<PAGE>
Exhibit 4.1
CERTIFICATE OF DESIGNATION
OF
SERIES A 8% CONVERTIBLE PREFERRED STOCK
OF
PRECEPT BUSINESS SERVICES, INC.
-------------------------------------------------------------------------------
Pursuant to Article 2.13 of the
Texas Business Corporation Act
-------------------------------------------------------------------------------
Precept Business Services, Inc., a corporation organized and
existing under the Texas Business Corporation Act (the "CORPORATION"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation on April 19, 2000 pursuant to authority of the Board of
Directors as required by Article 2.13 of the Texas Business Corporation Act:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Articles of Incorporation, the
Board of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $1.00 per share (the "PREFERRED STOCK"),
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, privileges, powers and restrictions thereof as follows:
Series A 8% Convertible Preferred Stock:
ARTICLE 1
DEFINITIONS
The terms defined in this Article whenever used in this
Certificate of Designation have the following respective meanings:
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in
Section 6.1.
(b) "AFFILIATE" has the meaning ascribed to such term in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
(c) "AMEX" means the American Stock Exchange.
(d) "BUSINESS DAY" means a day other than Saturday, Sunday or
any day on which banks located in the State of New York are authorized or
obligated to close.
(e) "CAPITAL SHARES" means the Common Shares and any other
shares of any other class or series of capital stock, whether now or hereafter
authorized and however designated, which have the right to participate in the
distribution of earnings and assets (upon dissolution, liquidation or
winding-up) of the Corporation.
(f) "CEILING PRICE" has the meaning set forth in Section 6.1.
<PAGE>
(g) "COMMON SHARES" or "COMMON STOCK" means shares of class A
common stock, par value $.01 per share, of the Corporation.
(h) "COMMON STOCK ISSUED AT CONVERSION", when used with
reference to the securities issuable upon conversion of the Series A Preferred
Stock, means all Common Shares now or hereafter Outstanding and securities of
any other class or series into which the Series A Preferred Stock hereafter
shall have been changed or substituted, whether now or hereafter created and
however designated.
(i) "CONVERSION DATE" means any day on which all or any
portion of shares of the Series A Preferred Stock is converted in accordance
with the provisions hereof.
(j) "CONVERSION NOTICE" means a written notice of conversion
substantially in the form annexed hereto as Annex I.
(k) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series A Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(l) "CORPORATION" means Precept Business Services, Inc., a
Texas corporation, and any successor or resulting corporation by way of merger,
consolidation, sale or exchange of all or substantially all of the Corporation's
assets, or otherwise.
(m) "CURRENT MARKET PRICE" means on any date of determination
the closing bid price of a Common Share on such day as reported on Nasdaq;
PROVIDED, if such security bid is not listed or admitted to trading on Nasdaq,
as reported on the principal national security exchange or quotation system on
which such security is quoted or listed or admitted to trading, or, if not
quoted or listed or admitted to trading on any national securities exchange or
quotation system, the closing bid price of such security on the over-the-counter
market on the day in question as reported by Bloomberg LP, or a similar
generally accepted reporting service, as the case may be.
(n) "DEFAULT DIVIDEND RATE" is equal to the Dividend Rate plus
an additional 4% per annum.
(o) "DIVIDEND PERIOD" means the quarterly period commencing on
and including the Issue Date or, if a dividend has previously been paid, the day
after the immediately preceding Dividend Payment Due Date and ending on and
including the immediately subsequent Dividend Payment Due Date.
(p) "DIVIDEND PAYMENT DUE DATE" means March 31, June 30,
September 30 and December 31 of each year.
(q) "DIVIDEND RATE" means 8% per annum, computed on the basis
of a 360-day year.
-2-
<PAGE>
(r) "HOLDER" means The Shaar Fund Ltd., any successor thereto,
or any Person or Persons to whom the Series A Preferred Stock is subsequently
transferred in accordance with the provisions hereof.
(s) "INVESTMENT AMOUNT" means $2,000,000.
(t) "ISSUE DATE" means, as to any share of Series A Preferred
Stock, the date of issuance of such share.
(u) "JUNIOR SECURITIES" means all capital stock of the
Corporation except for the Series A Preferred Stock and up to $2,800,000 of
preferred stock outstanding on the date hereof.
(v) "LIQUIDATION PREFERENCE" means, with respect to a share of
the Series A Preferred Stock, an amount equal to the sum of (i) the Stated Value
thereof, PLUS (ii) an amount equal to 30% of such Stated Value, PLUS (iii) the
aggregate of all accrued and unpaid dividends (whether or not earned or
declared, whether or not there were funds legally available for the payment of
dividends and whether or not a Dividend Payment Due Date has occurred since the
last dividend payment) on such share of Series A Preferred Stock until the most
recent Dividend Payment Due Date; PROVIDED that, in the event of an actual
liquidation, dissolution or winding up of the Corporation, the amount referred
to in clause (iii) above shall be calculated by including accrued and unpaid
dividends to the actual date of such liquidation, dissolution or winding up,
rather than the Dividend Payment Due Date referred to above.
(w) "MANDATORY CONVERSION DATE" has the meaning set forth in
Section 6.8.
