<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998.
REGISTRATION NO. 333-42689
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRECEPT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 5112 75-2487353
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
1909 WOODALL RODGERS FRWY., SUITE 500
DALLAS, TEXAS 75201
TELEPHONE: (214) 754-6600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
DAVID L. NEELY
CHIEF EXECUTIVE OFFICER
PRECEPT BUSINESS SERVICES, INC.
1909 WOODALL RODGERS FRWY., SUITE 500
TELEPHONE (214) 754-6600
(Name, address, including zip code, and telephone number,
including area code, of agent for service for registrant)
------------------------
COPIES TO:
RICHARD F. DAHLSON ROBERT BRANTL
Jackson Walker L.L.P. Bressler, Amery & Ross, P.C.
901 Main Street, Suite 6000 17 State Street
Dallas, Texas 75202 New York, New York 10004
(214) 953-6000 (212) 425-9300
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. /X/
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
NO. ITEM IN FORM S-4 LOCATION OR HEADING IN PROSPECTUS
--- -------------------------------------------------------- --------------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front Facing Page of Registration Statement;
Cover Page of Prospectus.............................. Cross-Reference Sheet; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages of Available Information; Incorporation of Documents
Prospectus............................................ by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and Outside Front Cover Page of Prospectus; Summary;
Other Information..................................... Risk Factors; Comparative Market Price Data;
Consolidated Financial Statements
4. Terms of the Transaction................................ Summary; The Transactions; Certain Differences in
the Rights of Shareholders of USTS and
Shareholders of Precept
5. Pro Forma Financial Information......................... Summary; Unaudited Pro Forma Consolidated
Financial Statements
6. Material Contacts With the Company Being Acquired....... Summary; Risk Factors
7. Additional Information Required For Reoffering by Not applicable
Persons and Parties Deemed to be Underwriters.........
8. Interests of Named Experts and Counsel.................. Summary; Risk Factors; Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification for Certain Differences in the Rights of Shareholders
Securities Act Liabilities............................ of USTS and Shareholders of Precept; Part II of
the Registration Statement
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants............. Not applicable
11. Incorporation of Certain Information by Reference....... Not applicable
12. Information With Respect to S-2 or S-3 Registrants...... Not applicable
13. Incorporation of Certain Information by Reference....... Not applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. ITEM IN FORM S-4 LOCATION OR HEADING IN PROSPECTUS
--- -------------------------------------------------------- --------------------------------------------------
<C> <S> <C>
14. Information With Respect to Registrants Other Than S-3 Outside Front Cover Page of Proxy
or S-2 Registrants.................................... Statement/Prospectus; Inside Front Cover Page of
Proxy Statement/Prospectus; Summary; Risk
Factors; Precept Selected Consolidated Financial
Information; Business of Precept; Precept
Management's Discussion and Analysis of
Financial Condition and Results of Operation;
Description of Precept Securities; Officers and
Directors of Precept; Precept Executive
Compensation; Precept Certain Relationships and
Related Transactions; Precept Security Ownership
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information With Respect to S-3 Companies............... Not applicable
16. Information With Respect to S-2 or S-3 Companies........ Not applicable
17. Information With Respect to Companies Other Than S-3 or Outside Front Cover Page of Proxy
S-2 Companies......................................... Statement/Prospectus; Inside Front Cover Page of
Prospectus; Summary; Market Price Data; Risk
Factors; USTS Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Description of USTS Securities; USTS
Business
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations Are Notice of Special Meeting of Shareholders; Outside
to Be Solicited....................................... Front Cover Page of Prospectus; Summary; The
Meeting; The Transactions; The Plan of
Reorganization; Certain Differences in the
Rights of Shareholders of USTS and Shareholders
of Precept; Officers and Directors of USTS; USTS
Security Ownership; USTS Certain Relationships
and Related Transactions; USTS Executive
Compensation
19. Information if Proxies, Consents or Authorizations Are Not applicable
not to Be Solicited or in an Exchange Offer...........
