-----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, NPLh2DUCF+z3Ffsml1zoz8ZQ1au6FfiYE9ffLxc6JNI0B8IBSbdYxE0B7gaZia4J 0uF4mGDyGdYpwbN9tgQFng== /in/edgar/work/0000912057-00-044599/0000912057-00-044599.txt : 20001016 0000912057-00-044599.hdr.sgml : 20001016 ACCESSION NUMBER: 0000912057-00-044599 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20001013 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: 739331 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 a2026300z10-qa.txt 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q/A (Amendment No. 2) 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 incorporation or (I.R.S. Employer Identification No.) organization) 1909 Woodall Rodgers Freeway, Suite 500 75201 Dallas, Texas (Zip Code) (Address of principal executive offices)
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 October 3, 2000, there were 9,645,657 outstanding shares of Class A Common Stock and 592,142 outstanding shares of Class B Common Stock. Explanatory Note This Form 10-Q/A Report is filed to amend the Form 10-Q Report for the period ended March 31, 2000, as amended by a Form 10-Q/A Report filed June 26, 2000 (collectively, the "Original Form 10-Q"), to (i) amend and restate our financial statements and notes to reflect newly discovered negative adjustments and to characterize our bank debt as current, (ii) restate Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) in accordance with the adjustments, and (iii) disclose the recent management changes and NASDAQ actions. 1 INDEX
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1 Financial Information 3 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II OTHER INFORMATION Item 5 Other Information 25 Item 6 Exhibits and Reports on Form 8-K 26 Signature 28
2 PART I - FINANCIAL INFORMATION - ITEM 1 EXPLANATORY INFORMATION As a result of the Company's internal audit process and preparation for its audit for fiscal year ended June 30, 2000, certain adjustments were identified pertaining to the nine months ended March 31, 2000. For the nine months ended March 31, 2000, revenues from continuing operations (as restated) decreased slightly from the $106.8 million previously reported to a restated $105.6 million and operating income from continuing operations (as restated) decreased from $3.0 million, as previously reported, to $1.0 million as restated. The $1.9 million of adjustments to operating income from continuing operations include impairment of goodwill and other intangible assets ($0.5 million), additional accruals for legal, accounting, and sales taxes ($0.3 million), adjustments to accounts receivable, prepaid expenses and other assets ($0.2 million), the recording of acquisition-related commissions, bonuses, and other expenses that were incorrectly capitalized ($0.3 million), adjustments to gross margins ($0.4 million), and adjustments to inventory ($0.2 million). In addition to these adjustments, the income from discontinued operations for the nine months ended March 31, 2000 was also reduced by approximately $.3 million, due primarily to a correction of depreciation expense, net of income taxes. For the nine months ended March 31, 2000, the aforementioned adjustments result in an increase in net loss from the reported $15.6 million to a restated $17.5 million and change in earnings per share from a previously reported ($1.58) to a restated ($1.77). For the three months ended March 31, 2000, the aforementioned adjustments result in an increase in net loss from the reported $17.3 million to a restated $19.2 million and change in earnings per share from a previously reported ($1.70) to a restated ($1.89). The aforementioned adjustments represent all adjustments known to management (as of the date of this report) that apply to the period ended March 31, 2000. However, these adjustments and the restated financial statements have not been audited. The procedures performed by management to identify the adjustments were substantially less in scope than an audit. Consequently additional material adjustments related to both the nine months ended March 31, 2000 as well as the fiscal year ended June 30, 2000 may be identified as a result of the year-end audit process. The Company's audit for the fiscal year ended June 30, 2000 is currently in process. Any adjustments found during the course of the audit will be reflected in the financial statements and the Company's 10-K Report for the fiscal year ended June 30, 2000. 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. On 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 was effective through June 29, 2000. Although negotiations with our banking group are still underway, we do not know that we will be able to obtain a fifth waiver from the bank and we, therefore, must present the outstanding debt under the Credit Agreement as short-term debt. The restated March 31, 2000 balance sheet reflects the debt reclassification. The following restated financial statements and management's discussion and analysis of financial condition and results of operations for the nine months ended March 31, 2000 include the aforementioned adjustments. 3 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share amounts)
March 31, June 30, 2000 1999 (Restated) ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents........................................... $ - $ - Trade accounts receivable, net...................................... 18,821 17,071 Accounts receivable from affiliates................................. 929 1,054 Inventory........................................................... 8,176 4,782 Other current assets................................................ 2,426 1,335 Deferred income taxes and income taxes receivable................... 4,295 1,734 Net assets of discontinued operations............................... 20,439 30,546 ------------- ------------- Total current assets............................................ 55,086 56,522 Property and equipment, net............................................ 2,781 2,518 Intangible assets, net................................................. 19,102 16,854 Deferred income taxes.................................................. 1,010 1,010 Other assets........................................................... 20 613 ------------- ------------- Total assets.................................................... $ 77,999 $ 77,517 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable.............................................. $ 14,042 $ 7,985 Accrued expenses. 2,456 3,007 Accrued compensation 2,426 1,705 Current portion of long-term debt................................... 42,049 1,364 ------------- ------------- Total current liabilities....................................... 60,973 14,061 Long-term debt......................................................... 3,061 34,334 Mandatory redeemable convertible preferred stock....................... 2,592 194 Commitments and contingencies Shareholders' equity: Preferred stock, $1.00 par value; 3,000 authorized shares, none issued..................................................... - - Class A Common Stock, $0.01 par value; 100,000 shares authorized and 9,748 and 8,877 shares issued in 2000 and 1999, respectively.................................. 97 89 Class B Common Stock, $0.01 par value; 10,500 shares authorized and 592 shares issued .......................................... 6 6 Additional paid-in capital.......................................... 39,758 39,717 Retained earnings (accumulated deficit)............................. (27,277) (9,673) -------------- -------------- 12,584 30,139 Class A treasury stock - 149 shares................................. (1,211) (1,211) -------------- -------------- Total shareholders' equity...................................... 11,373 28,928 ------------- ------------- Total liabilities and shareholders' equity.................. $ 77,999 $ 77,517 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts)
Three months Nine months Ended Ended March 31, March 31, 2000 2000 (Restated) 1999 (Restated) 1999 -------------- -------------- -------------- -------------- (Unaudited) CONTINUING OPERATIONS Revenue - Business Products...................... $ 35,562 $ 35,096 $ 105,649 $ 103,874 Costs and expenses: Cost of goods sold............................ 24,263 23,424 71,120 70,010 Sales commissions 5,215 4,881 14,732 14,005 Selling, general and administrative........... 6,671 6,051 16,590 16,551 Goodwill write-down and other non-recurring charges............... - 6,727 - 6,727 Depreciation and amortization................. 1,131 363 2,144 1,019 -------------- -------------- ------------- ------------- 37,280 41,446 104,586 108,312 -------------- -------------- ------------- ------------- Operating income (loss).......................... (1,718) (6,350) 1,063 (4,438) Interest expense................................. 551 201 2,322 1,148 -------------- -------------- ------------- ------------- Loss before income taxes......................... (2,269) (6,551) (1,259) (5,586) Income tax benefit.............................. (455) (3,038) - (2,526) -------------- -------------- ------------- ------------- Loss from continuing operations.................. (1,814) (3,513) (1,259) (3,060) DISCONTINUED OPERATIONS Income (loss) from discontinued operations; net of income tax provision...... (848) (6,886) 286 (6,000) Loss from sale of discontinued operations........ (16,500) - (16,500) - -------------- -------------- ------------- ------------- Loss from discontinued operations................ (17,348) (6,886) (16,214) (6,000) -------------- -------------- ------------- ------------- Net loss......................................... $ (19,162) $ (10,399) $ (17,473) $ (9,060) ============== ============== ============= ============= Basic and diluted net loss per share: Continuing operations......................... $ (0.19) $ (0.41) $ (0.13) $ (0.37) Discontinued operations....................... (1.70) (0.81) (1.64) (0.73) -------------- -------------- ------------- ------------- Net loss per share............................ $ (1.89) $ (1.22) $ (1.77) $ (1.10) ============== ============== ============= ============= Weighted average shares outstanding........... 10,153 8,512 9,859 8,208
See accompanying notes to condensed consolidated financial statements. 5 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Nine Months Ended March 31, ------------------------------- 2000 1999 (Restated) ------------- ------------- (Unaudited) Continuing operations: Cash flows from operating activities:..................................... $ 5,129 $ 9,073 Cash flows provided by (used in) investing activities: Acquisitions of businesses, including earnout payments................ (5,798) (8,851) Acquisition of property and equipment, net............................ (106) (325) Sale of assets of discontinued operations............................. - 1,115 ------------- ------------- Net cash used in investing activities............................. (5,904) (8,061) ------------- ------------- Cash flows provided by (used in) financing activities: Payments on long-term debt and other long-term liabilities, net....... (1,149) (1,034) Preferred stock redemption and dividend payments...................... (809) - Borrowings on revolving line of credit, net........................... 9,566 8,535 ------------- ------------- Net cash provided by financing activities......................... 7,608 7,501 ------------- ------------- Net change in cash and cash equivalents - continuing operations........... 6,833 8,513 Discontinued operations: Cash flows provided by operating activities............................... 159 (2,156) Cash flows used in investing activities - primarily acquisitions of businesses.............................................................. (4,982) (7,181) Cash flows used financing activities - net repayments of debt............. (2,010) (957) ------------- ------------- Net change in cash and cash equivalents - discontinued operations......... (6,833) (10,294) ------------- ------------- Net change in cash and cash equivalents...................................... - (1,781) Cash and cash equivalents at beginning of period............................. - 2,291 ------------- ------------- Cash and cash equivalents at end of period................................... $ - $ 510 ============= ============= Supplemental disclosure: Cash paid for: Interest.............................................................. $ 3,439 $ 1,420 Income taxes ......................................................... $ 651 $ 213
See accompanying notes to condensed consolidated financial statements. 6
PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands) RETAINED CLASS A CLASS B ADDITIONAL EARNINGS TOTAL COMMON COMMON PAID-IN (ACCUMULATED SHAREHOLDERS' STOCK STOCK CAPITAL DEFICIT) OTHER EQUITY ---------- ---------- ------------- ------------ ---------- ------------- (Unaudited) Balance, June 30, 1998.................. $ 69 $ 6 $ 23,515 $ (1,396) $ (192) $ 22,002 Issuance of shares to acquire businesses................... 11 - 12,533 - - 12,544 Exercise of stock options............... - - 20 - (20) - Repurchase of Class A common shares....................... - (999) (999) Conversion of seller notes.............. - - 383 - 383 Net loss................................ - - - (9,060) - (9,060) ---------- ---------- ------------- ------------ ---------- ------------- Balance, March 31, 1999................. $ 80 $ 6 $ 36,451 $ (10,456) $ (1,211) $ 24,870 ========== ========== ============= ============ =========== ============= Balance, June 30, 1999.................. $ 89 $ 6 $ 39,717 $ (9,673) $ (1,211) $ 28,928 Issuance of shares to acquire businesses and conversion of seller note payable......................... 8 - 40 - - 48 Dividends on preferred stock............ - - - (131) - (131) Net loss................................ - - - (17,473) - (17,473) ---------- ---------- ------------- ------------ ---------- ------------- Balance, March 31, 2000 (Restated).............................. $ 97 $ 6 $ 39,757 $ (27,277) $ (1,211) $ 11,372 ========== ========== ============= ============ =========== ============= See accompanying notes to condensed consolidated financial statements.
7 1. BUSINESS Precept Business Services, Inc. and its subsidiaries ("Precept" or the "Company") primarily engage in business products distribution management and services. The Business Products Division arranges for the manufacture, storage, and distribution of business forms, computer supplies, advertising information and other related business products for medium- to large-sized corporate customers. Precept operates from offices throughout the United States. DISCONTINUED OPERATIONS - TRANSPORTATION SERVICES DIVISION The Transportation Services Division provides chauffeured corporate transportation, livery and courier services from locations in the tri-state New York metropolitan area and in the states of Texas, Michigan, Kentucky and Ohio. During the quarter ended March 31, 2000, our Board of Directors approved a plan to sell the Transportation Services Division, and we signed a revised letter of intent to sell substantially all the assets and liabilities of the Transportation Services Division to a company funded by a group of investors, led by Holding Capital Group and certain members of the Transportation Services Division's executive management. Precept has experienced a delay in the anticipated divestiture of its Transportation Services Division. The sale of the Transportation Services Division, which was subject to certain conditions including the execution of a definitive purchase agreement, was to have been completed by the end of September 2000. In July 2000, the Company announced that it retained the investment banking firm of Murphy Noell Capital, LLC to advise in the review of strategic alternatives including a recapitalization, equity placement, merger of the Company, and divestiture of the Business Products Division. Murphy Noell has also been advising the Company in the divestiture of the Transportation Services Division. The original prospective buyer has suspended negotiations. The Company is in active discussions with other potential acquirers of the Transportation Services Division. It is the intent of management to complete the sale of this division during the quarter ending December 31, 2000, but there can be no assurances that this objective can be achieved. MANAGEMENT'S PLANS In addition to the prospective divestiture mentioned above, the Company is also in active discussions with potential acquirers of the Business Products Division. It is the intent of management to complete the sale of both of these divisions during the quarter ending December 31, 2000, but there can be no assurances that these objectives can be achieved. In addition, neither the Company nor Murphy Noell is currently able to predict the proceeds from the prospective divestitures nor make assurances that additional funds can be raised to support the working capital needs of the Company. An interest payment of $1.4 million was due to the Company's banking group on October 2, 2000. The Company has not made the required payment. As a result, the Company is in default. This may result in an adverse impact on the Company's current debt financing and the financial condition of the Company. The Company has launched a strategic cash management initiative to improve the cash position of the Company. This initiative is composed of the following efforts: policies and actions to accelerate collections, a comprehensive cost reduction program, sale of non-critical assets, and strategic cash flow forecasting and controls. At this time, management does not know that these efforts will have a material impact on the cash position of the Company. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements comprise the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. PRO FORMA INFORMATION 8 The pro forma information included in these financial statements and notes is unaudited. FISCAL YEAR END AND QUARTERLY REPORTING PERIODS We maintain a June 30 fiscal year end and report our quarterly operating results for the periods that end on September 30, December 31, and March 31, respectively. For purposes of the Company's current report on Form 10-Q, references to 2000 and 1999 are meant to be the three-month and nine-month reporting periods ended March 31, 2000 and 1999, respectively. References to fiscal years 2000 and 1999 are meant to be for the fiscal year ending June 30, 2000 and the fiscal year ended June 30, 1999, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of the consolidated financial statements are consistent with the accounting policies described in the Company's notes to consolidated financial statements included in the Company's Annual Report to Shareholders and Form 10-K Report for the fiscal year ended June 30, 1999. INTERIM FINANCIAL INFORMATION The accompanying interim financial statements and information are unaudited. We have omitted or condensed certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, although we believe that the disclosures included herein are adequate to make the information presented not misleading. These interim financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended June 30, 1999. We have included in the interim financial statements all adjustments, necessary for a fair presentation of the Company's financial position, its results of operations and its cash flows. We do not believe that the operating results for any particular interim period are necessarily indicative of the operating results for a full fiscal year. We derived the financial information for the year ended June 30, 1999 from our audited financial statements for the same year that are included in the Company's Annual Report to Shareholders and Form 10-K Report for fiscal year 1999. RESTATEMENT OF FINANCIAL INFORMATION As a result of the Company's internal audit process and preparation for its audit for fiscal year ended June 30, 2000, numerous adjustments were identified pertaining to the nine months ended March 31, 2000. For the nine months ended March 31, 2000, revenues from continuing operations (as restated) decreased slightly from the $106.8 million previously reported to a restated $105.6 million and operating income from continuing operations (as restated) decreased from $3.0 million, as previously reported, to $1.0 million as restated. The $1.9 million of adjustments to operating income from continuing operations include impairment of goodwill and other intangible assets ($0.5 million), additional accruals for legal, accounting, and sales taxes ($0.3 million), adjustments to accounts receivable, prepaid expenses and other assets ($0.2 million), the recording of acquisition-related commissions, bonuses, and other expenses that were incorrectly capitalized ($0.3 million), adjustments to gross margins ($0.4 million), and adjustments to inventory ($0.2 million). ). In addition to these adjustments, the income from discontinued operations for the nine months ended March 31, 2000 was also reduced by approximately $.3 million, due primarily to a correction of depreciation expense, net of income taxes. For the nine months ended March 31, 2000, the aforementioned adjustments will result in an increase in net loss from the reported $15.6 million to a restated $17.5 million and change in earnings per share from a previously reported ($1.58) to a restated ($1.77). For the three months ended March 31, 2000, the aforementioned adjustments will result in an increase in net loss from the reported $17.3 million to a restated $19.2 million and change in earnings per share from a previously reported ($1.70) to a restated ($1.89). The aforementioned adjustments represent all adjustments known to management (as of the date of this report) that apply to the period ended March 31, 2000. However, these adjustments and the restated financial statements have not been audited. The procedures performed by management to identify the adjustments were substantially less in scope than an audit. Consequently additional material adjustments related to both the nine months ended March 31, 2000 as well as the fiscal year ended June 30, 2000 may be identified as a result of the year-end audit process. 9 The Company's audit for the fiscal year ended June 30, 2000 is currently in process. Any adjustments found during the course of the audit will be reflected in the financial statements and the Company's 10K Report for the fiscal year ended June 30, 2000. 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. On 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 was effective through June 29, 2000. Although negotiations with our banking group are still underway, we do not know that we will be able to obtain a fifth waiver from the bank and we, therefore, must present the outstanding debt under the Credit Agreement as short-term debt. The restated March 31, 2000 balance sheet reflects the debt reclassification. DISCONTINUED OPERATIONS We reported the historical operating results for the Transportation Services Division as "Discontinued operations" on the accompanying condensed consolidated statements of operations for all periods presented. We have aggregated and separately identified the Transportation Services Division's related assets and liabilities on the condensed consolidated balance sheets as "Net assets of discontinued operations." We also separated the cash flow from discontinued operations on the condensed consolidated statements of cash flows. We have recognized the net loss from these operations during the three and nine-month periods ended March 31, 2000 in the statement of operations. Based on negotiations between the Company and Holding Capital Group, Inc. (which have since been suspended), we have recorded an estimated loss on the sale of the Transportation Services Division. However, the Company believes that the proceeds to be received from the divestiture will be less than the carrying value recorded at March 31, 2000. The Company is currently unable to estimate the size of this additional reduction to carrying value. The loss on the sale of the discontinued operations does not include the expected future income or loss expected to be generated by the Transportation Services Division. We do not expect that the amount of such income (loss) would have a material effect on the size of the loss from discontinued operations. As a result, the expected future income (loss) of the Transportation Services Division is not included in the loss from discontinued operations. We did not include a provision for tax benefit in the loss on the sale of the discontinued operations. We expect that the majority of the loss from the sale of the Transportation Services Division will not be able to be deducted for tax purposes. If there is a taxable loss, the future tax benefit of such loss will be evaluated at the time of the completion of the sale. If there is a taxable gain, we expect that the Company's tax net operating loss carryforward amounts will be used to offset the taxable gain. We have included in the net loss from discontinued operations (the Transportation Services Division) an allocation of our interest expense on the outstanding debt under our Credit Agreement. We based the allocation of this interest expense on the operating results of the Transportation Services Division, on its capital expenditures, on its contribution towards corporate expenses and on its changes in working capital. We did not allocate any corporate selling, general and administrative expenses to the net loss from the discontinued operations (the Transportation Services Division). 3. ACQUISITIONS During the first quarter of fiscal year 2000 we acquired two business products distribution companies with combined annual revenues of $10.2 million. We accounted for these acquisitions using the purchase method of accounting. For each of these purchase acquisitions, we allocated the aggregate acquisition cost to the net assets acquired based on the fair market value of such net assets. We have included the operating results of such companies in our historical results of operations for all periods following the acquisition. The aggregate acquisition cost for such purchased businesses amounted to $5.0 million and consisted of $1.0 million in cash, funded by the Company's revolving line of credit, $3.0 million in redemption value of mandatory redeemable convertible preferred stock and $1.0 million in assumed debt and deal costs. During the first quarter of fiscal year 1999, we acquired four business products distribution companies with combined annual revenues of $34.3 million. We accounted for these acquisitions using the 10 purchase method of accounting. For each of these purchase acquisitions, we allocated the aggregate acquisition cost to the net assets acquired based on the fair market value of such net assets. We included the operating results of such companies in our historical results of operations for all periods following the acquisitions. The aggregate acquisition cost for such purchased businesses amounted to $18.6 million and consisted of $5.7 million in cash, funded by working capital and the Company's revolving line of credit, 0.7 million shares of Class A common stock with an aggregate fair market value of $9.6 million, and $3.3 million in seller notes, assumed debt and deal costs.