(x) "MARKET PRICE" per Common Share means the arithmetic mean
of the closing bid prices of the Common Shares as reported on Nasdaq for the
five consecutive Trading Days during any Valuation Period; PROVIDED, if such
security is not listed or admitted to trading on Nasdaq, as reported on the
principal national security exchange or quotation system on which such security
is quoted or listed or admitted to trading, or, if not quoted or listed or
admitted to trading on any national securities exchange or quotation system, the
closing bid price of such security on the over-the-counter market on the day in
question as reported by Bloomberg LP, or a similar generally accepted reporting
service, for the five consecutive Trading Days during any Valuation Period.
(y) "NASDAQ" means the Nasdaq SmallCap Market.
(z) "NYSE" means The New York Stock Exchange.
(aa) "OPTIONAL REDEMPTION PRICE" has the meaning set forth in
Section 6.5.
(bb) "OUTSTANDING", when used with reference to Common Shares
or Capital Shares (collectively, "SHARES"), means, on any date of determination,
all issued and outstanding Shares, and includes all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; PROVIDED, HOWEVER, that any such Shares directly or
indirectly owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "OUTSTANDING" for purposes
hereof.
-3-
<PAGE>
(cc) "PERSON" means an individual, a corporation, a
partnership, an association, a limited liability company, an unincorporated
business organization, a trust or other entity or organization, and any
government or political subdivision or any agency or instrumentality thereof.
(dd) "REDEMPTION DATE" has the meaning set forth in Section
6.5.
(ee) "REGISTRATION RIGHTS AGREEMENT" means that certain
Registration Rights Agreement to be dated as of April [__], 2000 between the
Corporation and The Shaar Fund Ltd.
(ff) "SEC" means the United States Securities and Exchange
Commission.
(gg) "SECURITIES ACT" means the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
(hh) "SECURITIES PURCHASE AGREEMENT" means that certain
Securities Purchase Agreement to be dated as of April [__], 2000 between the
Corporation and The Shaar Fund Ltd.
(ii) "SERIES A PREFERRED SHARES" or "SERIES A PREFERRED STOCK"
means the shares of Series A 8% Convertible Preferred Stock of the Corporation
or such other convertible preferred stock of the Corporation as may be exchanged
therefor.
(jj) "STATED VALUE" has the meaning set forth in
Article 2.
(kk) "SUBSIDIARY" means any entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(ll) "TRADING DAY" means any day on which (a) purchases and
sales of securities authorized for quotation on Nasdaq are reported thereon, (b)
no event which results in a material suspension or limitation of trading of the
Common Shares on Nasdaq has occurred and (c) at least one bid for the trading of
Common Shares is reported on Nasdaq.
(mm) "VALUATION EVENT" has the meaning set forth in
Section 6.1.
(nn) "VALUATION PERIOD" means the period of 5 Trading Days
immediately preceding the Conversion Date; PROVIDED, HOWEVER, that if a
Valuation Event occurs during a Valuation Period on a date less than 5 Trading
Days before the Conversion Date, the Valuation Period shall be extended until
the date 5 Trading Days after the occurrence of the Valuation Event.
All references to "CASH" or "$" herein mean currency of the
United States of America.
-4-
<PAGE>
ARTICLE 2
DESIGNATION AND AMOUNT
The designation of this series, which consists of 200,000
shares of Preferred Stock, shall be Series A 8% Convertible Preferred Stock (the
"SERIES A PREFERRED STOCK") and the stated value shall be $10 per share (the
"STATED VALUE").
ARTICLE 3
RANK
The Series A Preferred Stock shall rank prior to any other
capital stock of the Corporation, other than up to $2,800,000 of preferred stock
outstanding on the date hereof.
ARTICLE 4
DIVIDENDS
(a) (i) The Holder shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends at the Dividend Rate on the Stated Value of each
share of Series A Preferred Stock on and as of each Dividend Payment Due Date
with respect to each Dividend Period; PROVIDED, HOWEVER, that if any dividend is
not paid in full on any Dividend Payment Due Date, dividends shall thereafter
accrue and be payable at the Default Dividend Rate on the Stated Value of each
share of Series A Preferred Stock until all accrued dividends are paid in full.
Dividends on the Series A Preferred Stock shall be cumulative from the date of
issue, whether or not declared for any reason, including if such declaration is
prohibited under any outstanding indebtedness or borrowings of the Corporation
or any of its Subsidiaries, or any other contractual provision binding on the
Corporation or any of its Subsidiaries, and whether or not there shall be funds
legally available for the payment thereof.
(ii) Each dividend shall be payable in equal
quarterly amounts on each Dividend Payment Due Date, commencing June 30, 2000,
to the Holders of record of shares of the Series A Preferred Stock, as they
appear on the stock records of the Corporation at the close of business on such
record date, not more than 60 days or less than 10 days preceding the payment
dates thereof, as shall be fixed by the Board of Directors. Accrued and unpaid
dividends for any past Dividend Period may be declared and paid at any time,
without reference to any Dividend Payment Due Date, to Holders of record, not
more than 15 days preceding the payment date thereof, as may be fixed by the
Board of Directors.
(iii) At the option of the Corporation, the dividend
shall be paid either (x) in cash or (y) through the issuance of duly and validly
authorized and issued, fully paid and nonassessable shares of the Common Stock
valued at the then applicable Conversion Price calculated in accordance with the
provisions of Section 6.1, assuming for this purpose, that the applicable
Dividend Payment Due Date is the applicable Conversion Date, and registered for
resale in open market transactions on the Registration Statement (as defined in
the Registration Rights Agreement), which Registration Statement shall then be
effective under the Securities Act; PROVIDED, HOWEVER, that if no funds are
legally available for the payment of cash dividends on the Series A Preferred
Stock, dividends shall be paid as provided in clause (y) above.
