-----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, P8OTe3lBbZd48Ka2LGpYW+QfU55wpGak4BkC0ds510a4J69lg+xPlH1WDNOfTONH ZELrXwWznZajutZMyO86bg== 0001157523-05-002734.txt : 20050322 0001157523-05-002734.hdr.sgml : 20050322 20050322104450 ACCESSION NUMBER: 0001157523-05-002734 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050131 FILED AS OF DATE: 20050322 DATE AS OF CHANGE: 20050322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEGIS ASSESSMENTS INC CENTRAL INDEX KEY: 0001183075 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 721525702 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-50213 FILM NUMBER: 05695758 BUSINESS ADDRESS: STREET 1: 4100 NEWPORT PLACE STREET 2: SUITE 660 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 877.718.7599 10QSB 1 a4845871.txt AEGIS ASSESSMENTS INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2005 ------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to _____________ Commission file number 000-50213 AEGIS ASSESSMENTS, INC. (Exact name of small business issuer as specified in its charter) Delaware 72-1525702 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 7975 N. Hayden Road, Suite D-363, Scottsdale, AZ 85258 (Address of principal executive offices) 480.778.9140 (Issuer's telephone number) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the issuer's common equity outstanding as of March 18, 2005 was approximately 25,386,891 shares of common stock, par value $.001. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] INDEX TO FORM 10-QSB FILING FOR THE PERIOD ENDED JANUARY 31, 2005 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements............................................. 1 Balance Sheet as of January 31, 2005....................... 1-2 Statements of Operations for the Three and Six Month Periods Ended January 31, 2005 and January 31, 2004........... 3 Statements of Cash Flows for the Three and Six month periods ended January 31, 2005 and January 31, 2004............................. 4-5 Notes to the Condensed Financial Statements................ 6-14 Item 2. Management's Discussion and Analysis............................. 15 Item 3. Controls and Procedures........................................ 30 PART II OTHER INFORMATION Item 1. Legal Proceedings .............................................. 31 Item 2. Changes in Securities .......................................... 32 Item 6. Exhibits and Reports on Form 8-K................................ 35 SIGNATURES 35 PART I- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AEGIS ASSESSMENTS, INC. (A Development Stage Company) CONDENSED BALANCE SHEET JANUARY 31, 2005 (Unaudited) ASSETS Current Assets Cash $ 164,014 Accounts Receivable 18,545 Inventory 406,488 ------------ TOTAL CURRENT ASSETS 589,047 Property and equipment, net of accumulated depreciation of $52,497 236,334 U.S. Treasury Bonds - Restricted (see Note 4) 5,000,000 Other Assets 14,616 ------------ TOTAL ASSETS $ 5,839,997 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable $ 72,307 Accrued Payroll 112,567 Deferred Revenue 350,000 Notes Payable 55,714 ------------ TOTAL CURRENT LIABILITIES 590,588 ------------ 1 AEGIS ASSESSMENTS, INC. (A Development Stage Company) CONDENSED BALANCE SHEET JANUARY 31, 2005 (Unaudited) (CONTINUED) Series A 8% convertible preferred stock $.001 par value; 200,000 shares authorized Shareholders' equity: Preferred stock, $.001 par value, 10,000,000 shares authorized for issuance in one or more series. Common stock $.001 par value; 100,000,000 shares authorized; 26,450,003 shares issued and outstanding at January 31, 2005 26,451 Additional paid-in capital 19,882,153 Stock subscription receivable - related party (67,500) Stock subscription receivable (175,000) Deficit accumulated during the development stage (14,416,695) ------------ TOTAL SHAREHOLDERS' EQUITY 5,249,409 ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,839,997 ============ The accompanying notes are an integral part of the condensed financial statements 2 AEGIS ASSESSMENTS, INC. (A Development Stage Company) CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the period For the three For the three For the six For the six from months ended months ended months ended months ended January 16,2002 January January January January (inception) to 31,2005 31,2004 31,2005 31,2004 January 31,2005 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ------------ ------------- ------------ Revenue $ 6,000 -- $ 6,000 -- $ 18,545 Cost of equipment sold 4,500 4,500 8,100 General and administrative expenses - other $ 3,350,751 $ 434,843 3,893,651 $ 829,583 14,139,275 Consulting fees - related party 53,588 287,065 ---------------------------------------------------------------------------- Loss before provision for income taxes (3,349,251) (434,843) (3,892,151) (883,171) $(14,415,895) Provision for income taxes -- 800 ---------------------------------------------------------------------------- NET LOSS $ (3,349,251) $ (434,843) $ (3,892,151) $ (883,171) $(14,416,695) ============================================================================ NET LOSS AVAILABLE TO COMMON SHAREHOLDERS PER COMMON SHARE - BASIC AND DILUTED $ (0.14) $ (0.03) $ (0.19) $ (0.07) $ (1.08) ---------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES - BASIC AND DILUTED 23,112,141 13,035,883 20,875,174 12,553,770 13,379,163 ============================================================================
The accompanying notes are an integral part of the condensed financial statements 3 Aegis Assessments, Inc. (A Development Stage Company) Condensed Statements of Cash Flows (Unaudited)
For the period from For the six For the six January 16,2002 months ended months ended (inception) to January 31,2005 January 31,2004 January 31,2005 (Unaudited) (Unaudited) (Unaudited) --------------- --------------- ------------------- Cash flows from operating activities: Net loss $ (3,892,151) $ (883,171) $(14,416,695) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash items included in the net loss: Depreciation 34,505 3,739 52,498 Amortization and expenses related to stock and stock options 2,824,565 364,927 11,053,125 The intrinsic value of non-detachable conversion rights of the Series A 8% preferred stock 9,800 Issuance of stock for payment of interest 1,184 3,266 Increase in Assets Accounts Receivable (6,000) (18,545) Inventory (210,088) (406,488) Increase in Other Assets (9,250) (14,616) Increase in Liabilities: Accrued payroll 96,148 (43,163) 112,567 Accounts payable 18,993 (7,243) 72,307 Accrued interest - officers (1,906) Deferred Revenue 350,000 Note Payable 53,381 55,714 ----------------- ----------------- -------------------- Net cash used in operating activities (1,080,647) (574,883) (3,147,067)
The accompanying notes are an integral part of the condensed financial statements 4 (CONTINUED) Aegis Assessments, Inc. (A Development Stage Company) Condensed Statements of Cash Flows (Unaudited)
For the period from For the six For the six January 16,2002 months ended months ended (inception) to January 31,2005 January 31,2004 January 31,2005 (Unaudited) (Unaudited) (Unaudited) --------------- --------------- ---------------- Cash flows from operating activities: Cash flows used in investing activities: Payments to acquire property and equipment $ (30,475) $ (46,473) $ (288,831) Net cash flows used in investing activities (30,475) (46,473) (288,831) Cash flows provided by financing activities: Proceeds from issuance of preferred stock - 90,100 Proceeds from issuance of common stock - related party 22,500 Proceeds from issuance of common stock 554,405 556,175 2,774,407 Proceeds from exercise of warrants 184,654 103,708 630,405 Proceeds from exercise of options 38,500 38,500 Proceeds from issuance of debenture - 17,000 Proceeds from notes payable and advances - related parties 583 17,000 Stock subscription receivable - 10,000 ------------- --------------- ---------------- Net cash provided financing activities 777,559 660,466 3,599,912 Net increase in cash and cash equivalents (333,563) 39,110 164,014 Cash and cash equivalents, beginning of period 497,577 32,932 - ------------- --------------- --------------- Cash and cash equivalents, end of period $ 164,014 $ 72,042 $ 164,014 ============= =============== =============== Exercise of options applied against notes $ 17,000 $ 17,000 ========= =============== Payment of accounts payable with stock $ 12,025 $ 12,025 ========= =============== Conversion of preferred stock to common stock $ 27,500 $ 27,500 ========= =============== Issuance of common stock for services $ 8,095,206 =============== Issuance of common stock for U.S. Treasury Bonds $5,000,000 ------------- Issuance of common stock for note - related party $ 67,500 ===============
The accompanying notes are an integral part of the condensed financial statements 5 Aegis Assessments, Inc. (A Development Stage Company) Notes To Financial Statements (unaudited) For The Six And Three Months Ended January 31, 2005 (Unaudited) and January 31, 2004 (Unaudited), For The Period January 16, 2002 (inception) Through January 31, 2005 This Quarterly Report on Form 10-QSB, including the Notes to the Condensed Financial Statements, contains forward-looking statements. The words "believe", "expect", "anticipate", "intends", "projects", and similar expressions identify forward-looking statements. Such statements may include, but are not limited to, projections regarding demand for the Company's products, the impact of the Company's development and manufacturing processes on its research and development costs, future research and development expenditures, and the Company's ability to obtain new financing as well as assumptions related to the foregoing. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 6 1. Basis of Presentation The accompanying unaudited condensed financial statements include all adjustments management believes are necessary for a fair presentation of the Company's financial position at January 31, 2005 and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying condensed financial statements should be read in conjunction with our audited financial statements and footnotes as of and for the year ended July 31, 2004, included in our Annual Report on Form 10-KSB. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates and assumptions on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and assumptions routinely require adjustment. US GAAP requires management to make estimates and judgments in several areas including those related to the capitalization of development costs of the Company's software, the valuation of the recoverability of those costs, and the fair value of stock-based compensation. Actual results in these particular areas could differ from those estimates. 2. Summary of Significant Accounting Policies New Accounting Pronouncements In November 2004, the Financial Accounting Standard board issued FAS 151 - -"Inventory Costs-an amendment of ARB No. 43, Chapter 4." This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges in all cases. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of FAS 151 is not expected to have a material impact on the Company. Development Stage Operations Aegis Assessments, Inc. (a Development Stage Company) (the "Company") is a development stage company and has limited operating history with insignificant revenues. The Company was incorporated under the laws of the State of Delaware on January 16, 2002. As of July 31, 2004 the Company completed development of its core product, a specialized emergency response and communication systems for law enforcement agencies at all levels, the U.S. Department of Defense, and select commercial firms. The Company refers to this product as the "Aegis SafetyNet Radio Bridge or "Radio Bridge" system. The Company is now engaged in producing the systems and establishing sales distribution channels. Initial Production and Sales Activity In May 2004 the Company received its first purchase order for the Aegis SafetyNet Radio Bridge system and began production. The initial $2.4 million purchase order was accompanied by a progress payment of $350,000 against the first units. The progress payment was recorded as deferred revenue. The Company anticipates significant involvement in the distributor's resale activities and will not record revenue related to the units until they are sold to end-users. 7 An additional Radio Bridge was sold to the U.S. government for evaluation in June 2004. The sale was recorded and the receivable remains outstanding at January 31, 2005. Because the Company expects collection of this receivable, it does not believe an allowance for doubtful accounts is necessary at January 31, 2005. Income Taxes The Company accounts for income taxes under the asset and liability method, whereby, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. As of January 31, 2005, the Company has provided a 100% valuation allowance for the deferred tax asset, since management has not been able to determine that the realization of that asset is more likely than not. Basic and Diluted Loss Per Share The basic loss per common share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed in the same way as basic loss per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive. As of January 31, 2005, the Company had 6,068,200 outstanding stock options, and warrants that can be converted into 634,142 shares of common stock. The options and warrants would have an anti-dilutive effect and, therefore, are not included in diluted loss per share. 8 Property, Plant and Equipment Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods, generally accelerated depreciation, for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows: Office equipment 3 years Shop equipment 5 years Office furniture 7 years Product Demonstration Equipment 5 years Stock-Based Compensation The Company accounts for its two stock option plans and other stock-based employee compensation using the intrinsic value method and related interpretations, as described more fully in the Company's annual report on Form 10-KSB for the year ended July 31, 2004. Accordingly, compensation expense is recorded on the date of grant only to the extent the current market price of the underlying stock exceeds the option exercise price. Had compensation expense been determined based on the fair values at dates of grant for its stock options under the fair value approach, net loss and net loss per share would have been reported as indicated in the pro forma results below:
Three Months Ended Six Months Ended January 31, January 31, 2005 2004 2005 2004 ------------ ----------- ------------ ---------- Net loss, as reported $ (3,349,251) $ (434,843) $ (3,892,151) $ (883,171) Add: Stock-based compensation expense included in reporting net loss Deduct: Stock based employee compensation expense determined under fair value based (231,000) (7,609) (231,000) (26,633) method ------------ ---------- ------------ --------------- Pro forma net loss $ (3,580,251) $ (442,452) $ (4,123,151) $ (909,804) Net loss per share, as reported (0.14) (0.03) (0.19) (0.07) Net loss per share, pro forma (0.15) (0.03) (0.20) (0.07)
9 The fair value under FAS 123 for options granted were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: Expected life (years) 3 Interest rate 3.00% Volatility 0% Dividend yield 0 Research And Development And Software Development Research and development costs are charged to expense as incurred. The costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. These capitalized costs will be subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in hardware and software technologies. Costs that will be capitalized include direct labor and related overhead. Amortization of capitalized software development costs will begin when the product is available for general release. No computer software costs are currently capitalized. Derivative Swap Transaction On November 23, 2004, the Company received $5,000,000 in U.S. Treasury bonds in a private placement of the Company's common stock. Subsequently, the Company entered into a derivative swap transaction in which the bonds, including the interest earned on the bonds during the 24-month period of the swap agreement, have been pledged as security. See Note 4 below. The accrued net obligation due under the agreement, if any, is periodically recorded as a liability. However, because accrued net amounts due the Company are not fully secured, a reserve for 100% of the net amount due the Company under the agreement in excess of the amount of the bonds has been established. As of January 31, 2005, the net amount due the Company, and the amount of the reserve, was $2,736,375. 3. Related Party Transactions In September 2004, a member of the board of directors exercised his option to acquire 20,000 shares for $.30 per share. On September 14, 2004, Ken Edge resigned as officer and director. Under terms of the Company's stock option plan, options held by employees expire if not exercised prior to termination of employment. Mr. Edge did not exercise his option and his 1.2 million options expired on September 14, 2004. On November 29, 2004, the Company borrowed $80,000 from a shareholder pursuant to a promissory note, with an interest rate of 10%. As additional consideration for entering into the note, the Company issued the shareholder 30,000 restricted shares of its common stack. On December 10, 2004, the Company issued options to acquire 2,310,000 common shares to a group including officers, directors, and employees. The option price is $1.20, the market price of the stock on the date of issue. 10 4. Stock Transactions Common Stock In July 2003, through a private placement the Company authorized 300,000 equity units, each of which consisted of one share of the Company's common stock, one warrant to acquire one share of the Company's common stock at $.50 per share, with an exercise period that expires six months after the purchase, and one warrant to acquire one share of the Company's common stock at $1.50 per share, with an exercise period that expires 18 months after purchase. As of January 31, 2005, a total of 254,667 of the units were sold for a total of $382,000, and 221,667 of the warrants were exercised for a total of $110,834. No units were sold and no warrants were exercised during the six months ended January 31, 2005. In October 2003, through a private placement the Company authorized the sale of 2,000,000 equity units for $1.50 per unit. Each unit consists of one share of common stock and one warrant to purchase a share of common stock for $.50, with an exercise period that expires six months after the unit is purchased. No units were sold prior to October 31, 2003. As of January 31, 2005 the Company had sold 1,279,969 units for a total of $1,919,955, and 1,039,146 of the warrants were exercised for a total of $519,574. Of these amounts, 16,242 of the units were sold and 146,833 of the warrants were exercised during the three months ended January 31, 2005. In November 2004, the Company authorized through a private placement the sale of 2,000,000 equity units for $1.00 per unit. Each unit consists of one share of common stock and one warrant to purchase a share of common stock for $.50, with an exercise period that expires six months after the unit is purchased. As of January 31, 2005, the Company has sold 251,150 units for a total of $251,150. No warrants have been exercised to date. On November 23, 2004, the Company entered into a private placement of the Company's common stock. Under terms of the agreement the Company sold 5,000,000 shares of stock in exchange for $5,000,000 in U.S. Treasury Bonds. A security agreement covering the bonds was subsequently granted another party incidental to a separate transaction. (See paragraph below). On November 23, 2004, the Company entered into an equity swap transaction with Cogent Capital Corporation (Cogent). Under terms of the agreement the Company paid Cogent $50,000 in cash, and agreed to pay an amount equal to the interest on $5 million, at LIBOR plus 1.25%, for the next 24 months. In addition, the Company agreed to pay Cogent an amount equal to the decrease in value of 4,000,000 shares of the Company's common stock below $1.00 per share, its fair market value at the date of the agreement. Cogent agreed to pay the Company an amount equal to the increase in value of 4,000,000 shares of the Company's common stock above $1.00 per share. The agreement is for 24 months, and the settlement between the Company and Cogent is to be paid in cash at the termination of the agreement. The Company's potential obligation under the swap transaction is secured with U.S. Treasury Bonds received in a private placement of the Company's stock (see paragraph above), including all interest earned on the bonds. The Company also received from Cogent a call option on 4,000,000 shares of Aegis' common stock. The option is callable only on November 23, 2006, for the market price on that date. 11 On December 22, 2004 the Company terminated the employment of its vice president. Under terms of the Company's stock option plan, options held by employees expire if not exercised prior to termination of employment. This employee did not exercise his option and his 1.25 million options expired on December 22, 2004. In December 2004, 770,000 shares of the Company's restricted common shares were issued to a consultant in exchange for a $77,000 note due in 90 days and future services totaling $ 693,000, based on $1.00 per share, which was the fair value of the Company's common stock on the date of issuance. In December 2004, the Company granted an option to acquire 500,000 shares of the Company's unrestricted common shares for $.10 a share to a consultant in exchange for future services totaling $825,000, based on $1.75 per share, which was the fair value of the Company's common stock on the date of issuance. The option was also exercised in December 2004 via a note for $50,000 payable 90 days from the date of issue. In January 2005, the Company granted an option to acquire 480,000 shares of the Company's unrestricted common shares for $.10 a share to a consultant in exchange for future services totaling $744,000, based on $1.65 per share, which was the fair value of the Company's common stock on the date of issuance. The option was also exercised in January 2005 via a note for $48,000 payable 90 days from the date of issue. In January 2005, the Company granted an option to acquire 115,000 shares of the Company's unrestricted common shares for $.13 a share to a consultant in exchange for future services totaling $169,050, based on $1.60 per share, which was the fair value of the Company's common stock on the date of issuance. In January 2005, the Company granted an option to acquire 103,500 shares of the Company's unrestricted common shares for $.13 a share to a consultant in exchange for future services totaling $133,515, based on $1.42 per share, which was the fair value of the Company's common stock on the date of issuance. In January 2005, a former consultant exercised his option to acquire 10,000 shares for $1.00 per share. In January 2005, 260,000 shares of the Company's restricted common shares were issued to consultants in exchange for future services totaling $ 260,000, based on $1.00 per share, which was the fair value of the Company's common stock on the date of issuance. 5. Lease Agreements In October 2003, the Company entered into a lease agreement for an industrial building. The lease had an initial term of eighteen months with an option to extend the lease for an additional six-month term thereafter. The monthly payment under the lease is $2,250. Upon execution of the lease the Company paid the first and last months lease payment and a security deposit of $7,000. The facility is used for product research and development. The Company arranged for an early termination of the lease and vacated the facility in February 2005. 12 On March 1, 2004 the Company moved its corporate headquarters to Scottsdale, Arizona. The Company signed a three-year lease calling for monthly payments of $4,963.13 beginning March 1, 2004. 6. Commitments and Contingencies Financial Results, Liquidity and Management's Plan (Unaudited) The Company has incurred net losses since its inception in January 2002 and has no established sources of revenue. Despite its negative cash flows from operations the Company has been able to obtain additional operating capital through private funding sources. Management's plans include the continued development of the Company's SafetyNet products and a client awareness program that it believes will enhance its ability to generate revenues from the sale of the Company's products. The Company has relied upon equity funding and loans from shareholders since inception. During the quarter ended January 31, 2005, the Company financed its operations through private equity funding and negligible revenues. No assurances can be given that the Company can obtain sufficient working capital through the sale of the Company's securities and borrowing, or that the sale of the SafetyNet products will generate sufficient revenues in the future to sustain ongoing operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Preferred Stock From November 2002 through January 2003, the Company sold 18,020 shares of its Series A Preferred Stock (the "preferred stock"). A question arose as to the propriety of the Company's reliance upon a section of the Securities Act of 1933 that the preferred stock was exempt from registration. The potential consequence of the shares not being subject to the exemption created a right of rescission for each investor amounting to the total of their investment. As of October 31, 2003 all the preferred shareholders had exercised their right to convert their preferred shares into common shares. It is possible that their right of rescission may survive the conversion. However, no provision for this contingency has been made in the accompanying financial statements. Litigation In September 2003, the Company filed a complaint in California Superior Court against two former officers of the Company and a related company (the "defendants"), alleging fraud, deceit, conspiracy, breach of contract and seeking rescission of agreements made in April and August 2002 and the return of the cancelled stock certificates representing 1,000,000 cancelled shares of the Company's common stock. In a preliminary ruling, the court ordered that the disputed stock certificates be held at two brokerage firms until the matter is resolved. If the Company prevails in this action, the stock will be considered cancelled. Until the court resolves this matter, the shares are included in common shares outstanding although the Company's position is that the stock has been validly cancelled. The Company believed that if they brought suit against the defendants, a cross-complaint would be filed in retaliation. The defendants have filed an amended cross complaint alleging conversion, breach of duty to transfer securities, breach of contract, defamation, and unfair business practices. 