at the close of business on such record date, not more than 60 days or less than 10 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Accrued and unpaid dividends for any past Dividend Period may be declared and paid at any time, without reference to any Dividend Payment Due Date, to Holders of record, not more than 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. (iii) At the option of the Corporation, the dividend shall be paid either (x) in cash or (y) through the issuance of duly and validly authorized and issued, fully paid and nonassessable shares of the Common Stock valued at the then applicable Conversion Price calculated in accordance with the provisions of Section 6.1, assuming for this purpose, that the applicable Dividend Payment Due Date is the applicable Conversion Date, and registered for resale in open market transactions on the Registration Statement (as defined in the Registration Rights Agreement), which Registration Statement shall then be effective under the Securities Act; PROVIDED, HOWEVER, that if no funds are legally available for the payment of cash dividends on the Series A Preferred Stock, dividends shall be paid as provided in clause (y) above. -5- (b) Except as provided in Section 4(d) hereof, the Holder shall not be entitled to any dividends in excess of the cumulative dividends, as herein provided, on the Series A Preferred Stock. (c) So long as any shares of the Series A Preferred Stock are outstanding, no dividends shall be declared or paid or set apart for payment or other distribution declared or made upon any Junior Securities, 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 Corporation or any Subsidiary) for any consideration by the Corporation, 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 Junior Securities, unless in each case (i) the full cumulative dividends required to be paid in cash on all outstanding shares of the Series A Preferred Stock shall have been paid or set apart for payment for all past Dividend Periods with respect to the Series A Preferred Stock and (ii) sufficient funds shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock. (d) If the Corporation shall at any time or from time to time after the Issue Date declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of stock or other securities or property or rights or warrants to subscribe for securities of the Corporation or any of its Subsidiaries by way of dividend or spin-off) on shares of its Common Stock, then, and in each such case, in addition to the dividend obligation of the Corporation specified in Section 4(a) hereof, the Corporation shall declare, order, pay and make the same dividend or distribution to each Holder of Series A Preferred Stock as would have been made with respect to the number of Common Shares the Holder would have received had it converted all of its Series A Preferred Shares, and exercised the Warrant held by it in full for all the Common Shares then underlying the Warrant, immediately prior to such dividend or distribution. ARTICLE 5 LIQUIDATION PREFERENCE; MERGERS, CONSOLIDATIONS, ETC. (a) If the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 30 consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or -6- wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, no distribution shall be made to the holders of any shares of capital stock of the Corporation upon liquidation, dissolution or winding-up unless prior thereto, the Holders of shares of Series A Preferred Stock, subject to this Article 5, shall have received the Liquidation Preference with respect to each share. (b) In case the Corporation shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another Person (where the Corporation is not the survivor or where there is a change in or distribution with respect to the Common Stock of the Corporation), 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 Corporation 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 Corporation, then each Holder of Series A Preferred Stock shall have the right thereafter, at its sole option, either (x) to require the Corporation to deem such Fundamental Corporate Change to be a liquidation, dissolution or winding up of the Corporation pursuant to which the Corporation shall be required to distribute, upon consummation of and as a condition to, such Fundamental Corporate Change an amount equal to 120% of the Liquidation Preference with respect to each outstanding share of Series A Preferred Stock, (y) to receive the number of shares of common stock of the successor or acquiring corporation or of the Corporation, 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 into which such Series A Preferred Stock may be converted at the Conversion Price applicable immediately prior to such Fundamental Corporate Change or (z) require the Corporation, or such successor, resulting or purchasing corporation, as the case may be, to, without benefit of any additional consideration therefor, to execute and deliver to the Holder shares of its Preferred Stock with substantial identical rights, preferences, privileges, powers, restrictions and other terms as the Series A Preferred Stock equal to the number of shares of Series A Preferred Stock held by such Holder immediately prior to such Fundamental Corporate Change; PROVIDED, that all Holders of Series A Preferred Stock shall be deemed to elect the option set forth in clause (x) above if at least a majority in interest of such Holders elect such option. For purposes of this Section 5(b), "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 5(b) shall similarly apply to successive Fundamental Corporate Changes. -7- ARTICLE 6 CONVERSION OF PREFERRED STOCK SECTION 6.1 Conversion; Conversion Price At the option of the Holder, the shares of Series A Preferred Stock may be converted, either in whole or in part, into Common Shares (calculated as to each such conversion to the nearest 1/100th of a share) at any time and from time to time following five month anniversary of the Issue Date at a Conversion Price per share of Common Stock equal to the lesser of: (i) $2.75 (subject to adjustment for any stock-split or stock combination to occur after the date hereof (the "CEILING PRICE"), or (ii) 85% of the Market Price; PROVIDED that any unconverted Series A Preferred Stock remaining nine months after the Issue Date may be converted, at the sole option of the Holder, at a Conversion Price per share of Common Stock equal to 80% of the Market Price; PROVIDED, FURTHER, that any unconverted Series A Preferred Stock