-5-
<PAGE>
(b) Except as provided in Section 4(d) hereof, the Holder
shall not be entitled to any dividends in excess of the cumulative dividends, as
herein provided, on the Series A Preferred Stock.
(c) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon any Junior Securities, nor shall any
Junior Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any Subsidiary) for any consideration by the
Corporation, directly or indirectly, nor shall any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any Junior
Securities, unless in each case (i) the full cumulative dividends required to be
paid in cash on all outstanding shares of the Series A Preferred Stock shall
have been paid or set apart for payment for all past Dividend Periods with
respect to the Series A Preferred Stock and (ii) sufficient funds shall have
been paid or set apart for the payment of the dividend for the current Dividend
Period with respect to the Series A Preferred Stock.
(d) If the Corporation shall at any time or from time to time
after the Issue Date declare, order, pay or make a dividend or other
distribution (including, without limitation, any distribution of stock or other
securities or property or rights or warrants to subscribe for securities of the
Corporation or any of its Subsidiaries by way of dividend or spin-off) on shares
of its Common Stock, then, and in each such case, in addition to the dividend
obligation of the Corporation specified in Section 4(a) hereof, the Corporation
shall declare, order, pay and make the same dividend or distribution to each
Holder of Series A Preferred Stock as would have been made with respect to the
number of Common Shares the Holder would have received had it converted all of
its Series A Preferred Shares, and exercised the Warrant held by it in full for
all the Common Shares then underlying the Warrant, immediately prior to such
dividend or distribution.
ARTICLE 5
LIQUIDATION PREFERENCE; MERGERS, CONSOLIDATIONS, ETC.
(a) If the Corporation shall commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or state bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee or sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee or sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of 30 consecutive days and, on account of any such event, the Corporation
shall liquidate, dissolve or
-6-
<PAGE>
wind up, or if the Corporation shall otherwise liquidate, dissolve or wind
up, no distribution shall be made to the holders of any shares of capital
stock of the Corporation upon liquidation, dissolution or winding-up unless
prior thereto, the Holders of shares of Series A Preferred Stock, subject to
this Article 5, shall have received the Liquidation Preference with respect
to each share.
(b) In case the Corporation shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another Person
(where the Corporation is not the survivor or where there is a change in or
distribution with respect to the Common Stock of the Corporation), sell, convey,
transfer or otherwise dispose of all or substantially all its property, assets
or business to another Person, or effectuate a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of (each, a "FUNDAMENTAL CORPORATE CHANGE") and, pursuant to the terms
of such Fundamental Corporate Change, shares of common stock of the successor or
acquiring corporation, or any cash, shares of stock or other securities or
property of any nature whatsoever (including warrants or other subscription or
purchase rights) in addition to or in lieu of common stock of the successor or
acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed
to the holders of Common Stock of the Corporation, then each Holder of Series A
Preferred Stock shall have the right thereafter, at its sole option, either (x)
to require the Corporation to deem such Fundamental Corporate Change to be a
liquidation, dissolution or winding up of the Corporation pursuant to which the
Corporation shall be required to distribute, upon consummation of and as a
condition to, such Fundamental Corporate Change an amount equal to 120% of the
Liquidation Preference with respect to each outstanding share of Series A
Preferred Stock, (y) to receive the number of shares of common stock of the
successor or acquiring corporation or of the Corporation, if it is the surviving
corporation, and Other Property as is receivable upon or as a result of such
Fundamental Corporate Change by a holder of the number of shares of Common Stock
into which such Series A Preferred Stock may be converted at the Conversion
Price applicable immediately prior to such Fundamental Corporate Change or (z)
require the Corporation, or such successor, resulting or purchasing corporation,
as the case may be, to, without benefit of any additional consideration
therefor, to execute and deliver to the Holder shares of its Preferred Stock
with substantial identical rights, preferences, privileges, powers, restrictions
and other terms as the Series A Preferred Stock equal to the number of shares of
Series A Preferred Stock held by such Holder immediately prior to such
Fundamental Corporate Change; PROVIDED, that all Holders of Series A Preferred
Stock shall be deemed to elect the option set forth in clause (x) above if at
least a majority in interest of such Holders elect such option. For purposes of
this Section 5(b), "COMMON STOCK OF THE SUCCESSOR OR ACQUIRING CORPORATION"
shall include stock of such corporation of any class which is not preferred as
to dividends or assets over any other class of stock of such corporation and
which is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 5(b) shall similarly apply to successive Fundamental Corporate
Changes.
-7-
<PAGE>
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 Conversion; Conversion Price
At the option of the Holder, the shares of Series A Preferred
Stock may be converted, either in whole or in part, into Common Shares
(calculated as to each such conversion to the nearest 1/100th of a share) at any
time and from time to time following five month anniversary of the Issue Date at
a Conversion Price per share of Common Stock equal to the lesser of: (i) $2.75
(subject to adjustment for any stock-split or stock combination to occur after
the date hereof (the "CEILING PRICE"), or (ii) 85% of the Market Price; PROVIDED
that any unconverted Series A Preferred Stock remaining nine months after the
Issue Date may be converted, at the sole option of the Holder, at a Conversion
Price per share of Common Stock equal to 80% of the Market Price; PROVIDED,
FURTHER, that any unconverted Series A Preferred Stock remaining fifteen months
after the Issue Date may be converted, at the sole option of the Holder, at a
Conversion Price per share of Common Stock equal to 78% of the Market Price;
PROVIDED, FURTHER, that if the Corporation's Common Stock is delisted off Nasdaq
for any reason (and is not listed at such time on the Nasdaq National Market,
the Amex or the NYSE), then any remaining unconverted Series A Preferred Stock
may be converted, at the sole option of the Holder, at a Conversion Price per
share of Common Stock equal to 50% of the Market Price.