13 The Company intends to vigorously prosecute its complaint and defend the cross-complaint. In the event of an unfavorable outcome of the defense against the cross-complaint, the award of damages to defendants could be material. The Company does not have director and officer insurance or some other form of insurance covering the period that gave rise to these events. The Company believes that the merits of its case are substantial and that the Company will prevail in the matter. If the Company prevails in the pending litigation, there is the potential of a contingent gain of an amount not to exceed $10,000 In May 2004, we entered into an exclusive distribution agreement with JAD Corporation of America to serve as our domestic distributor based on JAD's representations to us that it had sufficient resources, manpower and expertise to market the SafetyNet(TM) RadioBridge(TM) nationally. JAD's marketing efforts did not result in sales to end-users and we entered into discussions with JAD about reducing the size of the territory covered by the distribution agreement and amending other provisions of that agreement. On December 30, 2004 JAD notified the company that it intended to rescind the distribution agreement by filing a complaint against the company in Los Angeles County Superior Court, which included causes of action to terminate and rescind the distribution agreement, and for breach of contract. The principal of JAD, Joseph Dussich, also appeared as a plaintiff in a separate cause of action in the complaint to rescind and terminate his consulting agreement with the Company. There were also additional causes of action arising from the business relationship between the parties. The Company believes the case should be heard in Arizona and not California and has filed a motion to quash service of the complaint. We were also granted a protective order by the Los Angeles County Superior Court limiting discovery in the case to jurisdictional issues. The company further reserves the right to assert that the notices of termination were not in compliance with the respective agreements between the parties and were a negotiation tool to induce a modification of the agreements favorable to JAD and Dussich. In the interim, to mitigate any adverse consequences that may result from a termination of our relationship with JAD, we have begun negotiating agreements with new dealers and potential distributors that we believe will result in increased sales of our products to our end-users. 7. Subsequent Events In October 2003, through a private placement, the Company authorized the sale of 2,000,000 equity units for $1.50 per unit. Each unit consists of one share of common stock and one warrant to purchase a share of common stock for $.50, with an exercise period that expires six months after the unit is purchased. No units were sold prior to October 31, 2003. As of March 21, 2005 the Company had sold 1,279,969 units for a total of $1,919,955; and 1,039,146 of the warrants were exercised for a total of $519,574. Of these amounts, 16,242 of the units were sold and 146,833 of the warrants were exercised during the three months ended January 31, 2005. In November 2004, the Company authorized through a private placement the sale of 2,000,000 equity units for $1.00 per unit. Each unit consists of one share of common stock and one warrant to purchase a share of common stock for $.50, with an exercise period that expires six months after the unit is purchased. As of March 21, 2005 the Company has sold 266,150 units for a total of $266,150. No warrants have been exercised to date. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the period ended January 31, 2005, this "Management's Discussion and Analysis" should be read in conjunction with the Financial Statements, including the related notes, appearing in Item 1 of this Quarterly Report. The preparation of this Quarterly Report on Form 10-QSB requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results reported in the future will not differ from those estimates or that revisions of these estimates may not become necessary in the future. Forward Looking Statements This portion of this Quarterly Report on Form 10-QSB, includes statements that constitute "forward-looking statements." These forward-looking statements are often characterized by the terms "may," "believes," "projects," "expects," or "anticipates," and do not reflect historical facts. Specific forward-looking statements contained in this portion of the Quarterly Report include, but are not limited to the Company's (i) expectation that the private placement and related transactions will facilitate its attempt to obtain a listing of its common stock on the American Stock Exchange; (ii) expectation that it will begin generating significant revenues from the sale of its products rather than equity or debt financings; (iii) plan to allocate any funds it receives to expanding production capabilities, establishing a distribution channel for products, hiring additional personnel for a sales ramp-up, and meeting requirements to secure acceptance for listing its stock on the American Stock Exchange; (iv) belief that its client awareness program will enhance its ability to generate revenues from the sale of its products; and (v) belief that as a result of developments with the Department of Homeland Security, it will be easier to sell RadioBridge units to state and municipal public safety agencies. Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include, but are not limited to (i) market acceptance of our products; (ii) establishment and expansion of our direct and indirect distribution channels; (iii) attracting and retaining the endorsement of key opinion-leaders in the law enforcement, fire, rescue and other emergency response communities; (iv) the level of product technology and price competition for our products; (v) the degree and rate of growth of the markets in which we compete and the accompanying demand for our products; (vi) potential delays in international and domestic orders; (vii) risks associated with rapid technological change and execution and implementation risks of new technology; (viii) new product introduction risks; (ix) ramping manufacturing production to meet demand; (x) future potential litigation resulting from alleged product related injuries; (xi) potential fluctuations in quarterly operating results; (xii) financial and budgetary constraints of prospects and customers; (xiii) fluctuations in component pricing; (xiv) adoption of new or changes in accounting policies and practices, including pronouncements promulgated by standard setting bodies; (xv) changes in legislation and governmental regulation; and (xvi) publicity that may adversely impact our business and/or industry. 15 Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled "Risk Factors", as well as other factors that we are currently unable to identify or quantify, but that may exist in the future. In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Executive Overview. Through our SafetyNet(TM) line of products, we supply wireless security solutions to public safety agencies and commercial end users for homeland security and life safety applications. Our current product is the SafetyNet(TM) RadioBridge(TM), which allows most two-way radios to be interconnected regardless of the radio's frequency, modulation or encryption scheme. We have also modified and improved the technologies that comprised our Wireless Life Safety System (WLSS) and now anticipate marketing products using that technology under the name "SafetyNet(TM) Guardian(TM) System," which allows video transmissions and voice communications from the stairwells inside buildings for commercial safety applications. 16 RECENT TRENDS. The DHS has adopted new measures to expedite the flow of fund to equip, train and prepare first responders and local law enforcement to prevent incidents and to be ready should one occur. On December 3, 2004 the Department of Homeland Security (DHS) announced the recipients of $1.66 billion in grants to states and an additional $855 million in grants to urban areas to fund first responders and support state and local resources necessary to prevent, respond and recover from acts of terrorism and other disasters. The DHS also announced the implementation of a national strategy for homeland security that includes shared responsibility and accountability in equipping first responders with the resources they need to protect American citizens. The DHS cited the continuing maturation of its grants programs, streamlined distribution process and greater accountability measures as evidence that equipment necessary for first responders to mitigate acts of terrorism will be funded by the DHS. The DHS also announced that state and local jurisdictions can expect even more support in the coming months from the DHS. We believe these trends will make it easier for our public safety customers to purchase our products. According to recent announcements by the DHS, state and local governments may now have up to 120 days to draw down funds in advance of purchase and investments, as compared to the three to five days allowed previously, so that even small localities have the buying power to purchase expensive or backordered equipment. The DHS also has hosted training seminars and coordination calls with states and urban areas to ensure that they are coordinating to prevent delays in the funding flow. 17 Recent Developments In May 2004, we entered into an exclusive distribution agreement with JAD Corporation of America to serve as our domestic distributor based on JAD's representations to us that it had sufficient resources, manpower and expertise to market the SafetyNet RadioBridge nationally. JAD's marketing efforts did not result in sales to end-users and we entered into discussions with JAD about reducing the size of the territory covered by the distribution agreement and amending other provisions of that agreement. On December 30, 2004, JAD notified us that it intended to rescind the distribution agreement by filing a complaint against the Company in Los Angeles County Superior Court, which included causes of action to terminate and rescind the distribution agreement, and for breach of contract. JAD's principal, Joseph Dussich, also appeared as a plaintiff in a separate cause of action in the complaint to rescind and terminate his consulting agreement with the Company. There were also additional causes of action arising from the business relationship between the parties. We believe the case should be heard in Arizona and not California and have filed a motion to quash service of the complaint. We were also granted a protective order by the Los Angeles County Superior Court limiting discovery in the case to jurisdictional issues. We further reserved the right to assert that the notices of termination were not in compliance with the respective agreements between the parties and were a negotiation tool to induce a modification of the agreements favorable to JAD and Dussich. In July 2004 we began a production run of the first one hundred RadioBridge units at a third-party assembly facility located in Marysville, California. We are now shifting our RadioBridge(TM) production from Marysville, California to a larger manufacturer, CirTran Corporation, with manufacturing facilities in West Valley, Utah, in the greater Salt Lake City area. CirTran is a full-service electronics contract manufacturer and has an International Organization for Standardization or "ISO", 9002 registration. CirTran builds printed circuit board assemblies, cables, and plastic injection molding systems and has a 40,000 square foot facility capable of mass-production of our products with a high level of quality control and material management. 18 Sales and Marketing Progress To mitigate any adverse consequences that may result from a termination of our relationship with JAD, we have begun negotiating agreements with new dealers and potential distributors that we believe will result in increased sales of our products to our end-users. Additionally, we are currently in negotiations for a distribution agreement in the State of Arizona with an established radio products dealer with offices throughout the state. We believe establishing a dealer network is important to provide our end-users with customer support and to allow us to access existing distribution channels for commercial applications of the RadioBridge. We recently sold our RadioBridge to and entered into distribution agreements with the following parties: o WinTec Arrowmaker, Inc., located in Tampa, Florida for use by the United States Special Operations Command, or "USSOCOM." WinTec Arrowmaker provides a full range of services to USSOCOM and supports an assortment of Department of Defense organizations; o St. Augustine, Florida Fire Department; o Office for Domestic Preparedness, the principal component of the DHS responsible for preparing the United States for acts of terrorism, for further testing and evaluation; and o Fortis Networks, Inc., for Central America, which included an initial order for one RadioBridge. Fortis began its marketing activities in Panama and has demonstrated the RadioBridge to the Panamanian National Police. We are currently working with the United States Department of Commerce to obtain the appropriate authorizations to export our products to Mexico and Central America. We have also made the following marketing efforts: o On January 20, 2005, we demonstrated the RadioBridge to first responders at the Benicia Refinery at the Valero Refining Company; o On February 10, 2005, we demonstrated the RadioBridge to the San Manuel Indian Fire Department and the California Tribal National Emergency Management Council; a representative of the Federal Emergency Management Agency was also present; o On February 15, 2005, we demonstrated the RadioBridge to a regional co-operative in the greater Chicago area consisting of the Darien Police Department, Village of Burr Ridge Police Department, and Illinois Tri-State Fire Protection District; and o We are currently negotiating with major channel partners in Virginia and Arizona to establish a national distribution network for the RadioBridge in the United States to replace JAD. Results of Operations We have incurred losses since our inception in 2002 and have relied on the sale of our equity securities and on loans from our officers to fund our operations. Until very recently, we did not generate any revenues from operations. However, we have begun filling purchase orders for our Radio Bridge product and we are recording revenues. Revenues for the three month period ended January 31, 2005 were $6,000 compared to no revenues in the comparable period in 2004. This increase in revenue is due to the sale of a RadioBridge during the period. Our general and administrative expenses other than for related parties for the three month period ended January 31, 2005 were $3,350,751, as compared to $434,843 for the comparable period during the prior year. Our operating expenses have increased as a result of the costs of developing our products, hiring additional employees and contracting with outside consultants, who are usually compensated with equity. Now that we have a finished product ready for delivery to end-users, our marketing activities have increased significantly, and we are incurring increased marketing costs, including costs associated with demonstrating our products to public safety agencies and government officials, 19 major law enforcement officials, fire department officials, federal agencies, the United States Army, and potential commercial channel partners, including distributors, dealers and independent sales representatives. We have also incurred increased costs associated with the design, preparation, and printing of marketing and product informational material, courier costs and mailing costs. Moreover, we continue to incur legal and accounting expenses and other expenses incidental to our reporting obligations as a public company and to the increase in our requirements for transactional legal and accounting services. We did not have any consulting cost - related party expense for the three month period ended January 31, 2005, nor did we incur any such costs for the three-month period ended January 31, 2005. Our loss before provision for income taxes was $(3,349,251) for the three month period ended January 31, 2005, as compared to a loss of $(434,843) for the same period for the prior year. Our net loss for the three month period ended January 31, 2005 after provision for income taxes was $(3,349,251), as compared to a loss of $(434,843) for the comparable period for the prior year. The increase was the result of an increase in the number of employees and consultants, as well as increased office and operating expenses. Liquidity and Capital Resources At January 31, 2005, we had $164,014 in cash, as compared with $72,042 in cash during the equivalent period ended January 31, 2004. The increase is due to the sale of our equity in private placement transactions and revenues from the sale of our products. On November 23, 2004, we entered into a private placement of our common stock. Under terms of the agreement we sold 5,000,000 shares of stock in exchange for $5,000,000 in U.S. Treasury Bonds. 20 On November 23, 2004, we entered into an equity swap transaction with Cogent Capital Corporation (Cogent). Under terms of the agreement we paid Cogent $50,000 in cash, and agreed to pay an amount equal to the interest on $5,000,000, at LIBOR plus 1.25%, for the next 24 months. In addition, the Company agreed to pay Cogent an amount equal to the decrease in value of four million shares of our common stock below $1.25 per share, its fair market value at the date of the agreement. Cogent agreed to pay us an amount equal to the increase in value of 4,000,000 shares of our common stock above $1.25 per share. The agreement is for 24 months, and the settlement between the Company and Cogent is to be paid in cash at the termination of the agreement. The Company also received from Cogent a call option on four million shares of Aegis' common stock. The option is callable on November 23, 2006, for the market price on that date. We have the ability to borrow against the Treasury Bonds from lenders that agree to take a subordinate position to Cogent, which currently has a first position security interest on the Bonds. In November 2004, we borrowed $80,000 from one of our existing shareholders using the Bonds as collateral. At January 31, 2005 we had accrued payroll liability of $112,567, as compared with $210,608 at January 31, 2004. The decrease is attributed to paying down amounts due employees from prior periods. Accounts payable, deferred revenue and notes payable totaled $478,021 at January 31, 2005, as compared to $41,731 in accounts payable at January 31, 2004. This increase was due to increased costs of operations and the deferred revenue arising from transactions with JAD Corporation of America. We held property and equipment at January 31, 2005, which was valued, net of depreciation of $52,497, at $236,334, as compared with property valued, net of depreciation of $6,087, at $66,978 at January 31, 2004. The increase is attributed to the acquisition of components for our demonstration and production products and product models, as well as the acquisition of computer equipment, office equipment, and other assets necessary and incidental to our operations. Our total assets at January 31, 2005 were $5,839,997, as compared with $148,270 at January 31, 2004. We believe we have sufficient funds currently available to satisfy our cash requirements for the next six months. Our goal is to raise an additional $3,000,000 in equity financing during the next six months, to be allocated to expanding our production capabilities, establishing a distribution channel for our products and hiring additional personnel for our sales ramp-up. We also anticipate revenues from the sale of Radio Bridges during the next 12 months; however, because sales are dependent on establishing a dealer network and customer support infrastructure to support such sales, it is difficult to project a specific sales timeline. Going Concern Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our general business strategy is unproven, and we have just begun to record revenues. To date, we have relied solely on loans from shareholders and officers and the sale of our equity securities to fund our operations. We have incurred losses since our inception and we continue to incur legal, accounting, and other business and administrative expenses. Our auditor has therefore recognized that there is substantial doubt about our ability to continue as a going concern. 21 Risk Factors An investment in our common stock involves a substantial degree of risk. Before making an investment decision, you should give careful consideration to the following risk factors in addition to the other information contained in this report. The following risk factors, however, may not reflect all of the risks associated with our business or an investment in our common stock only if you can afford to lose your entire investment. Risks Related to Our Business We have a limited operating history and there is no assurance that our company will achieve profitability. Until recently, we have had no significant operations or revenues with which to generate profits or sustain our projected operations. We have a very limited current operating history on which investors can evaluate our potential for future success. Our ability to generate revenue is uncertain and we may never achieve profitability. Potential investors should evaluate our company in light of the expenses, delays, uncertainties, and complications typically encountered by early-stage businesses, many of which will be beyond our control. These risks include: o lack of sufficient capital, o unproven business model, o marketing difficulties, o competition, and o uncertain market acceptance of our products and services. As a result of our limited operating history, our plan for growth, and the competitive nature of the markets in which we may compete, our historical financial data are of limited value in anticipating future revenue, capital requirements, and operating expenses. Our planned capital requirements and expense levels will be based in part on our expectations concerning capital investments and future revenue, which are difficult to forecast accurately due to our current stage of development. We may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenue. Our product development, marketing and general administrative expenses may increase significantly if we begin to increase our sales and expand operations. To the extent that these expenses precede or are not rapidly followed by a corresponding and commensurate increase in revenue or additional sources of financing, our business, operating results, and financial condition may be materially and adversely affected. 22 We may need significant infusions of additional capital. To date, we have relied almost exclusively on outside financing to obtain the funding necessary to operate the business. Based upon our current cash reserves and forecasted operations, we may need to obtain additional outside funding in the future in order to further satisfy our cash requirements. Our need for additional capital to finance our business strategy, operations, and growth will be greater should, among other things, revenue or expense estimates prove to be incorrect. We cannot predict the timing or amount of our capital requirements at this time. If we fail to arrange for sufficient capital on a timely basis in the future, we may be required to reduce the scope of our business activities until we can obtain adequate financing. We may not be able to obtain additional financing in sufficient amounts or on acceptable terms when needed, which could adversely affect our operating results and prospects. Debt financing must be repaid regardless of whether or not we generate profits or cash flows from our business activities. Equity financing may result in dilution to existing shareholders and may involve securities that have rights, preferences, or privileges that are senior to our common stock. We may face significant competition, including from companies with greater resources, which could adversely affect our revenues, results of operations and financial condition. There are existing companies that offer or have the ability to develop products and services that will compete with those that we currently offer or may offer in the future. These include large, well-recognized companies that have substantial resources and established relationships in the markets in which we compete. Their greater financial, technical, marketing, and sales resources may permit them to react more quickly to emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, and sale of competing products and services. Emerging companies also may develop and offer products and services that compete with those that we offer. Increased competitive pressure could lead to reduced market share, as well as lower prices and reduced margins for our products, which would adversely affect our results of operations and financial condition. We cannot assure you that we will be able to compete successfully in the future. We depend materially upon acceptance of our products by specific agencies and markets and if these agencies and markets do not purchase or are not receptive to our products, our revenues will be adversely affected and we may not be able to expand into other markets. Our business and results of operations will be materially and adversely affected if a substantial number of law enforcement, fire, rescue, other emergency response and public safety agencies, as well as commercial end users for homeland security and life safety applications, do not purchase our SafetyNet(TM) products. In addition, we may not be able to expand sales of our products into other markets if our products are not widely accepted by these agencies or markets. This also would have an adverse affect on our business and results of operations. Our growth prospects will be diminished if our SafetyNet products are not widely accepted. We have generated minimal revenue to date from the sale of our SafetyNet products. Until recently, our funding came primarily from the sale of our equity and debt securities. However, we expect to generate greater revenues from the sale of our SafetyNet products. We expect to depend on sales of these products, primarily the SafetyNet Radio Bridge, for the foreseeable future. A decrease in the prices of or demand for these product lines, or their failure to achieve broad market acceptance, would significantly harm our growth prospects, operating results and financial condition. 