remaining fifteen months after the Issue Date may be converted, at the sole option of the Holder, at a Conversion Price per share of Common Stock equal to 78% of the Market Price; PROVIDED, FURTHER, that if the Corporation's Common Stock is delisted off Nasdaq for any reason (and is not listed at such time on the Nasdaq National Market, the Amex or the NYSE), then any remaining unconverted Series A Preferred Stock may be converted, at the sole option of the Holder, at a Conversion Price per share of Common Stock equal to 50% of the Market Price. At the Corporation's option, the amount of accrued and unpaid dividends as of the Conversion Date (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) shall not be subject to conversion but instead may be paid in cash as of the Conversion Date; if the Corporation elects to convert the amount of such accrued and unpaid dividends at the Conversion Date into Common Stock, the Common Stock issued to the Holder shall be valued at the applicable Conversion Price. The number of shares of Common Stock due upon conversion of Series A Preferred Stock shall be (i) the number of shares of Series A Preferred Stock to be converted, multiplied by (ii) the Stated Value plus accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment), to the extent the Corporation does not at its election pay such accrued and unpaid dividends in cash, and divided by (iii) the applicable Conversion Price. Within two Business Days of the occurrence of a Valuation Event, the Corporation shall send notice thereof to each Holder. Notwithstanding anything to the contrary contained herein, if a Valuation Event occurs during any Valuation Period, the Holder may convert some or all of its Series A Preferred Stock, at its sole option, at a Conversion Price equal to the Current Market Price on any Trading Day during the Valuation Period. For purposes of this Section 6.1, a "VALUATION EVENT" shall mean an event in which the Corporation takes any of the following actions: (a) subdivides or combines its Capital Shares; -8- (b) makes any distribution on its Capital Shares; (c) issues any additional Capital Shares (the "ADDITIONAL CAPITAL SHARES"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b) above, at a price per share less, or for other consideration lower, than the Current Market Price in effect immediately prior to such issuances, or without consideration, except for issuances under employee benefit plans consistent with those presently in effect and issuances under presently outstanding warrants, options or convertible securities; (d) issues any warrants, options or other rights to subscribe for or purchase any Additional Capital Shares if the price per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to such warrants, options or other rights shall be less than the Current Market Price in effect immediately prior to such issuance; (e) issues any securities convertible into or exchangeable or exercisable for Additional Capital Shares if the consideration per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to the terms of such convertible, exchangeable or exercisable securities shall be less than the Current Market Price in effect immediately prior to such issuance; (f) announces or effects a Fundamental Corporate Change; (g) makes any distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for the payment of dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or (h) takes any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing Sections 6.1(a) through 6.1(g) hereof, inclusive, which in the opinion of the Holder, determined in good faith, would have a material adverse effect upon the rights of the Holder at the time of a conversion of the Preferred Stock or is reasonably likely to result in a decrease in the Market Price. SECTION 6.2 Exercise of Conversion Privilege (a) Conversion of the Series A Preferred Stock may be exercised, in whole or in part, by the Holder by telecopying an executed and completed Conversion Notice to the Corporation. Each date on which a Conversion Notice is telecopied to the Corporation in accordance with the provisions of this Section 6.2 shall constitute a Conversion Date. The Corporation shall convert the Preferred Stock and issue the Common Stock Issued at Conversion, and all voting and other rights associated with the beneficial ownership of the Common Stock Issued at Conversion shall vest with the Holder, effective as of the Conversion Date at the time specified in the Conversion Notice. The Conversion Notice also shall state the name or names (with addresses) of the Persons who are to become the holders of the Common Stock Issued at Conversion in connection with such conversion. The Holder shall deliver the shares of Series A Preferred Stock to the Corporation by express courier within 30 days following the Conversion -9- Date. Upon surrender for conversion, the Preferred Stock shall be accompanied by a proper assignment thereof to the Corporation or be endorsed in blank. As promptly as practicable after the receipt of the Conversion Notice as aforesaid, but in any event not more than five Business Days after the Corporation's receipt of such Conversion Notice, the Corporation shall (i) issue the Common Stock issued at Conversion in accordance with the provisions of this Article 6, and (ii) cause to be mailed for delivery by overnight courier to the Holder (x) a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of such conversion, (y) cash, as provided in Section 6.3, in respect of any fraction of a Common Share issuable upon such conversion and (z) if the Corporation chooses to pay accrued and unpaid dividends in cash, cash in the amount of accrued and unpaid dividends as of the Conversion Date. Such conversion shall be deemed to have been effected at the time at which the Conversion Notice indicates so long as the Series A Preferred Stock shall have been surrendered as aforesaid at such time, and at such time the rights of the Holder of the Series A Preferred Stock, as such, shall cease and the Person or Persons in whose name or names the Common Stock Issued at Conversion 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 at such time vest with such Person or Persons. The Conversion Notice shall constitute a contract between the Holder and the Corporation, whereby the Holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 6.3), to surrender the Series A Preferred Stock and to release the Corporation from all liability thereon. No cash payment aggregating less than $1.00 shall be