At the Corporation's option, the amount of accrued and unpaid
dividends as of the Conversion Date (whether or not earned or declared, whether
or not there were funds legally available for the payment of dividends and
whether or not a Dividend Payment Due Date has occurred since the last dividend
payment) shall not be subject to conversion but instead may be paid in cash as
of the Conversion Date; if the Corporation elects to convert the amount of such
accrued and unpaid dividends at the Conversion Date into Common Stock, the
Common Stock issued to the Holder shall be valued at the applicable Conversion
Price.
The number of shares of Common Stock due upon conversion of
Series A Preferred Stock shall be (i) the number of shares of Series A Preferred
Stock to be converted, multiplied by (ii) the Stated Value plus accrued and
unpaid dividends (whether or not earned or declared, whether or not there were
funds legally available for the payment of dividends and whether or not a
Dividend Payment Due Date has occurred since the last dividend payment), to the
extent the Corporation does not at its election pay such accrued and unpaid
dividends in cash, and divided by (iii) the applicable Conversion Price.
Within two Business Days of the occurrence of a Valuation
Event, the Corporation shall send notice thereof to each Holder. Notwithstanding
anything to the contrary contained herein, if a Valuation Event occurs during
any Valuation Period, the Holder may convert some or all of its Series A
Preferred Stock, at its sole option, at a Conversion Price equal to the Current
Market Price on any Trading Day during the Valuation Period.
For purposes of this Section 6.1, a "VALUATION EVENT" shall
mean an event in which the Corporation takes any of the following actions:
(a) subdivides or combines its Capital Shares;
-8-
<PAGE>
(b) makes any distribution on its Capital Shares;
(c) issues any additional Capital Shares (the
"ADDITIONAL CAPITAL SHARES"), otherwise than as provided in the foregoing
Sections 6.1(a) and 6.1(b) above, at a price per share less, or for other
consideration lower, than the Current Market Price in effect immediately
prior to such issuances, or without consideration, except for issuances under
employee benefit plans consistent with those presently in effect and
issuances under presently outstanding warrants, options or convertible
securities;
(d) issues any warrants, options or other rights to
subscribe for or purchase any Additional Capital Shares if the price per
share for which Additional Capital Shares may at any time thereafter be
issuable pursuant to such warrants, options or other rights shall be less
than the Current Market Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or
exchangeable or exercisable for Additional Capital Shares if the
consideration per share for which Additional Capital Shares may at any time
thereafter be issuable pursuant to the terms of such convertible,
exchangeable or exercisable securities shall be less than the Current Market
Price in effect immediately prior to such issuance;
(f) announces or effects a Fundamental Corporate Change;
(g) makes any distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for the payment of dividends under
applicable law or any distribution to such holders made in respect of the sale
of all or substantially all of the Corporation's assets (other than under the
circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or
(h) takes any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing Sections
6.1(a) through 6.1(g) hereof, inclusive, which in the opinion of the Holder,
determined in good faith, would have a material adverse effect upon the rights
of the Holder at the time of a conversion of the Preferred Stock or is
reasonably likely to result in a decrease in the Market Price.
SECTION 6.2 Exercise of Conversion Privilege
(a) Conversion of the Series A Preferred Stock may be
exercised, in whole or in part, by the Holder by telecopying an executed and
completed Conversion Notice to the Corporation. Each date on which a
Conversion Notice is telecopied to the Corporation in accordance with the
provisions of this Section 6.2 shall constitute a Conversion Date. The
Corporation shall convert the Preferred Stock and issue the Common Stock
Issued at Conversion, and all voting and other rights associated with the
beneficial ownership of the Common Stock Issued at Conversion shall vest with
the Holder, effective as of the Conversion Date at the time specified in the
Conversion Notice. The Conversion Notice also shall state the name or names
(with addresses) of the Persons who are to become the holders of the Common
Stock Issued at Conversion in connection with such conversion. The Holder
shall deliver the shares of Series A Preferred Stock to the Corporation by
express courier within 30 days following the Conversion
-9-
<PAGE>
Date. Upon surrender for conversion, the Preferred Stock shall be accompanied
by a proper assignment thereof to the Corporation or be endorsed in blank. As
promptly as practicable after the receipt of the Conversion Notice as
aforesaid, but in any event not more than five Business Days after the
Corporation's receipt of such Conversion Notice, the Corporation shall (i)
issue the Common Stock issued at Conversion in accordance with the provisions
of this Article 6, and (ii) cause to be mailed for delivery by overnight
courier to the Holder (x) a certificate or certificate(s) representing the
number of Common Shares to which the Holder is entitled by virtue of such
conversion, (y) cash, as provided in Section 6.3, in respect of any fraction
of a Common Share issuable upon such conversion and (z) if the Corporation
chooses to pay accrued and unpaid dividends in cash, cash in the amount of
accrued and unpaid dividends as of the Conversion Date. Such conversion shall
be deemed to have been effected at the time at which the Conversion Notice
indicates so long as the Series A Preferred Stock shall have been surrendered
as aforesaid at such time, and at such time the rights of the Holder of the
Series A Preferred Stock, as such, shall cease and the Person or Persons in
whose name or names the Common Stock Issued at Conversion shall be issuable
shall be deemed to have become the holder or holders of record of the Common
Shares represented thereby and all voting and other rights associated with
the beneficial ownership of such Common Shares shall at such time vest with
such Person or Persons. The Conversion Notice shall constitute a contract
between the Holder and the Corporation, whereby the Holder shall be deemed to
subscribe for the number of Common Shares which it will be entitled to
receive upon such conversion and, in payment and satisfaction of such
subscription (and for any cash adjustment to which it is entitled pursuant to
Section 6.3), to surrender the Series A Preferred Stock and to release the
Corporation from all liability thereon. No cash payment aggregating less than
$1.00 shall be required to be given unless specifically requested by the
Holder.