23 If we are unable to manage our projected growth, our growth prospects may be limited and our future profitability may be adversely affected. We expect our business to grow in the near future. Rapid expansion may strain our current managerial, financial, operational, and other resources. If we are unable to manage our growth, our business, operating results, and financial condition could be adversely affected. We will need to continually improve our operations and our financial, accounting, and other internal control systems in order to manage our growth effectively. Any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and profitability. We may face personal injury and other liability claims that could harm our reputation and adversely affect our sales and financial condition. Our products will be depended upon in emergency, rescue and public safety situations that may involve physical harm or even death to individuals, as well as potential loss or damage to real and personal property. Our products may be associated with these injuries or other losses. A person who sustains injuries, the survivors of a person killed, the owner of damaged or destroyed property in a situation involving the use of our products, or the owner of a facility at which such injury, death or loss occurred may bring legal action against us to recover damages on the basis of theories including personal injury, wrongful death, negligent design, dangerous product or inadequate warning. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, such claims could have a material adverse effect on our operating results and financial condition. Significant litigation could also result in a diversion of management's attention and resources, negative publicity and an award of monetary damages in excess of our insurance coverage. Our future success will depend on our ability to expand sales through distributors, dealers, and independent sales representatives and our inability to take advantage of our existing distribution network or recruit new distributors, dealers, or independent sales representatives would negatively affect our sales. Our distribution strategy is to pursue sales through multiple channels with an emphasis on independent distributors, dealers, and sales representatives. We are in litigation with JAD Corporation of America, our original distributor, and both we and JAD clearly wish to terminate that relationship. Although we are now negotiating agreements with new potential dealers and distributors, and have entered into a distribution agreement for Central America, the distributors' inability to successfully sell our products or our inability to retain other distributors, dealers, and sales representatives who can successfully sell our products would adversely affect our sales. In addition, if we do not competitively price our products, meet the requirements of our current distributor or end-users, provide adequate marketing support, or comply with the terms of our distribution arrangement, a distributor may fail to aggressively market our products or may terminate its relationship with us. These developments would likely have a material adverse effect on our sales. Our reliance on others to sell our products also makes it more difficult to predict our revenues, cash flow and operating results. 24 We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return. Generally, law enforcement, fire, rescue, other emergency response and public safety agencies, as well as commercial end users for homeland security and life safety applications consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to or in place of other products, product reliability and budget constraints. The length of our sales cycle may range from a few weeks to as long as several years. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return. This could adversely affect our operating results and financial condition. Many of our end-users are subject to budgetary and political constraints that may delay or prevent sales. Many of our end-user customers currently are military, government agencies or entities or para-military or quasi-government entities or agencies. These entities and agencies often do not set their own budgets and therefore have little control over the amount of money they can spend. In addition, these entities and agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an entity or agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints. Some orders also may be canceled or substantially delayed due to budgetary, political or other scheduling delays that frequently occur in connection with the acquisition of products by such entities or agencies. Many of our end-users rely on state and federal grants to obtain the necessary funding to purchase our products, the delay or unavailability of which could adversely affect our sales and results of operations. The Department of Homeland Security currently awards funding grants for the purchase of communications equipment that provides interoperability to first responders. These funds are granted through the State Homeland Security Grant Program, the Urban Area Security Initiative, and other grants administered by the Office of Domestic Preparedness, the Federal Emergency Management Agency, and the Transportation Security Administration. Other Federal agency programs include Department of Justice grants for counter-terrorism and general-purpose law enforcement activities through the Office of Community Oriented Policing Services, which distributes funding through a wide range of programs, both as grants and cooperative agreements. Additionally, many grants are administered directly through state agencies and administrative offices. Budgetary, political or other constraints or delays in providing or the availability of funding through these grant programs could preclude many of our end-users from being able to purchase our products, which would have an adverse impact on our revenues, results of operations and financial condition. 25 If we are unable to protect our intellectual property, we may lose a competitive advantage or incur substantial litigation costs to protect our rights. Our success depends both on our internally developed technology and our third party technology. We rely on a variety of trademarks, service marks, and designs to promote our brand names and identity. We also rely on a combination of provisional patents, contractual provisions, confidentiality procedures, trademarks, copyrights, trade secrecy, unfair competition, and other intellectual property laws to protect the proprietary aspects of our products. The steps we take to protect our intellectual property rights may not be adequate to protect our intellectual property and may not prevent our competitors from gaining access to our intellectual property and proprietary information. In addition, we cannot provide assurance that courts will always uphold our intellectual property rights or enforce the contractual arrangements that we have entered into to protect our proprietary technology. Third parties may infringe or misappropriate our copyrights, trademarks, service marks, trade dress, and other proprietary rights. Any such infringement or misappropriation could have a material adverse effect on our business, prospects, financial condition, and results of operations. In addition, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We may decide to initiate litigation in order to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of our proprietary rights. Any such litigation could result in substantial expense, may reduce our profits, and may not adequately protect our intellectual property rights. In addition, we may be exposed to future litigation by third parties based on claims that our products or services infringe their intellectual property rights. Any such claim or litigation against us, whether or not successful, could result in substantial costs and harm our reputation. In addition, such claims or litigation could force us to do one or more of the following: o cease selling or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue; o obtain a license from and/or make royalty payments to the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all; o divert management's attention from our business; o redesign or, in the case of trademark claims, rename our products or services to avoid infringing the intellectual property rights of third parties, which may not be possible and in any event could be costly and time-consuming. o Even if we were to prevail, such claims or litigation could be time-consuming and expensive to prosecute or defend, and could result in the diversion of our management's time and attention. These expenses and diversion of managerial resources could have a material adverse effect on our business, prospects, financial condition, and results of operations. Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and injury to our reputation. Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products may result in a loss of sales, delay in market acceptance, injury to our reputation, increased warranty costs, recalls and costs associated with such recall efforts. In addition, defects in our products could result in personal injuries or death, as well as significant property damage. Any of these events could have a material adverse affect on our revenues, results of operations and financial condition. 26 Component shortages could result in our inability to produce sufficient volume to adequately sustain customer demand. This could result in a loss of sales, delay in deliveries and injury to our reputation. Components used in the manufacture of our products may become unavailable or may be discontinued. Delays caused by industry allocations, or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement parts. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition. Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline. Our revenues and operating results may vary significantly in the future due to various factors, including, but not limited to increased sales, increased raw material expenses, changes in our operating expenses, market acceptance of our products and services, regulatory changes that may affect the marketability of our products, and budgetary cycles of our targeted customer base. As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term and that you should not rely upon our performance in a particular period as indicating of our performance in any future period. We depend upon our executive officers and key personnel. Our performance depends substantially on the performance of our executive officers and other key personnel. The success of our business in the future will depend on our ability to attract, train, retain and motivate high quality personnel, especially highly qualified technical and managerial personnel. The loss of services of any executive officers or key personnel could have a material adverse effect on our business, revenues, results of operations or financial condition. We maintain key person life insurance on the lives of our CEO and President. Competition for talented personnel is intense, and there is no assurance that we will be able to continue to attract, train, retain or motivate other highly qualified technical and managerial personnel in the future. In addition, market conditions may require us to pay higher compensation to qualified management and technical personnel than we currently anticipate. Any inability to attract and retain qualified management and technical personnel in the future could have a material adverse effect on our business, prospects, financial condition, and results of operations. We may face risks as we expand our business into international markets. We currently are exploring opportunities to offer our products in foreign markets. We have limited experience in developing and marketing our services internationally, and we may not be able to successfully execute our business model in markets outside the United States. We will face a number of risks inherent in doing business in international markets, including the following: 27 o changing regulatory requirements; o fluctuations in the exchange rate for the United States dollar; o the availability of export licenses; o unexpected changes in regulatory requirements; o potentially adverse tax consequences; o political and economic instability; o changes in diplomatic and trade relationships; o difficulties in staffing and managing foreign operations, tariffs and other trade barriers; o complex foreign laws and treaties; o changing economic conditions; o difficulty of collecting foreign account receivables; o exposure to different legal standards, particularly with respect to intellectual property and distribution of products; In addition, we would be subject to the Foreign Corrupt Practices Act, which prohibits us from making payments to government officials and others in order to influence the granting of contracts we may be seeking. Our non-U.S. competitors are not subject to this law and this may give them a competitive advantage over us. To the extent that international operations represent a significant portion of our business in the future, our business could suffer if any of these risks occur. Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price. As disclosed in our prior filings we intend to change our fiscal year from July 31 to June 30. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-KSB for the fiscal year ending June 30, 2007, we will be required to furnish a report by our management on our internal control over financial reporting. The internal control report must contain (i) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (ii) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (iii) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (iv) a statement that the Company's independent auditors have issued an attestation report on management's assessment of internal control over financial reporting. In order to achieve compliance with Section 404 of the Act within the prescribed period, we will need to engage in a process to document and evaluate our internal control over financial reporting, which will be both costly and challenging. In this regard, management will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. We can provide no assurance as to our, or our independent auditors', conclusions at the prescribed periods with respect to the effectiveness of our internal control over financial reporting under Section 404 of the Act. There is a risk that neither we nor our independent auditors will be able to conclude at the prescribed period that our internal controls over financial reporting are effective as required by Section 404 of the Act. 28 During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly. Risks Related to Our Securities Stock prices of technology companies have declined precipitously at times in the past and the trading price of our common stock is likely to be volatile, which could result in substantial losses to investors. The trading price of our common stock has risen and fallen significantly over the past few months and could continue to be volatile in response to factors including the following, many of which are beyond our control: o variations in our operating results; o announcements of technological innovations or new services by us or our competitors; o changes in expectations of our future financial performance, including financial estimates by securities analysts and investors; o our failure to meet analysts' expectations; o changes in operating and stock price performance of other technology companies similar to us; o conditions or trends in the technology industry; o additions or departures of key personnel; and o future sales of our common stock. Domestic and international stock markets often experience significant price and volume fluctuations that are unrelated to the operating performance of companies with securities trading in those markets. These fluctuations, as well as political events, terrorist attacks, threatened or actual war, and general economic conditions unrelated to our performance, may adversely affect the price of our common stock. In the past, securities holders of other companies often have initiated securities class action litigation against those companies following periods of volatility in the market price of those companies' securities. If the market price of our stock fluctuates and our stockholders initiate this type of litigation, we could incur substantial costs and experience a diversion of our management's attention and resources, regardless of the outcome. This could materially and adversely affect our business, prospects, financial condition, and results of operations. 29 Provisions in our corporate charter and under Delaware law are favorable to our directors. Pursuant to our certificate of incorporation, members of our management and board of directors will have no liability for violations of their fiduciary duty of care as officers and directors, except in limited circumstances. This means that you may be unable to prevail in a legal action against our officers or directors even if you believe they have breached their fiduciary duty of care. In addition, our certificate of incorporation allows us to indemnify our officers and directors from and against any and all expenses or liabilities arising from or in connection with their serving in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay. Certain provisions of Delaware General Corporation Law and in our charter, as well as our current stockholder base may prevent or delay a change of control of our company. Under the Delaware General Corporation Law, which we are subject to, it will be more difficult for a third party to take control of our company and may limit the price some investors are willing to pay for shares of our common stock. Furthermore, our certificate of incorporation authorizes the issuance of preferred stock without a vote or other stockholder approval. Finally, a majority of our outstanding common stock is held by insiders. Without a disparate stockholder base or a fluid aggregation of stockholders, it will be more difficult for a third-party to acquire our company without the consent of the insiders. Our common stock may be subject to the "penny stock" rules as promulgated under the Exchange Act. In the event that no exclusion from the definition of "penny stock" under the Securities Exchange Act of 1934, as amended is available, then any broker engaging in a transaction in our company's common stock will be required to provide its customers with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker-dealer and its sales person in the transaction, and monthly account statements showing the market values of our company's securities held in the customer's accounts. The bid and offer quotation and compensation information must be provided prior to effecting the transaction and must be contained on the customer's confirmation of sale. Certain brokers are less willing to engage in transactions involving "penny stocks" as a result of the additional disclosure requirements described above, which may make it more difficult for holders of our company's common stock to dispose of their shares. ITEM 3. CONTROLS AND PROCEDURES Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-QSB, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls also are designed with an objective of ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, in order to allow timely consideration regarding required disclosures. 30 The evaluation of our disclosure controls by our principal executive officer and principal financial officer included a review of the controls' objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including our chief executive officer, chief operating officer and chief financial officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on their review and evaluation as of the end of the period covered by this Form 10-QSB, and subject to the inherent limitations described above, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report. They are not aware of any significant changes in our disclosure controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. During the period covered by this Form 10-QSB, there have not been any changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Items 3-5 are not applicable and have been omitted. ITEM 1. LEGAL PROCEEDINGS. In May 2004, we entered into an exclusive distribution agreement with JAD Corporation of America to serve as our domestic distributor based on JAD's representations to us that it had sufficient resources, manpower and expertise to market the RadioBridge(TM) product nationally. JAD's marketing efforts did not result in sales to end-users and we entered into discussions with JAD about reducing the size of the territory covered by the distribution agreement and amending other provisions of that agreement. On December 30, 2004, JAD notified us that it intended to rescind the distribution agreement by filing a complaint against us in Los Angeles County Superior Court, which included causes of action to terminate and rescind the distribution agreement, and for breach of contract. JAD's principal, Joseph Dussich, also appeared as a plaintiff in a separate cause of action in the complaint to rescind and terminate his consulting agreement with the Company. There were also additional causes of action arising from the business relationship between the parties. The company believes the case should be heard in Arizona and not California. We have filed a motion to quash service of the complaint. We were also granted a protective order by the Los Angeles County Superior Court limiting discovery in the case to jurisdictional issues. 31 We further reserved the right to assert that the notices of termination were not in compliance with the respective agreements between the parties and were a negotiation tool to induce a modification of the agreements favorable to JAD and Dussich. The litigation against Eric Peacock and Vernon Briggs III, and their cross-complaint in Orange County Superior Court has been stayed pending the retirement from the military of our co-founder and former director, Master Sergeant Joseph King; and a trial date has been set for February 2006. We plan to vigorously pursue our claims against the defendants when the stay is lifted. Other than as described above and in our previously filed Quarterly Reports and Annual Reports, we know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. Other than as described above and in our previously filed Annual Report, there are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest. ITEM 2. CHANGES IN SECURITIES. We are continuing to raise funds for operations through a private placement of our equity securities. Proceeds from the issuance of 267,392 shares of common stock during the three month period ended January 31, 2005 totaled $275,514.26, with an additional $73,416.50 in proceeds raised from the exercise of 146,833 warrants. The common stock was offered and sold in a private placement, pursuant to the provisions of Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D. The common stock was offered and sold to purchasers whom the company or its authorized agents believe are "accredited investors," as that term is defined in Rule 501 of Regulation D in reliance upon an exemption from the registration requirements of the Securities Act in a transaction not involving any public offering. Each of the investors represented to Aegis that: o such investor is an "accredited investor"; o the shares of common stock were purchased by such investor for its own account, for investment and without any view to the distribution, assignment or resale to others other than pursuant to a registered offering; o such investor understood that the shares of common stock issued to the investor have not been registered under the Securities Act of 1933 or any state securities laws; and o such investor acknowledged that it may not transfer the shares unless the shares are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to Aegis, an exemption from such laws is available. 32 We will arrange for the certificates representing such securities to be legended and subject to stop transfer restrictions. We did not engage in any form of general solicitation or general advertising in connection with these issuances. On November 23, 2004, we entered into common stock subscription agreements with four accredited investors: Potente Capital, Inc., Ellenallhatatlan, Inc., Nieodparty Inc., and Krachtig Inc., each of which is a Delaware corporation. Pursuant to these subscription agreements, each accredited investor acquired 1,250,000 shares of Aegis' common stock in an unregistered private placement. In exchange, Aegis received payment in a United States Treasury Note and stripped interest security ("Bonds") with an aggregate value of $5,000,000. This private placement is the first in a series of related concurrent transactions that are intended to facilitate Aegis' attempt to obtain a listing for its common stock on the American Stock Exchange. These related and concurrent transactions are among and between Aegis, the investors, Cogent Capital Corp., the party that facilitated the private placement and Investors Bank & Trust Company, which is serving as escrow agent in the transactions pursuant to an Escrow Agreement which the parties entered into in connection with the arrangements specified herein. The Escrow Agreement provides that Investors Bank & Trust acted as the escrow agent in the private placement transaction, and further provides that the Bonds, the private placement stock and the cash premium of $50,000 were to be deposited with the escrow agent at the closing. Additionally, the agreement specified that the Bonds will be held in an account at Investors Bank & Trust after the closing. Concurrently with the execution and acceptance of the subscription agreements by Aegis, the Registrant purchased from Cogent a call option for $1, which entitles Aegis to repurchase 80% of the shares of common stock it sold in the private placement at the then current market price. The option expires in two years and may only be exercised on the expiration date. Also concurrent with the private placement, Aegis entered into an equity swap arrangement with Cogent that entitles Aegis to receive or obligates Aegis to pay the price return on 80% of the shares issued in the private placement based upon a base price of $1.00 per share in two years, or sooner if the shares are registered for sale under the Securities Act of 1933. Aegis paid a premium of $50,000 to enter into this contract and secured the transaction by placing the $5 million of Bonds in a collateral account. These securities are restricted from being used during the contract period but may be borrowed against, as specified below. The Bonds will serve as collateral in this equity swap transaction with Cogent Capital Corp. These Bonds will remain in this collateral account for two years and can be used with a call option that Aegis may exercise. At the end of this two year period, assuming Aegis' stock price has not declined below the value as of the date the transaction closed, the Bonds would be released from the collateral account and made available to Aegis for working capital purposes. In the interim, while the Bonds reside in the collateral account, Aegis may borrow against the value of the bonds from a party that is willing to take a subordinate position to Cogent Capital Corp. In order to facilitate and memorialize these transactions, Aegis and Cogent also entered into the standard form International Swaps and Derivative Association, Inc. ("ISDA") ISDA 2002 Master Agreement & Schedule and ISDA 1994 Credit Support Annex. 