required to be given unless specifically requested by the Holder. (b) If, at any time (i) the Corporation challenges, disputes or denies the right of the Holder hereof to effect the conversion of the Series A Preferred Stock into Common Shares or otherwise dishonors or rejects any Conversion Notice delivered in accordance with this Section 6.2 or (ii) any third party commences any lawsuit or proceeding or otherwise asserts any claim before any court or public or governmental authority which seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to effect the conversion of the Series A Preferred Stock into Common Shares, then the Holder shall have the right, by written notice to the Corporation, to require the Corporation promptly to redeem the Series A Preferred Stock for cash at a redemption price equal to 135% of the Stated Value thereof together with all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) thereon (the "MANDATORY PURCHASE AMOUNT"). Under any of the circumstances set forth above, the Corporation shall be responsible for the payment of all costs and expenses of the Holder, including reasonable legal fees and expenses, as and when incurred in disputing any such action or pursuing its rights hereunder (in addition to any other rights of the Holder). (c) The Holder shall be entitled to exercise its conversion privilege notwithstanding the commencement of any case under 11 U.S.C. ss. 101 ET Seq. (the "BANKRUPTCY CODE"). In the event the Corporation is a debtor under the Bankruptcy Code, the Corporation 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 Holder's conversion privilege. The Corporation hereby waives to the fullest -10- extent permitted any rights to relief it may have under 11 U.S.C. ss. 362 in respect of the conversion of the Series A Preferred Stock. The Corporation agrees, without cost or expense to the Holder, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. SECTION 362. SECTION 6.3 Fractional Shares No fractional Common Shares or scrip representing fractional Common Shares shall be issued upon conversion of the Series A Preferred Stock. Instead of any fractional Common Shares which otherwise would be issuable upon conversion of the Series A Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction. SECTION 6.4 Adjustments to Conversion Price For so long as any shares of the Series A Preferred Stock are outstanding, if the Corporation issues and sells pursuant to an exemption from registration under the Securities Act (A) Common Shares at a purchase price that is lower than the Conversion Price on the date of issuance of such Common Shares, (B) warrants or options with an exercise price on the date of issuance thereof that is lower than the Conversion Price for the Holder on such date, except for warrants or options issued pursuant to employee stock option agreements or stock incentive agreements of the Corporation, or (C) convertible, exchangeable or exercisable securities with a right to exchange at lower than the Current Market Price on the date of issuance or conversion, as applicable, of such convertible, exchangeable or exercisable securities, except for stock option agreements or stock incentive agreements, then the Conversion Price shall be reduced to equal the lowest of any such purchase price, exercise price or exchange price, and the number of shares of Common Stock into which the Series A Preferred Stock is convertible pursuant to the second paragraph of Section 6.1 shall be correspondingly adjusted. After such reduction, the Conversion Price shall never exceed the Conversion Price as so reduced, in spite of any subsequent increase in the Market Price. SECTION 6.5 Optional Redemption (a) At any time after the date of issuance of the Series A Preferred Stock until the Mandatory Conversion Date (as defined below), the Corporation, upon notice delivered to the Holder as provided in Section 6.6, may redeem, in cash, the Series A Preferred Stock (but only with respect to such shares as to which the Holder has not theretofore furnished a Conversion Notice in compliance with Section 6.2), at 120% of the Stated Value thereof (the "OPTIONAL REDEMPTION PRICE"), together with all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) thereon to the date of redemption (the "REDEMPTION DATE"); PROVIDED, HOWEVER, that the Corporation may only redeem the Series A Preferred Stock under this Section 6.5 if the Current Market Price is less than the Ceiling Price. Except as set forth in this Section 6.5, the Corporation shall not have the right to redeem the Series A Preferred Stock. -11- SECTION 6.6 Notice of Redemption Notice of redemption pursuant to Section 6.5 shall be provided by the Corporation to the Holder in writing (by registered mail or overnight courier at the Holder's last address appearing in the Corporation's security registry) not less than 10 nor more than 15 days prior to the Redemption Date, which notice shall specify the Redemption Date and refer to Section 6.5 (including a statement of the Current Market Price per Common Share) and this Section 6.6. SECTION 6.7 Surrender of Preferred Stock Upon any redemption of the Series A Preferred Stock pursuant to Sections 6.5 and 6.6, the Holder shall either deliver the Series A Preferred Stock by hand to the Corporation at its principal executive offices or surrender the same to the Corporation at such address by express courier within 14 days after the date that the Buyer receives payment therefore. Payment of the Optional Redemption Price shall be made by the Corporation to the Holder by wire transfer of immediately available funds to such account(s) as the Holder shall specify to the Corporation. If payment of such Optional Redemption Price is not made in full by the Redemption Date, the Holder shall again have the right to convert the Series A Preferred Stock as provided in Article 6 hereof. SECTION 6.8 Mandatory Conversion On the third anniversary of the date of this Certificate of Designation (the "MANDATORY CONVERSION DATE"), the Corporation shall convert all Series A Preferred Stock outstanding, at the Conversion Price utilizing the Stated Value (plus accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment)) as the value of each share of Series A Preferred Stock, into shares of Common Stock registered for resale in open market transactions on the Registration Statement (as defined in the Registration Rights Agreement), which Registration Statement shall then be effective under the Securities Act. SECTION 6.9 Certain Conversion Limitations (a) Notwithstanding anything herein to the contrary, the Holder shall not have the right, and the Corporation shall not have the obligation, to convert all or any portion of the Series A Preferred Stock (and the Corporation shall not have the right to pay dividends on the Series A Preferred Stock in shares of Common Stock) if and to the extent that the issuance to the Holder of shares of Common Stock upon such conversion (or payment of dividends) would result in the Holder being deemed the "beneficial owner" of more than 5% of the then Outstanding shares of Common Stock within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. If any court of competent jurisdiction shall determine that the foregoing limitation is ineffective to prevent a Holder from being deemed the beneficial owner of more than 5% of the then Outstanding shares of Common Stock, then the Corporation shall redeem so many of such Holder's shares (the "Redemption Shares") of Series A Preferred Stock as are necessary to cause such Holder to be deemed the beneficial owner of not more than 5% of the then Outstanding shares of Common -12- Stock. Upon such determination by a court of competent jurisdiction, the Redemption Shares shall immediately and without further action be deemed returned to the status of authorized but unissued shares of Series A Preferred Stock, and the Holder shall have no interest in or rights under such Redemption Shares. Any and all dividends paid on or prior to the date of such determination shall be deemed dividends paid on the remaining shares of Series A Preferred Stock held by the Holder. Such redemption shall be for cash at a redemption price equal to the sum of (i) 120% of the Stated Value of the Redemption Shares and (ii) any accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) to the date of such redemption. (b) Notwithstanding anything herein to the contrary, if and to the extent that, on any date (the "SECTION 16 DETERMINATION DATE"), the holding by the Holder of shares of the Series A Preferred Stock would result in the Holder's becoming subject to the provisions of Section 16(b) of the Exchange Act in virtue of being deemed the "beneficial owner" of more than 10% of the then Outstanding shares of Common Stock, then the Holder shall not have the right, and the Corporation shall not have the obligation, to convert so many of such Holder's shares of Series A Preferred Stock (the "SECTION 16 REDEMPTION SHARES") as shall cause such Holder to be deemed the beneficial owner of more than 10% of the then Outstanding shares of Common Stock during the period ending 60 days after the Section 16 Determination Date. If any court of competent jurisdiction shall determine that the foregoing limitation is ineffective to prevent a Holder from being deemed the beneficial owner of more than 10% of the then Outstanding shares of Common Stock for the purposes of such Section 16(b), then the Corporation shall redeem the Section 16 Redemption Shares. Upon such determination by a court of competent jurisdiction, the Section 16 Redemption Shares shall immediately and without further action be deemed returned to the status of authorized but unissued shares of Series A Preferred Stock, and the Holder shall have no interest in or rights under such Section 16 Redemption Shares. Any and all dividends paid on or prior to the date of such determination shall be deemed dividends paid on the remaining shares of Series A Preferred Stock held by the Holder. Such redemption shall be for cash at a redemption price equal to the sum of (i) 105% of the Stated Value of the Section 16 Redemption Shares and (ii) any declared and unpaid dividends to the date of such redemption. (c) Unless the Corporation shall have obtained the approval of its voting stockholders to such issuance in accordance with the rules of Nasdaq or any other stock market rules with which the Corporation shall be required to comply, but only to the extent required thereby, the Corporation shall not issue shares of Common Stock (i) upon conversion of any shares of Series A Preferred Stock or (ii) as a dividend on the Series A Preferred Stock, if such issuance of Common Stock, when added to the number of shares of Common Stock previously issued by the Corporation (x) upon conversion of shares of the Series A Preferred Stock, (y) upon exercise of the Warrants issued pursuant to the terms of the Securities Purchase Agreement and (z) in payment of dividends on the Series A Preferred Stock, would equal or exceed 20% of the number of shares of the Corporation's Common Stock which were issued and Outstanding on the Issue Date (the "MAXIMUM ISSUANCE AMOUNT"). In the event that a properly executed Conversion Notice is received by the Corporation which would require the Corporation to issue shares of Common Stock equal to or in excess of the Maximum Issuance Amount, the Corporation shall honor such conversion request by (a) converting the number of shares of Series -13- A Preferred Stock stated in the Conversion Notice which is not in excess of the Maximum Issuance Amount and (b) redeeming the remaining number of shares of Series A Preferred Stock stated in the Conversion Notice in cash at a price equal to 120% of the Stated Value thereof, together with all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) on the total number of shares stated in the Conversion Notice. In the event that the Corporation shall elect to pay a dividend in shares of Common Stock which would require the Corporation to issue shares of Common Stock equal to or in excess of the Maximum Issuance Amount, the Corporation shall pay (1) a dividend in a number of shares of Common Stock equal to one less than the Maximum Issuance Amount and (2) the balance of the dividend in cash. ARTICLE 7 VOTING RIGHTS The Holders of the Series A Preferred Stock have no voting power, except as otherwise provided by the Texas Business Corporation Act (the "TBCA"), in this Article 7, and in Article 8 below. Notwithstanding the above, the Corporation shall provide each Holder of Series A Preferred Stock with prior notification of any meeting of the shareholders (and copies of all proxy materials and other information sent to shareholders). In the event of any taking by the Corporation of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice thereof to each Holder at least 30 days prior to the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, together with a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. To the extent that under the TBCA the vote of the Holders of