(b) If, at any time (i) the Corporation challenges,
disputes or denies the right of the Holder hereof to effect the conversion of
the Series A Preferred Stock into Common Shares or otherwise dishonors or
rejects any Conversion Notice delivered in accordance with this Section 6.2
or (ii) any third party commences any lawsuit or proceeding or otherwise
asserts any claim before any court or public or governmental authority which
seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right
of the Holder hereof to effect the conversion of the Series A Preferred Stock
into Common Shares, then the Holder shall have the right, by written notice
to the Corporation, to require the Corporation promptly to redeem the Series
A Preferred Stock for cash at a redemption price equal to 135% of the Stated
Value thereof together with all accrued and unpaid dividends (whether or not
earned or declared, whether or not there were funds legally available for the
payment of dividends and whether or not a Dividend Payment Due Date has
occurred since the last dividend payment) thereon (the "MANDATORY PURCHASE
AMOUNT"). Under any of the circumstances set forth above, the Corporation
shall be responsible for the payment of all costs and expenses of the Holder,
including reasonable legal fees and expenses, as and when incurred in
disputing any such action or pursuing its rights hereunder (in addition to
any other rights of the Holder).
(c) The Holder shall be entitled to exercise its
conversion privilege notwithstanding the commencement of any case under 11
U.S.C. ss. 101 ET Seq. (the "BANKRUPTCY CODE"). In the event the Corporation
is a debtor under the Bankruptcy Code, the Corporation hereby waives to the
fullest extent permitted any rights to relief it may have under 11 U.S.C.
SECTION 362 in respect of the Holder's conversion privilege. The Corporation
hereby waives to the fullest
-10-
<PAGE>
extent permitted any rights to relief it may have under 11 U.S.C. ss. 362 in
respect of the conversion of the Series A Preferred Stock. The Corporation
agrees, without cost or expense to the Holder, to take or consent to any and
all action necessary to effectuate relief under 11 U.S.C. SECTION 362.
SECTION 6.3 Fractional Shares
No fractional Common Shares or scrip representing fractional
Common Shares shall be issued upon conversion of the Series A Preferred Stock.
Instead of any fractional Common Shares which otherwise would be issuable upon
conversion of the Series A Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction.
SECTION 6.4 Adjustments to Conversion Price
For so long as any shares of the Series A Preferred Stock are
outstanding, if the Corporation issues and sells pursuant to an exemption from
registration under the Securities Act (A) Common Shares at a purchase price that
is lower than the Conversion Price on the date of issuance of such Common
Shares, (B) warrants or options with an exercise price on the date of issuance
thereof that is lower than the Conversion Price for the Holder on such date,
except for warrants or options issued pursuant to employee stock option
agreements or stock incentive agreements of the Corporation, or (C) convertible,
exchangeable or exercisable securities with a right to exchange at lower than
the Current Market Price on the date of issuance or conversion, as applicable,
of such convertible, exchangeable or exercisable securities, except for stock
option agreements or stock incentive agreements, then the Conversion Price shall
be reduced to equal the lowest of any such purchase price, exercise price or
exchange price, and the number of shares of Common Stock into which the Series A
Preferred Stock is convertible pursuant to the second paragraph of Section 6.1
shall be correspondingly adjusted. After such reduction, the Conversion Price
shall never exceed the Conversion Price as so reduced, in spite of any
subsequent increase in the Market Price.
SECTION 6.5 Optional Redemption
(a) At any time after the date of issuance of the
Series A Preferred Stock until the Mandatory Conversion Date (as defined
below), the Corporation, upon notice delivered to the Holder as provided in
Section 6.6, may redeem, in cash, the Series A Preferred Stock (but only with
respect to such shares as to which the Holder has not theretofore furnished a
Conversion Notice in compliance with Section 6.2), at 120% of the Stated
Value thereof (the "OPTIONAL REDEMPTION PRICE"), together with all accrued
and unpaid dividends (whether or not earned or declared, whether or not there
were funds legally available for the payment of dividends and whether or not
a Dividend Payment Due Date has occurred since the last dividend payment)
thereon to the date of redemption (the "REDEMPTION DATE"); PROVIDED, HOWEVER,
that the Corporation may only redeem the Series A Preferred Stock under this
Section 6.5 if the Current Market Price is less than the Ceiling Price.