Nine months ended March 31, (amounts in thousands) ------------------------------ 2000 1999 ------------- ------------- Purchase consideration: Cash paid..................................................... $ 1,000 $ 5,736 Amounts due sellers of acquired businesses.................... - 1,380 Common stock and mandatory preferred stock issued............. 3,000 9,604 Liabilities assumed........................................... 900 1,777 Other......................................................... 75 107 ------------- ------------- Fair value of net assets acquired.................................. $ 4,975 $ 18,604 ============= ============= Nine months ended March 31, (amounts in thousands) ------------------------------ Allocation of fair value of net assets acquired: 2000 1999 ------------- ------------- Goodwill and intangible assets................................ $ 3,737 $ 13,323 Accounts receivable........................................... 1,237 3,704 Inventory and other, net...................................... 264 1,577 ------------- ------------- $ 5,238 $ 18,604 ============= =============
The following table presents the pro forma results of continuing operations as if all the acquisitions described above had occurred at the beginning of each period presented. Pro forma adjustments reflect additional amortization expense since the excess of acquisition cost over the fair value of the assets acquired is amortized for a full period. Pro forma adjustments also reflect additional interest expense due to the related debt being outstanding for a full period. The income tax effect of the pro forma adjustments has also been reflected. These pro forma results are presented for comparative purposes only and do not purport to be indicative of what would have occurred had the businesses actually been acquired as of those dates or of results which may occur in the future (amounts in thousands, except per share amounts).
Nine months ended Three months ended March 31, March 31, --------------------------------- -------------------------------- 2000 1999 2000 1999 (Restated) (Restated) --------------- ------------- -------------- ------------- Total revenues $ 110,261 $ 121,196 $ 35,562 $ 38,984 Income (loss) before income taxes .... $ (427) $ 2,009 $ (2,269) $ 311 Income (loss)......................... $ (845) $ 1,045 $ (1,814) $ 162 Income (loss) per share............... $ (0.08) $ 0.12 $ (0.17) $ 0.02
The following supplemental table presents the same information as the table above except that the information below includes the goodwill write-down and other non recurring charges recorded during the quarter ended March 31, 1999 (amounts in thousands, except per share amounts).
Nine months ended Three months ended March 31, March 31, (amounts in thousands) (amounts in thousands) --------------------------------- -------------------------------- 2000 1999 2000 1999 (Restated) (Restated) --------------- ------------- -------------- ------------- 11 Total revenues $ 110,261 $ 121,196 $ 35,562 $ 38,984 Income (loss) before income taxes ....... $ (427) $ (4,859) $ (2,269) $ (6,537) Income (loss)............................ $ (845) $ (5,823) $ (1,814) $ (6,687) Income (loss) per share.................. $ (0.08) $ (0.69) $ (0.17) $ (0.77)
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following (amounts in thousands):
March 31, June 30, 2000 1999 Estimated Lives (Restated) --------------- ------------- ------------- Land $ - $ - Buildings 15 to 40 years 106 733 Leasehold improvements 1 to 10 years 1,479 1,296 Equipment and vehicles 3 to 5 years 5,484 4,416 Capitalized leasehold rights 3 to 5 years 440 440 ------------- ------------- 7,509 6,885 Accumulated depreciation and amortization.................... 4,728 4,367 ------------- ------------- $ 2,781 $ 2,518 ============= =============
5. INTANGIBLE ASSETS Intangible assets consist of the following (amounts in thousands):
March 31, June 30, 2000 1999 (Restated) ------------- ------------- Goodwill..................................................... $ 24,115 $ 20,378 Other........................................................ 570 570 ------------- ------------- 24,685 20,948 Accumulated amortization..................................... 5,583 4,094 ------------- ------------- $ 19,102 $ 16,854 ============= =============
6. LONG-TERM DEBT Debt with a stated maturity of more than one year consists of the following (amounts in thousands):
March 31, June 30, 2000 1999 (Restated) ------------- ------------- Revolving line of credit (reclassed as current liability).... $ 40,666 $ 31,100 Convertible notes payable to sellers......................... 1,123 3,285 Mortgage and equipment notes payable......................... 2,652 292 Capitalized lease obligations................................ 194 777 Other........................................................ 475 244 ------------- ------------- 45,110 35,698 Less current portion due within one year..................... 42,049 1,364 ------------- ------------- Long-term debt............................................... $ 3,061 $ 34,334 ============= =============
12 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 approximately $2.27 million of bank debt (plus interest and expense of enforcement), and we agreed to use our best efforts to sell our Transportation Services Division or our Business Products Division with the proceeds to be applied to our bank debt. The $2.27 million guaranty amount will be reduced ratably in proportion to any permanent reduction of the debt amount under the Credit Agreement except that the guaranty amount will not be reduced if either the Transportation Services Division or the Business Products Division is sold and the proceeds paid to Lender to reduce the debt amount are less than $17.5 million for the sale of the Transportation Services Division or $22.5 million for the sale of the Business Products Division. If the guaranteed obligations are not paid in full by October 22, 2000, the Company's Chairman must provide common stock of Affiliated Computer Services, Inc. as collateral for the guaranty. If the Company's Chairman has to pledge Affiliated Computer Services, Inc. stock as collateral, he has the right to request Precept to provide the requested collateral. Since all of our 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, we have agreed to reimburse him for any amounts he may have to pay under the guaranty and, if he is required by the bank to collateralize the guaranty, we have agreed to reimburse him on demand for the value of such collateral security, together with interest from the date that such security is provided. Furthermore, we have agreed that if the guaranteed amount is not paid in full in cash and the letters of credit issued under the credit agreement are not terminated or expired by October 22, 2000, we will deliver to our Chairman 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 of March 31, 2000 and October 11, 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. The Company is currently in negotiations with the banking group to obtain a waiver which the bank has thus far declined to give. Unless and until a waiver has been received, the Company will classify the present outstanding bank debt as a current liability. 7. PREFERRED STOCK In April 2000, we sold $2.0 million in convertible preferred stock and warrants to The Shaar Fund Ltd. and used the net proceeds to pay vendors. The preferred stock is convertible into Class A Common Stock at a rate of $2.75 or 85% of the market price of the Class A Common Stock, defined as the average of the five days closing price of the stock prior to the conversion. No conversion is permitted for the first five months. In addition, we may redeem the preferred stock at 120% of the face value during the first five months. We will pay a quarterly dividend of 8% of the face value in cash or Class A Common Stock. As part of the transaction, we issued warrants to purchase 125,000 shares of Class A Common Stock at an exercise price of $2.50 per share. Pursuant to a registration rights agreement, 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. However, the Company has not registered the Class A Common Stock as required by the registration rights agreement. In consideration of the personal guaranty provided by our Chairman for the bank debt (described in the previous footnote), we have agreed to reimburse the Chairman for any amounts he may have to pay under the guaranty, and if he is required by the bank to collateralize the guaranty, Precept has agreed to deliver to him as a guaranty fee securities equal to what he would have received if the guaranteed amount had been invested in preferred stock and warrants on the same terms as the investment by the Shaar Fund described above or, at his election, consideration of reasonably equivalent value. 8. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK 13 As part of its acquisition of two businesses during the first quarter of fiscal year 2000 and one acquisition during the third quarter of fiscal year 1999, the Company issued 3,200 shares of mandatory redeemable preferred stock in three series with an aggregate initial redemption value of $3,260,000. The preferred stock pays dividends at annual rates ranging from 6.0% to 9.0% on a monthly and quarterly basis. The preferred stock includes a mandatory redemption in the following annual amounts: $0.1 million for the remainder of fiscal year 2000; $0.3 million in 2001; $0.3 million in 2002; $1.8 million in 2003; and $0.1 million in 2004. The preferred stock is generally convertible at the option of the holder at a range of $8.00 to $30.00 for one share of Class A Common Stock. Dividends on the mandatory redeemable preferred stock of $0.1 million for fiscal year 2000 are not reflected on the face of the condensed consolidated statement of operations as the amount was not considered significant to the net loss for the three- and nine-month periods ended March 31, 2000. 9. DISCONTINUED OPERATIONS The net assets for the discontinued operations of the Transportation Services Division as of March 31, 2000 and June 30, 1999 are shown below (amounts in thousands):
March 31, June 30, 2000 1999 (Restated) ------------- ------------- Trade accounts receivable, net............................... $ 2,679 $ 2,720 Other current assets......................................... 1,834 1,260 ------------- ------------- Total current assets......................................... 4,513 3,980 Property and equipment, net.................................. 7,641 8,491 Intangible and other assets, primarily goodwill, net......... 31,049 26,801 ------------- ------------- Total assets................................................. 43,203 39,272 Accounts payable, accrued expenses and other current liabilities................................ (1,365) (3,562) Current portion of long-term debt............................ (2,521) (2,554) -------------- ------------- Total current liabilities.................................... (3,886) (6,116) Long-term debt............................................... (2,378) (2,610) Loss on sale of discontinued operations...................... (16,500) - -------------- ------------- Net assets of discontinued operations........................ $ 20,439 $ 30,546 =============== =============
The condensed results of operations for the discontinued operations of the Transportation Services Division are shown below for the three-month and the nine month periods ended March 31, 2000 and 1999 (amounts in thousands).
Three months ended Nine months ended March 31, March 31, ------------------------------ ------------------------------ 2000 1999 2000 1999 (Restated) (Restated) -------------- ------------ -------------- ------------- Revenue............................. $ 7,502 $ 7,115 $ 23,609 $ 17,992 Cost of goods sold.................. 4,989 4,059 14,674 10,474 Other operating expenses............ 2,238 8,639 4,752 10,374 Depreciation and amortization....... 1,109 570 2,675 1,441 Interest expense.................... 932 463 1,222 709 Income (loss) before income tax provision (benefit)........ (1,766) (6,616) 286 (5,006) Income (loss)....................... (848) (6,886) 286 (6,000)
The results of operations for the discontinued operations include an allocation of interest expense on the Company's debt outstanding under the Credit Agreement. The allocation is based on the amount of 14 debt used by the Transportation Services Division for acquisitions, capital expenditures and working capital, offset by the cash flow generated from its operations. During the second quarter of fiscal year 1999, we acquired one corporate transportation services company located in North Arlington, New Jersey, which provides executive limousine and town car service to the tri-state New York metropolitan area and had annual revenues of $14.0 million. We accounted for this acquisition using the purchase method of accounting. We allocated the aggregate acquisition cost to the net assets acquired based on the fair market value of such net assets. We have included the operating results of this company in our historical results of operations for all periods following the acquisition. The aggregate acquisition cost for this purchased business amounted to $9.0 million and consisted of $3.4 million in cash, funded by working capital and the Company's revolving line of credit, 0.3 million shares of Class A common stock with an aggregate fair market value of $3.0 million, and $2.6 million in assumed debt and transaction costs. 10. WEIGHTED AVERAGE SHARES OUTSTANDING The following table provides information to reconcile the basic and diluted weighted average shares outstanding for the three-month and nine-month periods ended March 31, 2000 and 1999 (amounts in thousands).