20. Indemnification of Directors and Officers............... Certain Differences in the Rights of Shareholders
of USTS and Shareholders of Precept; Part II of
the Registration Statement
21. Exhibits and Financial Statement Schedules.............. Financial Statements; Exhibits
22. Undertakings............................................ Part II of the Registration Statement
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (a) up to 9,612,500
shares of Precept Class A Common Stock to be issued by Precept to USTS in
connection with the acquisition by a subsidiary of Precept of substantially all
of the assets and business as a going concern of USTS (the "USTS Acquisition"),
(b) up to 1,815,000 shares of Precept Class A Common Stock issuable upon the
exercise of Precept Class A Common Stock Purchase Warrants and (c) an additional
19,887,500 shares of Precept Class A Common Stock to be offered and/or issued
from time to time in connection with the future direct and indirect acquisitions
of other businesses, properties or securities in one or more business
combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C
under the Securities Act of 1933, as amended (the "Securities Act") or as
otherwise permitted under the Securities Act (the "Shelf Offering"). The
complete form of prospectus relating to the USTS Acquisition (the "Proxy
Statement/Prospectus") follows immediately after this explanatory note. The form
of prospectus relating to the Shelf Offering (the "Shelf Prospectus") will be
identical in all respects to the form of the Proxy Statement/Prospectus, except
that the Shelf Prospectus contains (i) different front and back cover pages,
(ii) different "Summary" sections, and (iii) sections under the caption "Plan of
Distribution" instead of the sections under the captions "The Meeting," "The
Transactions," "USTS Business," "USTS Management's Discussion and Analysis of
Financial Condition and Results of Operations," "USTS Executive Compensation,"
"Market Price Data," "Description of USTS Securities," "Officers and Directors
of USTS," "USTS Security Ownership," "USTS Certain Relationships and Related
Transactions," and "Certain Differences in the Rights of Shareholders of USTS
and Shareholders of Precept". The form of the Proxy Statement/ Prospectus
included herein is followed by those pages to be used in the Shelf Prospectus
which differ from those in the Prospectus. Each of such pages included herein is
labeled "Alternate Page for Shelf Prospectus."
The number of shares and any other terms in connection with the offering and
issuance of Class A Common Stock in respect of which the Shelf Prospectus will
be delivered will be set forth in a separate supplement to the Shelf Prospectus.
The Shelf Prospectus may not be used to consummate issuance and sales of Precept
Class A Common Stock unless accompanied by such a Prospectus Supplement.
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC.
, 1998
Dear Shareholders of U.S. Transportation Systems, Inc. ("USTS"):
Attached is a Notice of Special Meeting of Shareholders of USTS and an
accompanying Proxy Statement/Prospectus which describes the matters to be acted
upon at a special meeting of the shareholders of USTS (the "Meeting"). At the
Meeting, shareholders of USTS will be asked to consider and vote to approve and
adopt, as a single proposal (the "Proposal") (i) an Agreement and Plan of
Reorganization, dated as of November 16, 1997 (the "Plan of Reorganization"), by
and among USTS, Precept Business Services, Inc., a Texas corporation
("Precept"), and Precept Acquisition Company, L.L.C., a Nevada limited liability
company and wholly-owned subsidiary of Precept ("Acquisition"), pursuant to
which USTS will transfer its business and substantially all of its assets to
Acquisition in exchange for 9,612,500 Shares (subject to increase if warrants
for USTS shares are exercised prior to the closing of the Transfer) of Precept
Class A Common Stock, par value $0.01 per share (the "Shares"), and Acquisition
will assume certain liabilities of USTS (the "Transfer"), and (ii) a Plan of
Liquidation and Dissolution pursuant to which USTS shall cease operations and
effect the liquidation and dissolution of USTS in accordance with Nevada law
(the "Plan of Liquidation"). Shareholders are urged to review carefully the
attached Proxy Statement/Prospectus. This document contains a detailed
description of the Plan of Reorganization and the Plan of Liquidation.
If the Transfer is approved and consummated, an aggregate of 9,612,500
Shares will be issued to USTS. Upon receipt of the Shares by USTS, USTS will
distribute the Shares to the holders of the outstanding shares of USTS Common
and Preferred Stock (the "Liquidating Distribution"); provided, however, that a
number of the Shares (the "Contingency Shares") will be held back by USTS and
placed in a liquidating trust to satisfy contingent liabilities of USTS. The
Board of Directors contemplates that approximately 600,000 Shares will be placed
in the liquidating trust. However, events between the date of this Proxy
Statement/Prospectus and the closing of the Transfer may cause the Board to
increase or decrease the number of Contingency Shares, but not below 500,000
shares. Any Contingency Shares and any other assets remaining in the liquidating
trust after three years or the earlier satisfaction of all tax and other
obligations and liabilities of USTS will be distributed to the USTS
shareholders. Based on the number of shares of USTS Common and Preferred Stock
outstanding on February 4, 1998, and assuming that 600,000 Shares are placed in
the liquidating trust as Contingency Shares, each outstanding share of USTS
Common and Preferred Stock would be entitled to receive approximately one share
of Precept Class A Common Stock in the Liquidating Distribution.