the Series A Preferred Stock, voting separately as a class or series as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the Holders of at least a majority of the outstanding shares of Series A Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the outstanding shares of Series A Preferred Stock (except as otherwise may be required under the TBCA) shall constitute the approval of such action by the class. To the extent that under the TBCA Holders of the Series A Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series A Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. Holders of the Series A Preferred Stock shall be entitled to notice of all shareholder meetings or written consents (and copies of all proxy materials and other -14- information sent to shareholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and the TBCA. ARTICLE 8 PROTECTIVE PROVISIONS So long as shares of Series A Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided in the TBCA) of the Holders of at least a majority of the then outstanding shares of Series A Preferred Stock: (a) alter or change the rights, preferences or privileges of the Series A Preferred Stock; (b) create any new class or series of capital stock having a preference over the Series A Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation ("SENIOR SECURITIES") or alter or change the rights, preferences or privileges of any Senior Securities so as to affect adversely the Series A Preferred Stock; (c) increase the authorized number of shares of Series A Preferred Stock; or (d) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the Holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code of 1986, as hereafter from time to time amended). In the event Holders of least a majority of the then outstanding shares of Series A Preferred Stock agree to allow the Corporation to alter or change the rights, preferences or privileges of the shares of Series Preferred Stock, pursuant to subsection (a) above, so as to affect the Series A Preferred Stock, then the Corporation will deliver notice of such approved change to the Holders of the Series Preferred Stock that did not agree to such alteration or change (the "DISSENTING HOLDERS") and Dissenting Holders shall have the right for a period of 30 days to convert pursuant to the terms of this Certificate of Designation as in effect prior to such alteration or change or to continue to hold their shares of Series A Preferred Stock. Notwithstanding anything to the contrary herein, if at any time the Corporation shall "spin-off' certain of its assets or businesses by transferring, directly or indirectly, such assets or businesses to a Subsidiary of the Corporation ("SPINCO") and making a dividend (the "SPIN-OFF DIVIDEND") to the Corporation's stockholders of the shares of capital stock of Spinco, then prior to making the Spin-off Dividend, the Corporation shall cause Spinco to issue to each Holder that number of shares of preferred stock of Spinco with substantially identical rights, preferences, privileges, powers, restrictions and other terms as the Series A Preferred Stock equal to the number of shares of Series A Preferred Shares held by such Holder immediately prior to the Spin-off Dividend. -15- ARTICLE 9 MISCELLANEOUS SECTION 9.1 Section 9.1 Loss, Theft, Destruction of Preferred Stock Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of shares of Series A Preferred Stock and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Corporation, or, in the case of any such mutilation, upon surrender and cancellation of the Series A Preferred Stock, the Corporation shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated shares of Series A Preferred Stock, new shares of Series A Preferred Stock of like tenor. The Series A Preferred Stock shall be held and owned upon the express condition that the provisions of this Section 9.1 are exclusive with respect to the replacement of mutilated, destroyed, lost or stolen shares of Series A Preferred Stock and shall preclude any and all other rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof. SECTION 9.2 Who Deemed Absolute Owner The Corporation may deem the Person in whose name the Series A Preferred Stock shall be registered upon the registry books of the Corporation to be, and may treat it as, the absolute owner of the Series A Preferred Stock for the purpose of receiving payment of dividends on the Series A Preferred Stock, for the conversion of the Series A Preferred Stock and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. All such payments and such conversion shall be valid and effectual to satisfy and discharge the liability upon the Series A Preferred Stock to the extent of the sum or sums so paid or the conversion so made. SECTION 9.3 Fundamental Corporate Change In the case of the occurrence of any Fundamental Corporate Change described in Section 5(b), the Corporation shall cause to be mailed to the Holder of the Series A Preferred Stock at its last address as it appears in the Corporation's security registry, at least 20 days prior to the applicable record, effective or expiration date specified in connection therewith (or, if such 20 days notice is not possible, at the earliest possible date prior to any such record, effective or expiration date), a notice stating (x) the date on which a record is to be taken for the purpose of such corporate action, or if a record is not to be taken, the date as of which the Holders of record of Series A Preferred Stock to be entitled to any dividend, distribution, issuance or granting of rights, options or warrants are to be determined or the date on which such Fundamental Corporate Change is expected to become effective, and (y) the date as of which it is expected that Holders of record of Series A Preferred Stock will be entitled to exchange their shares for securities, cash or other property deliverable upon such Fundamental Corporate Change. SECTION 9.4 Register The Corporation shall keep at its principal office a register in which the Corporation shall provide for the registration of the Series A Preferred Stock. Upon any transfer -16- of the Series A Preferred Stock in accordance with the provisions hereof, the Corporation shall register such transfer on the register of Series A Preferred Stock. SECTION 9.5 Withholding To the extent required by applicable law, the Corporation may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Corporation from any payments made pursuant to the Series A Preferred Stock. SECTION 9.6 Headings The headings of the