33 The equity swap agreement also provides that Aegis and Cogent Capital will exchange certain defined cash flows. Under terms of the agreement, Aegis will periodically pay Cogent interest on the value of Aegis' Bond account (the interest rate will be LIBOR + 1.25%) and an amount equal to the decrease in Aegis' stock price over the price at closing times 80% of the number of shares included in the private placement specified above. Similarly, Cogent agreed to pay Aegis, periodically, an amount equal to the increase in Aegis' stock price over the price at closing times 80% of the number of shares included in the private placement specified above. Both parties agreed that any required payment resulting from the increase or decrease of Aegis' stock price as of a measurement date will be made in the form of Bonds similar to those already in Aegis' account with Investors Bank & Trust. Aegis's Bond account will be subject to a security agreement executed in favor of Cogent. However, Cogent agrees and understands that Aegis will hold title to the bonds at all times. Aegis may, and in fact intends to, secure borrowing against the bond account, provided such borrowing is subordinate to Cogent's security interest. This agreement will commence at the date of closing and will continue for a period of 24 months, at which point Cogent's security interest in Aegis' bond account will expire. The common stock was offered and sold in a private placement, pursuant to the o provisions of Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D. The common stock was offered and sold to purchasers whom the company or its authorized agents believe are "accredited investors," as that term is defined in Rule 501 of Regulation D in reliance upon an exemption from the registration requirements of the Securities Act in a transaction not involving any public offering. Each of the investors represented to Aegis that: o such investor is an "accredited investor"; o the shares of common stock were purchased by such investor for its own account, for investment and without any view to the distribution, assignment or resale to others other than pursuant to a registered offering; o such investor understood that the shares of common stock issued to the investor have not been registered under the Securities Act of 1933 or any state securities laws; and o such investor acknowledged that it may not transfer the shares unless the shares are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to Aegis, an exemption from such laws is available. Aegis will arrange for the certificates representing such securities to be legended and subject to stop transfer restrictions. Aegis did not engage in any form of general solicitation or general advertising in connection with these issuances. 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are attached to this Quarterly Report: Exhibit Number Description - ------- ----------- 10.1 ISDA Credit Support Annex 10.2 ISDA 2002 Master Agreement 10.3 ISDA Schedule to 2002 Master Agreement 10.4 Equity Option Transaction 10.5 Equity Swap Transaction 31 Certification pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) The company filed two Current Reports on Form 8-K during the period ended January 31, 2005. On November 1, 2004, the company filed a report announcing the change in its fiscal year from year-end July 31 to year-end June 30. On November 30, 2004, the company filed a current report announcing the sale of unregistered equity securitites and entry into common stock subscription agreements with four accredited investors. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AEGIS ASSESSMENTS, INC. Date: March 18, 2005 /s/ David Smith ------------------------------------- Chief Financial Officer (Principal Financial Officer and Authorized Officer) 35 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10.1 ISDA Credit Support Annex 10.2 ISDA 2002 Master Agreement 10.3 ISDA Schedule to 2002 Master Agreement 10.4 Equity Option Transaction 10.5 Equity Swap Transaction 31 Certification pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 36 EX-10.1 2 a4845871ex101.txt EXHIBIT 10.1 Exhibit 10.1 (Bilateral Form) (ISDA Agreements Subject to New York Law Only) ISDA(R) International Swaps and Derivatives Association, Inc. CREDIT SUPPORT ANNEX to the Schedule to the 2002 ISDA Master Agreement dated as of November 15, 2004 between Cogent Capital Corp and Aegis Assessment, Inc. ("Party A") ("Party B") This Annex supplements, forms part of, and is subject to, the above-referenced Agreement, is part of its Schedule and is a Credit Support Document under this Agreement with respect to each party. Accordingly, the parties agree as follows: Paragraph 1. Interpretation (a) Definitions and Inconsistency. Capitalized terms not otherwise defined herein or elsewhere in this Agreement have the meanings specified pursuant to Paragraph 12, and all references in this Annex to Paragraphs are to Paragraphs of this Annex. In the event of any inconsistency between this Annex and the other provisions of this Schedule, this Annex will prevail, and in the event of any inconsistency between Paragraph 13 and the other provisions of this Annex, Paragraph 13 will prevail. (b) Secured Party and Pledgor. All references in this Annex to the "Secured Party" will be to either party when acting in that capacity and all corresponding references to the "Pledgor" will be to the other party when acting in that capacity; provided, however, that if Other Posted Support is held by a party to this Annex, all references herein to that party as the Secured Party with respect to that Other Posted Support will be to that party as the beneficiary thereof and will not subject that support or that party as the beneficiary thereof to provisions of law generally relating to security interests and secured parties. Paragraph 2. Security Interest Each party, as the Pledgor, hereby pledges to the other party, as the Secured Party, as security for its Obligations, and grants to the Secured Party a first priority continuing security interest in, lien on and right of Set-off against all Posted Collateral Transferred to or received by the Secured Party hereunder. Upon the Transfer by the Secured Party to the Pledgor of Posted Collateral, the security interest and lien granted hereunder on that Posted Collateral will be released immediately and, to the extent possible, without any further action by either party. Copyright (C) 1994 by International Swaps and Derivatives Association, Inc. Paragraph 3. Credit Support Obligations (a) Delivery Amount. Subject to Paragraphs 4 and 5, upon a demand made by the Secured Party on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Pledgor's Minimum Transfer Amount, then the Pledgor will Transfer to the Secured Party Eligible Credit Support having a Value as of the date of Transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "Delivery Amount" applicable to the Pledgor for any Valuation Date will equal the amount by which: (i) the Credit Support Amount exceeds (ii) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party. (b) Return Amount. Subject to Paragraphs 4 and 5, upon a demand made by the Pledgor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Secured Party's Minimum Transfer Amount, then the Secured Party will Transfer to the Pledgor Posted Credit Support specified by the Pledgor in that demand having a Value as of the date of Transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "Return Amount" applicable to the Secured Party for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party exceeds (ii) the Credit Support Amount. "Credit Support Amount" means, unless otherwise specified in Paragraph 13, for any Valuation Date (i) the Secured Party's Exposure for that Valuation Date plus (ii) the aggregate of all Independent Amounts applicable to the Pledgor, if any, minus (iii) all Independent Amounts applicable to the Secured Party, if any, minus (iv) the Pledgor's Threshold; provided, however, that the Credit Support Amount will be deemed to be zero whenever the calculation of Credit Support Amount yields a number less than zero. Paragraph 4. Conditions Precedent, Transfer Timing, Calculations and Substitutions (a) Conditions Precedent. Each Transfer obligation of the Pledgor under Paragraphs 3 and 5 and of the Secured Party under Paragraphs 3, 4(d)(ii), 5 and 6(d) is subject to the conditions precedent that: (i) no Event of Default, Potential Event of Default or Specified Condition has occurred and is continuing with respect to the other party; and (ii) no Early Termination Date for which any unsatisfied payment obligations exist has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the other party. (b) Transfer Timing. Subject to Paragraphs 4(a) and 5 and unless otherwise specified, if a demand for the Transfer of Eligible Credit Support or Posted Credit Support is made by the Notification Time, then the relevant Transfer will be made not later than the close of business on the next Local Business Day; if a demand is made after the Notification Time, then the relevant Transfer will be made not later than the close of business on the second Local Business Day thereafter. (c) Calculations. All calculations of Value and Exposure for purposes of Paragraphs 3 and 6(d) will be made by the Valuation Agent as of the Valuation Time. The Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Valuation Date (or in the case of Paragraph 6(d), following the date of calculation). ISDA(R)1994 10 (d) Substitutions. (i) Unless otherwise specified in Paragraph 13, upon notice to the Secured Party specifying the items of Posted Credit Support to be exchanged, the Pledgor may, on any Local Business Day, Transfer to the Secured Party substitute Eligible Credit Support (the "Substitute Credit Support"); and (ii) subject to Paragraph 4(a), the Secured Party will Transfer to the Pledgor the items of Posted Credit Support specified by the Pledgor in its notice not later than the Local Business Day following the date on which the Secured Party receives the Substitute Credit Support, unless otherwise specified in Paragraph 13 (the "Substitution Date"); provided that the Secured Party will only be obligated to Transfer Posted Credit Support with a Value as of the date of Transfer of that Posted Credit Support equal to the Value as of that date of the Substitute Credit Support. Paragraph 5. Dispute Resolution If a party (a "Disputing Party") disputes (I) the Valuation Agent's calculation of a Delivery Amount or a Return Amount or (II) the Value of any Transfer of Eligible Credit Support or Posted Credit Support, then (1) the Disputing Party will notify the other party and the Valuation Agent (if the Valuation Agent is not the other party) not later than the close of business on the Local Business Day following (X) the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (2) subject to Paragraph 4(a), the appropriate party will Transfer the undisputed amount to the other party not later than the close of business on the Local Business Day following (X) the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (3) the parties will consult with each other in an attempt to resolve the dispute and (4) if they fail to resolve the dispute by the Resolution Time, then: (i) In the case of a dispute involving a Delivery Amount or Return Amount, unless otherwise specified in Paragraph 13, the Valuation Agent will recalculate the Exposure and the Value as of the Recalculation Date by: (A) utilizing any calculations of Exposure for the Transactions (or Swap Transactions) that the parties have agreed are not in dispute; (B) calculating the Exposure for the Transactions (or Swap Transactions) in dispute by seeking four actual quotations at mid-market from Reference Market-makers for purposes of calculating Market Quotation, and taking the arithmetic average of those obtained; provided that if four quotations are not available for a particular Transaction (or Swap Transaction), then fewer than four quotations may be used for that Transaction (or Swap Transaction); and if no quotations are available for a particular Transaction (or Swap Transaction), then the Valuation Agent's original calculations will be used for that Transaction (or Swap Transaction); and (C) utilizing the procedures specified in Paragraph 13 for calculating the Value, if disputed, of Posted Credit Support. (ii) In the case of a dispute involving the Value of any Transfer of Eligible Credit Support or Posted Credit Support, the Valuation Agent will recalculate the Value as of the date of Transfer pursuant to Paragraph 13. Following a recalculation pursuant to this Paragraph, the Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) not later than the Notification Time on the Local Business Day following the Resolution Time. The appropriate party will, upon demand following that notice by the Valuation Agent or a resolution pursuant to (3) above and subject to Paragraphs 4(a) and 4(b), make the appropriate Transfer. ISDA(R)1994 10 Paragraph 6. Holding and Using Posted Collateral (a) Care of Posted Collateral. Without limiting the Secured Party's rights under Paragraph 6(c), the Secured Party will exercise reasonable care to assure the safe custody of all Posted Collateral to the extent required by applicable law, and in any event the Secured Party will be deemed to have exercised reasonable care if it exercises at least the same degree of care as it would exercise with respect to its own property. Except as specified in the preceding sentence, the Secured Party will have no duty with respect to Posted Collateral, including, without limitation, any duty to collect any Distributions, or enforce or preserve any rights pertaining thereto. (b) Eligibility to Hold Posted Collateral; Custodians. (i) General. Subject to the satisfaction of any conditions specified in Paragraph 13 for holding Posted Collateral, the Secured Party will be entitled to hold Posted Collateral or to appoint an agent (a "Custodian") to hold Posted Collateral for the Secured Party. Upon notice by the Secured Party to the Pledgor of the appointment of a Custodian, the Pledgor's obligations to make any Transfer will be discharged by making the Transfer to that Custodian. The holding of Posted Collateral by a Custodian will be deemed to be the holding of that Posted Collateral by the Secured Party for which the Custodian is acting. (ii) Failure to Satisfy Conditions. If the Secured Party or its Custodian fails to satisfy any conditions for holding Posted Collateral, then upon a demand made by the Pledgor, the Secured Party will, not later than five Local Business Days after the demand, Transfer or cause its Custodian to Transfer all Posted Collateral held by it to a Custodian that satisfies those conditions or to the Secured Party if it satisfies those conditions. (iii) Liability. The Secured Party will be liable for the acts or omissions of its Custodian to the same extent that the Secured Party would be liable hereunder for its own acts or omissions. (c) Use of Posted Collateral. Unless otherwise specified in Paragraph 13 and without limiting the rights and obligations of the parties under Paragraphs 3, 4(d)(ii), 5, 6(d) and 8, if the Secured Party is not a Defaulting Party or an Affected Party with respect to a Specified Condition and no Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then the Secured Party will, notwithstanding Section 9-207 of the New York Uniform Commercial Code, have the right to: (i) sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of, or otherwise use in its business any Posted Collateral it holds, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor; and (ii) register any Posted Collateral in the name of the Secured Party, its Custodian or a nominee for either. For purposes of the obligation to Transfer Eligible Credit Support or Posted Credit Support pursuant to Paragraphs 3 and 5 and any rights or remedies authorized under this Agreement, the Secured Party will be deemed to continue to hold all Posted Collateral and to receive Distributions made thereon, regardless of whether the Secured Party has exercised any rights with respect to any Posted Collateral pursuant to (i) or (ii) above. (d) Distributions and Interest Amount. (i) Distributions. Subject to Paragraph 4(a), if the Secured Party receives or is deemed to receive Distributions on a Local Business Day, it will Transfer to the Pledgor not later than the following Local Business Day any Distributions it receives or is deemed to receive to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). ISDA(R)1994 10 (ii) Interest Amount. Unless otherwise specified in Paragraph 13 and subject to Paragraph 4(a), in lieu of any interest, dividends or other amounts paid or deemed to have been paid with respect to Posted Collateral in the form of Cash (all of which may be retained by the Secured Party), the Secured Party will Transfer to the Pledgor at the times specified in Paragraph 13 the Interest Amount to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). The Interest Amount or portion thereof not Transferred pursuant to this Paragraph will constitute Posted Collateral in the form of Cash and will be subject to the security interest granted under Paragraph 2. Paragraph 7. Events of Default For purposes of Section 5(a)(iii)(1) of this Agreement, an Event of Default will exist with respect to a party if: (i) that party fails (or fails to cause its Custodian) to make, when due, any Transfer of Eligible Collateral, Posted Collateral or the Interest Amount, as applicable, required to be made by it and that failure continues for two Local Business Days after notice of that failure is given to that party; (ii) that party fails to comply with any restriction or prohibition specified in this Annex with respect to any of the rights specified in Paragraph 6(c) and that failure continues for five Local Business Days after notice of that failure is given to that party; or (iii) that party fails to comply with or perform any agreement or obligation other than those specified in Paragraphs 7(i) and 7(ii) and that failure continues for 30 days after notice of that failure is given to that party. Paragraph 8. Certain Rights and Remedies (a) Secured Party's Rights and Remedies. If at any time (1) an Event of Default or Specified Condition with respect to the Pledgor has occurred and is continuing or (2) an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Pledgor, then, unless the Pledgor has paid in full all of its Obligations that are then due, the Secured Party may exercise one or more of the following rights and remedies: (i) all rights and remedies available to a secured party under applicable law with respect to Posted Collateral held by the Secured Party; (ii) any other rights and remedies available to the Secured Party under the terms of Other Posted Support, if any: (iii) the right to Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral); and (iv) the right to liquidate any Posted Collateral held by the Secured Party through one or more public or private sales or other dispositions with such notice, if any, as may be required under applicable law, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor (with the Secured Party having the right to purchase any or all of the Posted Collateral to be sold) and to apply the proceeds (or the Cash equivalent thereof) from the liquidation of the Posted Collateral to any amounts payable by the Pledgor with respect to any Obligations in that order as the Secured Party may elect. Each party acknowledges and agrees that Posted Collateral in the form of securities may decline speedily in value and is of a type customarily sold on a recognized market, and, accordingly, the Pledgor is not entitled to prior notice of any sale of that Posted Collateral by the Secured Party, except any notice that is required under applicable law and cannot be waived. ISDA(R)1994 10 (b) Pledgor's Rights and Remedies. If at any time an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then (except in the case of an Early Termination Date relating to less than all Transactions (or Swap Transactions) where the Secured Party has paid in full all of its obligations that are then due under Section 6(e) of this Agreement): (i) the Pledgor may exercise all rights and remedies available to a pledgor under applicable law with respect to Posted Collateral held by the Secured Party; (ii) the Pledgor may exercise any other rights and remedies available to the Pledgor under the terms of Other Posted Support, if any; (iii) the Secured Party will be obligated immediately to Transfer all Posted Collateral and the Interest Amount to the Pledgor; and (iv) to the extent that Posted Collateral or the Interest Amount is not so Transferred pursuant to (iii) above, the Pledgor may: (A) Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral); and (B) to the extent that the Pledgor does not Set-off under (iv)(A) above, withhold payment of any remaining amounts payable by the Pledgor with respect to any Obligations, up to the Value of any remaining Posted Collateral held by the Secured Party, until that Posted Collateral is Transferred to the Pledgor. (c) Deficiencies and Excess Proceeds. The Secured Party will Transfer to the Pledgor any proceeds and Posted Credit Support remaining after liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b) after satisfaction in full of all amounts payable by the Pledgor with respect to any Obligations; the Pledgor in all events will remain liable for any amounts remaining unpaid after any liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b). (d) Final Returns. When no amounts are or thereafter may become payable by the Pledgor with respect to any Obligations (except for any potential liability under Section 2(d) of this Agreement), the Secured Party will Transfer to the Pledgor all Posted Credit Support and the Interest Amount, if any. Paragraph 9. Representations Each party represents to the other party (which representations will be deemed to be repeated as of each date on which it, as the Pledgor, Transfers Eligible Collateral) that: (i) it has the power to grant a security interest in and lien on any Eligible Collateral it Transfers as the Pledgor and has taken all necessary actions to authorize the granting of that security interest and lien; (ii) it is the sole owner of or otherwise has the right to Transfer all Eligible Collateral it Transfers to the Secured Party hereunder, free and clear of any security interest, lien, encumbrance or other restrictions other than the security interest and lien granted under Paragraph 2; (iii) upon the Transfer of any Eligible Collateral to the Secured Party under the terms of this Annex, the Secured Party will have a valid and perfected first priority security interest therein (assuming that any central clearing corporation or any third-party financial intermediary or other entity not within the control of the Pledgor involved in the Transfer of that Eligible Collateral gives the notices and takes the action required of it under applicable law for perfection of that interest); and (iv) the performance by it of its obligations under this Annex will not result in the creation of any security interest, lien or other encumbrance on any Posted Collateral other than the security interest and lien granted under Paragraph 2. ISDA(R)1994 10 Paragraph 10. Expenses (a) General. Except as otherwise provided in Paragraphs 10(b) and 10(c), each party will pay its own costs and expenses in connection with performing its obligations under this Annex and neither party will be liable for any costs and expenses incurred by the other party in connection herewith. (b) Posted Credit Support. The Pledgor will promptly pay when due all taxes, assessments or charges of any nature that are imposed with respect to Posted Credit Support held by the Secured Party upon becoming aware of the same, regardless of whether any portion of that Posted Credit Support is subsequently disposed of under Paragraph 6(c), except for those taxes, assessments and charges that result from the exercise of the Secured Party's rights under Paragraph 6(c). (c) Liquidation/Application of Posted Credit Support. All reasonable costs and expenses incurred by or on behalf of the Secured Party or the Pledgor in connection with the liquidation and/or application of any Posted Credit Support under Paragraph 8 will be payable, on demand and pursuant to the Expenses Section of this Agreement, by the Defaulting Party or, if there is no Defaulting Party, equally by the parties. Paragraph 11. Miscellaneous (a) Default Interest. A Secured Party that fails to make, when due, any Transfer of Posted Collateral or the Interest Amount will be obligated to pay the Pledgor (to the extent permitted under applicable law) an amount equal to interest at the Default Rate multiplied by the Value of the items of property that were required to be Transferred, from (and including) the date that Posted Collateral or Interest Amount was required to be Transferred to (but excluding) the date of Transfer of that Posted Collateral or Interest Amount. This interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (b) Further Assurances. Promptly following a demand made by a party, the other party will execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by that party to create, preserve, perfect or validate any security interest or lien granted under Paragraph 2, to enable that party to exercise or enforce its rights under this Annex with respect to Posted Credit Support or an Interest Amount or to effect or document a release of a security interest on Posted Collateral or an Interest Amount. (c) Further Protection. The Pledgor will promptly give notice to the Secured Party of, and defend against, any suit, action, proceeding or lien that involves Posted Credit Support Transferred by the Pledgor or that could adversely affect the security interest and lien granted by it under Paragraph 2, unless that suit, action, proceeding or lien results from the exercise of the Secured Party's rights under Paragraph 6(c). (d) Good Faith and Commercially Reasonable Manner. Performance of all obligations under this Annex, including, but not limited to, all calculations, valuations and determinations made by either party, will be made in good faith and in a commercially reasonable manner. (e) Demands and Notices. All demands and notices made by a party under this Annex will be made as specified in the Notices Section of this Agreement, except as otherwise provided in Paragraph 13. (f) Specifications of Certain Matters. Anything