Three months ended Nine months ended March 31, March 31, ----------------------------- ----------------------------- 2000 1999 2000 1999 ------------- ---------- ------------- ---------- Basic and diluted weighted average shares outstanding: Common shares, Class A and Class B, outstanding at the beginning of the period.............. 9,944 8,459 9,320 7,394 Common shares repurchased......................... - (79) - (79) Common shares issued upon exercise of options..... - 45 - 45 Common shares issued upon conversion of note receivable.................................. 15 47 15 47 Common shares used to acquire businesses during the period.................................. 233 1 857 1,066 ------------- ---------- ------------- ---------- Common shares, Class A and Class B, outstanding at the end of the period.................... 10,192 8,473 10,192 8,473 ============= ========== ============= ========== Weighted average number of common shares outstanding during the period based on the number of days outstanding ................. 10,153 8,512 9,859 8,208 ============= ========== ============= ==========
15 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, but the original prospective buyer has suspended negotiations. 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 and attempted to sell its Transportation Services Division (discussed elsewhere in this Report). In July 2000, the Company terminated its agreement with Southwest Securities. In July 2000, the Company announced that it retained the investment banking firm of Murphy Noell Capital, LLC ("Murphy Noell")to advise in the review of strategic alternatives including a recapitalization, equity placement, merger of the Company, and divestiture of the Business Products Division. Murphy Noell has also been advising the Company in the divestiture of the Transportation Services Division. The original prospective buyer has suspended negotiations. The Company is in active discussions with other potential acquirers of the Transportation Services Division. It is the intent of management to complete the sale of this division during the quarter ending December 31, 2000. The Company is also in active discussions with potential acquirers of the Business Products Division. As a strategic alternative, the Company is in discussions with other parties that would involve their investments in a combination of debt and equity securities of the Company. Neither the Company nor Murphy Noell is currently able to predict whether or when either of the proposed divestitures can be accomplished or the net proceeds that would be received in the event that either or both divisions of the Company were to be divested. No assurances can be given that the Company will be successful in its divestiture activity or that additional funds can be raised to support its working capital needs. 16 ACQUISITIONS Our results of operations and the comparability of our results of operations from period to period have been affected significantly by businesses acquired in each period. From 1991 through the date of this report, we completed 21 acquisitions of Business Products distribution companies. In the three-month period ended September 30, 1999, we completed the acquisition of two Business Products companies located in North Carolina with aggregate annual revenues of $10.2 million. We paid for such acquisitions with $1.0 million in cash, financed by the Company's working capital and its revolving line of credit, $3.0 million in mandatory redeemable convertible preferred stock and $1.0 million in assumed debt and deal costs. 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. RESTATEMENT OF FINANCIAL INFORMATION The following financial information reflects the restatement for the period ended March 31, 2000. RESULTS OF CONTINUING OPERATIONS The following table (restated in accordance with the restated financial statements) 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........................................... 68.2% 66.7% 67.3% 67.4% Sales commissions............................................ 14.7% 13.9% 14.0% 13.5% Selling, general and administrative.......................... 18.8% 17.2% 15.7% 15.9% Goodwill write-down and other non-recurring charges.......... 0.0% 19.3% 0.0% 6.5% Depreciation and amortization................................ 3.2% 1.0% 2.0% 1.0% ----- ----- ----- ----- 104.9% 118.1% 99.0% 104.3% ----- ----- ----- ----- Operating income (loss)........................................... (4.9)% (18.1)% 1.0% (4.3)% Interest and other expense........................................ 1.5% 0.6% 2.2% 1.1% ----- ----- ----- ----- 17 Income (loss) from continuing operations before income taxes...... (6.4)% (18.7)% (1.2)% (5.4)% Income tax provision (benefit).................................... (1.3)% (8.7)% 0.0% (2.5)% ----- ----- ----- ----- Net income (loss) from continuing operations...................... (5.1)% (10.0)% (1.2)% (2.9)% ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 REVENUE for 2000 increased by $0.5 million, or 1.3%, from $35.1 million in 1999 to $35.6 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 0.9%, or $0.3 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 $0.9 million, or 3.8%, from $23.4 million to $24.3 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 68.2% 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 6.8%, from $4.9 million, or 13.9% of revenue in 1999, to $5.2 million, or 14.7% 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. 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 increased by $0.6 million, or 10.2%, from $6.1 million in 1999 to $6.7 million in 2000. As a percentage of revenue, such expense increased from 17.2% in 1999 to 18.8% in 2000. The increase is primarily attributable to additional selling, general and administrative expenses of $0.5 million from companies acquired. DEPRECIATION AND AMORTIZATION EXPENSE increased $0.8 million in 2000 from $0.4 million in 1999 to $1.1 million in 2000 due largely to the effect of acquisitions. INTEREST EXPENSE increased $0.4 million, or 174.1%, 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. LOSS FROM CONTINUING OPERATIONS was reduced by $1.7 million in 2000 due primarily to the non-recurrence of goodwill write-down and non-recurring charges recorded during the third quarter of 1999 partially offset by the increase in expenses mentioned above. The loss per share was lowered from $0.41 in 1999 to $0.19 in 2000 for the same reasons. NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999 18 REVENUE for 2000 increased by $1.8 million, or 1.7%, from $103.9 million in 1999 to $105.6 million in 2000. During the first nine months of fiscal year 2000, Business Products revenue increased from internal growth by $8.6 million or 9.4%. 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 $1.1 million, or 1.6%, from $70.0 million in 1999 to $71.1 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 ($5.9 million) offset the effect of the lower cost of goods sold from the lost MBF revenue ($8.4 million) and inventory adjustments ($0.2 million). As a percentage of revenue, cost of goods sold decreased from 67.4% in 1999 to 67.3% in 2000 due primarily to negative inventory adjustments. 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 5.2%, from $14.0 million, or 13.5% of revenue in 1999, to $14.7 million, or 13.9% of revenue in 2000. The change in the percentage of revenue is due primarily to the higher dollar amount of commissions paid. The increase in the dollar amount is due to internal growth ($1.8 million), and to companies acquired ($0.6 million), offset by lower commissions due to the lost MBF revenue ($1.7 million). SELLING, GENERAL AND ADMINISTRATIVE EXPENSE remained constant, with $16.6 million in 1999 and 2000. The Company increased its selling, general and administrative expense from existing operations 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 15.7% in 2000. DEPRECIATION AND AMORTIZATION EXPENSE increased $1.1 million in 2000 from $1.0 million in 1999 to $2.1 million in 2000 due largely to acquisitions and a $0.5 million writedown of goodwill. 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. LOSS FROM CONTINUING OPERATIONS decreased by $1.8 million, or 58.9% in 2000, from a loss of $3.1 million in 1999 to a loss of $1.3 million in 2000, due primarily to revenue growth driven by internal growth and acquisitions. DISCONTINUED OPERATIONS The discontinued operations consist of the Transportation Services Division. In March 2000, Precept signed a revised letter of intent to sell substantially all the assets and liabilities of the Transportation Services Division to a company funded by a group of investors, led by Holding Capital Group 19 and certain members of the Transportation Services Division's executive management. The sale of this division, which was subject to certain conditions including the execution of a definitive purchase agreement, was to have been completed by the end of September 2000. In July 2000, the Company announced that it retained the investment banking firm of Murphy Noell Capital, LLC to advise in the review of strategic alternatives including a recapitalization, equity placement, merger of the Company, and divestiture of the Business Products Division. Murphy Noell has also been advising the Company in the divestiture of the Transportation Services Division. The original prospective buyer (Holding Capital Group) has suspended negotiations. The Company is in active discussions with other potential acquirers of the Transportation Services Division. It is the intent of management to complete the sale of this division during the quarter ending December 31, 2000, although there can be no assurance that the divestiture can be accomplished. 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 $1.0 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 $8.0 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 Services Division for the three months ended March 31, 2000 increased by $0.9 million, or 22.9%, 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 Services Division for the nine months ended March 31, 2000 increased by $4.2 million, or 40.1%, 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 Services 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 $1.2 million, or 118.5%, from $1.0 million in 1999 to $2.2 million in 2000. Selling, general and administrative expenses for the nine months ended March 31, 2000 increased by $1.9 million, or 72.7%, from $2.7 million in 1999 to $4.6 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 $0.5 million, or 94.6%, from $0.6 million in 1999 to $1.1 million in 2000. Depreciation and amortization expense for the nine months ended March 31, 2000 increased by $1.2 million, or 85.6%, from $1.4 million in 1999 to $2.7 million in 2000. Interest expense for the three months ended March 31, 2000 increased by $0.5 million, or 101.3%, 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 Services Division includes an allocation of interest expense on the outstanding debt under the Company's Credit Agreement. 20 The loss for the Transportation Services Division decreased by $6.0 million for the three months ended March 31, 2000 from $6.9 million in 1999 to $0.8 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 $2.3 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 North 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. Income for the nine months ended March 31, 2000 improved by $6.3 million, from a loss of $6.0 million in 1999 to income of $0.3 million in 2000. Excluding the goodwill and asset write-downs of $7.6 million and $0.3 million depreciation adjustment recorded in the third quarter of 1999, the division's operating results declined by $2.1 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, heretofore 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 due to late payments. As of September 30, 2000, the Company had approximately $10.3 million in past due accounts payable and payments to vendors have been within 60 to 75 days. Additionally, numerous vendors have placed the Company on credit hold, resulting in delays in obtaining inventory. 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. Since April, the Company has added collections personnel to improve the timeliness of the collection of accounts receivable from our customers. This has resulted in a slight improvement in collections. However, the improvement in collections has not been sufficient to reduce the level of vendor financing. If we are not able to dramatically improve the collection of accounts receivable, 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. In April 2000, we sold $2.0 million in convertible preferred stock and warrants 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 are obligated to pay a quarterly dividend of 8% of the face value in cash or Class A Common Stock, but we are currently unable to declare or pay dividends on this or any other series of our Preferred 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 21 issued pursuant to the terms of the Securities 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. Pursuant to a Registration rights agreement, 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. However, the Company has not registered the Class A Common Stock as required by the registration rights agreement. 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 approximately $2.27 million of bank debt (plus interest and expense of enforcement), and we agreed to use our best efforts to sell our Transportation Services Division or our Business Products Division with the proceeds to be applied to our bank debt. The $2.27 million guaranty amount will be reduced ratably in proportion to any permanent reduction of the debt amount under the Credit Agreement except that the guaranty amount will not be reduced if either the Transportation Services Division or the Business Products Division is sold and the proceeds paid to Lender to reduce the debt amount are less than $17.5 million for the sale of the Transportation Services Division or $22.5 million for the sale of the Business Products Division. If the guaranteed obligations are not paid in full by October 22, 2000, the Company's Chairman must provide common stock of Affiliated Computer Services, Inc. as collateral for the guaranty. If the Company's Chairman has to pledge Affiliated Computer Services, Inc. stock as collateral, he has the right to request Precept to provide the requested collateral. Since all of our 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, we have agreed to reimburse him for any amounts he may have to pay under the guaranty and, if he is required by the bank to collateralize the guaranty, we have agreed to reimburse him on demand for the value of such collateral security, together with interest from the date that such security is provided. Furthermore, we have agreed that if the guaranteed amount is not paid in full in cash and the letters of credit issued under the credit agreement are not terminated or expired by October 22, 2000, we will deliver to our Chairman 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. In July 2000, the Company announced that it retained the investment banking firm of Murphy Noell Capital, LLC to advise in the review of strategic alternatives, including a recapitalization, equity placement, merger of the Company, and divestiture of the Business Products Division. Murphy Noell has also been advising the Company in the divestiture of the Transportation Services Division. However, negotiations with the original prospective buyer have been suspended. The Company is in active discussions with other acquirers of the Transportation Services Division. It is the intent of management to complete the sale of this division during the quarter ending December 31, 2000. Neither the Company nor Murphy Noell is currently able to predict the net proceeds that would be received in the event that both divisions of the Company were to be divested. Accordingly, it is unknown if such proceeds would be sufficient to repay the secured and unsecured creditors and to have remaining funds in order to make a distribution to shareholders. Likewise, in the event of a potential recapitalization of the Company, the potential dilution to Precept's existing shareholders could be significant, resulting in a substantial decrease in Precept's stock price. No assurances can be given that the Company will be successful in its divestiture activity or that additional funds can be raised to support its working capital needs. 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. On 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 was effective through June 29, 2000. Although negotiations with our banking group are still underway, we do not know that we will be able to obtain a fifth waiver from the bank and we, therefore, must present the outstanding debt under the Credit Agreement as short-term debt. The restated March 31, 2000 balance sheet reflects the debt reclassification. An interest payment of $1.4 million was due to the Company's banking group on October 2, 2000. The Company has not made the required payment. As a 22 result, the Company is in default. This may result in an adverse impact on the Company's current debt financing and the financial condition of the Company. The Company has launched a strategic cash management initiative to improve the cash position of the Company. This initiative is composed of the following efforts: policies and actions to accelerate collections, a comprehensive cost reduction program, sale of non-critical assets, and strategic cash flow forecasting and controls. At this time, management does not know that these efforts will have a material impact on the cash position of the Company. NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first nine months of fiscal year 2000, the Company generated $5.1 million of cash for operating needs. During this period, the Company's net loss, adjusted for non-cash charges of $2.1 million, amounted to $0.9 million. We used an increase in accounts payable vendor financing of $6.1 million to fund an increase in inventory of $3.4 million and an increase in trade accounts receivable of $1.8 million. Overall, working capital decreased by $48.3 million primarily due to the reclassification of the $40.7 revolving line of credit form long-term debt to current debt. NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first nine months of fiscal year 2000, Precept used $5.9 million in cash for investing activities as compared to a use of $8.1 million for investing activities in the first nine months of fiscal year 1999. During 2000, the Company acquired two Business Products distribution companies. During the first nine months of 1999, the Company acquired four Business Products distribution businesses for a total of $8.9 million, acquired $0.3 million of equipment and received $1.1 million in proceeds from the sale of land, building and an investment in a restaurant company. NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first nine months of fiscal year 2000, $7.6 million of cash was generated by financing activities as compared to $7.5 million of cash generated by financing activities in the first nine months of fiscal year 1999. During the first nine months of 2000, Precept increased its outstanding revolving line of credit balance by approximately $9.6 million, primarily to finance acquisitions, service existing debt ($1.1 million), redeem preferred stock and pay preferred dividends ($0.8 million) and provide cash to fund operating cash flow needs of the Transportation Services 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 Services Division provided $0.1 million of cash from operating activities. Excluding non-cash charges of $2.7 million during this period for depreciation and amortization, $2.8 million was generated by operating activities, before changes in working capital. This was used primarily to reduce accounts payable and accrued expenses ($2.9 million). The Transportation Services Division repaid $2.0 million in other debt, primarily vehicle notes and capitalized leases. The Transportation Services Division's use of 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 Services Division's operating results may be affected by increases in the prices of fuel if the division is not able to pass along such 23 increases to its customers on a timely basis. In general, Precept does not believe that inflation has had a material effect on its results of operations in recent years. However, there can be no assurance that Precept's business will not be affected by inflation, the price of paper and the price of fuel in the future. IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of these planning and implementation efforts, the Company experienced no significant disruptions in mission 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 December 31, 2000. Management is in the process of evaluating the effects, if any, of adopting these two new pronouncements. FORWARD-LOOKING STATEMENTS The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. This section should be read in conjunction with the "Risk Factors Affecting the Company's Prospects" located in Item I of the Company's annual report on Form 10-K for the year ended June 30, 1999 and in the "Risk Factors" included in the Company's Prospectus dated November 12, 1999. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein are forward-looking statements and accordingly involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to the other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements. 1. Changes in economic conditions, in particular those that affect the end users of business products and transportation services, primarily corporations. 24 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. 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. PART II OTHER INFORMATION ITEM 5 - OTHER INFORMATION Subsequent to the Company's Original From 10-Q filing on May 19, 2000, the following changes in the Company's management have occurred at various times: (a) Douglas R. Deason has resigned as President and Chief Executive Officer of the Company, but remains as a director of the Company. On September 15, 2000, the Company entered into a Separation and Release Agreement with Doug Deason (the "Separation Agreement") that took effect immediately. Pursuant to the Separation Agreement, Mr. Deason terminated his employment relationship with the Company but agreed to serve as a consultant for a period of twelve months. Mr. Deason has received the remaining $125,000 of his 1999 Management Performance Bonus and will receive a salary in the amount of $250,000 over the next twelve months for services to be rendered by him as a consultant to the Company. (b) R.L. Hassell of Hassell & Associates has been elected as interim President, Secretary, and Chief Financial Officer of the Company. Hassell & Associates has been engaged to provide operational and financial oversight of the Company. On September 15, 2000, the Company and R.L. Hassell signed a Letter of Understanding setting forth the scope of Mr. Hassell's assignment at the Company and the fee structure of Mr. Hassell's compensation. In addition, the Company and Mr. Hassell have entered into an Indemnification Agreement whereby the Company has agreed to indemnify Mr. Hassell as incentive for Mr. Hassell to serve as an officer of the Company. 