Articles and Sections of this Certificate of Designation are inserted for convenience only and do not constitute a part of this Certificate of Designation. SECTION 9.7 Severability If any provision of this Certificate of Designation, or the application thereof to any person or entity or any circumstance, is invalid or unenforceable, (i) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision, and (ii) the remainder of this Certificate of Designation and the application of such provision to other persons, entities or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. [SIGNATURE PAGE FOLLOWS] -17- IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be signed by its duly authorized officers on April 19, 2000. PRECEPT BUSINESS SERVICES, INC. By: /s/ Doug Deason ------------------------------------ Name: Title: ANNEX I FORM OF CONVERSION NOTICE To: [Name of Company] ------------------------- ------------------------- ------------------------- The undersigned owner of this Series A 8% Convertible Preferred Stock (the "SERIES A PREFERRED STOCK") issued by Precept Business Services, Inc. (the "CORPORATION") hereby irrevocably exercises its option to convert __________ shares of the Series A Preferred Stock into shares of the common stock, par value $.01 per share ("COMMON STOCK"), of the Corporation in accordance with the terms of the Certificate of Designation. The undersigned hereby instructs the Corporation to convert the number of shares of the Series A Preferred Stock specified above into Shares of Common Stock Issued at Conversion in accordance with the provisions of Article 6 of the Certificate of Designation. The undersigned directs that the Common Stock issuable and certificates therefor deliverable upon conversion and the recertificated Series A Preferred Stock, if any, not being surrendered for conversion hereby, together with any check in payment for fractional Common Stock, be issued in the name of and delivered to the undersigned unless a different name has been indicated below. All capitalized terms used and not defined herein have the respective meanings assigned to them in the Certificate of Designation. So long as the Series A Preferred Stock shall have been surrendered for conversion hereby, the conversion pursuant hereto shall be deemed to have been effected at the date and time specified below, and at such time the rights of the undersigned as a Holder of the Series A Preferred Stock shall cease and the Person or Persons in whose name or names the Common Stock Issued at Conversion 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 at such time vest with such Person or Persons. Date and time: ______________________ ----------------------------------------- Signature Fill in for registration of Series A Preferred Stock - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Please print name and address (including zip code number) EX-10.3 3 ex-10_3.txt EXHIBIT 10-3 Exhibit 10.3 WAIVER AND CONSENT NO. 4 DATED AS OF JUNE 14, 2000 TO CREDIT AGREEMENT DATED AS OF MARCH 22, 1999 THIS WAIVER AND CONSENT NO. 4 TO CREDIT AGREEMENT ("WAIVER") is made as of the 14th day of June, 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, Amendment and Waiver No. 2 thereto dated as of November 12, 1999 and Amendment and Waiver No. 3 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"). 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; WHEREAS, the Borrower has notified the Agent and the Lenders that the "Specified Defaults" (as defined below) have occurred; WHEREAS, the Borrower has requested that the Agent and the Lenders waive the Specified Defaults under the Credit Agreement; WHEREAS, the Borrower, the Lenders and the Agent have agreed to enter into this Waiver 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 terms applicable to the waivers given under the Credit Agreement. 1. WAIVERS AND CONSENTS. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, effective as of the date hereof and through and including June 29, 2000 (the "WAIVER PERIOD"), the parties hereby agree as follows: 1.1. Waivers. The parties agree that the Defaults arising as a result of the Borrower's noncompliance with the provisions set forth below are hereby waived (such Defaults being herein, the "SPECIFIED DEFAULTS"): (a) the Borrower's non-compliance with the provisions of SECTION 7.4(B) for the quarter ended March 31, 2000 PROVIDED, THAT, such waiver shall only be effective if the Borrower's Leverage Ratio as of the quarter then ended was not greater than 3.85 to 1.00; (b) the Borrower's noncompliance prior to the date of this Waiver with the provisions of SECTION 7.3(F) as a result of (i) the payment of dividends prior to the date hereof on the Disqualified Stock fisted on SCHEDULE 7.3(M) and (ii) the making of certain Restricted Payments while a Default had occurred and was continuing; (c) the Borrower's non-compliance with the provisions of SECTION 7.4(C) for the quarter ended March 31, 2000 PROVIDED THAT, such waiver shall only be effective if the Company's Net Worth as of the quarter then ended was not less than $13,200,000; and (d) the Borrower's default under SECTION 8.1(d) as a result of the Borrower's and its Subsidiaries' failure to comply with the terms of the Collateral Documents with respect to the requirement to obtain landlord agreements and collection account agreements in connection with the consummation of the acquisitions of Computer Forms & Products, Inc. and Artcraft Printing, Inc.; PROVIDED THAT such waiver shall only be effective if such agreements are obtained during the Waiver Period. 1.2. CONDITIONAL CONSENT AND ADDITIONAL AGREEMENTS. In addition to the waivers set forth above, the parties hereto agree as follows: (a) the Lenders hereby agree and consent, that notwithstanding the provisions of the Credit Agreement prohibiting Restricted Payments (other than on the terms provided in SECTION 7.3(F)), during the Waiver Period the Borrower shall be permitted to declare and make dividends or other Restricted Payments with respect to the Disqualified Stock provided the aggregate amount thereof declared and/or paid during the Waiver Period does not exceed $15,000; (b) for and in consideration of the waivers and consents set forth herein, the Borrower hereby (i) represents that since December 31, 1999 the Borrower has not made and hereby agrees it will not make and will not permit any of its Subsidiaries to make any bonus payments or similar supplemental compensation payments to any members of the Borrower's senior management in excess of $55,000 and (ii) hereby agrees to deliver to the Agent and the Lenders as soon as practicable but in any event not later than 45 days after the and of each fiscal month, commencing with the fiscal month ended April 30, 2000, the consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at the end of such period and the related consolidated and consolidating statements of income and cash flows of the Borrower and its Subsidiaries for such fiscal month, certified by the president or chief financial officer of the Borrower 2 on behalf of the Borrower as fairly presenting the consolidated and consolidating financial position of the Borrower and its Subsidiaries as at the dates indicated and the results of their operations and cash flows for the periods indicated in accordance with Agreement Accounting Principles, subject to normal year end adjustments. 