referred to in this Annex as being specified in Paragraph 13 also may be specified in one or more Confirmations or other documents and this Annex will be construed accordingly. ISDA(R)1994 10 Paragraph 12. Definitions As used in this Annex:- "Cash" means the lawful currency of the United States of America. "Credit Support Amount" has the meaning specified in Paragraph 3. "Custodian" has the meaning specified in Paragraphs 6(b)(i) and 13. "Delivery Amount" has the meaning specified in Paragraph 3(a). "Disputing Party" has the meaning specified in Paragraph 5. "Distributions" means with respect to Posted Collateral other than Cash, all principal, interest and other payments and distributions of cash or other property with respect thereto, regardless of whether the Secured Party has disposed of that Posted Collateral under Paragraph 6(c). Distributions will not include any item of property acquired by the Secured Party upon any disposition or liquidation of Posted Collateral or, with respect to any Posted Collateral in the form of Cash, any distributions on that collateral, unless otherwise specified herein. "Eligible Collateral" means, with respect to a party, the items, if any, specified as such for that party in Paragraph 13. "Eligible Credit Support" means Eligible Collateral and Other Eligible Support. "Exposure" means for any Valuation Date or other date for which Exposure is calculated and subject to Paragraph 5 in the case of a dispute, the amount, if any, that would be payable to a party that is the Secured Party by the other party (expressed as a positive number) or by a party that is the Secured Party to the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(2)(A) of this Agreement as if all Transactions (or Swap Transactions) were being teiminated as of the relevant Valuation Time; provided that Market Quotation will be determined by the Valuation Agent using its estimates at mid-market of the amounts that would be paid for Replacement Transactions (as that term is defined in the definition of "Market Quotation"). "Independent Amount" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Interest Amount" means, with respect to an Interest Period, the aggregate sum of the amounts of interest calculated for each day in that Interest Period on the principal amount of Posted Collateral in the form of Cash held by the Secured Party on that day, determined by the Secured Party for each such day as follows: (x) the amount of that Cash on that day; multiplied by (y) the Interest Rate in effect for that day; divided by (z) 360. "Interest Period" means the period from (and including) the last Local Business Day on which an Interest Amount was Transferred (or, if no Interest Amount has yet been Transferred, the Local Business Day on which Posted Collateral in the form of Cash was Transferred to or received by the Secured Party) to (but excluding) the Local Business Day on which the current Interest Amount is to be Transferred. "Interest Rate" means the rate specified in Paragraph 13. "Local Business Day", unless otherwise specified in Paragraph 13, has the meaning specified in the Definitions Section of this Agreement, except that references to a payment in clause (b) thereof will be deemed to include a Transfer under this Annex. ISDA(R)1994 10 "Minimum Transfer Amount" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Notification Time" has the meaning specified in Paragraph 13. "Obligations" means, with respect to a party, all present and future obligations of that party under this Agreement and any additional obligations specified for that party in Paragraph 13. "Other Eligible Support" means, with respect to a party, the items, if any, specified as such for that party in Paragraph 13. "Other Posted Support" means all Other Eligible Support Transferred to the Secured Party that remains in effect for the benefit of that Secured Party. "Pledgor" means either party, when that party (i) receives a demand for or is required to Transfer Eligible Credit Support under Paragraph 3(a) or (ii) has Transferred Eligible Credit Support under Paragraph 3(a). "Posted Collateral" means all Eligible Collateral, other property, Distributions, and all proceeds thereof that have been Transferred to or received by the Secured Party under this Annex and not Transferred to the Pledgor pursuant to Paragraph 3(h), 4(d)(ii) or 6(d)(i) or released by the Secured Party under Paragraph 8. Any Interest Amount or portion thereof not Transferred pursuant to Paragraph 6(d)(ii) will constitute Posted Collateral in the form of Cash. "Posted Credit Support" means Posted Collateral and Other Posted Support. "Recalculation Date" means the Valuation Date that gives rise to the dispute under Paragraph 5; provided, however, that if a subsequent Valuation Date occurs under Paragraph 3 prior to the resolution of the dispute, then the "Recalculation Date" means the most recent Valuation Date under Paragraph 3. "Resolution Time" has the meaning specified in Paragraph 13. "Return Amount" has the meaning specified in Paragraph 3(b). "Secured Party" means either party, when that party (i) makes a demand for or is entitled to receive Eligible Credit Support under Paragraph 3(a) or (ii) holds or is deemed to hold Posted Credit Support. "Specified Condition" means, with respect to a party, any event specified as such for that party in Paragraph 13. "Substitute Credit Support" has the meaning specified in Paragraph 4(d)(i). "Substitution Date" has the meaning specified in Paragraph 4(d)(ii). "Threshold" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Transfer" means, with respect to any Eligible Credit Support, Posted Credit Support or Interest Amount, and in accordance with the instructions of the Secured Party, Pledgor or Custodian, as applicable: (i) in the case of Cash, payment or delivery by wire transfer into one or more bank accounts specified by the recipient; (ii) in the case of certificated securities that cannot be paid or delivered by book-entry, payment or delivery in appropriate physical form to the recipient or its account accompanied by any duly executed instruments of transfer, assignments in blank, transfer tax stamps and any other documents necessary to constitute a legally valid transfer to the recipient; (iii) in the case of securities that can be paid or delivered by book-entry, the giving of written instructions to the relevant depository institution or other entity specified by the recipient, together with a written copy thereof to the recipient, sufficient if complied with to result in a legally effective transfer of the relevant interest to the recipient; and (iv) in the case of Other Eligible Support or Other Posted Support, as specified in Paragraph 13. ISDA(R)1994 10 "Valuation Agent" has the meaning specified in Paragraph 13. "Valuation Date" means each date specified in or otherwise determined pursuant to Paragraph 13. "Valuation Percentage" means, for any item of Eligible Collateral, the percentage specified in Paragraph 13. "Valuation Time" has the meaning specified in Paragraph 13. "Value" means for any Valuation Date or other date for which Value is calculated and subject to Paragraph 5 in the case of a dispute, with respect to: (i) Eligible Collateral or Posted Collateral that is: (A) Cash, the amount thereof; and (B) a security, the bid price obtained by the Valuation Agent multiplied by the applicable Valuation Percentage, if any; (ii) Posted Collateral that consists of items that are not specified as Eligible Collateral, zero; and (iii) Other Eligible Support and Other Posted Support, as specified in Paragraph 13. ISDA(R)1994 10 Paragraph 13. Elections and Variables (a) Security Interest for "Obligations". The term "Obligations" as used in this Annex includes the following additional obligations: With respect to Party A: none. With respect to Party B: none. (b) Credit Support Obligations. (i) Delivery Amount, Return Amount and Credit Support Amount. (A) "Delivery Amount" has the meaning specified in Paragraph 3(a). (B) "Return Amount" has the meaning specified in Paragraph 3(b). (C) "Credit Support Amount" has the meaning specified in Paragraph 3. (ii) Eligible Collateral. The following items will qualify as "Eligible Collateral" for the party specified:
Party A Party B Valuation Percentage (A) Cash [X] [X] 100% (B) negotiable debt obligations issued by the U.S. Treasury Department having an original maturity t issuance of not more than one year ("Treasury Bills") [X] [X] 100% (C) negotiable debt obligations issued by the U.S. Treasury Department having an original maturity at issuance of more than one year but not more than 10 years ("Treasury Notes") [X] [X] 100% (D) negotiable debt obligations issued by the U.S. Treasury Department having an original maturity at issuance of more than 10 years ("Treasury Bonds") [ ] [ ] [ ]% (E) other:...............................................
(iii) Other Eligible Support. The following items will qualify as "Other Eligible Support" for the party specified: Party A -None. 11 Party B- None (iv) Thresholds. (A) "Independent Amount" means with respect to Party A: $ 0.00 (Zero) "Independent Amount" means with respect to Party B: The amount, if any, specified as the Independent Amount in the Confirmation for a particular Transaction. (B) "Threshold" means with respect to Party A: Infinity "Threshold" means with respect to Party B: Infinity (C) "Minimum Transfer Amount" means with respect to Party A: $ 0 "Minimum Transfer Amount" means with respect to Party B: $ 0 (D) Rounding. The Delivery Amount and the Return Amount will be rounded up and down to the nearest integral multiple of $1000, respectively. (c) Valuation and Timing. (i) "Valuation Agent" means, for purposes of Paragraphs 3 and 5, the party making the demand under Paragraph 3, and, for purposes of Paragraph 6(d), the Secured Party receiving or deemed to receive the Distributions or the Interest Amount, as applicable. (ii) "Valuation Date" means: Valuation Dates as defined by Equity Swap Confirm dated November 15, 2004 (iii) "Valuation Time" means: [X] the close of business in the city of the Valuation Agent on the Valuation Date or date of calculation, as applicable; [] the close of business on the Local Business Day before the Valuation Date or date of calculation, as applicable; provided that the calculations of Value and Exposure will be made as of approximately the same time on the same date. (iv) "Notification Time" means 1:00 p.m., New York time, on a Local Business Day. (d) Conditions Precedent and Secured Party's Rights and Remedies. The following Termination Event(s) will be a "Specified Condition" for the party specified (that party being the Affected Party if the Termination Event occurs with respect to that party): Party A Party B Illegality [ X] [X] Tax Event [ I] [ ] 12 Tax Event Upon Merger [ ] [ ] Credit Event Upon Merger [ ] [ ] Additional Termination Event(s): [ ][ ] [ ][ ] (e) Substitution. (i) "Substitution Date" has the meaning specified in Paragraph 4(d)(ii). (ii) Consent. If specified here as applicable, then the Pledgor must obtain the Secured Party's consent for any substitution pursuant to Paragraph 4(d): applicable. (f) Dispute Resolution. (i) "Resolution Time" means 1:00 p.m., New York time, on the Local Business Day following the date on which the notice is given that gives rise to a dispute under Paragraph 5. (ii) Value. For the purpose of Paragraphs 5(i)(C) and 5(ii), the Value of Posted Credit Support will be calculated as follows: Retain "AAA" rated bank or investment bank to calculations using paragraphs 5(i)(A) and 5(i)(B). (iii) Alternative. The provisions of Paragraph 5 will apply. Holding and Using Posted Collateral. (i) Eligibility to Hold Posted Collateral; Custodians. Party A and its Custodian will be entitled to hold Posted Collateral pursuant to Paragraph 6(b); provided that the following conditions applicable to it are satisfied: (1) Party A is not a Defaulting Party. (g) (2) Posted Collateral may be held only in the following jurisdictions: United States of America. Initially, the Custodian for Party A is Investor's Bank & Trust. (ii) Use of Posted Collateral. The provisions of Paragraph 6(c) will not apply to the Party A. (h) Distributions and Interest Amount. (i) Interest Rate. The "Interest Rate" will be: USD-LIBOR-BBA (ii) Transfer of Interest Amount. The Transfer of the Interest Amount will be made on the last Local Business Day of each calendar month and on any Local Business Day that Posted Collateral in the form of Cash is Transferred to the Pledgor pursuant to Paragraph 3 (b). (iii) Alternative to Interest Amount. The provisions of Paragraph 6(d)(ii) will apply. (i) Additional Representation(s). None. (j) Other Eligible Support and Other Posted Support. Not Applicable. (k) Demands and Notices. All demands, specifications and notices under this Annex will be made pursuant to the Notices Section of this Agreement, unless otherwise specified here: Party A: Cogent Capital Corp. Attn: Greg Kofford 11444 S. Jolley Acres Cir. Sandy, UT 84092 Fax 801-576-0583 Party B: Aegis Assessments, Inc. Attn: Eric D. Johnson 7975 North Hayden Road, Suite D363 Scottsdale, Arizona 85258 Telephone: 480-778-9140 Fax: 480-778-1310 Party A: To be provided Party B: To be provided (m) Other Provisions. (i) Notwithstanding anything herein to the contrary, the parties agree that: (A) Party A shall not be a Pledgor under this Credit Support Annex under any circumstances and shall have no obligation to provide any Collateral to Party B pursuant to the terms of this Credit Support Annex; and (B) Party B shall have no obligation to provide Collateral to Party A pursuant to this Credit Support Annex except for the Independent Amount, if any, specified in the Confirmation for any Transaction. (ii) The Collateral to be provided by Party B to Party A pursuant to this Credit Support Annex is to be held in an account established pursuant to that certain Escrow Agreement, dated as of November 15, 2004, by and among Party A, Party B, Ellenahatatlan, Inc., Potente Capital, Inc., Krachtig, Inc., Nieodparty, Inc., and Investors Bank & Trust Company (the "Escrow Agreement"). Party B, as Pledgor, hereby confirms that it is hereby granting to Party A a security interest in all accounts established under the Escrow Agreement in which such Collateral may from time to time be held to the same extent as the security interest granted by Party B in the Posted Collateral pursuant to Section 2 above. (iii) Notwithstanding anything herein to the contrary, including in Paragraph 6(d)(i) or 13(h) above, the parties agree that: (A) All Distributions received by Party A shall be held by Party A in the Collateral Account referred to in the Escrow Agreement and, on each day that any Floating Amount is due from Party B to Party A under any 14 Confirmation, Party A shall (and is hereby authorized to) apply any such Distributions then held in the Collateral Account in satisfaction of Party B's obligation to pay any such Floating Amount; provided that, if the amount of such Distributions so held is insufficient to satisfy all of such obligation, Party B shall remain obligated to make payment of the amount of such shortfall on the original due date therefor. (B) For purposes of federal and all other taxes based on income, Party B shall be treated as the owner of all Distributions referred to in clause (A) above. Accordingly, the Escrow Agent shall be instructed to report all such Distributions as income of Party B and to issue or cause to be issued to Party B such Forms 1099 or other such forms reflecting such income. (iv) Paragraph 5(i)(B) above is amended to read in its entirety as follows: "(B) calculating the Exposure for the Transactions in dispute by seeking four actual quotations at mid-market from third parties for purposes of calculating the relevant Close-out Amount, and taking the arithmetic average of those obtained; provided that if four quotations are not available for a particular Transaction, then fewer than four quotations may be used for that Transaction, and if no quotations are available for a particular Transaction, then the Valuation Agent's original calculations will be used for the Transaction; and" (v) The definition of "Exposure" in Paragraph 12 above is amended to read in its entirety as follows: "'Exposure' means for any Valuation Date or other date for which Exposure is calculated and subject to Paragraph 5 in the case of a dispute, the amount, if any, that would be payable to a party that is the Secured Party by the other party (expressed as a positive number) or by a party that is the Secured Party to the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(i) of this Agreement if all Transactions were being terminated as of the relevant Valuation Date, on the basis that (i) that party is not the Affected Party and (ii) United Stated Dollars is the Termination Currency; provided that the Close-out Amount will be determined by the Valuation Agent on behalf of that party using its estimates of mid-market of the amounts that would be paid for transactions providing the economic equivalent of (x) the material terms of the Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of the Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in Section 2(a)(iii)); and (y) the option rights of the parties in respect of the Transactions." (vi) Paragraph 12 is amended by inserting, between the definitions of "Secured Party" and "Specified Condition", the following additional definition: "'Set-off' eans set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 of the Agreement is entitled or subject (whether arising under the Agreement, under another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer. Cogent Capital Corp. Aegis Assessments, Inc. Name: Gregory L. Kofford Name: Eric D. Johnson Title: President Title: President Date: November 15, 2004 Date: November 15, 2004 By: /s/Gregory L. Kofford By: /s/Eric D. Johnson --------------------- ------------------ 15 EX-10.2 3 a4845871ex102.txt EXHIBIT 10.2 Exhibit 10.2 ISDA(R) International Swaps and Derivatives Association, Inc. 2002 MASTER AGREEMENT dated as of November 15, 2004 Cogent Capital Corp. and Aegis Assessment, Inc. have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this 2002 Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties or otherwise effective for the purpose of confirming or evidencing those Transactions. This 2002 Master Agreement and the Schedule are together referred to as this "Master Agreement". Accordingly, the parties agree as follows: 1. Interpretation (a) Definitions. The terms defined in Section 14 and elsewhere in this Master Agreement will have the meanings therein specified for the purpose of this Master Agreement. (b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement, such Confirmation will prevail for the purpose of the relevant Transaction. (c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. Obligations (a) General Conditions. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other condition specified in this Agreement to be a condition precedent for the purpose of this Section 2(a)(iii). (b) Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the Scheduled Settlement Date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) Netting of Payments. If on any date amounts would otherwise be payable: (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by which the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount and payment obligation will be determined in respect of all amounts payable on the same date in the same currency in respect of those Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or any Confirmation by specifying that "Multiple Transaction Payment Netting" applies to the Transactions identified as being subject to the election (in which case clause (ii) above will not apply to such Transactions). If Multiple Transaction Payment Netting is applicable to Transactions, it will apply to those Transactions with effect from the starting date specified in the Schedule or such Confirmation, or, if a starting date is not specified in the Schedule or such Confirmation, the starting date otherwise agreed by the parties in writing. This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries. (d) Deduction or Withholding for Tax. (i) Gross-Up. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party ("X") will: (1) promptly notify the other party ("Y") of such requirement; (2) pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y; (3) promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities; and 2 ISDA(R) 2002 (4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for: (A) the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d); or (B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law. (ii) Liability. If: (1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4); (2) X does not so deduct or withhold; and then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)). (3) a liability resulting from such Tax is assessed directly against X, then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)). 3. Representations Each party makes the representations contained in Sections 3(a), 3(b), 3(c), 3(d), 3(e) and 3(f) and, if specified in the Schedule as applying, 3(g) to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement). If any "Additional Representation" is specified in the Schedule or any Confirmation as applying, the party or parties specified for such Additional Representation will make and, if applicable, be deemed to repeat such Additional Representation at the time or times specified for such Additional Representation. (a) Basic Representations. (i) Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; 3 ISDA(R) 2002 (iii) No Violation or Conflict Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) Absence of Litigation. There is not pending or, to its knowledge, threatened against it, any of its Credit Support Providers or any of its applicable Specified Entities any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. (e) Payer Tax Representation. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true. (f) Payee Tax Representations. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true. (g) No Agency. It is entering into this Agreement, including each Transaction, as principal and not as agent of any person or entity. 4. Agreements Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party: (a) Furnish Specified Information. It will deliver to the other party or, in certain cases under clause (iii) below, to such government or tax in authority as the other party reasonably directs: (i) any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation; (ii) any other documents specified in the Schedule or any Confirmation; and 4 ISDA(R) 2002 (iii) upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification, in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) Comply With Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. (d) Tax Agreement. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure. (e) Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, organised, managed and controlled or considered to have its seat, or where an Office through which it is acting for the purpose of this Agreement is located ("Stamp Tax Jurisdiction"), and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the other party. 5. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes (subject to Sections 5(c) and 6(e)(iv)) an event of default (an "Event of Default") with respect to such party: (i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 9(h)(i)(2) or (4) required to be made by it if such failure is not remedied on or before the first Local Business Day in the case of any such payment or the first Local Delivery Day in the case of any such delivery after, in each case, notice of such failure is given to the party; (ii) Breach of Agreement; Repudiation of Agreement. (1) Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 9(h)(i)(2) or (4) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied within 30 days after notice of such failure is given to the party; or (2) the party disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, this Master Agreement, any Confirmation executed and delivered by that party or any 5 ISDA(R) 2002 Transaction evidenced by such a Confirmation (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (iii) Credit Support Default. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document, or any security interest granted by such party or such Credit Support Provider to the other party pursuant to any such Credit Support Document, to be in full force and effect for the purpose of this Agreement (in each case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (iv) Misrepresentation. A representation (other than a representation under Section 3(e) or 3(f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) Default Under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party: (1) defaults (other than by failing to make a delivery) under a Specified Transaction or any credit support arrangement relating to a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, such default results in a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction; (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment due on the last payment or exchange date of, or any payment on early termination of, a Specified Transaction (or, if there is no applicable notice requirement or grace period, such default continues for at least one Local Business Day); (3) defaults in making any delivery due under (including any delivery due on the last delivery or exchange date of) a Specified Transaction or any credit support arrangement relating to a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, such default results in a liquidation of, an acceleration of obligations under, or an early termination of, all transactions outstanding under the documentation applicable to that Specified Transaction; or (4) disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, a Specified Transaction or any credit support arrangement relating to a Specified Transaction that is, in either case, confirmed or evidenced by a document or other confirming evidence executed and delivered by that party, Credit Support Provider or Specified Entity (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); 6 ISDA(R) 2002 (vi) Cross-Default. If "Cross-Default" is specified in the Schedule as applying to the party, the occurrence or existence of: (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) where the aggregate principal amount of such agreements or instruments, either alone or together with the amount, if any, referred to in clause (2) below, is not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments before it would otherwise have been due and payable; or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments under such agreements or instruments on the due date for payment (after giving effect to any applicable notice requirement or grace period) in an aggregate amount, either alone or together with the amount, if any, referred to in clause (1) above, of not less than the applicable Threshold Amount; (vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party: (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4)(A) institutes or has instituted against it, by a regulator, supervisor or any similar official with primary insolvency, rehabilitative or regulatory jurisdiction over it in the jurisdiction of its incorporation or organisation or the jurisdiction of its head or home office, a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation by it or such regulator, supervisor or similar official, or (B) has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding -up or liquidation, and such proceeding or petition is instituted or presented by a person or entity not described in clause (A) above and either (I) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (II) is not dismissed, discharged, stayed or restrained in each case within 15 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 15 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) above (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or 7 ISDA(R) 2002 (viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, or reorganises, reincorporates or reconstitutes into or as, another entity and, at the time of such consolidation, amalgamation, merger, transfer, reorganisation, reincorporation or reconstitution: (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes (subject to Section 5(c)) an Illegality if the event is specified in clause (i) below, a Force Majeure Event if the event is specified in clause (ii) below, a Tax Event if the event is specified in clause (iii) below, a Tax Event Upon Merger if the event is specified in clause (iv) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to clause (v) below or an Additional Termination Event if the event is specified pursuant to clause (vi) below: (i) Illegality. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, due to an event or circumstance (other than any action taken by a party or, if applicable, any Credit Support Provider of such party) occurring after a Transaction is entered into, it becomes unlawful under any applicable law (including without limitation the laws of any country in which payment, delivery or compliance is required by either party or any Credit Support Provider, as the case may be), on any day, or it would be unlawful if the relevant payment, delivery or compliance were required on that day (in each case, other than as a result of a breach by the party of Section 4(b)): (1) for the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction to perform any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) for such party or any Credit Support Provider of such party (which will be the Affected Party) to perform any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, to receive a payment or delivery under such Credit Support Document or to comply with any other material provision of such Credit Support Document; (ii) Force Majeure Event. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, by reason of force majeure or act of state occurring after a Transaction is entered into, on any day: (1) the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction is prevented from performing any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, from receiving a payment or delivery in respect of such Transaction or from complying with any other material provision of this Agreement relating to such Transaction (or would be so prevented if such payment, delivery or compliance were required on that day), or it becomes impossible or 8 ISDA(R) 2002 impracticable for such Office so to perform, receive or comply (or it would be impossible or impracticable for such Office so to perform, receive or comply if such payment, delivery or compliance were required on that day); or (2) such party or any Credit Support Provider of such party (which will be the Affected Party) is prevented from performing any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, from receiving a payment or delivery under such Credit Support Document or from complying with any other material provision of such Credit Support Document (or would be so prevented if such payment, delivery or compliance were required on that day), or it becomes impossible or impracticable for such party or Credit Support Provider so to perform, receive or comply (or it would be impossible or impracticable for such party or Credit Support Provider so to perform, receive or comply if such payment, delivery or compliance were required on that day), so long as the force majeure or act of state is beyond the control of such Office, such party or such Credit Support Provider, as appropriate, and such Office, party or Credit Support Provider could not, after using all reasonable efforts (which will not require such party or Credit Support Provider to incur a loss, other than immaterial, incidental expenses), overcome such prevention, impossibility or impracticability; (iii) Tax Event. Due to (1) any action taken by a taxing authority, or brought in a court of competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (2) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Settlement Date (A) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (B) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 9(h)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); (iv) Tax Event Upon Merger. The party (the "Burdened Party") on the next succeeding Scheduled Settlement Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets (or any substantial part of the assets comprising the business conducted by it as of the date of this Master Agreement) to, or reorganising, reincorporating or reconstituting into or as, another entity (which will be the Affected Party) where such action does not constitute a Merger Without Assumption; (v) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, a Designated Event (as defined below) occurs with respect to such party, any Credit Support Provider of such party or any applicable Specified Entity of such party (in each case, "X") and such Designated Event does not constitute a Merger Without Assumption, and the creditworthiness of X or, if applicable, the successor, surviving or transferee entity of X, after taking into account any applicable Credit Support Document, is materially weaker immediately after the occurrence of such Designated Event than that of X immediately prior to the occurrence of such Designated Event (and, in any such event, such party or its successor, surviving or transferee entity, as appropriate, will be the Affected Party). A "Designated Event" with respect to X means that: (1) X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets (or any substantial part of the assets comprising the business conducted by X as of the 9 ISDA(R) 2002 date of this Master Agreement) to, or reorganises, reincorporates or reconstitutes into or as, another entity; (2) any person, related group of persons or entity acquires directly or indirectly the beneficial ownership of (A) equity securities having the power to elect a majority of the board of directors (or its equivalent) of X or (B) any other ownership interest enabling it to exercise control of X; or (3) X effects any substantial change in its capital structure by means of the issuance, incurrence or guarantee of debt or the issuance of (A) preferred stock or other securities convertible into or exchangeable for debt or preferred stock or (B) in the case of entities other than corporations, any other form of ownership interest; or (vi) Additional Termination Event. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties will be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) Hierarchy of Events. (i) An event or circumstance that constitutes or gives rise to an Illegality or a Force Majeure Event will not, for so long as that is the case, also constitute or give rise to an Event of Default under Section 5(a)(i), 5(a)(ii)(1) or 5(a)(iii)(1) insofar as such event or circumstance relates to the failure to make any payment or delivery or a failure to comply with any other material provision of this Agreement or a Credit Support Document, as the case may be. (ii) Except in circumstances contemplated by clause (i) above, if an event or circumstance which would otherwise constitute or give rise to an Illegality or a Force Majeure Event also constitutes an Event of Default or any other Termination Event, it will be treated as an Event of Default or such other Termination Event, as the case may be, and will not constitute or give rise to an Illegality or a Force Majeure Event. (iii) If an event or circumstance which would otherwise constitute or give rise to a Force Majeure Event also constitutes an Illegality, it will be treated as an Illegality, except as described in clause (ii) above, and not a Force Majeure Event. (d) Deferral of Payments and Deliveries During Waiting Period. If an Illegality or a Force Majeure Event has occurred and is continuing with respect to a Transaction, each payment or delivery which would otherwise be required to be made under that Transaction will be deferred to, and will not be due until: (i) the first Local Business Day or, in the case of a delivery, the first Local Delivery Day (or the first day that would have been a Local Business Day or Local Delivery Day, as appropriate, but for the occurrence of the event or circumstance constituting or giving rise to that Illegality or Force Majeure Event) following the end of any applicable Waiting Period in respect of that Illegality or Force Majeure Event, as the case may be; or (ii) if earlier, the date on which the event or circumstance constituting or giving rise to that Illegality or Force Majeure Event ceases to exist or, if such date is not a Local Business Day or, in the case of a delivery, a Local Delivery Day, the first following day that is a Local Business Day or Local Delivery Day, as appropriate. (e) Inability of Head or Home Office to Perform Obligations of Branch. If (i) an Illegality or a Force Majeure Event occurs under Section 5(b)(i)(1) or 5(b)(ii)(1) and the relevant Office is not the Affected Party's head or home office, (ii) Section 10(a) applies, (iii) the other party seeks performance of the relevant obligation or 10 ISDA(R) 2002 compliance with the relevant provision by the Affected Party's head or home office and (iv) the Affected Party's head or home office fails so to perform or comply due to the occurrence of an event or circumstance which would, if that head or home office were the Office through which the Affected Party makes and receives payments and deliveries with respect to the relevant Transaction, constitute or give rise to an Illegality or a Force Majeure Event, and such failure would otherwise constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(1) with respect to such party, then, for so long as the relevant event or circumstance continues to exist with respect to both the Office referred to in Section 5(b)(i)(1) or 5(b)(ii)(1), as the case may be, and the Affected Party's head or home office, such failure will not constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(1). 6. Early Termination; Close-Out Netting (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) Right to Terminate Following Termination Event. (i) Notice. If a Termination Event other than a Force Majeure Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction, and will also give the other party such other information about that Termination Event as the other party may reasonably require. If a Force Majeure Event occurs, each party will, promptly upon becoming aware of it, use all reasonable efforts to notify the other party, specifying the nature of that Force Majeure Event, and will also give the other party such other information about that Force Majeure Event as the other party may reasonably require. (ii) Transfer to Avoid Termination Event. If a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, other than immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party's policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed. (iii) Two Affected Parties. If a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice of such occurrence is given under Section 6(b)(i) to avoid that Termination Event. 11 ISDA(R) 2002 (iv) Right to Terminate. (A) a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (B) a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there are two Affected Parties, or the Nonaffected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, if the relevant Termination Event is then continuing, by not more than 20 days notice to the other party, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (2) If at any time an Illegality or a Force Majeure Event has occurred and is then continuing and any applicable Waiting Period has expired: (A) Subject to clause (B) below, either party may, by not more than 20 days notice to the other party, designate (I) a day not earlier than the day on which such notice becomes effective as an Early Termination Date in respect of all Affected Transactions or (II) by specifying in that notice the Affected Transactions in respect of which it is designating the relevant day as an Early Termination Date, a day not earlier than two Local Business Days following the day on which such notice becomes effective as an Early Termination Date in respect of less than all Affected Transactions. Upon receipt of a notice designating an Early Termination Date in respect of less than all Affected Transactions, the other party may, by notice to the designating party, if such notice is effective on or before the day so designated, designate that same day as an Early Termination Date in respect of any or all other Affected Transactions. (B) An Affected Party (if the Illegality or Force Majeure Event relates to performance by such party or any Credit Support Provider of such party of an obligation to make any payment or delivery under, or to compliance with any other material provision of, the relevant Credit Support Document) will only have the right to designate an Early Termination Date under Section 6(b)(iv)(2)(A) as a result of an Illegality under Section 5(b)(i)(2) or a Force Majeure Event under Section 5(b)(ii)(2) following the prior designation by the other party of an Early Termination Date, pursuant to Section 6(b)(iv)(2)(A), in respect of less than all Affected Transactions. (c) Effect of Designation. (i) If notice designating an Early Termination Date is given under Section 6(a) or 6(b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date will be determined pursuant to Sections 6(e) and 9(h)(ii). 12 ISDA(R) 2002 (d) Calculations; Payment Date. (i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying (except where there are two Affected Parties) any Early Termination Amount payable and (3) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data. (ii) Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable (1) on the day on which notice of the amount payable is effective in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default and (2) on the day which is two Local Business Days after the day on which notice of the amount payable is effective (or, if there are two Affected Parties, after the day on which the statement provided pursuant to clause (i) above by the second party to provide such a statement is effective) in the case of an Early Termination Date which is designated as a result of a Termination Event. (e) Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the "Early Termination Amount") will be determined pursuant to this Section 6(e) and will be subject to Section 6(f). (i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (I) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Nondefaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party. (ii) Termination Events. If the Early Termination Date results from a Termination Event: (1) One Affected Party. Subject to clause (3) below, if there is one Affected Party, the Early Termination Amount will be determined in accordance with Section 6(e)(i), except that references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and to the Non-affected Party, respectively. (2) Two Affected Parties. Subject to clause (3) below, if there are two Affected Parties, each party will determine an amount equal to the Termination Currency Equivalent of the sum of the Close-out Amount or Close-out Amounts (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions, as the case may be, and the Early Termination Amount will be an amount equal to (A) the sum of (I) one-half of the difference between the higher amount so determined (by party "X") and the lower amount so determined (by party "Y") and (II) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to Y. If the Early Termination Amount is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of the Early Termination Amount to Y. 13 ISDA(R) 2002 (3) Mid-Market Events. If that Termination Event is an Illegality or a Force Majeure Event, then the Early Termination Amount will be determined in accordance with clause (1) or (2) above, as appropriate, except that, for the purpose of determining a Close-out Amount or Close-out Amounts, the Determining Party will: (A) if obtaining quotations from one or more third parties (or from any of the Determining Party's Affiliates), ask each third party or Affiliate (I) not to take account of the current creditworthiness of the Determining Party or any existing Credit Support Document and (II) to provide mid-market quotations; and (B) in any other case, use mid-market values without regard to the creditworthiness of the Determining Party. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because Automatic Early Termination applies in respect of a party, the Early Termination Amount will be subject to such adjustments as are appropriate and permitted by applicable law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Adjustment for Illegality or Force Majeure Event. The failure by a party or any Credit Support Provider of such party to pay, when due, any Early Termination Amount will not constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(1) if such failure is due to the occurrence of an event or circumstance which would, if it occurred with respect to payment, delivery or compliance related to a Transaction, constitute or give rise to an Illegality or a Force Majeure Event. Such amount will (1) accrue interest and otherwise be treated as an Unpaid Amount owing to the other party if subsequently an Early Termination Date results from an Event of Default, a Credit Event Upon Merger or an Additional Termination Event in respect of which all outstanding Transactions are Affected Transactions and (2) otherwise accrue interest in accordance with Section 9(h)(ii)(2). (v) Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and, except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of the termination of the Terminated Transactions. (f) Set-Off. Any Early Termination Amount payable to one party (the "Payee") by the other party (the "Payer"), in circumstances where there is a Defaulting Party or where there is one Affected Party in the case where either a Credit Event Upon Merger has occurred or any other Termination Event in respect of which all outstanding Transactions are Affected Transactions has occurred, will, at the option of the Non-defaulting Party or the Nonaffected Party, as the case may be ("X") (and without prior notice to the Defaulting Party or the Affected Party, as the case may be), be reduced by its set-off against any other amounts ("Other Amounts") payable by the Payee to the Payer (whether or not arising under this Agreement, matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation). To the extent that any Other Amounts are so set off, those Other Amounts will be discharged promptly and in all respects. X will give notice to the other party of any set-off effected under this Section 6(f). For this purpose, either the Early Termination Amount or the Other Amounts (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, in good faith and using commercially reasonable procedures, to purchase the relevant amount of such currency. 14 ISDA(R) 2002 If an obligation is unascertained, X may in good faith estimate that obligation and set off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in this Section 6(f) will be effective to create a charge or other security interest. This Section 6(f) will be without prejudice and in addition to any right of set-off, offset, combination of accounts, lien, right of retention or withholding or similar right or requirement to which any party is at any time otherwise entitled or subject (whether by operation of law, contract or otherwise). 7. Transfer Subject to Section 6(b)(ii) and to the extent permitted by applicable law, neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that: (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any Early Termination Amount payable to it by a Defaulting Party, together with any amounts payable on or with respect to that interest and any other rights associated with that interest pursuant to Sections 8, 9(h) and 11. Any purported transfer that is not in compliance with this Section 7 will be void. 8. Contractual Currency (a) Payment in the Contractual Currency. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the "Contractual Currency"). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in good faith and using commercially reasonable procedures in converting the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess. (b) Judgments. To the extent permitted by applicable law, if any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgment or order of another court for the payment of any amount described in clause (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purpose of such judgment or order and the rate of exchange at which such party is able, acting in good faith and using 15 ISDA(R) 2002 commercially reasonable procedures in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party. (c) Separate Indemnities. To the extent permitted by applicable law, the indemnities in this Section 8 constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement. (d) Evidence of Loss. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made. 9. Miscellaneous (a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud. (b) Amendments. An amendment, modification or waiver in respect of this Agreement will only be effective if in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system. (c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) Counterparts and Confirmations. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission and by electronic messaging system), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation will be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes, by an exchange of electronic messages on an electronic messaging system or by an exchange of e-mails, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex, electronic message or e-mail constitutes a Confirmation. (f) No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 16 ISDA(R) 2002 (h) Interest and Compensation. (i) Prior to Early Termination. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction: (1) Interest on Defaulted Payments. If a party defaults in the performance of any payment obligation, it will, to the extent permitted by applicable law and subject to Section 6(c), pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as the overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment (and excluding any period in respect of which interest or compensation in respect of the overdue amount is due pursuant to clause (3)(B) or (C) below), at the Default Rate. (2) Compensation for Defaulted Deliveries. If a party defaults in the performance of any obligation required to be settled by delivery, it will on demand (A) compensate the other party to the extent provided for in the relevant Confirmation or elsewhere in this Agreement and (B) unless otherwise provided in the relevant Confirmation or elsewhere in this Agreement, to the extent permitted by applicable law and subject to Section 6(c), pay to the other party interest (before as well as after judgment) on an amount equal to the fair market value of that which was required to be delivered in the same currency as that amount, for the period from (and including) the originally scheduled date for delivery to (but excluding) the date of actual delivery (and excluding any period in respect of which interest or compensation in respect of that amount is due pursuant to clause (4) below), at the Default Rate. The fair market value of any obligation referred to above will be determined as of the originally scheduled date for delivery, in good faith and using commercially reasonable procedures, by the party that was entitled to take delivery. Interest on Deferred Payments. If: (A) a party does not pay any amount that, but for Section 2(a)(iii), would have been payable, it will, to the extent permitted by applicable law and subject to Section 6(c) and clauses (B) and (C) below, pay interest (before as well as after judgment) on that amount to the other party on demand (3) (after such amount becomes payable) in the same currency as that amount, for the period from (and including) the date the amount would, but for Section 2(a)(iii), have been payable to (but excluding) the date the amount actually becomes payable, at the Applicable Deferral Rate; (B) a payment is deferred pursuant to Section 5(d), the party which would otherwise have been required to make that payment will, to the extent permitted by applicable law, subject to Section 6(c) and for so long as no Event of Default or Potential Event of Default with respect to that party has occurred and is continuing, pay interest (before as well as after judgment) on the amount of the deferred payment to the other party on demand (after such amount becomes payable) in the same currency as the deferred payment, for the period from (and including) the date the amount would, but for Section 5(d), have been payable to (but excluding) the earlier of the date the payment is no longer deferred pursuant to Section 5(d) and the date during the deferral period upon which an Event of Default or Potential Event of Default with respect to that party occurs, at the Applicable Deferral Rate; or (C) a party fails to make any payment due to the occurrence of an Illegality or a Force Majeure Event (after giving effect to any deferral period contemplated by clause (B) above), it will, to the extent permitted by applicable law, subject to Section 6(c) and for so long as the event or circumstance giving rise to that Illegality or Force Majeure Event 17 ISDA(R) 2002 continues and no Event of Default or Potential Event of Default with respect to that party has occurred and is continuing, pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as the overdue amount, for the period from (and including) the date the party fails to make the payment due to the occurrence of the relevant Illegality or Force Majeure Event (or, if later, the date the payment is no longer deferred pursuant to Section 5(d)) to (but excluding) the earlier of the date the event or circumstance giving rise to that Illegality or Force Majeure Event ceases to exist and the date during the period upon which an Event of Default or Potential Event of Default with respect to that party occurs (and excluding any period in respect of which interest or compensation in respect of the overdue amount is due pursuant to clause (B) above), at the Applicable Deferral Rate. (4) Compensation for Deferred Deliveries. If: (A) a party does not perform any obligation that, but for Section 2(a)(iii), would have been required to be settled by delivery; (B) a delivery is deferred pursuant to Section 5(d); or (C) a party fails to make a delivery due to the occurrence of an Illegality or a Force Majeure Event at a time when any applicable Waiting Period has expired, the party required (or that would otherwise have been required) to make the delivery will, to the extent permitted by applicable law and subject to Section 6(c), compensate and pay interest to the other party on demand (after, in the case of clauses (A) and (B) above, such delivery is required) if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. (ii) Early Termination. Upon the occurrence or effective designation of an Early Termination Date in respect of a Transaction: (1) Unpaid Amounts. For the purpose of determining an Unpaid Amount in respect of the relevant Transaction, and to the extent permitted by applicable law, interest will accrue on the amount of any payment obligation or the amount equal to the fair market value of any obligation required to be settled by delivery included in such determination in the same currency as that amount, for the period from (and including) the date the relevant obligation was (or would have been but for Section 2(a)(iii) or 5(d)) required to have been performed to (but excluding) the relevant Early Termination Date, at the Applicable Close-out Rate. (2) Interest on Early Termination Amounts. If an Early Termination Amount is due in respect of such Early Termination Date, that amount will, to the extent permitted by applicable law, be paid together with interest (before as well as after judgment) on that amount in the Termination Currency, for the period from (and including) such Early Termination Date to (but excluding) the date the amount is paid, at the Applicable Close-out Rate. (iii) Interest Calculation. Any interest pursuant to this Section 9(h) will be calculated on the basis of daily compounding and the actual number of days elapsed. 