25 (c) Sheldon I. Stien and Peter Trembath have resigned as directors of the Company. Mr. Trembath has additionally resigned as Senior Vice President, Secretary and General Counsel of the Company. (d) William W. Solomon, Jr. has resigned as Executive Vice President and Chief Financial Officer of the Company. Mr. Solomon also resigned as a director of the Company. (e) Robert N. Bazinet has resigned as director of the Company. (f) Paul Cabra has resigned as President of the Business Products Division. Mr. Cabra has been retained by the Company as an independent contractor. NASDAQ has advised the Company that the Company's Common Stock has failed to maintain the minimum bid price of $1.00 over the prescribed period required for continued listing of the NASDAQ Small Cap Market and, if the Company is unable to demonstrate compliance, the Common Stock will be delisted on December 8, 2000. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K FILED DURING PERIOD JANUARY 1, 2000 THROUGH SEPTEMBER 22, 2000 (a) Exhibits EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Securities Purchase Agreement, dated as of April 19, 2000, by and between the Company 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 the Company 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 the Company and The Shaar Fund Ltd. (1) 10.1 Limited Guaranty dated April 25, 2000 executed by Darwin Deason in favor of BankOne, Texas, NA, as Agent, together with Form of Pledge Agreement attached as Exhibit A thereto. (5) 10.2 Letter agreement dated April 25, 2000 among the Company and Darwin Deason, Chairman. (1) 10.3 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) 10.4 Waiver and Consent No. 4, dated June 14, 2000 among the Company., Bank One, N.A., individually and as agent and Wells Fargo Bank (Texas), N.A., as a Lender. (2) 10.5 Letter of Understanding dated September 15, 2000 between Hassell & Associates and the Company and Lee Hassell. (5) 10.6 Separation and Release Agreement dated September 15, 2000 between Douglas R. Deason and the Company. (5) 10.7 Indemnification agreement dated September 18, 2000 between R. L. Hassell and the Company. 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. 26 (2) Previously filed as an Exhibit to the Amended Form 10-Q/A filed on June 26, 2000. (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 of Form S-4 (file no. 333-42689) and incorporated herein by reference. (5) Filed herewith. (b) Reports on Form 8-K filed during the period from January 1, 2000 through October 12, 2000. The Company has not filed any reports on Form 8-K for the period from January 1, 2000 through October 12, 2000. 27 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 October 12, 2000. PRECEPT BUSINESS SERVICES, INC. /s/ R.L. Hassell - -------------------------- R.L. Hassell President, Secretary, and Chief Financial Officer 28 EX-10.1 2 a2026300zex-10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 LIMITED GUARANTY THIS LIMITED GUARANTY (this "Guaranty") is made as of the [25] day of April, 2000 by Darwin Deason, an individual residing in Dallas, Texas ("Deason") in favor of the Agent, for the ratable benefit of the Lenders, under (and as defined in) the Credit Agreement referred to below; WITNESSETH: WHEREAS, Precept Business Services, Inc., a Texas corporation (the "Borrower"), Bank One, Texas, NA, as contractual representative (the "Agent"), and certain Lenders have entered into a certain Credit Agreement dated as of March 22, 1999, as previously amended by Amendment and Waiver No. 1 thereto dated as of May 14, 1999 and Amendment and Waiver No. 2 thereto dated as of November 12, 1999 and as simultaneously being amended by Amendment and Waiver No. 3 thereto dated as of the date hereof (as so amended thereby and as further amended, modified, supplemented and/or restated from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Lenders to the Borrower; WHEREAS, it is a condition precedent to execution of Amendment and Waiver No. 3 to the Credit Agreement, the extension of the Provisional Loans contemplated therein and the continuation of the other financial accommodations by the Lenders under the Credit Agreement that Deason execute and deliver this Guaranty, whereby Deason shall guarantee the payment when due of all "Secured Obligations" (as defined in the Credit Agreement), principal, interest, letter of credit reimbursement obligations and other amounts that shall be at any time payable by the Borrower under the Credit Agreement, any "Hedging Agreement" (as defined in the Credit Agreement), the Notes and the other Loan Documents, subject to the dollar limitations and termination provisions set forth herein; and WHEREAS, Deason, owns approximately 14.8% of the outstanding Capital Stock (Class A Common Stock and Class B Common Stock) of the Borrower and Deason acknowledges and agrees that the making of the Loans, including the Provisional Loan, and the extension of the other financial accommodations under the Credit Agreement and the other Loan Documents to the Borrower is, and will continue to be, of direct economic benefit to Deason; WHEREAS, in consideration of the foregoing and in order to induce the Lenders and the Agent to enter into Amendment and Waiver No. 3 to the Credit Agreement, Deason is willing to guarantee the obligations of the Borrower under the Credit Agreement, any Hedging Agreement, the Notes, and the other Loan Documents on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Terms defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) REPRESENTATIONS AND WARRANTIES. Deason represents and warrants (which representations and warranties shall be deemed to have been renewed at the time of the making of any Advance or issuance of any Letter of Credit) that: (i) He has the power, capacity, authority and legal right to execute and deliver this Guaranty and to perform his obligations hereunder. This Guaranty constitutes a legal, valid and binding obligation of Deason enforceable against Deason in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. (ii) Neither the execution and delivery by him of this Guaranty, nor the consummation by him of the transactions herein contemplated, nor compliance by him with the terms and provisions hereof, will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on him or the provisions of any indenture, instrument or material agreement to which he is a party or is subject, or by which he, or his property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on his property pursuant to the terms of any such indenture, instrument or material agreement. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any Governmental Authority, is required to authorize, or is required in connection with the execution, delivery and performance by him of, or the legality, validity, binding effect or enforceability against him of, this Guaranty. (b) COVENANTS. Unless prior to October 22, 2000(2) all Guaranteed Obligations shall have been paid in full in cash and the Commitments and all Letters of Credit issued under the Credit Agreement shall have terminated or expired or a "Release Event" (as defined below) occurs, then on or before such date Deason shall (i) deliver to the Agent a duly executed Pledge Agreement in the form attached hereto as EXHIBIT A, together with an opinion of counsel to Deason in connection therewith in form and substance acceptable to the Agent and the Lenders, (ii) deliver to the Agent original stock certificates for Class A common stock of Affiliated Computer Services, Inc. (in connection with which all of the representations required to be made under the Pledge Agreement can be made) with a current market value at the time of such initial delivery of not less than $3,021,333.34 (utilizing for purposes of valuation the average closing price over the five (5) immediately preceding trading days for such stock on the - ---------------------- (2) Insert date that is 180 days after date of this Limited Guaranty. 2 New York Stock Exchange) and stock powers duly executed in blank for such shares, (iii) deliver a form U-1 signed by the Borrower and a U-1 signed by Deason with respect to such pledged shares together with such information as shall permit the Agent to complete the provisions of such form U-1, and (iv) thereafter shall comply with each of the covenants and requirements set forth in such Pledge Agreement. SECTION 3. THE LIMITED GUARANTY. (a) (i) GUARANTY TERMS. Deason hereby unconditionally guarantees the full and punctual payment when due (whether at stated maturity, upon acceleration or otherwise) of the Secured Obligations, including, without limitation, (A) the principal of and interest on each Loan under or Note issued by the Borrower pursuant to the Credit Agreement, (B) any Reimbursement Obligations of the Borrower, (C) all Hedging Obligations of the Borrower owing to any Lender or any affiliate of any Lender under any Hedging Agreement, and (D) all other amounts payable by the Borrower under the Credit Agreement, any Hedging Agreement and the other Loan Documents (all of the foregoing being referred to collectively as the "Guaranteed Obligations"); PROVIDED, HOWEVER, notwithstanding anything herein to the contrary, the maximum amount which may be recovered from Deason pursuant to the terms of this Guaranty shall not exceed the sum of (1) $2,266,000 (the "Initial Stated Amount"), as such Initial Stated Amount may be reduced pursuant to the provisions of SECTION 3(a)(ii) below PLUS (2) interest on such sum and expenses of enforcement, if applicable, pursuant to the terms of SECTION 16 below; PROVIDED, FURTHER, no demand for payment under this Guaranty shall be permitted to be made if a "Release Event" (as defined below) has occurred. Upon failure by the Borrower to pay punctually any such Guaranteed Obligations, Deason agrees that he shall forthwith on demand pay such amount at the place and in the manner specified in the Credit Agreement, Hedging Agreements, any Note or the relevant Loan Document, as the case may be. Deason hereby agrees that this Guaranty is an absolute, irrevocable and a guaranty of payment and is not a guaranty of collection. Neither the Agent nor any Lender shall be required to pursue any other remedy prior to invoking the benefits of this Guaranty, including, without limitation, taking any action against the Borrower, exhausting any remedy against any endorser of any instrument issued by the Borrower, foreclosing against any Collateral of the Borrower or any other guarantors, or setting-off against the balance of any deposit account of the Borrower or any other guarantors kept with the Agent or any Lender. (ii) REDUCTIONS OF INITIAL STATED AMOUNT. The Initial Stated Amount will be reduced ratably simultaneously with and in proportion to any permanent reductions of the Aggregate Commitment; PROVIDED, HOWEVER, no such reduction of Initial Stated Amount shall be available if a Sale Event with respect to either the transportation or business products operating divisions of the Borrower are sold and the net cash proceeds (after taking into account all expenses of such transaction) paid to the Lenders in reduction of the Obligations and reduction of the Aggregate Commitment are less than $17,500,000 in the case of a Sale Event with respect to the transportation division or $22,500,000 in the case of a Sale Event with respect to the business products division, in either of which events the Initial Stated Amount will remain unchanged and will remain available for the full Initial Stated Amount as support to the Lenders even after such a Sale Event unless the Guaranty is released in accordance with the terms set forth in clause (iii) below. Without affecting the foregoing, it should be noted that any Sale Event requires the consent of each of the Lenders under the Credit Agreement and nothing herein shall be construed as a consent to any such sale. 3 (iii) RELEASE EVENTS. For purposes hereof, the term "Release Event" means satisfaction of any one or more of the following: (A) LEVERAGE RELATED RELEASE: Satisfaction of each of the following: (1) the receipt by the Agent of financial statements and compliance certificates pursuant to the terms of SECTION 7.1(A) of the Credit Agreement, which financial statements and compliance certificates reflect, to the reasonable satisfaction of the Agent, that the Borrower's Leverage Ratio was less than 2.00 to 1.00 as of the end of four consecutive fiscal quarters (calculated on a trailing 12-month basis as provided in SECTION 7.4(B) of the Credit Agreement), (2) the receipt by the Agent of an unqualified audit of the Borrower's and its Subsidiaries financial statements as required pursuant to the terms of SECTION 7.1(A)(ii) of the Credit Agreement with respect to one of the quarters included in the four-quarters referenced in clause (1) and (3) no Default or Unmatured Default has occurred and is continuing under the Credit Agreement as of the date of satisfaction with such requirements under clauses (1) and (2); or (A) EQUITY RELATED RELEASE: The sale by the Borrower Equity Interests of the Borrower (other than Disqualified Stock) where the net cash proceeds equal or exceed $2,266,000 and the proceeds of which are utilized by the Borrower for the repayment or prepayment (including all interest and fees accrued thereon) and termination of the Provisional Loan facility provided pursuant to SECTION 2.1A of the Credit Agreement in its entirety; or (C) CONSENT BASED RELEASE: Receipt by Deason of a written release and termination of this Guaranty by the Agent and each of the Lenders. (b) ACCELERATED GUARANTY OBLIGATION. Notwithstanding anything in this Guaranty to the contrary, demand for payment from Deason under this Guaranty shall be presumed to have been issued and the entire unpaid amount which can be demanded hereunder, together with accrued interest thereon, if any, shall become immediately due and payable regardless of any payment limitation in the event of the occurrence of any one or more of the following: (1) Deason has commenced a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; consented to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law; consented to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of his property; made any assignment for the benefit of creditors; or taken any action to authorize any of the foregoing; 4 (2) An involuntary case was commenced against Deason; or a court has entered a decree or order for relief in respect of Deason in an involuntary case, under any applicable bankruptcy, insolvency or other similar law now or hereinafter in effect; or similar relief has been granted under any applicable federal, state, local or foreign law; or (3) A decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Deason or over all or a substantial part of his assets has been entered; or an interim receiver, trustee or other custodian of Deason or of all or a substantial part of his property has been appointed or a warrant of attachment, execution or similar process against any substantial part of the property of Deason has been issued. SECTION 4. GUARANTY UNCONDITIONAL. The obligations of Deason hereunder shall be unconditional and absolute (subject to the provisions of SECTION 3 above) and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, indulgence, compromise, waiver or release of or with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto, or with respect to any obligation of any other guarantor of any of the Guaranteed Obligations, whether (in any such case) by operation of law or otherwise, or any failure or omission to enforce any right, power or remedy with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto, or with respect to any obligation of any other guarantor of any of the Guaranteed Obligations; (ii) any modification or amendment of or supplement to the Credit Agreement, any Hedging Agreement, any Note, or any other Loan Document, including, without limitation, any such amendment which may increase the amount of the Secured Obligations guaranteed hereby; (iii) any release, surrender, compromise, settlement, waiver, subordination or modification, with or without consideration, of any collateral securing the Guaranteed Obligations or any part thereof, any other guaranties with respect to the Guaranteed Obligations or any part thereof, or any other obligation of any person or entity with respect to the Guaranteed Obligations or any part thereof, or any nonperfection or invalidity of any direct or indirect security for the Guaranteed Obligations; (iv) any change in the corporate, partnership or other existence, structure or ownership of the Borrower or any other guarantor of any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or any other guarantor of the Guaranteed Obligations, or any of their 5 respective assets or any resulting release or discharge of any obligation of the Borrower or any other guarantor of any of the Guaranteed Obligations; (v) the existence of any claim, setoff or other rights which Deason may have at any time against the Borrower, any other guarantor of any of the Guaranteed Obligations, the Agent, any Holder of Secured Obligations or any other Person, whether in connection herewith or in connection with any unrelated transactions, PROVIDED that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) the enforceability or validity of the Guaranteed Obligations or any part thereof or the genuineness, enforceability or validity of any agreement relating thereto or with respect to any collateral securing the Guaranteed Obligations or any part thereof, or any other invalidity or unenforceability relating to or against the Borrower or any other guarantor of any of the Guaranteed Obligations, for any reason related to the Credit Agreement, any Hedging Agreement, any other Loan Document, or any provision of applicable law or regulation purporting to prohibit the payment by the Borrower or any other guarantor of the Guaranteed Obligations, of any of the Guaranteed Obligations; (vii) the failure of the Agent to take any steps to perfect and maintain any security interest in, or to preserve any rights to, any security or collateral for the Guaranteed Obligations, if any; (viii) the election by, or on behalf of, any one or more of the Holders of Secured Obligations, in any proceeding instituted under Chapter 11 of Title 11 of the United States Code (11 U.S.C. 101 et seq.) (the "Bankruptcy Code"), of the application of Section 1111(b)(2) of the Bankruptcy Code; (ix) any borrowing or grant of a security interest by the Borrower, as debtor-in-possession, under Section 364 of the Bankruptcy Code; (x) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of the claims of any of the Holders of Secured Obligations or the Agent for repayment of all or any part of the Guaranteed Obligations; (xi) the Agent's or any Lender's failure to diligently preserve the Borrower's or any other guarantor's liability under any Loan Document or to bring an action to enforce collection of any amounts owing under any Loan Document; (xii) the Guaranty being deemed invalid or unenforceable as to or against any party hereto; (xiii) the Borrower's entry into any Loan Document is found to be ULTRA VIRES, any Authorized Officer acting on the Borrower's behalf with regard to any Loan Document is found to have acted beyond the scope of such Authorized Officer's 6 authority, or the Loan Documents are found to be unenforceable against the Borrower for any other reason; or (xiv) any other act or omission to act or delay of any kind by the Borrower, any other guarantor of the Guaranteed Obligations, the Agent, any Holder of Secured Obligations or any other Person or any other circumstance whatsoever which might, but for the provisions of this SECTION 4, constitute a legal or equitable discharge of any of Deason's obligations hereunder. SECTION 5. DISCHARGE ONLY UPON PAYMENT IN FULL AND CERTAIN TERMINATION EVENTS: REINSTATEMENT IN CERTAIN CIRCUMSTANCES. Deason' obligations hereunder shall remain in full force and effect until (a) all Guaranteed Obligations shall have been paid in full in cash and the Commitments and all Letters of Credit issued under the Credit Agreement shall have terminated or expired or (b) a Release Event occurs. If at any time any payment of the principal of or interest on any Note, any Reimbursement Obligation or any other amount payable by the Borrower or any other party under the Credit Agreement, any Hedging Agreement or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, Deason' obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 6. GENERAL WAIVERS. Deason irrevocably waives acceptance hereof, presentment, demand or action on delinquency, protest, the benefit of any statutes of limitations and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Borrower, any other guarantor of the Guaranteed Obligations, or any other Person. Without in any way limiting the foregoing, Deason waives the benefits of Chapter 34 of the Texas Business and Commerce Code. SECTION 7. SUBORDINATION OF SUBROGATION. Until the Secured Obligations have been indefeasibly paid in full in cash, Deason (i) shall have no right of subrogation with respect to such Secured Obligations and (ii) waives any right to enforce any remedy which the Holders of Secured Obligations, Issuing Banks or the Agent now have or may hereafter have against the Borrower, any endorser or any guarantor of all or any part of the Secured Obligations or any other Person, and Deason waives any benefit of, and any right to participate in, any security or collateral given to the Holders of Secured Obligations, the Issuing Banks and the Agent to secure the payment or performance of all or any part of the Secured Obligations or any other liability of the Borrower to the Holders of Secured Obligations or Issuing Banks. Should Deason have the right, notwithstanding the foregoing, to exercise his subrogation rights, Deason hereby expressly and irrevocably (a) subordinates any and all rights at law or in equity to subrogation, reimbursement, exoneration, contribution, indemnification or set off that Deason may have to the indefeasible payment in full in cash of the Secured Obligations and (b) waives any and all defenses available to a surety, guarantor or accommodation co-obligor until the Secured Obligations are indefeasibly paid in full in cash. Deason acknowledges and agrees that this subordination is intended to benefit the Agent and the Holders of Secured Obligations and shall not limit or otherwise affect Deason's liability hereunder or the enforceability of this Guaranty, and that the Agent, the Holders of Secured Obligations and their respective successors and 7 assigns are intended third party beneficiaries of the waivers and agreements set forth in this SECTION 7. SECTION 8. STAY OF ACCELERATION. If acceleration of the time for payment of any amount payable by the Borrower under the Credit Agreement, any Hedging Agreement, any Note or any other Loan Document is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement, any Hedging Agreement any Note or any other Loan Document shall nonetheless be payable by Deason hereunder, subject to the limitations set forth herein, forthwith on demand by the Agent. SECTION 9. NOTICES. Except as otherwise expressly provided below, any notice required or desired to be served, given or delivered hereunder shall be in writing and shall be deemed to have been validly served, given or delivered (i) three (3) days after deposit in the United States Mails, with proper postage prepaid or provided for, (ii) when sent after receipt of confirmation or answerback if sent by telecopy, telex or other similar facsimile transmission, (iii) one (1) business day after deposited with a reputable overnight courier with all charges prepaid or (iv) when delivered, if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated as follows: (a) If to the Agent at: Bank One, Texas, NA 1717 Main Street 4th Floor Dallas, Texas 75201 Attn: Rick Rogers Ph: 214/290-2540 Fax: 214/290-2054 (b) If to Deason at: Darwin Deason c/o Affiliated Computer Services Inc. 2828 North Haskell Avenue 10th Floor Dallas, Texas 75204 Attn: General Counsel Telephone No.: (214)841-6152 Facsimile No.: (214) 841-5746 SECTION 10. NO WAIVERS. No failure or delay by the Agent or any Holder of Secured Obligations in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Guaranty, the Credit Agreement, any Hedging Agreement, the Notes, and the 8 other Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 11. SUCCESSORS AND ASSIGNS. This Guaranty is for the benefit of the Agent and the Holders of Secured Obligations and their respective successors and permitted assigns and in the event of an assignment of any amounts payable under the Credit Agreement, any Hedging Agreement, the Notes, or the other Loan Documents in accordance with the respective terms thereof, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Guaranty shall be binding upon Deason and his heirs, successors and assigns. SECTION 12. CHANGES IN WRITING. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Agent with the consent of the Required Lenders, and, if any such change, waiver, discharge or termination directly and adversely affects the rights, duties and obligations of Deason hereunder, Deason. SECTION 13. GOVERNING LAW. THIS GUARANTY IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN DALLAS, TEXAS, AND THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS GUARANTY. ANY DISPUTE BETWEEN DEASON AND THE AGENT OR ANY LENDER ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS GUARANTY, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. SECTION 14. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL. (A) DEASON HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE COURT SITTING IN DALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY AND DEASON HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION HE MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST DEASON IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY DEASON AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR 9 CONNECTED WITH THIS GUARANTY SHALL BE BROUGHT ONLY IN A COURT IN DALLAS, TEXAS. (B) SERVICE OF PROCESS. DEASON WAIVES PERSONAL SERVICE OF ANY PROCESS UPON HIM AND IRREVOCABLY APPOINTS THE GENERAL COUNSEL OF AFFILIATED COMPUTER SERVICES INC. (THE ADDRESS FOR WHICH IS 2828 NORTH HASKELL AVENUE, 10TH FLOOR, DALLAS, TEXAS, 75204) AS HIS AGENT FOR THE PURPOSE OF ACCEPTING SERVICE OF PROCESS ISSUED BY ANY COURT. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF THE AGENT OR THE LENDERS TO SERVE ANY SUCH WRITS, PROCESS OR SUMMONSES IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. DEASON IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE. (C) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (D) WAIVER OF BOND. DEASON WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF ANY PARTY HERETO IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS GUARANTY OR ANY OTHER LOAN DOCUMENT. (E) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS GUARANTY AND, SPECIFICALLY, THE PROVISIONS OF THIS SECTION 14, WITH ITS COUNSEL. SECTION 15. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Guaranty. In the event an ambiguity or question of intent or interpretation arises, this Guaranty shall be construed as if drafted jointly by the parties hereto 10 and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Guaranty. SECTION 16. TAXES, INTEREST AFTER DEMAND; EXPENSES OF ENFORCEMENT, ETC. All payments required to be made by Deason hereunder shall be made without setoff or counterclaim and free and clear of and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political or taxing authority thereof, PROVIDED, HOWEVER, that if Deason is required by law to make such deduction or withholding, Deason shall forthwith pay to the Agent or any Holder of Secured Obligations, as applicable, such additional amount as results in the net amount received by the Agent or any Holder of Secured Obligations, as applicable, equaling the full amount which would have been received by the Agent or any Holder of Secured Obligations, as applicable, had no such deduction or withholding been made. If any payment hereunder is not paid within two (2) days of demand therefor under the terms hereof, then interest on the unpaid amount shall be computed at a rate per annum equal to ten percent (10%) (calculated on the basis of a 365 day year) or the maximum rate permitted by law, whichever is less, until all past due amounts and such interest thereon have been paid. Deason also agree to reimburse the Agent and the Holders of Secured Obligations for any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent and the Holders of Secured Obligations, which attorneys may be employees of the Agent or the Holders of Secured Obligations) paid or incurred by the Agent or any Holders of Secured Obligation in connection with the collection and enforcement of amounts due under this Guaranty. SECTION 17. SETOFF. At any time after all or any part of the Guaranteed Obligations have become due and payable (by acceleration or otherwise), each Holder of Secured Obligations and the Agent may, without notice to Deason and regardless of the acceptance of any security or collateral for the payment hereof, appropriate and apply toward the payment of all or any part of the Guaranteed Obligations (i) any indebtedness due or to become due from such Holder of Secured Obligations or the Agent to Deason, and (ii) any moneys, credits or other property belonging to Deason, at any time held by or coming into the possession of such Holder of Secured Obligations or the Agent or any of their respective affiliates. SECTION 18. FINANCIAL INFORMATION. Deason hereby assumes responsibility for keeping himself informed of the financial condition of the Borrower and any and all endorsers and/or other guarantor of all or any part of the Guaranteed Obligations, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations, or any part thereof, that diligent inquiry would reveal, and Deason hereby agrees that none of the Holders of Secured Obligations or the Agent shall have any duty to advise Deason of information known to any of them regarding such condition or any such circumstances. In the event any Holder of Secured Obligations or the Agent, in its sole discretion, undertakes at any time or from time to time to provide any such information to Deason, such Holder of Secured Obligations or the Agent shall be under no obligation (i) to undertake any investigation not a part of its regular business routine, (ii) to disclose any information which such Holder of Secured Obligations or the Agent, pursuant to accepted or reasonable commercial finance or banking practices, wishes 11 to maintain confidential or (iii) to make any other or future disclosures of such information or any other information to Deason. SECTION 19. SEVERABILITY. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Guaranty. SECTION 20. ENTIRE AGREEMENT. This Guaranty embodies the final and entire agreement and understanding among Deason, the Agent and the Holders of Secured Obligations and supersedes all prior agreements and understandings among Deason, the Agent and the Holders of Secured Obligations relating to the subject matter hereof. This Guaranty and the other Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties hereto. SECTION 21. HEADINGS. Section headings in this Guaranty are for convenience of reference only and shall not govern the interpretation of any provision of this Guaranty. 12 IN WITNESS WHEREOF, Deason has caused this Contingent Limited Guaranty to be duly executed as of the day and year first above written. DARWIN DEASON /s/ Darwin Deason -------------------------------- STATE OF TEXAS ) ) SS.: COUNTY OF TEXAS _ ) On this [25th] day of April, 2000, before me personally came Darwin Deason, to me known who, being by me duly sworn, did acknowledge the execution of this Contingent Limited Guaranty. /s/ Traci Houpt -------------------------------- Notary Public (NOTARY STAMP/SEAL) Accepted in Dallas, Texas ------------------ as of the [____] day of April, 2000 TRACI HOUPT MY COMMISSION ENDS BANK ONE, TEXAS, NA, as Agent MARCH 18, 2004 ------------------ By: ------------------------------------- Name: Title: 13 EXHIBIT A TO LIMITED GUARANTY FORM OF PLEDGE AGREEMENT PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (the "Pledge Agreement"), dated as of [_____________], 2000, is entered into by and between Darwin Deason, an individual residing in Dallas, Texas (the "Pledgor"), and Bank One, Texas, NA, as contractual representative (the "Agent") for itself and for the "Holders of Secured Obligations" under (and as defined in) the Credit Agreement defined below. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Credit Agreement (as defined below). WITNESSETH: WHEREAS, Precept Business Services, Inc., a Texas corporation (the "Borrower"), the Agent and certain financial institutions (the "Lenders") have entered into a certain Credit Agreement dated as of March 22, 1999, as previously amended by Amendment and Waiver No. 1 thereto dated as of May 14, 1999, Amendment and Waiver No. 2 thereto dated as of November 12, 1999 and Amendment and Waiver No. 3 thereto dated as of April 27, 2000 (as so amended and as further amended, modified, supplements and or restated from time to time, the "Credit Agreement"), pursuant to which the Lenders have agreed, subject to certain conditions precedent, to make loans and other financial accommodations to the Borrower from time to time; WHEREAS, the Pledgor owns approximately 14.8% of the outstanding Capital Stock (Class A Common Stock and Class B Common Stock) of the Borrower acknowledges and agrees that the making of the Loans, including the Provisional Loan, and the extension of the other financial accommodations under the Credit Agreement and the other Loan Documents to the Borrower is, and will continue to be, of direct economic benefit to the Pledgor; WHEREAS, SCHEDULE I hereto sets forth certain shares of Affiliated Computer Services, Inc. ("ACS") initially being pledged hereunder (the "Initial Pledged Shares"), which Initial Pledged Shares have a current market value of not less than $3,021,333.34 (utilizing for purposes of valuation the average closing price over the five (5) immediately preceding trading days for such stock); WHEREAS, Pledgor may from time to time execute and deliver to the Agent a supplement to this Pledge Agreement substantially in the form of EXHIBIT A hereto (each such supplement, a "Pledge Supplement") setting forth additional shares of ACS (the "Additional Pledged Shares") (the Initial Pledged Shares and the Additional Pledged Shares, collectively referred to herein as the "Pledged Shares"); WHEREAS, the Pledgor has executed and delivered to the Agent that certain Limited Guaranty dated as of April 27, 2000 (the "Limited Guaranty"); and WHEREAS, the Agent and the Lenders have required, as a condition to their continued extension of credit and financial accommodations under the Credit Agreement, that the Pledgor execute and deliver this Pledge Agreement; NOW, THEREFORE, for and in consideration of the foregoing and of any financial accommodations or extensions of credit (including, without limitation, any loan or advance by renewal, refinancing or extension of the agreements described hereinabove or otherwise) heretofore, now or hereafter made to or for the benefit of the Borrower pursuant to the Credit Agreement or any other agreement, instrument or document executed pursuant to or in connection therewith, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor and the Agent hereby agree as follows: 1. PLEDGE. The Pledgor hereby pledges to the Agent, for the benefit of the Agent and the Holders of Secured Obligations, and grants to the Agent for the benefit of the Agent and the Holders of Secured Obligations, a security interest in, the collateral described in SECTIONS 1.1 through 1.3 below (collectively as of the date the same is pledged to the Agent, the "Pledged Collateral"): 1.1 (a) The shares of the capital stock of ACS owned by the Pledgor (such shares being identified on SCHEDULE I attached hereto or on any SCHEDULE I attached to any applicable Pledge Supplement), and the certificates representing the shares of such capital stock (all of said capital stock being hereinafter collectively referred to as the "Pledged Stock"), delivered herewith, or from time to time, delivered to the Agent accompanied by stock powers in the form of EXHIBIT B attached hereto and made a part hereof (the "Powers") duly executed in blank, and all dividends, cash, instruments, investment property and other property from time to time received, receivable or otherwise distributed in respect of, or in exchange for, any or all of the Pledged Stock. (b) The additional shares of capital stock of ACS as required to be delivered pursuant to SECTION 3.2 below, and the certificates, which shall be delivered to the Agent, representing such additional shares (any such additional shares shall constitute part of the Pledged Stock and the Agent is irrevocably authorized to unilaterally amend SCHEDULE I hereto or on any SCHEDULE I to any applicable Pledge Supplement to reflect such additional shares), and all dividends, cash, instruments, investment property and other rights and options from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares. 1.2 The property and interests in property described in SECTION 3 below; and 1.3 All proceeds of the collateral described in SECTIONS 1.1 and 1.2 above. 2. SECURITY FOR OBLIGATIONS. The Pledged Collateral secures the prompt payment, performance and observance of the "Guaranteed Obligations" (as defined in the Limited Guaranty). 3. PLEDGED COLLATERAL ADJUSTMENTS; ADDITIONAL PLEDGED SHARES. 3.1 PLEDGED COLLATERAL ADJUSTMENTS. If, during the term of this Pledge Agreement: (a) Any stock dividend, reclassification, readjustment or other change is declared or made in the capital structure of ACS, or (b) Any subscription warrants or any other rights or options shall be issued in connection with the Pledged Collateral, then all new, substituted and additional certificates, shares, warrants, rights, options, investment property or other securities, issued by reason of any of the foregoing, in connection with Pledged Collateral shall be immediately delivered to and held by the Agent under the terms of this Pledge Agreement and shall constitute Pledged Collateral hereunder. 3.2 ADDITIONAL PLEDGED SHARES. The Pledgor and the Agent agree that on the last business day of each calendar quarter (or more frequently if requested by the Agent), the "Market Value" (as defined below) of the Pledged Stock will be calculated and if, at the time of such calculation, the Market Value of the Pledged Stock is less than an amount equal to 1.33333 multiplied by the Provisional Loan Commitment, then within three (3) Business Days the Pledgor will deliver to the Agent an executed Pledge Supplement together with additional ACS Class A Common Stock (together with Powers with respect thereto) having a Market Value such that when added when added to the Market Value of the previously Pledged Stock is equal to or greater than 1.33333 multiplied by the Provisional Loan Commitment. "Market Value" for the Pledged Stock shall be equal to the average closing price over the five (5) trading days immediately preceding the applicable date of any calculation for such stock on the New York Stock Exchange. 4. SUBSEQUENT CHANGES AFFECTING PLEDGED COLLATERAL. The Pledgor represents and warrants that it has made its own arrangements for keeping itself informed of changes or potential changes affecting the Pledged Collateral (including, but not limited to, rights to convert, rights to subscribe, payment of dividends, cash distributions or other distributions reorganization or other exchanges, tender offers and voting rights), and the Pledgor agrees that neither the Agent nor any of the Holders of Secured Obligations shall have any obligation to inform the Pledgor of any such changes or potential changes or to take any action or omit to take any action with respect thereto. The Agent may, after the occurrence of a default by the Pledgor hereunder or under the Limited Guaranty ( a "Specified Default"), without notice and at its option, transfer or register the Pledged Collateral or any part thereof into its or its nominee's name with or without any indication that such Pledged Collateral is subject to the security interest hereunder. In addition, the Agent may after the occurrence of a Specified Default exchange certificates or instruments representing or evidencing Pledged Shares for certificates or instruments of smaller or larger denominations. 5. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants as follows: (a) The Pledgor is the sole legal and beneficial owner of the Pledged Collateral, free and clear of any pledge, mortgage, hypothecation, Lien, charge, encumbrance or any security interest therein except for the security interest created by this Pledge Agreement; (b) The Pledgor has owned the Pledged Collateral of record and beneficially for at least the two (2) year holding period required under paragraph (k) of Rule 144 as promulgated by the Securities and Exchange Commission under the Securities Act ("RULE 144") and if any of the Pledged Collateral was acquired by the Pledgor by purchase, the purchase price has been paid for in full for at least two (2) years and after the occurrence of a Specified Default, assuming the Agent is not then an affiliate (as defined in Rule 144) of ACS, the sale by the Agent of the Pledged Collateral could be made by or on behalf of the Agent without compliance with Rule 144; (c) There are no restrictions upon the voting rights associated with, or upon the transfer of, any of the Pledged Collateral; (d) The Pledgor has the right to vote, pledge and grant a security interest in or otherwise transfer such Pledged Collateral free of any Liens; (e) The pledge of the Pledged Collateral does not violate (1) any mortgage, bank loan or credit agreement or other agreements to which the Pledgor is a party or by which any of his assets may be bound; or (2) any restriction on such transfer or encumbrance of such Pledged Collateral; (f) The Pledgor agrees to execute and file financing statements pursuant to the Uniform Commercial Code as the Agent may request to perfect the security interest granted hereby; (g) No authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the pledge of the Pledged Collateral pursuant to this Pledge Agreement or for the execution, delivery or performance of this Pledge Agreement by the Pledgor or (ii) for the exercise by the Agent of the remedies in respect of the Pledged Collateral pursuant to this Pledge Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally); (h) Upon delivery of each of the certificates representing the Pledged Collateral, the pledge of the Pledged Collateral pursuant to this Pledge Agreement will create a valid and perfected first priority security interest in the Pledged Collateral, in favor of the Agent for the benefit of the Agent and the Holders of Secured Obligations, securing the payment and performance of the Guaranteed Obligations; (i) The Powers are duly executed and give the Agent the authority they purport to confer; (j) The Pledgor has no obligation to make further capital contributions or make any other payments to ACS with respect to his interest therein; and (k) The information set forth on the questionnaire attached hereto as EXHIBIT C and made a part hereof, and any subsequent questionnaire supplied by the Pledgor (each, a "QUESTIONNAIRE"), is and will be true and complete in all material respects. 6. VOTING RIGHTS. During the term of this Pledge Agreement, and except as provided in this SECTION 6 below, the Pledgor shall have the right to vote the Pledged Stock on all governing questions in a manner not inconsistent with the terms of this Pledge Agreement. After the occurrence of a Specified Default, the Agent or the Agent's nominee may, at the Agent's or such nominee's option and upon written notice from the Agent to the Pledgor, (i) exercise all voting powers pertaining to the Pledged Collateral and (ii) exercise, or direct the Pledgor as to the exercise of any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to the applicable Pledged Collateral, as if the Agent were the absolute owner thereof, all without liability except to account for property actually received by it, but the Agent shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure so to do or delay in so doing. Such authorization shall constitute an irrevocable voting proxy from the Pledgor to the Agent or, at the Agent's option, to the Agent's nominee. 