Except as set forth in this Section 6.5, the Corporation shall not have the
right to redeem the Series A Preferred Stock.
-11-
<PAGE>
SECTION 6.6 Notice of Redemption
Notice of redemption pursuant to Section 6.5 shall be provided
by the Corporation to the Holder in writing (by registered mail or overnight
courier at the Holder's last address appearing in the Corporation's security
registry) not less than 10 nor more than 15 days prior to the Redemption Date,
which notice shall specify the Redemption Date and refer to Section 6.5
(including a statement of the Current Market Price per Common Share) and this
Section 6.6.
SECTION 6.7 Surrender of Preferred Stock
Upon any redemption of the Series A Preferred Stock pursuant
to Sections 6.5 and 6.6, the Holder shall either deliver the Series A Preferred
Stock by hand to the Corporation at its principal executive offices or surrender
the same to the Corporation at such address by express courier within 14 days
after the date that the Buyer receives payment therefore. Payment of the
Optional Redemption Price shall be made by the Corporation to the Holder by wire
transfer of immediately available funds to such account(s) as the Holder shall
specify to the Corporation. If payment of such Optional Redemption Price is not
made in full by the Redemption Date, the Holder shall again have the right to
convert the Series A Preferred Stock as provided in Article 6 hereof.
SECTION 6.8 Mandatory Conversion
On the third anniversary of the date of this Certificate of
Designation (the "MANDATORY CONVERSION DATE"), the Corporation shall convert all
Series A Preferred Stock outstanding, at the Conversion Price utilizing the
Stated Value (plus accrued and unpaid dividends (whether or not earned or
declared, whether or not there were funds legally available for the payment of
dividends and whether or not a Dividend Payment Due Date has occurred since the
last dividend payment)) as the value of each share of Series A Preferred Stock,
into shares of Common Stock registered for resale in open market transactions on
the Registration Statement (as defined in the Registration Rights Agreement),
which Registration Statement shall then be effective under the Securities Act.
SECTION 6.9 Certain Conversion Limitations
(a) Notwithstanding anything herein to the contrary,
the Holder shall not have the right, and the Corporation shall not have the
obligation, to convert all or any portion of the Series A Preferred Stock
(and the Corporation shall not have the right to pay dividends on the Series
A Preferred Stock in shares of Common Stock) if and to the extent that the
issuance to the Holder of shares of Common Stock upon such conversion (or
payment of dividends) would result in the Holder being deemed the "beneficial
owner" of more than 5% of the then Outstanding shares of Common Stock within
the meaning of Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules promulgated thereunder. If any court of competent
jurisdiction shall determine that the foregoing limitation is ineffective to
prevent a Holder from being deemed the beneficial owner of more than 5% of
the then Outstanding shares of Common Stock, then the Corporation shall
redeem so many of such Holder's shares (the "Redemption Shares") of Series A
Preferred Stock as are necessary to cause such Holder to be deemed the
beneficial owner of not more than 5% of the then Outstanding shares of Common
-12-
<PAGE>
Stock. Upon such determination by a court of competent jurisdiction, the
Redemption Shares shall immediately and without further action be deemed
returned to the status of authorized but unissued shares of Series A
Preferred Stock, and the Holder shall have no interest in or rights under
such Redemption Shares. Any and all dividends paid on or prior to the date of
such determination shall be deemed dividends paid on the remaining shares of
Series A Preferred Stock held by the Holder. Such redemption shall be for
cash at a redemption price equal to the sum of (i) 120% of the Stated Value
of the Redemption Shares and (ii) any accrued and unpaid dividends (whether
or not earned or declared, whether or not there were funds legally available
for the payment of dividends and whether or not a Dividend Payment Due Date
has occurred since the last dividend payment) to the date of such redemption.
(b) Notwithstanding anything herein to the contrary,
if and to the extent that, on any date (the "SECTION 16 DETERMINATION DATE"),
the holding by the Holder of shares of the Series A Preferred Stock would
result in the Holder's becoming subject to the provisions of Section 16(b) of
the Exchange Act in virtue of being deemed the "beneficial owner" of more
than 10% of the then Outstanding shares of Common Stock, then the Holder
shall not have the right, and the Corporation shall not have the obligation,
to convert so many of such Holder's shares of Series A Preferred Stock (the
"SECTION 16 REDEMPTION SHARES") as shall cause such Holder to be deemed the
beneficial owner of more than 10% of the then Outstanding shares of Common
Stock during the period ending 60 days after the Section 16 Determination
Date. If any court of competent jurisdiction shall determine that the
foregoing limitation is ineffective to prevent a Holder from being deemed the
beneficial owner of more than 10% of the then Outstanding shares of Common
Stock for the purposes of such Section 16(b), then the Corporation shall
redeem the Section 16 Redemption Shares. Upon such determination by a court
of competent jurisdiction, the Section 16 Redemption Shares shall immediately
and without further action be deemed returned to the status of authorized but
unissued shares of Series A Preferred Stock, and the Holder shall have no
interest in or rights under such Section 16 Redemption Shares. Any and all
dividends paid on or prior to the date of such determination shall be deemed
dividends paid on the remaining shares of Series A Preferred Stock held by
the Holder. Such redemption shall be for cash at a redemption price equal to
the sum of (i) 105% of the Stated Value of the Section 16 Redemption Shares
and (ii) any declared and unpaid dividends to the date of such redemption.