The Board of Directors of USTS has carefully reviewed and considered the
terms and conditions of the Plan of Reorganization. In addition, the Board of
Directors has received a written opinion from M.H. Meyerson & Co., Inc., its
financial advisor, to the effect that, as of the date hereof, the Transactions
are fair, from a financial point of view, to the common shareholders of USTS.
THE USTS BOARD OF DIRECTORS HAS DETERMINED THAT THE TRANSACTIONS ARE FAIR
TO, AND IN THE BEST INTERESTS OF, USTS AND ITS SHAREHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PLAN OF REORGANIZATION AND THE
PLAN OF LIQUIDATION, AND RECOMMENDS THAT THE USTS SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE PROPOSALS TO BE CONSIDERED AT THE MEETING.
The affirmative vote of the holders of a majority of the outstanding shares
of USTS Common Stock is required in order for the Plan of Reorganization to be
approved. IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING, YOU ARE
URGED TO PROMPTLY COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD TO US. If
you sign, date and mail your proxy card without indicating how you want to vote,
your proxy will be counted as a vote in favor of the Plan of Reorganization and
the Plan of Liquidation. If you fail to return your card, the effect will be a
vote against the Plan of Reorganization and the Plan of Liquidation. Even if you
plan to attend the meeting, please complete, sign and date your proxy and return
it promptly in the enclosed envelope that has been provided for your
convenience. This will not limit your right to vote in person or to attend the
meeting. You may revoke your proxy by following the procedures set forth in the
accompanying Proxy Statement/Prospectus.
Sincerely yours,
Michael Margolies, CHAIRMAN
U.S. Transportation Systems, Inc.
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC.
33 WEST MAIN STREET
ELMSFORD, NEW YORK 10523
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
To the Shareholders of U.S. Transportation Systems, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of U.S.
Transportation Systems, Inc., a Nevada corporation ("USTS"), will be held on
, 1998, commencing at 10:00 a.m., local time, at , located
at , to consider and act upon the following matters which are
described in more detail in the accompanying Proxy Statement/Prospectus:
1. To consider and vote, as a single proposal, upon the proposal (the
"Proposal") (1) to approve and adopt (a) the Agreement and Plan of
Reorganization, dated as of November 16, 1997 (the "Plan of
Reorganization"), by and among USTS, Precept Business Services, Inc., a
Texas corporation ("Precept"), and Precept Acquisition Company, L.L.C., a
Nevada limited liability company and wholly-owned subsidiary of Precept
("Acquisition"), pursuant to which USTS will transfer its business and
substantially all of its assets to Acquisition in exchange for 9,612,500
shares of Precept Class A Common Stock, par value $0.01 per share, of
Precept, and Acquisition will assume certain liabilities of USTS (the
"Transfer"), and (b) the Plan of Liquidation and Dissolution (the "Plan of
Liquidation") pursuant to which USTS will distribute Precept Class A Common
Stock received in the Transfer (subject to the holdback of at least 500,000
of the shares to satisfy certain contingent liabilities) to the USTS
shareholders in complete liquidation of USTS and USTS will dissolve, and (2)
to change the name of USTS to .
2. To consider and act upon such other business as may properly be
brought before the meeting or any adjournment or postponement thereof.
The close of business on February 4, 1998 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
meeting and any adjournment or postponement thereof. Neither holders of USTS
Common Stock nor holders of USTS Preferred Stock are entitled to dissenters'
appraisal rights under the Nevada General Corporation Law in respect of the
Proposal.
When the proxies are returned properly executed, the shares represented
thereby will be voted in accordance with the indicated instructions. However, if
no instructions have been specified on the returned proxy, the shares
represented thereby will be voted "FOR" approval of the Proposal. Any
shareholder giving a proxy has the right to revoke it at any time before it is
voted by filing, with the Secretary of USTS, either an instrument revoking the
proxy or a duly executed proxy bearing a later date. Proxies also may be revoked
by attending the meeting and voting in person.
By Order of the Board of Directors
U.S. Transportation Systems, Inc.
SECRETARY
, 1998
YOUR VOTE IS IMPORTANT NO MATTER HOW LARGE OR SMALL YOUR HOLDINGS MAY BE. TO
ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE THE ENCLOSED PROXY CARD,
WHICH IS SOLICITED BY THE BOARD OF DIRECTORS OF USTS, SIGN EXACTLY AS YOUR NAME
APPEARS THEREON AND RETURN IMMEDIATELY IN THE ENVELOPE SUPPLIED.