7. DIVIDENDS AND OTHER DISTRIBUTIONS. (a) So long as no Specified Default shall have occurred and is continuing: (i) The Pledgor shall be entitled to receive and retain any and all dividends and cash distributions paid in respect of the Pledged Collateral, PROVIDED, HOWEVER, that any and all (A) distributions and dividends paid or payable other than in cash with respect to, and instruments and other property received, receivable or otherwise distributed with respect to, or in exchange for, any of the Pledged Collateral; (B) dividends and other distributions paid or payable in cash with respect to any of the Pledged Collateral on account of a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus; and (C) cash paid, payable or otherwise distributed with respect to principal of, or in redemption of, or in exchange for, any of the Pledged Collateral; shall be Pledged Collateral, and shall be forthwith delivered to the Agent to hold, for the benefit of the Agent and the Holders of Secured Obligations, as Pledged Collateral and shall, if received by the Pledgor, be received in trust for the Agent, for the benefit of the Agent and the Holders of Secured Obligations, be segregated from the other property or funds of the Pledgor, and be delivered immediately to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsement); and (ii) The Agent shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to receive the dividends or interest payments which it is authorized to receive and retain pursuant to CLAUSE (i) above. (b) After the occurrence and during the continuance of a Specified Default: (i) All rights of the Pledgor to receive the dividends and distributions which it would otherwise be authorized to receive and retain pursuant to SECTION 7(a)(i) hereof shall cease, and all such rights shall thereupon become vested in the Agent, for the benefit of the Agent and the Holders of Secured Obligations, which shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and distributions; (ii) All dividends and distributions which are received by the Pledgor contrary to the provisions of CLAUSE (i) of this SECTION 7(b) shall be received in trust for the Agent, for the benefit of the Agent and the Holders of Secured Obligations, shall be segregated from other funds of the Pledgor and shall be paid over immediately to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsements); (iii) The Pledgor shall, upon the request of the Agent, at Borrower's expense, execute and deliver all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Agent or its counsel, advisable to register the applicable Pledged Collateral under the provisions of the Securities Act of 1933, as amended (the "Securities Act") and to exercise its reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Agent or its counsel, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (iv) The Pledgor shall, upon the request of the Agent, at Borrower's expense, use its reasonable efforts to qualify the Pledged Collateral under state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by the Agent; and (v) The Pledgor shall, upon the request of the Agent, at the Borrower's expense, do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. The Borrower will reimburse the Agent and/or the Holders of Secured Obligations for all expenses incurred by the Agent and/or the Holders of Secured Obligations, including, without limitation, reasonable attorneys' and accountants' fees and expenses in connection with the foregoing. Upon or at any time after the occurrence of a Specified Default, if the Agent determines that, prior to any public offering of any securities constituting part of the Pledged Collateral and Rule 144 under the Securities Act of 1933 is not available for the proposed sale, such securities should be registered under the Securities Act and/or registered or qualified under any other federal or state law and such registration and/or qualification is not practicable, then the Pledgor agrees that it will be commercially reasonable if a private sale, upon at least five (5) Business Days' notice to the Pledgor, is arranged so as to avoid a public offering, even though the sales price established and/or obtained at such private sale may be substantially less then prices which could have been obtained for such security on any market or exchange or in any other public sale. (c) Upon the Agent's request following a determination that due to a change in the interpretation of Rule 144 or otherwise the sale by the Agent of the Pledged Collateral would require compliance with Rule 144, the Pledgor shall: (i) use his reasonable efforts to cause ACS to comply at all times and on a timely basis with the requirements of paragraph (c) of Rule 144 to the extent required to permit a sale of the Pledged Stock in compliance with Rule 144 and promptly notify the Agent if such Pledgor obtains knowledge that ACS has failed at any time to comply with such requirements; (ii) complete and execute one or more Forms 144 or fully cooperate in the completion and execution of one or more Forms 144 if completed and/or executed by the Agent, to the extent required to permit the sale of the Pledged Stock in compliance with Rule 144; and (iii) complete and maintain current a Questionnaire containing such information as the Agent reasonably requests in connection with the Agent's ability to comply with Rule 144 in any sale of Pledged Stock including, without limitation, the delivery of a completed Questionnaire contemporaneously with the delivery of the Pledged Stock. 8. TRANSFERS AND OTHER LIENS. The Pledgor agrees that it will not (i) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral without the prior written consent of the Agent, or (ii) create or permit to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Pledge Agreement. 9. REMEDIES. (a) The Agent shall have, in addition to any other rights given under this Pledge Agreement or by law, all of the rights and remedies with respect to the Pledged Collateral of a secured party under the Uniform Commercial Code as in effect in the State of Texas. The Agent (personally or through an agent) is hereby authorized and empowered to transfer and register in its name or in the name of its nominee the whole or any part of the Pledged Collateral, to exercise all voting rights with respect thereto, to collect and receive all cash dividends or distributions and other distributions made thereon, and to otherwise act with respect to the Pledged Collateral as though the Agent were the outright owner thereof, the Pledgor hereby irrevocably constituting and appointing the Agent as the proxy and attorney-in-fact of the Pledgor, with full power of substitution to do so, provided, however, that the Agent shall have no duty to exercise any such right or to preserve the same and shall not be liable for any failure to do so or for any delay in doing so; PROVIDED, FURTHER, however that the Agent agrees to exercise such proxy and powers contained in this sentence only so long as a Specified Default shall have occurred and is continuing and following written notice thereof. In addition, after the occurrence of a Specified Default, the Agent shall have such powers of sale and other powers as may be conferred by applicable law. With respect to the Pledged Collateral or any part thereof which shall then be in or shall thereafter come into the possession or custody of the Agent or which the Agent shall otherwise have the ability to transfer under applicable law, the Agent may, in its sole discretion, without notice except as specified below, after the occurrence of a Specified Default, sell or cause the same to be sold at any exchange, broker's board or at public or private sale, in one or more sales or lots, at such price as the Agent may deem best, for cash or on credit or for future delivery, without assumption of any credit risk, and the purchaser of any or all of the Pledged Collateral so sold shall thereafter own the same, absolutely free from any claim, encumbrance or right of any kind whatsoever. The Agent and each of the Holders of Secured Obligations may, in its own name, or in the name of a designee or nominee, buy the Pledged Collateral at any public sale and, if permitted by applicable law, buy the Pledged Collateral at any private sale. The Borrower will pay to the Agent all reasonable expenses (including, without limitation, court costs and reasonable attorneys' and paralegals' fees and expenses) of, or incidental to, the enforcement of any of the provisions hereof. The Agent agrees to distribute any proceeds of the sale of the Pledged Collateral in accordance with the Credit Agreement and the Pledgor shall remain liable for any deficiency following the sale of the Pledged Collateral, subject to the limitations or liability set forth in the Limited Guaranty. (b) The Agent will give the Pledgor reasonable notice of the time and place of any public sale thereof, or of the time after which any private sale or other intended disposition is to be made. Any sale of the Pledged Collateral conducted in conformity with reasonable commercial practices of banks, commercial finance companies, insurance companies or other financial institutions disposing of property similar to the Pledged Collateral shall be deemed to be commercially reasonable. Notwithstanding any provision to the contrary contained herein, the Pledgor agrees that any requirements of reasonable notice shall be met if such notice is received by the Pledgor as provided in SECTION 19 below at least five (5) Business Days before the time of the sale or disposition; provided, however, that Agent may give any shorter notice that is commercially reasonable under the circumstances. Any other requirement of notice, demand or advertisement for sale is waived, to the extent permitted by law. (c) In view of the fact that federal and state securities laws may impose certain restrictions on the method by which a sale of the Pledged Collateral may be effected after a Specified Default, the Pledgor agrees that after the occurrence of a Specified Default, the Agent may, from time to time, attempt to sell all or any part of the Pledged Collateral by means of a private placement restricting the bidders and prospective purchasers to those who are qualified and will represent and agree that they are purchasing for investment only and not for distribution. In so doing, the Agent may solicit offers to buy the Pledged Collateral, or any part of it, from a limited number of investors deemed by the Agent, in its reasonable judgment, to be financially responsible parties who might be interested in purchasing the Pledged Collateral. If the Agent solicits such offers from not less than four (4) such investors, then the acceptance by the Agent of the highest offer obtained therefrom shall be deemed to be a commercially reasonable method of disposing of such Pledged Collateral; provided, however, that this Section does not impose a requirement that the Agent solicit offers from four or more investors in order for the sale to be commercially reasonable. 10. AGENT APPOINTED ATTORNEY-IN-FACT. The Pledgor hereby appoints the Agent its attorney-in-fact, coupled with an interest, with full authority, in the name of the Pledgor or otherwise, from time to time in the Agent's sole discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Pledgor representing any dividend, distribution, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same and to arrange for the transfer of all or any part of the Pledged Collateral on the books of ACS to the name of the Agent or the Agent's nominee; PROVIDED, HOWEVER that the Agent agrees to exercise such powers only so long as a Specified Default shall have occurred and is continuing. 11. WAIVERS. (i) The Pledgor waives presentment and demand for payment of any of the Guaranteed Obligations, protest and notice of dishonor or Specified Default with respect to any of the Guaranteed Obligations and all other notices to which the Pledgor might otherwise be entitled except as otherwise expressly provided herein or in the Credit Agreement. (ii) The Pledgor understands and agrees that his obligations and liabilities under this Pledge Agreement shall remain in full force and effect, notwithstanding foreclosure of any real property securing all or any part of the Guaranteed Obligations by trustee sale or any other reason impairing the right of the Pledgor, the Agent or any of the Holders of Secured Obligations to proceed against any other guarantor or such guarantor's property. The Pledgor agrees that all of its obligations under this Pledge Agreement shall remain in full force and effect without defense, offset or counterclaim of any kind, notwithstanding that the Pledgor's rights may be impaired, destroyed or otherwise affected by reason of any action or inaction on the part of the Agent or any Holder of Secured Obligations. 12. TERM. This Pledge Agreement shall remain in full force and effect until (a) all "Guaranteed Obligations" (as defined in the Limited Guaranty) shall have been paid in full in cash and the Commitments and all Letters of Credit issued under the Credit Agreement shall have terminated or expired or (b) a "Release Event" (as defined in the Limited Guaranty) occurs. Upon the termination of this Pledge Agreement as provided above (other than as a result of the sale of the Pledged Collateral), the Agent will release the security interest created hereunder and, if it then has possession of the Pledged Stock, will deliver the Pledged Stock and the Powers to the Pledgor. If at any time any payment of the principal of or interest on any Note, any Reimbursement Obligation or any other amount payable by the Borrower or any other party under the Credit Agreement, any Hedging Agreement or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, and the Pledgor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time and the Pledgor shall redeliver the Pledged Stock and Powers to the Agent. 13. DEFINITIONS. The singular shall include the plural and vice versa and any gender shall include any other gender as the context may require. 14. SUCCESSORS AND ASSIGNS. This Pledge Agreement shall be binding upon and inure to the benefit of the Pledgor, the Agent, for the benefit of itself and the Holders of Secured Obligations, and their respective heirs, successors and assigns. The Pledgor's heirs, successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession of or for the Pledgor. 15. GOVERNING LAW. THIS PLEDGE AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN DALLAS, TEXAS, AND THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS PLEDGE AGREEMENT AND ALL OTHER LOAN DOCUMENTS. ANY DISPUTE BETWEEN THE PLEDGOR AND THE AGENT, ANY LENDER OR ANY HOLDER OF SECURED OBLIGATIONS ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS PLEDGE AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 16. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL. (A) THE PLEDGOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXAS STATE COURT SITTING IN DALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE PLEDGOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION HE MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE PLEDGOR AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN DALLAS, TEXAS. (B) SERVICE OF PROCESS. DEASON WAIVES PERSONAL SERVICE OF ANY PROCESS UPON HIM AND IRREVOCABLY APPOINTS THE GENERAL COUNSEL OF AFFILIATED COMPUTER SERVICES INC. (THE ADDRESS FOR WHICH IS 2828 NORTH HASKELL AVENUE, 10TH FLOOR, DALLAS, TEXAS, 75204) AS THE PLEDGOR'S AGENT FOR THE PURPOSE OF ACCEPTING SERVICE OF PROCESS ISSUED BY ANY COURT. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF THE AGENT OR THE LENDERS TO SERVE ANY SUCH WRITS, PROCESS OR SUMMONSES IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW THE PLEDGOR IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH HE MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS PLEDGE AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE. (C) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS PLEDGE AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS PLEDGE AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (D) WAIVER OF BOND. THE PLEDGOR WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF ANY PARTY HERETO IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO REALIZE ON THE COLLATERAL ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS PLEDGE AGREEMENT OR ANY OTHER LOAN DOCUMENT. (E) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS PLEDGE AGREEMENT AND, SPECIFICALLY, THE PROVISIONS OF THIS SECTION 16, WITH ITS COUNSEL. 17. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the negotiation and drafting of this Pledge Agreement. In the event an ambiguity or question of intent or interpretation arises, this Pledge Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Pledge Agreement. 18. SEVERABILITY. Whenever possible, each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but, if any provision of this Pledge Agreement shall be held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. 19. FURTHER ASSURANCES. The Pledgor agrees that he will cooperate with the Agent and will execute and deliver, or cause to be executed and delivered, all such other stock powers, proxies, instruments and documents, and will take all such other actions, including, without limitation, the execution and filing of financing statements, as the Agent may reasonably request from time to time in order to carry out the provisions and purposes of this Pledge Agreement. 20. THE AGENT'S DUTY OF CARE. The Agent shall not be liable for any acts, omissions, errors of judgment or mistakes of fact or law including, without limitation, acts, omissions, errors or mistakes with respect to the Pledged Collateral, except for those arising out of or in connection with the Agent's (i) Gross Negligence or willful misconduct, or (ii) failure to use reasonable care with respect to the safe custody of the Pledged Collateral in the Agent's possession. Without limiting the generality of the foregoing, the Agent shall be under no obligation to take any steps necessary to preserve rights in the Pledged Collateral against any other parties but may do so at its option. All expenses incurred in connection therewith shall be for the sole account of the Pledgor, and shall constitute part of the Guaranteed Obligations secured hereby. THE PARTIES INTEND FOR THE EXCULPATORY PROVISIONS OF THIS SECTION 20 TO APPLY AND PROTECT THE AGENT FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF ANY CLAIM. 21. NOTICES. All notices and other communications required or desired to be served, given or delivered hereunder shall be given in the manner and to the addresses set forth in the Credit Agreement. 22. AMENDMENTS, WAIVERS AND CONSENTS. No amendment or waiver of any provision of this Pledge Agreement nor consent to any departure by the Pledgor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent pursuant to the terms of the Credit Agreement, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 23. SECTION HEADINGS. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 24. EXECUTION IN COUNTERPARTS. This Pledge Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. 25. MERGER. This Pledge Agreement and the other Loan Documents embody the final and entire agreement and understanding among the Pledgor, the Agent and the Holders of Secured Obligations and supersede all prior agreements and understandings among the Pledgor, the Agent and the Holders of Secured Obligations relating to the subject matter thereof. This Pledge Agreement and the other Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties hereto. IN WITNESS WHEREOF, the Pledgor and the Agent have executed this Pledge Agreement as of the date set forth above. DARWIN DEASON --------------------------------- BANK ONE, TEXAS, NA, as agent for itself and the Holders of Secured Obligations By: ------------------------------ Name: Title: SCHEDULE I to PLEDGE AGREEMENT dated as of [_____________], 2000 INITIAL PLEDGED SHARES NUMBER OF SHARES OF ACS CERTIFICATE NUMBER EXHIBIT A to PLEDGE AGREEMENT dated as of [___________], 2000 Form of Pledge Supplement Reference is hereby made to the Pledge Agreement (the "Pledge Agreement") dated as of the [___] day of [________], 2000, by and between Darwin Deason (the "Pledgor") and Bank One, Texas, NA, as contractual representative (the "Agent"), whereby the Pledgor has pledged certain capital stock of Affiliated Computer Services, Inc. ("ACS") as collateral to the Agent, for the ratable benefit of the Holders of Secured Obligations, as more fully described in the Pledge Agreement. This Supplement is a "Pledge Supplement" as defined in the Pledge Agreement and is, together with the certificates and Powers delivered herewith, subject in all respects to the terms and provisions of the Pledge Agreement. Capitalized terms used herein and not defined herein shall have the meanings given to them in the Pledge Agreement. By its execution below, the Pledgor hereby agrees that (i) the capital stock of ACS listed on the SCHEDULE I hereto shall be pledged to the Agent as additional collateral pursuant to SECTION [1.[_]][3.2] of the Pledge Agreement and (ii) such property shall be considered Pledged Stock under the Pledge Agreement and be a part of the Pledged Collateral pursuant to the Pledge Agreement. By its execution below, the Pledgor represents and warrants that the representations and warranties contained in SECTION 5 of the Pledge Agreement are true and correct in all respects as of the date hereof and after taking into account the pledge of the additional Pledged Stock relating hereto. IN WITNESS WHEREOF, the Pledgor has executed and delivered this Pledge Supplement to the Pledge Agreement as of this __________ day of _________, ____. DARWIN DEASON ------------------------ SCHEDULE I TO PLEDGE SUPPLEMENT ADDITIONAL PLEDGED STOCK NUMBER OF SHARES OF ACS CERTIFICATE NUMBER EXHIBIT B to PLEDGE AGREEMENT dated as of [___________], 2000 Form of Stock Power STOCK POWER FOR VALUE RECEIVED, the undersigned does hereby sell, assign and transfer to _____________________________ _____ Shares of Common Stock of Affiliated Computer Services, Inc., a __________ corporation, represented by Certificate No. __ (the "Stock"), standing in the name of the undersigned on the books of said corporation and does hereby irrevocably constitute and appoint ___________________________________ as the undersigned's true and lawful attorney, for it and in its name and stead, to sell, assign and transfer all or any of the Stock, and for that purpose to make and execute all necessary acts of assignment and transfer thereof; and to substitute one or more persons with like full power, hereby ratifying and confirming all that said attorney or substitute or substitutes shall lawfully do by virtue hereof. Dated: _______________ DARWIN DEASON - ------------------------- EXHIBIT C to PLEDGE AGREEMENT dated as of [___________], 2000 Form of Questionnaire INFORMATIONAL EXHIBIT - PLEDGE OF SECURITIES In connection with the undersigned's pledge of the following capital stock of Affiliated Computer Services, Inc. (the "Securities") to Bank One Texas, N.A., as agent (the "Agent"):