18 ISDA(R) 2002 10. Offices; Multibranch Parties (a) If Section 10(a) is specified in the Schedule as applying, each party that enters into a Transaction through an Office other than its head or home office represents to and agrees with the other party that, notwithstanding the place of booking or its jurisdiction of incorporation or organisation, its obligations are the same in terms of recourse against it as if it had entered into the Transaction through its head or home office, except that a party will not have recourse to the head or home office of the other party in respect of any payment or delivery deferred pursuant to Section 5(d) for so long as the payment or delivery is so deferred. This representation and agreement will be deemed to be repeated by each party on each date on which the parties enter into a Transaction. (b) If a party is specified as a Multibranch Party in the Schedule, such party may, subject to clause (c) below, enter into a Transaction through, book a Transaction in and make and receive payments and deliveries with respect to a Transaction through any Office listed in respect of that party in the Schedule (but not any other Office unless otherwise agreed by the parties in writing). (c) The Office through which a party enters into a Transaction will be the Office specified for that party in the relevant Confirmation or as otherwise agreed by the parties in writing, and, if an Office for that party is not specified in the Confirmation or otherwise agreed by the parties in writing, its head or home office. Unless the parties otherwise agree in writing, the Office through which a party enters into a Transaction will also be the Office in which it books the Transaction and the Office through which it makes and receives payments and deliveries with respect to the Transaction. Subject to Section 6(b)(ii), neither party may change the Office in which it books the Transaction or the Office through which it makes and receives payments or deliveries with respect to a Transaction without the prior written consent of the other party. 11. Expenses A Defaulting Party will on demand indemnify and hold harmless the other party for and against all reasonable out-ofpocket expenses, including legal fees, execution fees and Stamp Tax, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 12. Notices (a) Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner described below (except that a notice or other communication under Section 5 or 6 may not be given by electronic messaging system or e-mail) to the address or number or in accordance with the electronic messaging system or e-mail details provided (see the Schedule) and will be deemed effective as indicated: (ii) if sent by telex, on the date the recipient's answerback is received; (iii) if sent by facsimile transmission, on the date it is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (i) if in writing and delivered in person or by courier, on the date it is delivered; (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date it is delivered or its delivery is attempted; (vi) if sent by e-mail, on the date it is delivered, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication will be deemed given and effective on the first following day that is a Local Business Day. (v) if sent by electronic messaging system, on the date it is received; or 19 ISDA(R) 2002 (b) Change of Details. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system or e-mail details at which notices or other communications are to be given to it. 13. Governing Law and Jurisdiction (a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) Jurisdiction. With respect to any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement ("Proceedings"), each party irrevocably: 0) submits: (1) if this Agreement is expressed to be governed by English law, to (A) the non-exclusive jurisdiction of the English courts if the Proceedings do not involve a Convention Court and (B) the exclusive jurisdiction of the English courts if the Proceedings do involve a Convention Court; or (2) if this Agreement is expressed to be governed by the laws of the State of New York, to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City; (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party; and (iii) agrees, to the extent permitted by applicable law, that the bringing of Proceedings in any one or more jurisdictions will not preclude the bringing of Proceedings in any other jurisdiction. (c) Service of Process. Each party irrevocably appoints the Process Agent, if any, specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any reason any party's Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12(a)(i), 12(a)(iii) or 12(a)(iv). Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by applicable law. (d) Waiver of Immunities. Each party irrevocably waives, to the extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction or order for specific performance or recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 20 ISDA(R) 2002 14. Definitions As used in this Agreement: "Additional Representation" has the meaning specified in Section 3. "Additional Termination Event" has the meaning specified in Section 5(b). "Affected Party" has the meaning specified in Section 5(b). "Affected Transactions" means (a) with respect to any Termination Event consisting of an Illegality, Force Majeure Event, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event (which, in the case of an Illegality under Section 5(b)(i)(2) or a Force Majeure Event under Section 5(b)(ii)(2), means all Transactions unless the relevant Credit Support Document references only certain Transactions, in which case those Transactions and, if the relevant Credit Support Document constitutes a Confirmation for a Transaction, that Transaction) and (b) with respect to any other Termination Event, all Transactions. "Affiliate" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "Agreement" has the meaning specified in Section 1(c). "Applicable Close-out Rate" means: (a) in respect of the determination of an Unpaid Amount: (i) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (ii) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; (iii) in respect of obligations deferred pursuant to Section 5(d), if there is no Defaulting Party and for so long as the deferral period continues, the Applicable Deferral Rate; and (iv) in all other cases following the occurrence of a Termination Event (except where interest accrues pursuant to clause (iii) above), the Applicable Deferral Rate; and (b) in respect of an Early Termination Amount: (i) for the period from (and including) the relevant Early Termination Date to (but excluding) the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable: 21 ISDA(R) 2002 (1) if the Early Termination Amount is payable by a Defaulting Party, the Default Rate; (2) if the Early Termination Amount is payable by a Non-defaulting Party, the Non-default Rate; and (ii) for the period from (and including) the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable to (but excluding) the date of actual payment: (1) if a party fails to pay the Early Termination Amount due to the occurrence of an event or circumstance which would, if it occurred with respect to a payment or delivery under a Transaction, constitute or give rise to an Illegality or a Force Majeure Event, and for so long as the Early Termination Amount remains unpaid due to the continuing existence of such event or circumstance, the Applicable Deferral Rate; (2) if the Early Termination Amount is payable by a Defaulting Party (but excluding any period in respect of which clause (1) above applies), the Default Rate; (3) if the Early Termination Amount is payable by a Non-defaulting Party (but excluding any period in respect of which clause (1) above applies), the Non-default Rate; and (4) in all other cases, the Termination Rate. "Applicable Deferral Rate" means: (a) for the purpose of Section 9(h)(i)(3)(A), the rate certified by the relevant payer to be a rate offered to the payer by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the payer for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market; (b) for purposes of Section 9(h)(i)(3)(B) and clause (a)(iii) of the definition of Applicable Close-out Rate, the rate certified by the relevant payer to be a rate offered to prime banks by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the payer after consultation with the other party, if practicable, for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market; and (c) for purposes of Section 9(h)(i)(3)(C) and clauses (a)(iv), (b)(i)(3) and (b)(ii)(1) of the definition of Applicable Close-out Rate, a rate equal to the arithmetic mean of the rate determined pursuant to clause (a) above and a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount. "Automatic Early Termination" has the meaning specified in Section 6(a). "Burdened Party" has the meaning specified in Section 5(b)(iv). (3) in all other cases, the Applicable Deferral Rate; and 22 ISDA(R) 2002 "Change in Tax Law" means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs after the parties enter into the relevant Transaction. "Close-out Amount" means, with respect to each Terminated Transaction or each group of Terminated Transactions and a Determining Party, the amount of the losses or costs of the Determining Party that are or would be incurred under then prevailing circumstances (expressed as a positive number) or gains of the Determining Party that are or would be realised under then prevailing circumstances (expressed as a negative number) in replacing, or in providing for the Determining Party the economic equivalent of, (a) the material terms of that Terminated Transaction or group of Terminated Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of that Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in Section 2(a)(iii)) and (b) the option rights of the parties in respect of that Terminated Transaction or group of Terminated Transactions. Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result. The Determining Party may determine a Close-out Amount for any group of Terminated Transactions or any individual Terminated Transaction but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates following the Early Termination Date as would be commercially reasonable. Unpaid Amounts in respect of a Terminated Transaction or group of Terminated Transactions and legal fees and outof-pocket expenses referred to in Section 11 are to be excluded in all determinations of Close-out Amounts. In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without limitation, one or more of the following types of information: quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the terms of any relevant documentation, including credit support documentation, between the Determining Party and the third party providing the quotation; (ii) information consisting of relevant market data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other relevant market data in the relevant market; or (iii) information of the types described in clause (i) or (ii) above from internal sources (including any of the Determining Party's Affiliates) if that information is of the same type used by the Determining Party in the regular course of its business for the valuation of similar transactions. 23 ISDA(R) 2002 The Determining Party will consider, taking into account the standards and procedures described in this definition, quotations pursuant to clause (i) above or relevant market data pursuant to clause (ii) above unless the Determining Party reasonably believes in good faith that such quotations or relevant market data are not readily available or would produce a result that would not satisfy those standards. When considering information described in clause (i), (ii) or (iii) above, the Determining Party may include costs of funding, to the extent costs of funding are not and would not be a component of the other information being utilised. Third parties supplying quotations pursuant to clause (i) above or market data pursuant to clause (ii) above may include, without limitation, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information. Without duplication of amounts calculated based on information described in clause (i), (ii) or (iii) above, or other relevant information, and when it is commercially reasonable to do so, the Determining Party may in addition consider in calculating a Close-out Amount any loss or cost incurred in connection with its terminating, liquidating or re-establishing any hedge related to a Terminated Transaction or group of Terminated Transactions (or any gain resulting from any of them). Commercially reasonable procedures used in determining a Close-out Amount may include the following: (1) application to relevant market data from third parties pursuant to clause (ii) above or information from internal sources pursuant to clause (iii) above of pricing or other valuation models that are, at the time of the determination of the Close-out Amount, used by the Determining Party in the regular course of its business in pricing or valuing transactions between the Determining Party and unrelated third parties that are similar to the Terminated Transaction or group of Terminated Transactions; and (2) application of different valuation methods to Terminated Transactions or groups of Terminated Transactions depending on the type, complexity, size or number of the Terminated Transactions or group of Terminated Transactions. "Confirmation" has the meaning specified in the preamble. "Consent" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "Contractual Currency" has the meaning specified in Section 8(a). "Convention Court" means any court which is bound to apply to the Proceedings either Article 17 of the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters or Article 17 of the 1988 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters. "Credit Event Upon Merger" has the meaning specified in Section 5(b). "Credit Support Document" means any agreement or instrument that is specified as such in this Agreement. "Credit Support Provider" has the meaning specified in the Schedule. "Cross-Default" means the event specified in Section 5(a)(vi). 24 ISDA(R) 2002 "Default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1 % per annum. "Defaulting Party" has the meaning specified in Section 6(a). "Designated Event" has the meaning specified in Section 5(b)(v). "Determining Party" means the party determining a Close-out Amount. "Early Termination Amount" has the meaning specified in Section 6(e). "Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iv). "electronic messages" does not include e-mails but does include documents expressed in markup languages, and "electronic messaging system" will be construed accordingly. "English law" means the law of England and Wales, and "English" will be construed accordingly. "Event of Default" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "Force Majeure Event" has the meaning specified in Section 5(b). "General Business Day" means a day on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits). "Illegality" has the meaning specified in Section 5(b). "Indemnifiable Tax" means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document). "law" includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority), and "unlawful" will be construed accordingly. 25 ISDA(R) 2002 "Local Business Day" means (a) in relation to any obligation under Section 2(a)(i), a General Business Day in the place or places specified in the relevant Confirmation and a day on which a relevant settlement system is open or operating as specified in the relevant Confirmation or, if a place or a settlement system is not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) for the purpose of determining when a Waiting Period expires, a General Business Day in the place where the event or circumstance that constitutes or gives rise to the Illegality or Force Majeure Event, as the case may be, occurs, (c) in relation to any other payment, a General Business Day in the place where the relevant account is located and, if different, in the principal financial centre, if any, of the currency of such payment and, if that currency does not have a single recognised principal financial centre, a day on which the settlement system necessary to accomplish such payment is open, (d) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), a General Business Day (or a day that would have been a General Business Day but for the occurrence of an event or circumstance which would, if it occurred with respect to payment, delivery or compliance related to a Transaction, constitute or give rise to an Illegality or a Force Majeure Event) in the place specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (e) in relation to Section 5(a)(v)(2), a General Business Day in the relevant locations for performance with respect to such Specified Transaction. "Local Delivery Day" means, for purposes of Sections 5(a)(i) and 5(d), a day on which settlement systems necessary to accomplish the relevant delivery are generally open for business so that the delivery is capable of being accomplished in accordance with customary market practice, in the place specified in the relevant Confirmation or, if not so specified, in a location as determined in accordance with customary market practice for the relevant delivery. "Master Agreement" has the meaning specified in the preamble. "Merger Without Assumption" means the event specified in Section 5(a)(viii). "Multiple Transaction Payment Netting" has the meaning specified in Section 2(c). "Non-affected Party" means, so long as there is only one Affected Party, the other party. "Non-default Rate" means the rate certified by the Non-defaulting Party to be a rate offered to the Non-defaulting Party by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the Non-defaulting Party for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market. "Non-defaulting Party" has the meaning specified in Section 6(a). "Office" means a branch or office of a party, which may be such party's head or home office. "Other Amounts" has the meaning specified in Section 6(f). 26 ISDA(R) 2002 "Payee" has the meaning specified in Section 6(f). "Payer" has the meaning specified in Section 6(f). "Potential Event of Default" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "Proceedings" has the meaning specified in Section 13(b). "Process Agent" has the meaning specified in the Schedule. "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the Contractual Currency. "Relevant Jurisdiction" means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organised, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made. "Schedule" has the meaning specified in the preamble. "Scheduled Settlement Date" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "Specified Entity" has the meaning specified in the Schedule. "Specified Indebtedness" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "Specified Transaction" means, subject to the Schedule, (a) any transaction (including an agreement with respect to any such transaction) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is not a Transaction under this Agreement but (i) which is a rate swap transaction, swap option, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option, credit protection transaction, credit swap, credit default swap, credit default option, total return swap, credit spread transaction, repurchase transaction, reverse repurchase transaction, buy/sell-back transaction, securities lending transaction, weather index transaction or forward purchase or sale of a security, commodity or other financial instrument or interest (including any option with respect to any of these transactions) or (ii) which is a type of transaction that is similar to any transaction referred to in clause (i) above that is currently, or in the future becomes, recurrently entered into in the financial markets (including terms and conditions incorporated by reference in such agreement) and which is a forward, swap, future, option or other derivative on one or more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic indices or measures of economic risk or value, or other benchmarks against which payments or deliveries are to be made, (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. 27 ISDA(R) 2002 "Stamp Tax" means any stamp, registration, documentation or similar tax. "Stamp Tax Jurisdiction" has the meaning specified in Section 4(e). "Tax" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax. "Tax Event" has the meaning specified in Section 5(b). "Tax Event Upon Merger" has the meaning specified in Section 5(b). "Terminated Transactions" means, with respect to any Early Termination Date, (a) if resulting from an Illegality or a Force Majeure Event, all Affected Transactions specified in the notice given pursuant to Section 6(b)(iv), (b) if resulting from any other Termination Event, all Affected Transactions and (c) if resulting from an Event of Default, all Transactions in effect either immediately before the effectiveness of the notice designating that Early Termination Date or, if Automatic Early Termination applies, immediately before that Early Termination Date. "Termination Currency" means (a) if a Termination Currency is specified in the Schedule and that currency is freely available, that currency, and (b) otherwise, euro if this Agreement is expressed to be governed by English law or United States Dollars if this Agreement is expressed to be governed by the laws of the State of New York. "Termination Currency Equivalent" means, in respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the "Other Currency"), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Close-out Amount is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties. "Termination Event" means an Illegality, a Force Majeure Event, a Tax Event, a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. 28 ISDA(R) 2002 "Termination Rate" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "Threshold Amount" means the amount, if any, specified as such in the Schedule. "Transaction" has the meaning specified in the preamble. "Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii) or due but for Section 5(d)) to such party under Section 2(a)(i) or 2(d)(i)(4) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date, (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii) or 5(d)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered and (c) if the Early Termination Date results from an Event of Default, a Credit Event Upon Merger or an Additional Termination Event in respect of which all outstanding Transactions are Affected Transactions, any Early Termination Amount due prior to such Early Termination Date and which remains unpaid as of such Early Termination Date, in each case together with any amount of interest accrued or other compensation in respect of that obligation or deferred obligation, as the case may be, pursuant to Section 9(h)(ii)(1) or (2), as appropriate. The fair market value of any obligation referred to in clause (b) above will be determined as of the originally scheduled date for delivery, in good faith and using commercially reasonable procedures, by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it will be the average of the Termination Currency Equivalents of the fair market values so determined by both parties. "Waiting Period" means: (a) in respect of an event or circumstance under Section 5(b)(i), other than in the case of Section 5(b)(i)(2) where the relevant payment, delivery or compliance is actually required on the relevant day (in which case no Waiting Period will apply), a period of three Local Business Days (or days that would have been Local Business Days but for the occurrence of that event or circumstance) following the occurrence of that event or circumstance; and (b) in respect of an event or circumstance under Section 5(b)(ii), other than in the case of Section 5(b)(ii)(2) where the relevant payment, delivery or compliance is actually required on the relevant day (in which case no Waiting Period will apply), a period of eight Local Business Days (or days that would have been Local Business Days but for the occurrence of that event or circumstance) following the occurrence of that event or circumstance. 