<PAGE>
SUBJECT TO COMPLETION
DATED JANUARY 30, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC.
PROXY STATEMENT
---------------------
PRECEPT BUSINESS SERVICES, INC.
PROSPECTUS
This Proxy Statement/Prospectus is being furnished by the management of U.S.
Transportation Systems, Inc., a Nevada corporation ("USTS") to holders of common
stock, par value $0.01 per share ("USTS Common Stock"), of U.S. Transportation
Systems, Inc., a Nevada corporation ("USTS"), in connection with the
solicitation of proxies by the Board of Directors of USTS for use at a special
meeting of shareholders of USTS (the "Meeting") to be held on , 1998,
at , located at , commencing at 10:00 a.m., local time,
and at any adjournment or postponement thereof.
At the Meeting, the shareholders of USTS will vote upon the transactions
contemplated by (a) the Agreement and Plan of Reorganization, dated as of
November 16, 1997 (the "Plan of Reorganization"), by and among USTS, Precept
Business Services, Inc., a Texas corporation ("Precept") and Precept Acquisition
Company, L.L.C., a Nevada limited liability company and wholly-owned subsidiary
of Precept ("Acquisition"), pursuant to which USTS will transfer its business
and substantially all of its assets to Acquisition in exchange for 9,612,500
shares (subject to increase on a share-for-share basis if outstanding warrants
for the purchase of USTS shares are exercised prior to the closing of the
Transfer) of Precept Class A Common Stock, par value $0.01 per share (the
"Shares"), and Acquisition will assume certain liabilities of USTS (the
"Transfer"), and (b) a Plan of Liquidation and Dissolution pursuant to which
USTS shall cease operations and effect the liquidation and dissolution of USTS
in accordance with Nevada law (the "Plan of Liquidation"), as well as on the
proposal to change the name of USTS after the Transfer to (the "Name
Change"). Upon completion of the Transfer, the entire outstanding capital stock
of Precept will consist of an aggregate of 45,612,500 shares of Precept Class A
and Class B Common Stock (collectively, the "Precept Common Stock"). After the
Transfer, USTS will distribute the Shares (subject to the holdback by USTS of a
number of Shares (currently estimated to be 600,000) to satisfy certain
contingent liabilities and obligations) to the USTS shareholders in liquidation
of USTS (the "Liquidating Distribution") and USTS will dissolve, in accordance
with the terms of a Plan of Liquidation. The remaining Shares (the "Contingency
Shares") will be retained by USTS and placed in a liquidating trust to satisfy
contingent liabilities of USTS, in accordance with the terms of the Plan of
Liquidation. The Board of Directors of USTS shall determine the number of
Contingency Shares, which number shall not be less than 500,000 nor more than
1,000,000, as shall in its sole discretion be sufficient for the satisfaction of
any remaining taxes, expenses and contingent liabilities of USTS after the
consummation of the transactions contemplated in the Plan of Reorganization and
Plan of Liquidation. Any of the Contingency Shares and any other assets
remaining in the liquidating trust after the earlier of (a) the date on which
all liabilities of USTS have been satisfied or settled or (b) three years, will
be distributed to the USTS shareholders at that time. Based on the number of
shares of common stock $0.01 par value per share of USTS ("USTS Common Stock")
and the preferred stock of USTS $0.01 par value per share ("USTS Preferred
Stock") (collectively, "USTS Stock") outstanding on February 4, 1998 and the
estimate of 600,000 Contingency Shares, each outstanding share of USTS Stock
would be entitled to receive approximately one share of Precept Class A Common
Stock in the Liquidating Distribution. Throughout this Prospectus/Proxy
Statement, the Plan of Reorganization, the Plan of Liquidation, and all of the
transactions contemplated by either of them are referred to collectively as the
"Transactions."
Holders of USTS Stock do not have dissenters' appraisal rights in respect of
the Transactions.
This Proxy Statement/Prospectus also constitutes a prospectus of Precept
with respect to the shares of Precept Class A Common Stock to be issued to USTS
in the Transfer, and the Precept Class A Warrants to acquire shares of Precept
Class A Common Stock to be issued by Precept to the holders of outstanding USTS
Class C Warrants to purchase USTS Common Stock, as provided in the Plan of
Reorganization.
Precept has applied for approval for listing of the Shares to be issued in
connection with the Transfer on the Nasdaq SmallCap Market ("Nasdaq"), subject
to notice of issuance and requisite approval of the Transactions by the USTS
shareholders. FOR A DISCUSSION OF CERTAIN CONSIDERATIONS REGARDING THE
BUSINESSES AND OPERATIONS OF USTS AND PRECEPT THAT SHOULD BE EVALUATED BEFORE
VOTING ON THE PROPOSALS DESCRIBED HEREIN AT THE MEETING, SEE "RISK FACTORS" ON
PAGE .