CLASS AMOUNT NAME OF ISSUER OF SECURITIES PLEDGED -------------- ------------- ------- Affiliated Computer Services, Inc. Class A Common Stock ________ Shares Par Value $__________
the undersigned warrants and represents that the answers which he is hereby providing to the following questions are to the best of the undersigned's knowledge, complete, true, accurate and not misleading in any way and that if the undersigned, at any time, receives any information which would in any way make such answer incomplete, untrue, inaccurate or misleading (either at the time such answer was given or at some later time), the undersigned will immediately notify the Agent of the existence of such information and, provide the Agent with all such information within ten (10) business days of the undersigned's receipt thereof. Part I 1. How did you acquire the Securities? Were any of the Securities ever registered under the Securities Act of 1933? Are any of the Securities subject to any restrictions on their transferability? Provide details with respect to each class or issue of the Securities in order to substantiate and clarify your answers. [_______________________________] 2. Are any of the Securities part of an issue or class which is regularly traded on one or more securities exchanges or quotation systems? If so, please identify all such exchanges and systems. [_______________________________] 3. Are any of the Securities "restricted securities" within the meaning of Rule 144 of the Securities Act of 1933 -- i.e., securities acquired directly or indirectly from the issuer thereof, or from any affiliate of such issuer, in a transaction or chain of transactions not involving any public offering? [_______________________________] 4. Do you own or have a beneficial interest in any other securities issued by the issuer of the Securities? If so, provide details and set forth the amounts of each such security that you hold. [_______________________________] 5. Do any of the following persons or entities own of record or have a beneficial interest in any securities issued by the issuer of the Securities? If so, provide details and set forth the amounts of each such security that each such person holds. (a) Your spouse or any relative of either you or your spouse who has the same home as you. [_______________________________] (b) Any trust or estate in which you or any person specified in subparagraph (a) above collectively own ten percent (10%) or more of the total beneficial interest or of which any such person serves as trustee, executor or in any similar capacity. [_______________________________] (c) Any corporation or other organization in which you or any person specified in subparagraph (a) are the beneficial owners collectively of ten percent (10%) or more of any class of equity securities of ten percent (10%) or more of the total equity interest. [_______________________________] 6. Are you or any of the persons or entities described in Question 5 above an "affiliate" of the issuer of the Securities -- i.e., are you or any such person directly, or indirectly through one or more intermediaries, controlled by, in control of or under common control with such issuer? If yes, please give all details. [_______________________________] 7. Are you aware of any state or federal securities law which would prevent the Agent from legally selling the Securities? [_______________________________] Part II 8. With respect to the Securities, is the issuer subject to the reporting requirements of either Section 13 or Section 15(d) of the Securities Exchange Act of 1934, and, is the issuer current with respect to all required filings thereunder, including its most recent annual report on Form 10-K? [_______________________________] 9. If you acquired the Securities with the proceeds of any loan, was such loan on a full or partial recourse basis? If yes, answer the following questions: (a) On what date did you fully pay for the Securities? Describe any type of deferred payment arrangement under which any of the Securities were purchased and describe any contingencies regarding the issuance of the Securities. [_______________________________] (b) If any of the Securities were obtained through conversion privileges with respect to other securities of that issuer or through stock dividends, splits or recapitalizations, describe the circumstances surrounding such acquisition and the acquisition of the convertible securities or securities in respect of which the stock dividend, split or recapitalization occurred. [_______________________________] 10. Have you or any of the persons or entities set forth in Question 5 above sold securities of the same class or any securities convertible into securities within the last three (3) months of the same class as the Securities pursuant to Rule 144? If so, provide copies of Form 144. [_______________________________] 11. In the last three months, have you or any of the persons or entities set forth in Question 5 above, sold any securities of the same class as the Securities? [_______________________________] In addition to the foregoing warranties and representations, the undersigned hereby acknowledges that the undersigned understands that the Agent may rely upon the information given in these questions in realizing upon and selling the Securities. IN WITNESS WHEREOF, this instrument has been duly executed by the undersigned this [_______] day of [____________], 2000. DARWIN DEASON By:_________________________ Name: Title: STATE OF ) ) SS. COUNTY OF ) On this [_______] day of [_______________], in the year 2000 before me, the undersigned, a Notary Public in and for said State, personally appeared Darwin Deason, known to me to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same. WITNESS my hand and official seal. ---------------------------------- Notary Public EX-10.5 3 a2026300zex-10_5.txt EXHIBIT 10.5 EXHIBIT 10.5 September 15, 2000 To: Mr. Darwin Deason, Chairman, Precept Business Services, Inc. Subject: Agreement My Understanding of the scope of this assignment is: - - Title, President COO/CFO reporting to you and the Board of Precept Business Services, Inc. - - Responsible for approval of any new commitments made on behalf of the company. This includes but is not limited to contracts for products or services, capital expenditures, sale of assets, credit approval, personnel hiring or termination, bonuses and review of all current contracts for continuation, change or termination. - - Responsible for cash flow, maintaining relationships with key vendors and management of staff in Dallas. - - Maintenance of relationships with lenders, attorneys and accountants. - - Contact with investment bankers and potential buyers as required. - - Other responsibilities and authority as mutually agreed. - - Provide leadership, professional management and focus to the company and its employees. - - Assignment begins 9/12 and is for three months and may be extended by mutual agreement. The requirements and fee structure are as follows: - - The monthly retainer/fee is $24,000 and is paid on day one of the assignment. Every seven days thereafter an additional payment of $6,000 is made by Precept to Hassell & Associates. This provides a 30-day retainer for my services, which should never put me in conflict regarding whether Hassell & Associates is paid for some other party. Either party is free to cancel this agreement with 30 days written notice. - - Release and Indemnification Agreement authorized and signed by the Board. D&O coverage for Hassell & Associates provided by Precept. - - Hassell & Associates eligible for a bonus based on performance and will be based on collections of past due accounts receivable in the Products Division. Bonus criteria and agreement to be decided upon and put in writing by day 18 of assignment. - - Expenses for travel outside the DFW area will be involved separately. - - An office, staff, telephone and parking will be provided or are available. - - I will require approximately three days per month for work outside PBS. /s/ R. L. Hassell /s/ Darwin Deason - -------------------------- ------------------------------- R. L. Hassell Darwin Deason, Chairman Hassell & Associates Precept Business Services, Inc. 9/21/00 9/18/00 - ------- ------- Date Date EX-10.6 4 a2026300zex-10_6.txt EXHIBIT 10.6 EXHIBIT 10.6 SEPARATION AND RELEASE AGREEMENT BETWEEN DOUGLAS R. DEASON AND PRECEPT BUSINESS SERVICES, INC. This Separation Agreement and Release ("the Agreement" or the "Separation and Release Agreement") is made and entered into by and between Douglas R. Deason (hereafter "Employee" or "You") and Precept Business Services, Inc. (hereinafter referred to as the "Company" or "Employer") (Employee and the Company are sometimes referred to collectively as the "Parties"). WITNESSETH: WHEREAS, Employee and the Company mutually agree to terminate their employment relationship as it currently exists; and WHEREAS, Employee and the Company mutually agree that the effective date of the termination of such relationship will be September 15, 2000; and WHEREAS, Employee and the Company mutually desire to have an ongoing consulting relationship whereby the Company may, from time to time, consult with Employee regarding various issues relating to the business of the Company; and WHEREAS, Employee desires to provide such consulting services; and NOW, THEREFORE, in consideration of the premises and mutual promises herein contained, it is agreed as follows: 1. This Agreement supersedes any and all other Agreements, written or verbal, which may exist between the Company and Employee except for the Consulting Services Agreement which is attached hereto as Exhibit A and the Confidentiality Agreement which is attached hereto as Exhibit B, both of which are incorporated by reference as if set forth fully herein. This Agreement shall be of no force or effect unless and until Employee executes and delivers to Company the Consulting Services Agreement and the Confidentiality Agreement. 2. It is further expressly agreed by the Parties that this Agreement shall become effective on September 15, 2000 (the "Effective Date"). 3. The Company agrees that on or before September 30, 2000, it shall pay to Employee in one lump sum payment subject to the usual deductions for federal payroll taxes and benefits, a total payment of $125,000.00 (ONE HUNDRED TWENTY-FIVE THOUSAND DOLLARS AND NO CENTS) as the remainder of his 1999 Management Performance Bonus. SEPARATION AND RELEASE AGREEMENT - PAGE 1 4. In satisfaction of its obligation under paragraph 3(A) of the Consulting Services Agreement, the Company agrees that it shall pay to employee $250,000.08 (TWO HUNDRED FIFTY THOUSAND DOLLARS AND EIGHT CENTS) payable in 24 equal semi-monthly installments of $10,416.67 (TEN THOUSAND FOUR HUNDRED SIXTEEN DOLLARS AND SIXTY SEVEN-CENTS). 5. On or before October 1, 2000 you will return all of the Company's property in your possession including, but not limited to, records, manuals, memorandums, documents, keys, access cards, any phone cards, and all of the tangible and intangible property belonging to the Company and relating to your employment with the Company, except that the Company agrees that you may retain and shall be the owner of all of the furniture in Your office, including the portable computer and accessories previously provided by the Company. You shall, however, make this computer available to the Company by October 1, 2000, so that the Company can purge the hard drive of any confidential and proprietary information relating to the Company. You agree that you will not retain any copies or summaries, electronic or otherwise, of such property. 6. The Company further agrees that You shall retain in Your possession for Your use the automobile currently leased by the Company, a 1997 Jaguar XK8 two door convertible, account number 950110230342. The Company agrees that it shall continue to make payments toward such lease in the amount of $1,298.06 for the months of September, October, November, and December of 2000, and the month of January, 2001. You agree to return the vehicle in accordance with the terms and conditions of the lease and You further agree that You will be responsible for paying any fees or damages assessed under the terms of the lease other than the five payments of $1,298.06 described above. Beginning February 1, 2001, the Company will pay You a monthly automobile allowance in the amount of $1,300.00 and will make six such monthly payments for the months of February, March, April, May, June, July, and August of 2001. For the month of September, 2001, the Company will pay You an automobile allowance of $650.00. 7. The Company agrees to maintain in full force and effect, from September 15, 2000, to September 15, 2001, Precept's health, disability and life insurance currently available to you to the same extent and in the same manner as would be available to you as if you had remained a normal employee of Precept; provided, however, any procedure deemed ineligible pursuant to any Plan guidelines in connection with the above mentioned benefits will not be provided or paid for by Precept. 8. As a material inducement to the Company to enter into this Agreement and subject to the terms of this paragraph, Employee hereby irrevocably and unconditionally releases, acquits and forever discharges the Company and each of the Company and its parent, owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, attorneys, divisions, subsidiaries, affiliates and all persons acting by, through, under or in concert with any of them, (collectively "Releasees"), from any and all SEPARATION AND RELEASE AGREEMENT - PAGE 2 charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any nature whatsoever, known or unknown ("Claim" or "Claims") which Employee now has, owns, holds, or which Employee at any time heretofore had, owned, or held against each of the Releasees, including, but not limited to: (a) all Claims under Title VII of the Civil Rights Act of 1964, as amended, or any analogous state law claim; (b) all Claims under the Employee Retirement Income Security Act of 1974, as amended; (c) all Claims arising under the Americans With Disabilities Act of 1990, as amended; (d) all Claims arising under the Family and Medical Leave Act of 1993, as amended; (e) all Claims related to Employee's employment with the Company; (f) all Claims of unlawful discrimination based on age, sex, race, religion, national origin, handicap, disability, equal pay, sexual orientation or otherwise; (g) all Claims of wrongful discharge, breach of an implied or express employment contract, negligent or intentional infliction of emotional distress, libel, defamation, breach of privacy, fraud, breach of any implied covenant of good faith and fair dealing and any other federal, state, or local common law or statutory claims, whether in tort or in contract; (h) all Claims related to unpaid wages, salary, overtime compensation, bonuses, severance pay, vacation pay or other compensation or benefits arising out of Employee's employment with the Company; and (i) all claims arising under any federal, state or local regulation, law, code or statute. 9. The Parties agree that during the course of Your employment with the Company and pursuant to the Parties' understanding of Your Employment Agreement, the Company was obligated to disclose to You, and did disclose to You, confidential and proprietary information, the disclosure of which would be harmful and deleterious to the Company. You hereby acknowledge both the Company's original obligation to disclose such information to You and that the Company did in fact disclose such information to You. You further acknowledge that pursuant to the Consulting Services Agreement, the Company is required to disclose to You additional confidential and proprietary information, the disclosure of which would be harmful and deleterious to the Company. In exchange for this consideration under the Consulting Services Agreement, and the previous consideration provided to You pursuant to Your employment agreement, You agree that for a period of one year which shall coincide with the term of the Consulting Services Agreement, You shall not engage in competition with the Company. Specifically, from September 15, 2000 to September 15, 2001, You agree not to solicit the customers of the Company with whom you had contact during the term of Your employment with the Company. You further agree that from September 15, 2000 to September 15, 2001, You will not solicit the current customers of the Company or those individuals, entities, or companies with whom You have had contact on behalf of the Company for the purpose of engaging in business with the Company. You further agree that during this time-frame, September 15, 2000 to September 15, 2001, You shall not accept employment in the same industry as the Company's Business Products Division because such employment would inevitably lead to the disclosure of the Company's confidential and proprietary information. Further, it is recognized and understood by the Parties hereto that the employees of the Company are an integral part of the Company and SEPARATION AND RELEASE AGREEMENT - PAGE 3 that it is extremely important for the Company to use its maximum efforts to prevent the loss of such employees. It is therefore understood and agreed by the Parties that, because of the nature of the business of the Company, it is necessary to afford fair protection to the Company from the loss of any such employees. Consequently, as a material inducement to the Company to enter into this Separation and Release Agreement and the Consulting Services Agreement with Employee, Employee covenants and agrees that for a period commencing on the Effective Date of this Agreement and ending six (6) months after the Effective Date of this Agreement, Employee shall not, without written permission from the Company, directly or indirectly, hire or engage or attempt to hire or engage any individual who shall have been an employee, direct seller, or subcontractor of the Company, its parent, its affiliates or its subsidiaries at any time during the two (2) year period prior to such Effective Date of this Agreement, whether for or on behalf of Employee or for any entity in which Employee shall have a direct or indirect interest (or any subsidiary or affiliate of any such entity), whether as a proprietor, partner, co-venturer, financier, investor, stockholder, director, officer, employer, employee, servant, agent, representative or otherwise. Further, Employee covenants and agrees that for a period commencing on the Effective Date of this Agreement and ending six (6) months after such Effective Date, Employee shall not, without written permission from the Company, directly or indirectly, or through any other person, firm, or corporation, or in any capacity as described in this paragraph above, induce, or attempt to induce or influence any employee, direct seller, or subcontractor of the Company, its parent, its subsidiaries or affiliates to terminate employment or relationship with the Company, its parent, its subsidiaries or affiliates when the Company or its parent, affiliates or subsidiaries desires to retain that employee's, direct seller's, subcontractor's services. 10. EMPLOYEE HAS CAREFULLY READ AND CONSIDERED THE PROVISIONS OF THIS AGREEMENT AND, HAVING DONE SO, AGREES THAT THE RESTRICTIONS SET FORTH HEREIN ARE REASONABLE AND ARE REASONABLY REQUIRED FOR THE PROTECTION OF THE BUSINESS INTERESTS AND GOODWILL OF THE EMPLOYER AND ITS BUSINESS, OFFICERS, DIRECTORS AND EMPLOYEES. EMPLOYEE FURTHER AGREES THAT THE RESTRICTIONS SET FORTH IN THIS AGREEMENT ARE NOT TO IMPAIR EMPLOYEE'S ABILITY TO SECURE EMPLOYMENT WITHIN THE FIELD OR FIELDS OF EMPLOYEE'S CHOICE, INCLUDING THOSE AREAS IN WHICH EMPLOYEE IS, IS TO BE, OR HAS BEEN EMPLOYED BY THE EMPLOYER BUT INSTEAD TO PROTECT THE CONFIDENTIALITY OF ITS CONFIDENTIAL INFORMATION AND TRADE SECRETS AND LEGITIMATE BUSINESS INTERESTS. 11. The Parties to this Agreement understand that to the extent Employee may have vested rights pursuant to Employer's group health insurance plans, group life insurance plans, and the 401(k) plan, such rights are excluded from the scope of this Agreement and are not terminated or released by it. SEPARATION AND RELEASE AGREEMENT - PAGE 4 12. Employee agrees that in all future litigation involving the Company for which the Company requests Employee's cooperation that he will fully cooperate with the Company. In return for his cooperation, Employer agrees to pay Employee for all the reasonable costs incurred by Employee due to his cooperation. 13. If Employee or the Company determine that the other has breached this Agreement, the non-breaching party will notify the party in breach of that fact in writing and the party in breach will be afforded ten (10) days to cure the breach. 14. The provisions of this Agreement shall be construed in accordance with the laws of the State of Texas without regard to its conflicts of law principles. In the event any term or condition or provision of this Agreement shall be determined to be invalid, illegal or unenforceable by a court of competent jurisdiction, the remaining terms, conditions and provisions of this Agreement shall remain in full force and effect to the extent permitted by law. 15. No waiver of any of the terms of this Agreement shall be valid unless in writing and signed by all Parties to this Agreement. No waiver or default of any term of this Agreement shall be deemed a waiver of any subsequent breach or default of the same or similar nature. This Agreement may not be changed except by writing signed by the Parties. 16. This Agreement shall be binding upon Employee and upon Employee's heirs, administrators, representatives, executors, trustees, successors and assigns, and shall inure to the benefit of Releasees and each of them, and to their heirs, administrators, representatives, executors, trustees, successors, and assigns. 17. The parties agree that the Agreement may be executed in multiple originals. 