(c) Unless the Corporation shall have obtained the
approval of its voting stockholders to such issuance in accordance with the
rules of Nasdaq or any other stock market rules with which the Corporation
shall be required to comply, but only to the extent required thereby, the
Corporation shall not issue shares of Common Stock (i) upon conversion of any
shares of Series A Preferred Stock or (ii) as a dividend on the Series A
Preferred Stock, if such issuance of Common Stock, when added to the number
of shares of Common Stock previously issued by the Corporation (x) upon
conversion of shares of the Series A Preferred Stock, (y) upon exercise of
the Warrants issued pursuant to the terms of the Securities Purchase
Agreement and (z) in payment of dividends on the Series A Preferred Stock,
would equal or exceed 20% of the number of shares of the Corporation's Common
Stock which were issued and Outstanding on the Issue Date (the "MAXIMUM
ISSUANCE AMOUNT"). In the event that a properly executed Conversion Notice is
received by the Corporation which would require the Corporation to issue
shares of Common Stock equal to or in excess of the Maximum Issuance Amount,
the Corporation shall honor such conversion request by (a) converting the
number of shares of Series
-13-
<PAGE>
A Preferred Stock stated in the Conversion Notice which is not in excess of
the Maximum Issuance Amount and (b) redeeming the remaining number of shares
of Series A Preferred Stock stated in the Conversion Notice in cash at a
price equal to 120% of the Stated Value thereof, together with all accrued
and unpaid dividends (whether or not earned or declared, whether or not there
were funds legally available for the payment of dividends and whether or not
a Dividend Payment Due Date has occurred since the last dividend payment) on
the total number of shares stated in the Conversion Notice. In the event that
the Corporation shall elect to pay a dividend in shares of Common Stock which
would require the Corporation to issue shares of Common Stock equal to or in
excess of the Maximum Issuance Amount, the Corporation shall pay (1) a
dividend in a number of shares of Common Stock equal to one less than the
Maximum Issuance Amount and (2) the balance of the dividend in cash.
ARTICLE 7
VOTING RIGHTS
The Holders of the Series A Preferred Stock have no voting
power, except as otherwise provided by the Texas Business Corporation Act (the
"TBCA"), in this Article 7, and in Article 8 below.
Notwithstanding the above, the Corporation shall provide each
Holder of Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of all proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice thereof to
each Holder at least 30 days prior to the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event,
together with a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the TBCA the vote of the Holders of
the Series A Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the Holders of at least a majority of the
outstanding shares of Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of a majority of the
outstanding shares of Series A Preferred Stock (except as otherwise may be
required under the TBCA) shall constitute the approval of such action by the
class. To the extent that under the TBCA Holders of the Series A Preferred Stock
are entitled to vote on a matter with holders of Common Stock, voting together
as one class, each share of Series A Preferred Stock shall be entitled to a
number of votes equal to the number of shares of Common Stock into which it is
then convertible using the record date for the taking of such vote of
shareholders as the date as of which the Conversion Price is calculated. Holders
of the Series A Preferred Stock shall be entitled to notice of all shareholder
meetings or written consents (and copies of all proxy materials and other
-14-
<PAGE>
information sent to shareholders) with respect to which they would be entitled
to vote, which notice would be provided pursuant to the Corporation's bylaws and
the TBCA.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series A Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided in the TBCA) of the Holders of at least a majority
of the then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or
privileges of the Series A Preferred Stock;
(b) create any new class or series of capital stock
having a preference over the Series A Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation
("SENIOR SECURITIES") or alter or change the rights, preferences or
privileges of any Senior Securities so as to affect adversely the Series A
Preferred Stock;
(c) increase the authorized number of shares of Series
A Preferred Stock; or
(d) do any act or thing not authorized or contemplated
by this Certificate of Designation which would result in taxation of the
Holders of shares of the Series A Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code of 1986, as hereafter from time to time amended).
In the event Holders of least a majority of the then
outstanding shares of Series A Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series A
Preferred Stock, then the Corporation will deliver notice of such approved
change to the Holders of the Series Preferred Stock that did not agree to such
alteration or change (the "DISSENTING HOLDERS") and Dissenting Holders shall
have the right for a period of 30 days to convert pursuant to the terms of this
Certificate of Designation as in effect prior to such alteration or change or to
continue to hold their shares of Series A Preferred Stock.
Notwithstanding anything to the contrary herein, if at any
time the Corporation shall "spin-off' certain of its assets or businesses by
transferring, directly or indirectly, such assets or businesses to a Subsidiary
of the Corporation ("SPINCO") and making a dividend (the "SPIN-OFF DIVIDEND") to
the Corporation's stockholders of the shares of capital stock of Spinco, then
prior to making the Spin-off Dividend, the Corporation shall cause Spinco to
issue to each Holder that number of shares of preferred stock of Spinco with
substantially identical rights, preferences, privileges, powers, restrictions
and other terms as the Series A Preferred Stock equal to the number of shares of
Series A Preferred Shares held by such Holder immediately prior to the Spin-off
Dividend.