1.3. TERMINATION OF WAIVERS AND CONSENTS. Notwithstanding anything herein to the contrary, the waivers of the Specified Defaults and the consents set forth above shall no longer be effective if: (1) the end of the Waiver Period occurs, (2) a Default or Event of Default under the Credit Agreement shall occur and be continuing or the Borrower shall be in violation of any of the terms of this Waiver, and (3) for any transactions entered into on or after June 1, 2000 between the Borrower or any of its Subsidiaries, on the one hand, and Affiliated Computer Services, any member of the Deason Family, any Person in which any member of the Deason family has a material ownership interest, or any Person related to or under common control with the foregoing ("Related Persons") on the other hand, the terms of payment therefor are longer than net 30 days from the date of such transaction or any Related Person has defaulted on its Receivables to the Borrower or any of its Subsidiaries. 1.4. EFFECT OF WAIVERS. The Borrower understands and agrees that the Waivers set forth herein shall not in any way establish a course of dealing by the Agent or any Lender and shall not affect or impair the rights of the Agent or the Lenders to require strict compliance by the Borrower and its Subsidiaries with the terms of the Credit Agreement and the other Loan Documents. The Agent and the Lenders reserve all rights and remedies available to them after the occurrence of any Event of Default or Default should additional Defaults or Events of Default occur and be continuing. 2. CONDITIONS OF EFFECTIVENESS. This Waiver shall not become effective unless: (a) this Waiver shall have been executed by the Borrower, the Agent and the Lenders; (b) 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; (c) each of the members of the Borrower's senior management (other than the Borrower's prior chief financial officer, William Solomon) shall, have executed a bonus deferral consent in the form attached as EXHIBIT B hereto; and (d) the Borrower shall have received from all Related Persons (as defined in SECTION 1.3 above), other than the $280,000 receivable owing from Precept Builders, payment for all Receivables owing to the Borrower and the Borrower's Subsidiaries which have been outstanding for more than 30 days after the date of the transaction giving rise thereto or are otherwise past the terms granted with respect thereto. 3. 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 Waiver and the officers of the Borrower executing this Waiver have been duly authorized to execute and deliver the same and bind the Borrower with respect to the provisions hereof (b) This Waiver and the Credit Agreement as previously executed and as amended hereby constitute legal, valid and binding obligations of the 3 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) The Borrower hereby reaffirms all covenants, representations and warranties made in the Credit Agreement and the other Loan Documents and agrees that all such representations and warranties shall be deemed to have been remade as of the effective date of this Waiver. (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 Default or Unmatured Defaults thereunder other than the Specified Defaults. Without limiting the foregoing, the Borrower confirms that it has reviewed the provisions of Section 7.3(h) of the Credit Agreement and all transactions between the Borrower and its Subsidiaries with Affiliates and holders of its Equity interests and confirms that all such transactions are permitted under the terms of such Section. (e) The entities listed on EXHIBIT A constitute all of the Borrower's subsidiaries. 4. 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 modified hereby. (b) Except as specifically waived or modified above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and affect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Waiver 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. 5. Field Examination. The Borrower understands, that promptly following the execution of this Waiver, the Agent will be making arrangements for the conduct of a field examination and audit of the Borrowers and its Subsidiaries' businesses and the Collateral which the Borrower hereby agrees to facilitate by making available during regular business hours the people and records necessary for the Agent or its designees to promptly conclude such field examination and audit. Pursuant to the terms of SECTION 10.7(A) of the Credit Agreement, amounts incurred in connection with such field examination and audit shall be for the sole cost and expense of the Borrower. Notwithstanding the foregoing, the Agent hereby agrees that not more than $20,000 for expenses incurred during the Waiver Period shall be invoiced by the Agent to the Borrower. 