18. If either the Company or its Business Products Division are sold or if all or substantially all of the assets of the Company or the Business Products Division are sold or transferred, then all of the obligations contained in this Separation and Release Agreement and the Consulting Services Agreement shall be assumed by the purchaser or transferee as a condition of the transaction or, alternatively, the Company shall pay the remaining sums owed to Employee under paragraphs 4 and 6. 19. The provisions of this Agreement are severable and if any provision is held to be invalid or unenforceable, it shall not affect the validity or enforceability of any other provision. If the Company is unable for any reason to make all payments required under paragraph 3(A) of the Consulting Services Agreement, then paragraphs 8, 9, 11 and 13 of this Agreement shall nevertheless remain valid and enforceable. 20. This Agreement shall not be in any way construed as an admission by you or by the Company that either party has acted wrongfully with respect to the other party or any other person. SEPARATION AND RELEASE AGREEMENT - PAGE 5 21. Employee represents that he has consulted or has had sufficient opportunity to discuss with any person, including the attorney of his choice, all provisions of this Agreement, that he has carefully read and fully understands all the provisions of this Agreement, that he is competent to execute this Agreement, and that he is voluntarily entering into this Agreement of his own free will and accord, WITHOUT RELIANCE UPON ANY STATEMENT OR REPRESENTATION BY THE COMPANY, ITS ATTORNEYS, INCLUDING THE ATTORNEYS OF THE LAW FIRM OF JACKSON WALKER, L.L.P., or of any of the Parties, the Releasees, or their representatives. SEPARATION AND RELEASE AGREEMENT - PAGE 6 EXECUTED on the 15th day of September, 2000. /s/ R. L. Hassell ---------------------------- On behalf of the Company By: Its: President ACCEPTED AND AGREED TO this 15th day of September, 2000. /s/ Douglas R. Deason ---------------------------- Douglas R. Deason SEPARATION AND RELEASE AGREEMENT - PAGE 7 EXHIBIT A ENGAGEMENT OF DOUGLAS R. DEASON FOR CONSULTING SERVICES This Agreement for Precept Business Services, Inc. (the "Consulting Services Agreement") is made as of this 15 day of September, 2000, by and between Precept Business Services, Inc. ("Company"), whose mailing address is 1909 Woodall Rogers Frwy, Dallas, TX, and Douglas R. Deason ("Consultant") whose mailing address is 5808 Lupton Drive, Dallas, Tx 75225. This Consulting Services Agreement incorporates by reference as if set forth fully herein the terms and conditions of the Separation and Release Agreement between Douglas R. Deason and Precept Services, Inc. (the "Separation and Release Agreement") to which this Consulting Services Agreement is attached as Exhibit A and the terms and conditions of the Confidentiality Agreement between Douglas R. Deason and Precept Services, Inc. (the "Confidentiality Agreement"), which is attached to the Separation and Release Agreement as Exhibit B. None of these agreements shall be effective until all have been duly executed and signed by the Company and the Consultant. For and in consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, the parties hereto agree as follows: 1. SCOPE OF WORK A. Subject to the terms and conditions set forth hereinafter, Company engages Consultant to furnish consulting services as Company and Consultant may agree upon. Consultant shall use his best efforts and professional judgment in the performance of such services, consistent with accepted industry practice. Consultant may provide services other than the services provided for under this Consulting Services Agreement if such other services do not conflict with the terms, conditions, and obligations of this Consulting Services Agreement. B. Upon the request of Company and otherwise periodically, Consultant shall report the status of his performance hereunder to Lee Hassell ("President") and such other persons as President shall designate. 2. TERM The services called for under this Consulting Services Agreement shall commence on the date hereof and shall continue for twelve (12) months. 3. CONSIDERATION AND PAYMENT -1- A. As consideration for the services provided hereunder, Company agrees to pay Consultant $250,000.08 for all services furnished hereunder payable 24 equal semi-monthly installments of $10,416.67 during the term of this Consulting Services Agreement. B. Company further agrees to provide Consultant with confidential and proprietary information, which shall be necessary for Consultant to perform the services required in this Consulting Services Agreement. Consultant agrees that in exchange for the consideration provided herein, including the disclosure of confidential and proprietary information, Consultant shall be bound by the terms and conditions of paragraph 9 of the Separation and Release Agreement which includes, among other things, a non-competition agreement. C. EMPLOYEE HAS CAREFULLY READ AND CONSIDERED THE PROVISIONS OF THIS CONSULTING SERVICES AGREEMENT AND, HAVING DONE SO, AGREES THAT THE RESTRICTIONS SET FORTH HEREIN ARE REASONABLE AND ARE REASONABLY REQUIRED FOR THE PROTECTION OF THE BUSINESS INTERESTS AND GOODWILL OF THE EMPLOYER AND ITS BUSINESS, OFFICERS, DIRECTORS AND EMPLOYEES. EMPLOYEE FURTHER AGREES THAT THE RESTRICTIONS SET FORTH IN THIS CONSULTING SERVICES AGREEMENT ARE NOT TO IMPAIR EMPLOYEE'S ABILITY TO SECURE EMPLOYMENT WITHIN THE FIELD OR FIELDS OF EMPLOYEE'S CHOICE, INCLUDING THOSE AREAS IN WHICH EMPLOYEE IS, IS TO BE, OR HAS BEEN EMPLOYED BY THE EMPLOYER BUT INSTEAD TO PROTECT THE CONFIDENTIALITY OF ITS CONFIDENTIAL INFORMATION AND TRADE SECRETS AND LEGITIMATE BUSINESS INTERESTS. 4. RELATIONSHIP . In all matters relating to this Consulting Services Agreement, Consultant shall be acting as an independent contractor to Company. Consultant is not an employee of Company under the meaning or application of any federal or state unemployment or insurance laws or worker's compensation laws, or otherwise. Consultant shall assume all liabilities or obligations imposed by any of such laws with respect to employees of Consultant in the performance of this Consulting Services Agreement. Consultant shall pay timely all local, state, and federal taxes arising from payments made to Consultant for the services provided hereunder and shall prepare and file all tax returns, including, without limitation, income, self-employment, and other taxes attributable to payments hereunder. Company shall not provide Consultant with insurance of any kind in connection with the services to be provided hereunder during or after the expiration of the term of this Consulting Services Agreement. Consultant shall not have any authority to assume or create any obligation, express or -2- implied, on behalf of the Company. Consultant shall have no authority to represent himself as an agent, employee, or in any other capacity of Company unless given written authorization. 5. CONFLICT OF INTEREST During the term of this Consulting Services Agreement, Consultant shall not act as a sales agent, or in a liaison capacity as an officer, employee, agent, or representative of any party which is a competitor or prospective competitor of the Company without the prior written consent of the Company. Further, Employee expressly agrees that he will comply with the terms and conditions provided in paragraph 9 of the Separation and Release Agreement. 6. SAFETY AND SECURITY REGULATIONS Consultant shall comply with all applicable Company security and safety regulations, if Consultant renders services on the premises of any facilities controlled by Company. Consultant shall not remove any Company proprietary information therefrom without the expressed written consent of Company. 7. RESPONSIBILITIES A. Company shall provide all equipment and material necessary to perform the services required hereunder which Consultant shall deliver to Company upon termination of this Consulting Services Agreement. B. All information developed under this Consulting Services Agreement, of whatever type, relating to the work performed under this Consulting Services Agreement shall be the exclusive property of Company. All material, research, and information developed or any instruments, products whether manufactured, assembled, or otherwise purchased by Consultant pursuant to this Consulting Services Agreement and paid for by Company, either directly or through reimbursement of consultant's expenses, shall be the exclusive property of Company. Upon termination of this Consulting Services Agreement, Consultant shall deliver such items to Company or shall dispose of them, as directed by Company. If such property is not returned to Company upon termination of this Consulting Services Agreement, Company may at its sole discretion deduct from any payments due Consultant the value of such property. 8. INDEMNITY Company shall save and hold Consult harmless from and against all suits or claims incurred by Company in connection with Consultant's performance of this Consulting Services Agreement, whether such claims shall be made by Consultant, by an employee of Consultant -3- or by any other person. If any judgment shall be rendered against Company in any such action, Company shall satisfy and discharge the same without cost or expense to Consultant. This indemnity shall not apply to claims, actions, or suits resulting from Consultant's negligence. 9. ASSIGNMENT This Consulting Services Agreement shall not be transferred or assigned by Consultant without prior written consent of Company. 10. APPLICABLE LAW Any controversy or claim arising out of or relating to this Consulting Services Agreement shall be governed by the laws of the State of Texas. Any litigation under this Consulting Services Agreement, if commenced by Consultant, shall be brought in a court of competent jurisdiction in Dallas County, State of Texas. 11. CONFIDENTIALITY Concurrent with the execution of this Consulting Services Agreement, Consultant shall execute the Confidentiality Agreement provided to him by Company which is attached to the Separation and Release Agreement as Exhibit B and incorporated by reference as if set forth fully herein. Consultant shall deliver such executed Confidentiality Agreement with an executed copy of this Consulting Services Agreement to Company at the address set forth hereinafter. This Consulting Services Agreement shall be of no force or effect unless and until Consultant executes and delivers such Confidentiality Agreement to Company. 12. ENTIRE AGREEMENT This Consulting Services Agreement and the terms and conditions set forth in the Separation and Release Agreement and the Confidentiality Agreement constitute the entire agreement and understanding between the parties hereto and shall supersede and replace any prior agreements, discussions, negotiations, or understandings between the parties, whether written or oral, express or implied, governing or pertaining to the services to be performed hereunder. 13. SEVERABILITY. The provisions of this Consulting Services Agreement are severable and if any provision is held to be invalid or unenforceable, it shall not affect the validity or enforceability of any other provision. If the Company is unable for any reason to make all payments required under paragraph 3(A) of the Consulting Services Agreement, then paragraphs 8, 9, 11 and 13 of the Separation and Release Agreement shall nevertheless remain valid and enforceable. -4- /s/ R. L. Hassell --------------------------- On behalf of the Company By: Its: President ACCEPTED AND AGREED TO this 15th day of September, 2000. /s/ Douglas R. Deason ---------------------------- Douglas R. Deason, Consultant -5- EXHIBIT B CONFIDENTIALITY AGREEMENT BETWEEN DOUGLAS DEASON AND PRECEPT BUSINESS SERVICES, INC. This Agreement for Precept Business Services, Inc. (the "Confidentiality Agreement") is made as of this 15 day of September, 2000, by and between Precept Business Services, Inc. ("Company"), whose mailing address is 1909 Woodall Rogers Frwy, Dallas, TX, and Douglas R. Deason ("Consultant") whose mailing address is 5808 Lupton Drive, Dallas, Tx 75225. This Confidentiality Agreement incorporates by reference as if set forth fully herein the terms and conditions of the Separation and Release Agreement between Douglas R. Deason and Precept Services, Inc. (the "Separation and Release Agreement") to which this Confidentiality Agreement is attached as Exhibit B, and the terms and conditions of the Consulting Services Agreement between Douglas R. Deason and Precept Services, Inc. (the "Consulting Services Agreement"), which is attached as Exhibit A to the Separation and Release Agreement. None of these agreements shall be effective until all have been duly executed and signed by the Company and Consultant. Confidential Information. (a) ACKNOWLEDGMENT OF PROPRIETARY INTEREST. Consultant acknowledges the proprietary interest of Company in all Confidential Information. Consultant agrees that all Confidential Information learned by Consultant when he was employed by the Company and which he will learn during the term of the Consulting Services Agreement, or otherwise, whether developed by Consultant alone or in conjunction with others or otherwise, is and shall remain the exclusive property of Company. Consultant further acknowledges and agrees that his disclosure of any Confidential Information will result in irreparable injury and damage to Company. (b) CONFIDENTIAL INFORMATION DEFINED. "Confidential Information" means all confidential and proprietary information of Company, including without limitation (i) information derived from reports, investigations, experiments, research and work in progress, (ii) methods of operation, (iii) market data, (iv) proprietary computer programs and codes, (v) drawings, designs, plans and proposals, (vi) marketing and sales programs, (vii) client lists, (viii) historical financial information and financial projections, (ix) pricing formulae and policies, (x) all other concepts, ideas, materials and information prepared or performed for or by Company and (xi) all information related to the business, products, purchases or sales of Company or any of its suppliers and customers, other than information that is publicly available. (c) COVENANT NOT TO DIVULGE CONFIDENTIAL INFORMATION. Company is entitled to prevent the disclosure of Confidential Information. As a portion of the consideration provided by Company for the Separation and Release Agreement and the Consulting Services Agreement, and for the compensation being paid to Consultant by Company, Consultant agrees at all times during the term of the Consulting Services Agreement and thereafter to hold in strict confidence and not to disclose or allow to be disclosed to any person, firm or corporation, other than to persons engaged by -1- Company to further the business of Company, and not to use except in the pursuit of the business of Company, the Confidential Information, without the prior written consent of Company. /s/ R. L. Hassell ---------------------------- On behalf of the Company By: Its: President ACCEPTED AND AGREED TO this 15th day of September, 2000. /s/ Douglas R. Deason ----------------------------- Douglas R. Deason, Consultant -2- EX-99 5 a2026300zex-99.txt EXHIBIT 99 Exhibit 10.7 INDEMNIFICATION AGREEMENT THIS AGREEMENT is effective as of September 18, 2000, among Precept Business Services, Inc., a Texas corporation (the "Corporation"), and R.L. Hassell ("Indemnitee" ). WHEREAS, the Corporation has adopted Bylaws (the "Bylaws") providing for indemnification of the Corporation's directors and officers in accordance with Texas Business Corporation Act (the "Statute"); and WHEREAS, such Bylaws and Statute contemplate that contracts and other arrangements may be entered into with respect to indemnification of directors and officers; and WHEREAS, it is reasonable, prudent and necessary for the Corporation to obligate itself contractually to indemnify Indemnitee so that he will consent to be elected and to serve as an officer of the Corporation and will be able to serve the Corporation free from undue concern that he will not be adequately protected. NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Corporation and Indemnitee do hereby covenant and agree as follows: I. DEFINITIONS. As used in this Agreement: A. The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding against the Corporation or the Indemnitee, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party, as a witness or otherwise, by reason of the fact that Indemnitee is or was a director, officer, agent or advisor of the Corporation, by reason of any action taken by him or of any inaction on his part while acting as a director, officer, agent or advisor of the Corporation, or by reason of the fact that he is or was serving at the request of the Corporation as a director, officer, employee, agent or advisor of another corporation, partnership, joint venture, trust, limited liability company or other entity or enterprise, in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement; provided that any such action which is brought by Indemnitee against the Corporation or directors or officers of the Corporation, other than an action brought by Indemnitee to enforce his rights under this Agreement, shall not be deemed a Proceeding without prior approval by a majority of the Board of Directors of the Corporation. B. The term "Expenses" shall include, without limitation, any liabilities, judgments, fines and penalties against Indemnitee in connection with a Proceeding; and all reasonable attorneys' fees and disbursements, accountants' fees and disbursements, private investigation fees and disbursements, retainers, court costs, transcript costs, fees of experts, fees and expenses of witnesses, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses reasonably incurred by or for Indemnitee in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding or establishing Indemnitee's right or entitlement to indemnification for any of the foregoing. D. The term "substantiating documentation" shall mean copies of bills or invoices for costs incurred by or for Indemnitee, or copies of court or agency orders or decrees or settlement agreements, as the case may be, accompanied by a sworn statement from Indemnitee that such bills, invoices, court or agency orders or decrees or settlement agreements, represent costs or liabilities meeting the definition of "Expenses" herein. E. The terms "he" and "his" have been used for convenience and mean "she" and "her" if Indemnitee is female. II. INDEMNITY OF DIRECTOR OR OFFICER. The Corporation hereby agrees to hold harmless and indemnify Indemnitee against any and all Expenses incurred by reason of the fact that Indemnitee is or was a director, officer, agent or advisor of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, agent or advisor of another corporation, partnership, joint venture, trust, limited liability company or other entity or enterprise, but only if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation and, in the case of a criminal proceeding, did not believe that his conduct was unlawful. The termination of any Proceeding by judgment, order of the court, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the Corporation, and with respect to any criminal proceeding, that such person believed that his conduct was unlawful. The indemnification provided herein shall not be applicable in the event that the Expenses are finally adjudicated to have resulted from the gross negligence or willful misconduct of the Indemnitee. III. ADVANCES OF EXPENSES. Expenses (other than judgments, penalties, fines and settlements) incurred by Indemnitee shall be paid by the Corporation, in advance of the final disposition of the Proceeding and after receipt of Indemnitee's written request accompanied by substantiating documentation and Indemnitee's unsecured undertaking to repay such amount to the extent it is ultimately determined that Indemnitee is not entitled to indemnification. IV. UNDERTAKING BY INDEMNITEE. Indemnitee hereby undertakes to repay to the Corporation any advances of Expenses pursuant to Section III hereof to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification. V. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Articles of Incorporation and Bylaws of the Corporation, the Statute, any policy or policies of directors' and officers' liability insurance, any agreement, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. However, Indemnitee shall reimburse the Corporation for amounts paid to him pursuant to such other rights to the extent such payments duplicate any payments received pursuant to this Agreement. VI. SETTLEMENT OF CLAIMS. The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without the Corporation's written consent which shall not be unreasonably withheld; provided, that consent will be deemed given if the Corporation does not object to any such settlement by written notice to Indemnitee within ten (10) days following Indemnitee's request for consent; and provided further, that in the event the Corporation does not consent to any such settlement, the Corporation's indemnification of Indemnitee hereunder shall become absolute and not subject to any defenses or counter claims arising under paragraph II hereunder or otherwise. The Corporation shall not be liable to indemnify Indemnitee under this Agreement with regard to any judicial award if the Corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. VII. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION. A. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Texas. B. This Agreement shall be binding upon the Corporation, its successors and assigns, and shall inure to the benefit of Indemnitee, his heirs, personal representatives and assigns and to the benefit of the Corporation, its successors and assigns. C. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the Corporation and Indemnitee. VII. NOTICE. Notice to the Corporation shall be directed to 1909 Woodall Rogers Freeway, Suite 500, Dallas, TX 75201. Attention: Secretary. Notice to Indemnitee shall be directed to Indemnitee at his address most recently furnished to the Corporation. The foregoing addresses may be changed from time to time by the addressee upon notice to the other parties. Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. CORPORATION: PRECEPT BUSINESS SERVICES, INC. By: /s/ Darwin Deason ------------------------------------ Its: Chairman ----------------------------------- INDEMNITEE: /s/ R.L. Hassell --------------------------------------- R.L. Hassell -----END PRIVACY-ENHANCED MESSAGE-----