-15-
<PAGE>
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 Section 9.1 Loss, Theft, Destruction of
Preferred Stock
Upon receipt of evidence satisfactory to the Corporation of
the loss, theft, destruction or mutilation of shares of Series A Preferred Stock
and, in the case of any such loss, theft or destruction, upon receipt of
indemnity or security reasonably satisfactory to the Corporation, or, in the
case of any such mutilation, upon surrender and cancellation of the Series A
Preferred Stock, the Corporation shall make, issue and deliver, in lieu of such
lost, stolen, destroyed or mutilated shares of Series A Preferred Stock, new
shares of Series A Preferred Stock of like tenor. The Series A Preferred Stock
shall be held and owned upon the express condition that the provisions of this
Section 9.1 are exclusive with respect to the replacement of mutilated,
destroyed, lost or stolen shares of Series A Preferred Stock and shall preclude
any and all other rights and remedies notwithstanding any law or statute
existing or hereafter enacted to the contrary with respect to the replacement of
negotiable instruments or other securities without the surrender thereof.
SECTION 9.2 Who Deemed Absolute Owner
The Corporation may deem the Person in whose name the Series A
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series A Preferred Stock
for the purpose of receiving payment of dividends on the Series A Preferred
Stock, for the conversion of the Series A Preferred Stock and for all other
purposes, and the Corporation shall not be affected by any notice to the
contrary. All such payments and such conversion shall be valid and effectual to
satisfy and discharge the liability upon the Series A Preferred Stock to the
extent of the sum or sums so paid or the conversion so made.
SECTION 9.3 Fundamental Corporate Change
In the case of the occurrence of any Fundamental Corporate
Change described in Section 5(b), the Corporation shall cause to be mailed to
the Holder of the Series A Preferred Stock at its last address as it appears in
the Corporation's security registry, at least 20 days prior to the applicable
record, effective or expiration date specified in connection therewith (or, if
such 20 days notice is not possible, at the earliest possible date prior to any
such record, effective or expiration date), a notice stating (x) the date on
which a record is to be taken for the purpose of such corporate action, or if a
record is not to be taken, the date as of which the Holders of record of Series
A Preferred Stock to be entitled to any dividend, distribution, issuance or
granting of rights, options or warrants are to be determined or the date on
which such Fundamental Corporate Change is expected to become effective, and (y)
the date as of which it is expected that Holders of record of Series A Preferred
Stock will be entitled to exchange their shares for securities, cash or other
property deliverable upon such Fundamental Corporate Change.
SECTION 9.4 Register
The Corporation shall keep at its principal office a register
in which the Corporation shall provide for the registration of the Series A
Preferred Stock. Upon any transfer
-16-
<PAGE>
of the Series A Preferred Stock in accordance with the provisions hereof, the
Corporation shall register such transfer on the register of Series A
Preferred Stock.
SECTION 9.5 Withholding
To the extent required by applicable law, the Corporation may
withhold amounts for or on account of any taxes imposed or levied by or on
behalf of any taxing authority in the United States having jurisdiction over the
Corporation from any payments made pursuant to the Series A Preferred Stock.
SECTION 9.6 Headings
The headings of the Articles and Sections of this Certificate
of Designation are inserted for convenience only and do not constitute a part of
this Certificate of Designation.
SECTION 9.7 Severability
If any provision of this Certificate of Designation, or the
application thereof to any person or entity or any circumstance, is invalid or
unenforceable, (i) a suitable and equitable provision shall be substituted
therefor in order to carry out, so far as may be valid and enforceable, the
intent and purpose of such invalid or unenforceable provision, and (ii) the
remainder of this Certificate of Designation and the application of such
provision to other persons, entities or circumstances shall not be affected by
such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any other jurisdiction.
[SIGNATURE PAGE FOLLOWS]
-17-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Designation to be signed by its duly authorized officers on
April 19, 2000.
PRECEPT BUSINESS SERVICES, INC.
By: /s/ Doug Deason
------------------------------------
Name:
Title:
<PAGE>
ANNEX I
FORM OF CONVERSION NOTICE
To: [Name of Company]
-------------------------
-------------------------
-------------------------
The undersigned owner of this Series A 8% Convertible
Preferred Stock (the "SERIES A PREFERRED STOCK") issued by Precept Business
Services, Inc. (the "CORPORATION") hereby irrevocably exercises its option to
convert __________ shares of the Series A Preferred Stock into shares of the
common stock, par value $.01 per share ("COMMON STOCK"), of the Corporation in
accordance with the terms of the Certificate of Designation. The undersigned
hereby instructs the Corporation to convert the number of shares of the Series A
Preferred Stock specified above into Shares of Common Stock Issued at Conversion
in accordance with the provisions of Article 6 of the Certificate of
Designation. The undersigned directs that the Common Stock issuable and
certificates therefor deliverable upon conversion and the recertificated Series
A Preferred Stock, if any, not being surrendered for conversion hereby, together
with any check in payment for fractional Common Stock, be issued in the name of
and delivered to the undersigned unless a different name has been indicated
below. All capitalized terms used and not defined herein have the respective
meanings assigned to them in the Certificate of Designation. So long as the
Series A Preferred Stock shall have been surrendered for conversion hereby, the
conversion pursuant hereto shall be deemed to have been effected at the date and
time specified below, and at such time the rights of the undersigned as a Holder
of the Series A Preferred Stock shall cease and the Person or Persons in whose
name or names the Common Stock Issued at Conversion shall be issuable shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby and all voting and other rights associated with the
beneficial ownership of such Common Shares shall at such time vest with such
Person or Persons.
Date and time: ______________________
-----------------------------------------
Signature
Fill in for registration of Series A Preferred Stock
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Please print name and address (including zip code number)