29 ISDA(R) 2002 IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. Cogent Capital Corp. Aegis Assessment, Inc. By: /s/Gregory L. Kofford By: /s/Eric D. Johnson --------------------- ------------------ Name: Gregory L. Kofford Name: Eric D. Johnson Title: President Title: CEO Date: November 15, 2004 Date: November 15, 2004 30 ISDA(R) 2002 EX-10.3 4 a4845871ex103.txt EXHIBIT 103 Exhibit 10.3 ISDA(R) International Swaps and Derivatives Association, Inc. SCHEDULE to the 2002 Master Agreement dated as of November 15, 2004 between Cogent Capital Corp. and Aegis Assessments, Inc. ("Party A") ("Party B") established as a corporation established as a corporation under the laws of Utah under the laws of Delaware Part 1. Termination Provisions. (a) "Specified Entity" means in relation to Party A for the purpose of: Section 5 (a)(v), Affiliate........................................... Section 5(a)(vi), Affiliate .......................................... Section 5(a)(vii), Affiliate .......................................... Section 5(b)(v), Affiliate .......................................... and in relation to Party B for the purpose of: Section 5(a)(v), Affiliate........................................... Section 5(a)(vi), Affiliate .......................................... Section 5(a)(vii), Affiliate .......................................... Section 5(b)(v), Affiliate .......................................... 31 ISDA(R) 2002 (b) "Specified Transaction" will have the meaning specified in Section 14 of this Agreement. (c) The "Cross-Default" provisions of Section 5(a)(vi) will apply to Party A will apply to Party B "Specified Indebtedness" will have the meaning specified in Section 14 of this Agreement. "Threshold Amount" means $0.00 (zero dollars). (d) The "Credit Event Upon Merger" provisions of Section 5(b)(v) will not apply to Party A will not apply to Party B (e) The "Automatic Early Termination" provision of Section 6(a) will not apply to Party A will not apply to Party B (f) "Termination Currency" will have the meaning specified in Section 14 of this Agreement. (g) Additional Termination Event will apply. Any Additonal Termination Event and the Affected Party or Parties with respect thereto shall be specified in a Confirmation executed by the Parties. Part 2. Tax Representations. (a) Payer Representations. For the purpose of Section 3(e) of this Agreement, Party A and Party B do not make any representations. (b) Payee Representations. For the purpose of Section 3(f) of this Agreement, Party A and Party B do not make any representations. Part 3. Agreement to Deliver Documents. For the purpose of Sections 4(a)(i) and 4(a)(ii) of this Agreement, each party agrees to deliver the following documents, as applicable: (a) Tax forms, documents or certificates to be delivered are: none (b) Other documents to be delivered are: Certified Board Resolutions authorizing share issuance, Master Agreement, Credit Support Annex, and Eqity Swap. Opinion from corporate counsel that shares are validly issued. Part 4. Miscellaneous. (a) Addresses for Notices. For the purpose of Section 12(a) of this Agreement: Address for notices or communications to Party A: Address: PO Box 1362, Draper, UT 84020 Attention: Greg Kofford Facsimile No.: 801-576-0583 Telephone No.: 801-523-6063 E-mail: gkofford@cogent-capital.com Electronic Messaging System Details:............................... Specific Instructions:............................................. 32 Address for notices or communications to Party B: Address: 7975 North Hayden Road, Suite D363, Scottsdale, Arizona 85258.. Attention: Eric D. Johnson ............................................. Facsimile No.: 480-778-1310 Telephone No.: 480-778-9140............... E-mail: eric@aegiscorporate.com ........................................ Electronic Messaging System Details: ................................... Specific Instructions:.................................................. (b) Process Agent. For the purpose of Section 13(c) of this Agreement: Party A appoints as its Process Agent: not applicable. Party B appoints as its Process Agent: To be provided. (c) Offices. The provisions of Section 10(a) will apply to this Agreement. (d) Multibranch Party. For the purpose of Section 10(b) of this Agreement: Party A is not a Multibranch Party. Party B is not a Multibranch Party (e) Calculation Agent. The Calculation Agent is Party A. (f) Credit Support Document. Details of any Credit Support Documents: (i) 1994 ISDA Credit Support Annex by and between Party A and Party B, dated November 15, 2004 and (ii) the Escrow Agreement, dated as of November 15, 2004, by and among Party A, Party B, Ellenahatatlan, Inc., Potente Capital, Inc., Krachtig, Inc., Nieodparty, Inc., and Investors Bank & Trust Company. (g) Governing Lmv. This Agreement will be governed by and construed in accordance with the laws of the State of New York (without reference to choice of law doctrine). (i) Netting of Payments. "Multiple Transaction Payment Netting" will apply for the purpose of Section 2(c) of this Agreement to all Transactions. (j) "Affiliate" will have the meaning specified in Section 14 of this Agreement. (k) Absence of Litigation. For the purpose of Section 3(c):- "Specified Entity" means in relation to Party A, any Affiliate. "Specified Entity" means in relation to Party B, any Affiliate. (1) No Agency. The provisions of Section 3(g) will apply to this Agreement. 33 (m) Additional Representation will apply. For the purpose of Section 3 of this Agreement, the following will constitute an Additional Representation: (i) Relationship Between Parties. Each party will be deemed to represent to the other party on the date on which it enters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction): (1) Non-Reliance. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction, it being understood that information and explanations related to the terms and conditions of a Transaction will not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party will be deemed to be an assurance or guarantee as to the expected results of that Transaction. (2) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction. (3) Status of Parties. The other party is not acting as a fiduciary for or an adviser to it in respect of that Transaction. (n) Recording of Conversations. Each party (i) consents to the recording of telephone conversations between the trading, marketing and other relevant personnel of the parties in connection with this Agreement or any potential Transaction, (ii) agrees to obtain any necessary consent of, and give any necessary notice of such recording to, its relevant personnel and (iii) agrees, to the extent permitted by applicable law, that recordings may be submitted in evidence in any Proceedings. Cogent Capital Corp. Aegis Assessments, Inc. By: /s/Gregory L. Kofford By: /s/Eric D. Johnson --------------------- ------------------ Name: Gregory L. Kofford Name: Eric D. Johnson Title: President Title: CEO Date: November 15, 2004 Date: November 15, 2004 34 EX-10.4 5 a4845871ex104.txt EXHIBIT 10.4 Exhibit 10.4 Date: November 15, 2004 To: Aegis Assessments, Inc. From: Cogent Capital Corp. SUBJECT: EQUITY OPTION TRANSACTION ---------------------------------- The purpose of this communication is to set forth the terms and conditions of the Call Option transaction entered into on the Trade Date referred to below (the "Option Transaction"), between Cogent Capital Corp., a Utah corporation ("Cogent" or "we") and Aegis Assessments, Inc., a Utah corporation ("Aegis Assessments" or "you"). This communication constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below. This Confirmation incorporates the definitions and provisions contained in the 2002 ISDA Equity Derivatives Definitions as published by the International Swap and Derivatives Association, Inc. (the "Equity Definitions"). In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. 1. This Confirmation will supplement, form a part of, and be subject to the ISDA Master Agreement dated as of November 15, 2004 between Aegis Assessments and Cogent (the "Master Agreement"). All provisions contained in, or incorporated by reference to, the Master Agreement shall govern this Confirmation except as expressly modified below. In the event of any inconsistency between the provisions of that Master Agreement and this Confirmation, this Confirmation shall prevail for the purpose of this Equity Option Transaction. In addition, this Confirmation shall itself evidence a complete and binding agreement between you and us as to the terms and conditions of the Equity Option Transaction to which this Confirmation relates. Cogent and Aegis Assessments each represents that entering into the Equity Transaction is authorized and does not violate any laws of its jurisdiction of organization or residence or the terms of any agreement to which it is a party. Cogent and Aegis Assessments each represents that (i) it is not relying on the other party in connection with its decision to enter into this Option Transaction, and neither party is acting as an advisor or fiduciary of the other party in connection with this Option Transaction regardless of whether the other party provides it with market information or its views; (ii) it understands the risks of the Option Transaction and any legal, regulatory, tax, accounting and economic consequences resulting therefrom; and (iii) it has determined based upon its own judgment and upon any advice received from its own professional advisors as it has deemed necessary to consult that entering into the Option Transaction is appropriate for such party in light of its financial capabilities and objectives. 2. The terms of the particular Transaction to which this Confirmation relates are as follows: General Terms: Trade Date: November 15, 2004 1 Option Style: European Option Type: Call Seller: Cogent Buyer: Aegis Assessments Shares: Aegis Assessments, Inc. common shares ("AEGIS ASSESSMENTS") CUSIP number ____________ Number of Options: 3,200,000 Option Entitlement: 1 Share per Option Strike Price: The "Strike Price" shall equal the average of the Relevant Prices for the Averaging Dates relating to that Expiration Date. Averaging Dates: The ten trading days up to and including that Expiration Date Averaging Date Disruption: Modified Postponement Relevant Price: For each Averaging Date, the average of the bid and ask price per Share as determined by the Calculation Agent at the Valuation Time on that Averaging Date. Valuation Time: The closing time on the Exchange Premium: $1 Premium Payment Date: Trade Date Exchange: All Exchanges Related Exchange(s): All Exchanges Clearance System(s): DTC or Physical Certificate(s) Knock-in Event: Applicable. The "Knock-in Event" shall occur at the time that the disbursements contemplated by Section 2 of the Escrow Agreement (as defined in the Schedule to the Master Agreement) have been completed, but only if such disbursements are completed on or before the Knock-in Determination Day. Knock-in Determination Day(s): November 30, 2004 Procedures for Exercise: Latest Exercise Time: Notice given 12:00 noon, New York time, September 29, 2006 2 Expiration Time: The official closing time on the Exchange Expiration Date: November 15, 2006 Multiple Exercise: Not Applicable Automatic Exercise: Not Applicable Minimum Number of Options: The Number of Options. As a result, this Option may only be exercised in whole, and not in part. Seller's Telephone Number and Telex and/or Facsimile Number and Contact Details for purpose of giving Notice: Telephone: 801-523-6063 Facsimile: 801-576-0583 Settlement Terms: Physical Settlement: Applicable. Certificates with standard Rule 144 transfer restrictions may be used for good delivery. Settlement Currency: USD Settlement Method Election: Not Applicable Default Settlement Method: Physical Settlement Adjustments: Method of Adjustment: Calculation Agent Adjustment Options Exchange: Related Exchange Extraordinary Events: Consequences of Merger Events: Share-for-Share: Calculation Agent Adjustment Share-for-Other: Calculation Agent Adjustment Share-for-Combined: Calculation Agent Adjustment Tender Offer: Applicable Consequences of Tender Offers: Share-for-Share: Calculation Agent Adjustment Share-for-Other: Calculation Agent Adjustment 3 Share-for-Combined: Calculation Agent Adjustment Composition of Combined Consideration: Applicable Nationalization, Insolvency or Delisting: Negotiated Close-Out Additional Disruption Events: Change in Law: Applicable Failure to Deliver: Applicable Insolvency Filing: Applicable Determining Party: Cogent Non-Reliance: Applicable 4. Calculation Agent: Cogent 5. Account Details: Account for payments to Cogent: To be provided. Account for payments to Aegis Assessments To be provided. Account for delivery of Shares to Aegis Assessments: To be provided. 6. Relationship between the parties: (a) Except as expressly provided herein, each party acknowledges that in connection with entering into this Transaction, it has not entered into any agreements, arrangements or understandings with the other party or any related entity of such party in relation to timing or manner of any acquisition or disposal of any Shares, the voting rights attaching to any Shares or the management of the Issuer. 4 7. Governing Law: the laws of the State of New York (without reference to choice of law doctrine). Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the copy of this Confirmation enclosed for that purpose and returning it to us or by sending to us a letter or telex substantially similar to this letter, which letter or telex sets forth the material terms of the Transaction to which this Confirmation relates and indicates your agreement to those terms. Yours sincerely, Cogent Capital Corp. By: /s/Gregory L. Kofford ---------------------------- Gregory L. Kofford President Confirmed as of the date first above written: Aegis Assessments, Inc. By: /s/Eric D. Johnson ------------------ Eric D. Johnson CEO 5 EX-10.5 6 a4845871ex105.txt EXHIBIT 10.5 Exhibit 10.5 Date: November 15, 2004 To: Aegis Assessments, Inc. From: Cogent Capital Corp. SUBJECT: EQUITY SWAP TRANSACTION -------------------------------- The purpose of this communication is to set forth the terms and conditions of the Swap transaction entered into on the Trade Date referred to below (the "Swap Transaction"), between Cogent Capital Corp., a Utah corporation ("Cogent" or "we") and Aegis Assessments, Inc., a Delaware corporation ("Aegis Assessments" or "you"). This communication constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below. This Confirmation incorporates the definitions and provisions contained in the 2002 ISDA Equity Derivatives Definitions as published by the International Swaps and Derivatives Association, Inc. (the "Equity Definitions"). In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. 1. This Confirmation will supplement, form a part of, and be subject to the ISDA Master Agreement dated as of November 15, 2004 between Aegis Assessments and Cogent (the "Master Agreement"). All provisions contained in, or incorporated by reference to, the Master Agreement shall govern this Confirmation except as expressly modified below. In the event of any inconsistency between the provisions of that Master Agreement and this Confirmation, this Confirmation shall prevail for the purpose of this Swap Transaction. In addition, this Confirmation shall itself evidence a complete and binding agreement between you and us as to the terms and conditions of the Swap Transaction to which this Confirmation relates. Cogent and Aegis Assessments each represents that entering into the Swap Transaction is authorized and does not violate any laws of its jurisdiction of organization or residence or the terms of any agreement to which it is a party. Cogent and Aegis Assessments each represents that (i) it is not relying on the other party in connection with its decision to enter into this Swap Transaction, and neither party is acting as an advisor or fiduciary of the other party in connection with this Swap Transaction regardless of whether the other party provides it with market information or its views; (ii) it understands the risks of the Swap Transaction and any legal, regulatory, tax, accounting and economic consequences resulting therefrom; and (iii) it has determined based upon its own judgment and upon any advice received from its own professional advisors as it has deemed necessary to consult that entering into the Swap Transaction is appropriate for such party in light of its financial capabilities and objectives. 1 2. The terms of the particular Transaction to which this Confirmation relates are as follows: General Terms: Trade Date: November 15, 2004 Effective Date: November 15, 2004 Termination Date: The earlier of: (i) April 29, 2008 and (ii) the 30th day after the Calculation Agent has determined that the Resale Condition (as defined below) has been satisfied with respect to all 4,000,000 of the Equity Shares (as defined below) or, if such day is not an Exchange Business Day, the first Exchange Business Day thereafter; provided that, if the Equity Option (as defined below) is exercised, then the Termination Date shall be the Expiration Date of the Equity Option. Shares: Aegis Assessments, Inc. common shares ("AEGIS ASSESSMENTS") CUSIP number ___________ Exchange: The primary exchange on which the shares are traded Related Exchange(s): The primary exchange on which listed options or futures on the Shares are traded. Knock-in Event: Applicable. The "Knock-in Event" shall occur at the time that the disbursements contemplated by Section 2 of the Escrow Agreement (as defined in the Schedule to the Master Agreement) have been completed, but only if such disbursements are completed on or before the Knock-in Determination Day. Knock-in Determination Day: November 30, 2004 Knock-out Event: Applicable. The "Knock-out Event" shall occur if the equity option evidenced by the Confirmation, dated November 15, 2004, between Aegis Assessments and Cogent (the "Equity Option") is exercised by Aegis Assessments. Knock-out Price: The "Knock-Out Price" shall equal the Final Price as of the Termination Date (which shall be the Expiration Date of the Equity Option) and shall be determined in the manner provided below (including the use of Averaging as specified below). Knock-out Reference Security: Aegis Assessments, Inc. common shares ("AEGIS ASSESSMENTS") 2 Knock-out Determination Day(s): October 10, 2006 Knock-out Valuation Time: The closing time on the Exchange Equity Amounts payable by Cogent Equity Amount Payer: Cogent Equity Amount Receiver: Counterparty Equity Amount: An amount determined by the Calculation Agent as of the Valuation Time on the Valuation Date equal to the product of the Equity Notional Amount as of the day and the Rate of Return, provided that, if the Equity Amount is a negative number, then the Equity Amount Receiver will pay (in addition to any other amounts payable by the Equity Amount Receiver) to the Equity Amount Payer the absolute value of the Equity Amount on the Termination Date. Number of Shares: 3,200,000 (subject to reduction as provided below) Equity Notional Amount: Number of Shares multiplied by the Initial Price Equity Notional Reset: Inapplicable Type of Return: Price Return Initial Price: $1.5625 per Share Final Price: For any Valuation Date, the average of the Relevant Prices for the Averaging Dates relating to that Valuation Date. Valuation Time: The closing time on the Exchange Valuation Date: The Termination Date Averaging Dates: For any Valuation Date, the ten trading days up to and including that Valuation Date Averaging Date Disruption: Modified Postponement Relevant Price: For each Averaging Date, the average of the bid and ask price per Share as determined by the Calculation Agent at the Valuation Time on that Averaging Date. Floating Amounts payable by Counterparty: Floating Amount Payer: Counterparty Notional Amount: The Equity Notional Amount 3 Payment Dates: Each monthly anniversary of the Trade Date prior to the Termination Date, and the Termination Date Floating Rate Option: USD-LIBOR-BBA-2yr Spread: 0.2% Floating Rate Day Count Fraction: Actual/360 Reset Dates: Valuation Dates Initial Exchange Amount payable by Counterparty: Counterparty Initial $50,000 Exchange Amount: Counterparty Initial Exchange Date: November 30, 2004 or completion of Knock-In Event whichever is earlier. Other Terms: Adjustment of Number of Shares: If no Knock-out Event has occurred and the Equity Option has expired, and this Transaction has not been otherwise terminated, the Number of Shares shall be reduced as follows: (i) If on the day occurring 27 months after the Trade Date, the Resale Condition (as defined below) is then satisfied with respect to not less than 1,333,333 of the Equity Shares (as defined below), the Number of Shares shall be reduced to 2,666,667 shares on the first Exchange Business Day thereafter, or, in the alternative, (ii) If on the day occurring 30 months after the Trade Date, the Resale Condition is then satisfied with respect to not less than 1,866,667 Equity Shares, the Number of Shares shall be reduced to 2,133,333 shares on the first Exchange Business Day thereafter, (iii) If on the day occurring 33 months after the Trade Date, the Resale Condition is then satisfied with respect to not less than 2,400,000 Equity Shares, the Number of Shares shall be reduced to 1,600,000 shares on the first Exchange Business Day thereafter, (iv) If on the day occurring 36 months after the Trade Date, the Resale Condition is then satisfied with respect to not less than 2,933,333 Equity Shares, the Number of Shares shall be reduced to 1,066,667 shares on the first Exchange Business Day thereafter, and 4 (v) If on the day occurring 39 months after the Trade Date, the Resale Condition is then satisfied with respect to not less than 3,466,667 Equity Shares, the Number of Shares shall be reduced to 533,333 shares on the first Exchange Business Day thereafter. The "Resale Condition" shall be deemed satisfied as of any day with respect to the number of Equity Shares that, as of such day, are then subject to an effective resale registration statement under the Securities Act of 1933, as amended, with the holders of such shares being named therein as selling shareholders or fully eligible for resale under paragraph (k) of Rule 144 adopted under the Securities Act of 1933. "Equity Shares" mean the shares originally purchased under the Subscription Agreements dated November 15, 2004 (the "Equity Shares") between Aegis Assessments and the investors named therein. Settlement Terms: Cash Settlement: Applicable Settlement Currency: USD Cash Settlement Payment Date: USD Currency Business Days after the relevant Valuation Date Settlement Method Election: Not Applicable Default Settlement Method: Cash Settlement Adjustments: Method of Adjustment: Calculation Agent Adjustment Extraordinary Events: Consequences of Merger Events: Share-for-Share: Calculation Agent Adjustment Share-for-Other: Calculation Agent Adjustment Share-for-Combined: Calculation Agent Adjustment Determining Party: Cogent Tender Offer: Applicable Consequences of Tender Offers: Share-for-Share: Calculation Agent Adjustment Share-for-Other: Calculation Agent Adjustment Share-for-Combined: Component Adjustment Determining Party: Cogent 5 Composition of Combined Consideration: Applicable Nationalization, Insolvency or Delisting: Negotiated Close-out Determining Party: Cogent Additional Disruption Events: Change in Law: Applicable Failure to Deliver: Applicable Insolvency Filing: Applicable Determining Party: Cogent Non-Reliance: Applicable Agreements and Acknowledgments Regarding Hedging Activities: Not Applicable Additional Acknowledgments: Applicable 4. Credit Support Annex: For purposes of Paragraph 13 of the Credit Support Annex to the Master Agreement, the "Independent Amount" for this Transaction shall equal the Equity Notional Amount. 5. Additional Termination Events: The parties agree that, for purposes of the Master Agreement, an "Additional Termination Event" shall occur if the Resale Condition has not been satisfied with respect to all 4,000,000 of the Equity Shares by no later than April 10, 2008; and for purposes of that Additional Termination Event, Aegis Assessments shall be the sole Affected Party. 6. Calculation Agent: Cogent 7. Account Details: 6 Account for payments to Cogent: To be provided. Account for payments to Aegis Assessments: To be provided. 8. Relationship between the parties: (a) Except as expressly provided herein, each party acknowledges that in connection with entering into this Transaction, it has not entered into any agreements, arrangements or understandings with the other party or any related entity of such party in relation to timing or manner of any acquisition or disposal of any Shares, the voting rights attaching to any Shares or the management of the Issuer. 9. Governing Law: the laws of the State of New York (without reference to choice of law doctrine). Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the copy of this Confirmation enclosed for that purpose and returning it to us by facsimile at (801) 576-0583. Yours sincerely, Cogent Capital Corp. By: /s/Gregory L. Kofford ---------------------- Gregory L. Kofford President Confirmed as of the date first above written: Aegis Assessments, Inc. By: /s/Eric D. Johnson ------------------ Eric D. Johnson CEO 7 EX-31 7 a4845871ex31.txt EXHIBIT 31 Exhibit 31 CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY I, Eric Johnson, Chief Executive Officer of Aegis Assessments, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Aegis Assessments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have; a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent function); a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 18, 2005 /s/ Eric Johnson ------------------ Eric Johnson Chief Executive Officer (Principal Executive Officer) 1 I, David Smith, Chief Financial Officer of Aegis Assessments, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Aegis Assessments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have; a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent function); a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 18, 2005 /s/ David Smith --------------------------- David Smith Chief Financial Officer (Principal Financial Officer) 2 EX-32 8 a4845871ex32.txt EXHIBIT 32 Exhibit 32 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Eric Johnson, the CEO of Aegis Assessments, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aegis Assessments, Inc. on Form 10-QSB for the quarter ended January 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Aegis Assessments, Inc. Date: March 18, 2005 /s/ Eric Johnson ------------------------------- Eric Johnson Chief Executive Officer I, David Smith, the CFO of Aegis Assessments, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aegis Assessments, Inc. on Form 10-QSB for the quarter ended January 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Aegis Assessments, Inc. Date: March 18, 2005 /s/ David Smith ------------------------------ David Smith Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----