4 6. Release. To the fullest extent permitted by applicable law, in consideration of the Agent's and the Lenders' execution of this Waiver the Borrower and, by their execution of the reaffirmation, each of its Subsidiaries in each case on behalf of itself and each of their successors and assigns (collectively, the "RELEASORS"), does hereby forever release, discharge and acquit the Agent, each Lender and each of their respective parents, subsidiaries and affiliate corporations or partnerships, and their respective officers, directors, partners, trustees, shareholders, agents, attorneys and employees, and their respective successors, heirs and assigns (collectively, the "RELEASEES") of and from any and all claims, demands, liabilities, responsibilities, disputes, causes of action (whether at law or equity), indebtedness and obligations (collectively, "CLAIMS"), of every type, kind, nature, description or character, including, without limitation, any so-called "lender liability" claims or defenses, and irrespective of how, why or by reason of what facts, whether such Claims have heretofore arisen, are now existing or hereafter arise, or which could, might, or may be claimed to exist, of whatever kind or name, whether known or unknown, suspected or unsuspected, liquidated or unliquidated, each as though fully set forth herein at length, which in any way arise out of, are connected with or in any way relate to actions or omissions which occurred on or prior to the date hereof with respect to the Releasors, the Obligations, this Waiver, the Credit Agreement, any Loan Document or any third parties liable in whole or in part for the Obligations. Each of the Releasors further agrees to indemnify the Releasees and hold each of the Releasees harmless from and against any and all such Claims which might be brought against any of the Releasees on behalf of any person or entity, including, without limitation, officers, directors, agents, trustees, creditors or shareholders of any of the Releasors. For purposes of the release contained in this paragraph, any reference to any Releasor shall mean and include, as applicable, such Person's or Persons' successors and assigns, including, without limitation, any receiver, trustee or debtor-in-possession, acting on behalf of such parties. 7. 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 Waiver. 8. GOVERNING LAW. THIS WAIVER 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 WAIVER 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 WAIVER 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. 5 9. HEADINGS. Section headings in this Waiver are included herein for convenience of reference only and shall not constitute a part of this Waiver for any other purpose. 10. COUNTERPARTS. This Waiver 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. 11. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Waiver, the Credit Agreement and the other Loan Documents. In the event an ambiguity or question of intent or interpretation arises, this Waiver, 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 Waiver, the Credit Agreement or any of the other Loan Documents. - - - - Remainder of this page intentionally blank - - - - 6 IN WITNESS WHEREOF, this Waiver has been duly executed as of the day and year first above written. PRECEPT BUSINESS SERVICES, INC. AS THE BORROWER By: /s/ Doug Deason --------------------------------- Name: ------------------------------- Title: ------------------------------ BANK ONE, TEXAS, NA, INDIVIDUALLY AND AS AGENT By: /s/ C. Dianne Wooley --------------------------------- Print Name: C. Dianne Wooley ------------------------- Title: Vice President ------------------------------ WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, AS A LENDER By: /s/ Ronald Christenson --------------------------------- Print Name: Ronald Christenson ------------------------- Title: Vice President ------------------------------ 7 EXHIBIT A TO WAIVER AND CONSENT NO. 4 REAFFIRMATION OF LOAN DOCUMENTS Attached 8 REAFFIRMATION Each of the undersigned acknowledges receipt of a copy of Waiver and Consent No. 4 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, 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, 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 Waiver and Consent No. 4 is dated as of June 14, 2000 (the "Waiver"). 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. In addition, by its execution hereof, each of the undersigned agrees to be bound by the terms of SECTION 6 of the Waiver. 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 Waiver 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. ARTCRAFT PRINTING, INC. (formerly known 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: /s/ Peter H. Trembath By: /s/ Peter H. Trembath ------------------------------ ------------------------------------- Name: Peter H. Trembath Name: Peter H. Trembath ---------------------------- ----------------------------------- Title: Sr. Vice President Title: Senior Vice President --------------------------- ---------------------------------- 9 PRECEPT TRANSPORTATION SERVICES, LLC By: PRECEPT BUSINESS SERVICES, INC., as its sole member By: /s/ Peter H. Trembath ----------------------------- Name: Peter H. Trembath --------------------------- Title: Senior Vice President -------------------------- 10 EXHIBIT B TO WAIVER AND CONSENT NO. 4 COMPENSATION DEFERRAL AGREEMENT Attached 11 COMPENSATION DEFERRAL AGREEMENT Each of the undersigned acknowledges receipt of a copy of Waiver and Consent No. 4 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, 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, by and among Precept Business Services, Inc., the Lenders and the Agent (as so amended thereby and as farther amended, modified, supplemented and/or restated from time to time, the "Credit Agreement") which Waiver and Consent No. 4 is dated as of June 14, 2000 (the "Waiver"). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Each of the undersigned agrees to defer all bonus, supplemental compensation and other compensation either previously awarded or which may hereafter be awarded by the Borrower or its Subsidiaries to the undersigned, other than (i) base salary payable at a level consistent with the undersigned's base salary which he/she has been receiving during the period from January 1, 2000 to the present (ii) continuation of standard benefits and (iii) reimbursement for out-of-pocket expenses incurred in the ordinary course of business by such person in the course of conduct of the business of the Borrower or its Subsidiaries, such deferral to remain in effect until the earlier of (a) written consent by the Lenders under the Credit Agreement or (b) the repayment in full in cash of all of the Secured Obligations. Each of the undersigned acknowledges and agrees that the prior financial accommodations made by the Lenders to the Borrower and its Subsidiaries and the continued provision of financial accommodations by the Leaders to the Borrower and its Subsidiaries under the Credit Agreement is of significant benefit to each of the undersigned. Executed as of this 14th day of June, 2000 /s/ Doug Deason ------------------------------------------ /s/ Ronald Sorci ------------------------------------------ /s/ Peter H. Trembath ------------------------------------------ /s/ Paul Cabra ------------------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----