--------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/ PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Proxy Statement/Prospectus and accompanying forms of proxy are first
being mailed to stockholders of USTS on or about , 1998.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1998.
<PAGE>
AVAILABLE INFORMATION
USTS is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements, information statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements, information statements and other information filed by USTS with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission, at
prescribed rates. Additionally, the Commission maintains a Website that contains
such information regarding USTS. USTS Common Stock is principally traded on
Nasdaq. Reports, proxy statements and other information relating to USTS can be
inspected at the offices of Nasdaq, 1735 K Street, Washington, D.C. 20006.
Precept will be subject to the informational requirements of the Exchange
Act and in accordance therewith will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission described above. Precept intends to furnish to its shareholders
annual reports containing financial statements audited by independent certified
public accountants following the end of each fiscal year.
Precept has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities to be issued pursuant to the Plan of Reorganization. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference. The Registration
Statement, including exhibits filed as a part thereof, are available for
inspection and copying at the Commission's offices as described above.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS IN
CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY USTS, PRECEPT OR ANY OTHER PERSON. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL OR TO OR
FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN
SUCH JURISDICTION.
2
<PAGE>
SUMMARY
THE FOLLOWING IS ONLY A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/ PROSPECTUS AND DOES NOT PURPORT TO BE COMPLETE.
REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE
DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. AS
USED IN THIS PROXY STATEMENT/PROSPECTUS, THE TERMS "USTS", "PRECEPT", AND
"ACQUISITION" REFER TO SUCH CORPORATIONS, RESPECTIVELY, AND, EXCEPT WHERE THE
CONTEXT OTHERWISE REQUIRES, SUCH ENTITIES AND THEIR RESPECTIVE PREDECESSORS AND
SUBSIDIARIES. ALL INFORMATION CONCERNING USTS INCLUDED IN THIS PROXY
STATEMENT/PROSPECTUS HAS BEEN FURNISHED BY USTS, AND ALL INFORMATION CONCERNING
PRECEPT AND ACQUISITION INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS HAS BEEN
FURNISHED BY PRECEPT. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN
THIS SUMMARY HAVE THE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. PRECEPT EXPECTS TO EFFECT A 3.15438 TO 1 STOCK SPLIT ON
THE PRECEPT COMMON STOCK PRIOR TO THE EFFECTIVE DATE OF THIS PROXY
STATEMENT/PROSPECTUS. THE PRO FORMA SHARE AND PER SHARE INFORMATION REFLECTS THE
PROPOSED STOCK SPLIT. UNLESS OTHERWISE INDICATED, YEAR END FINANCIAL INFORMATION
AND OTHER INFORMATION REFERENCING A PARTICULAR YEAR WITH RESPECT TO USTS IS AS
OF AND FOR THE YEAR ENDED DECEMBER 31, AND WITH RESPECT TO PRECEPT IS AS OF AND
FOR THE YEAR ENDED JUNE 30. USTS IS CONSIDERED BY THE COMMISSION TO BE A SMALL
BUSINESS ENTERPRISE AND, ACCORDINGLY, THE FINANCIAL INFORMATION CONTAINED HEREIN
REGARDING USTS WAS PREPARED IN ACCORDANCE WITH THE COMMISSION'S SPECIAL RULES
AND REGULATIONS APPLICABLE TO FINANCIAL REPORTING BY SMALL BUSINESS ENTERPRISES.
SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES
ATTACHED HERETO IN THEIR ENTIRETY.
GENERAL
At the Meeting, holders of USTS Common Stock will be asked to act upon and
vote, as a single proposal, on the adoption and approval of the transfer of the
business and substantially all of the assets of USTS to Acquisition, and the
assumption by Acquisition of certain liabilities of USTS, pursuant to the terms
of the Plan of Reorganization, and the subsequent liquidation and dissolution of
USTS pursuant to the Plan of Liquidation, which are more particularly described
herein. A copy of each of the Plan of Reorganization and the Plan of Liquidation
is attached hereto and incorporated herein by reference as Annex A and Annex B,
respectively. For a description of certain important federal income tax
consequences of the Transactions, see "Summary--The Transfer"; "--Certain
Material Federal Income Tax Consequences"; and "The Transactions--Certain
Material Federal Income Tax Consequences."
THE PARTIES
USTS
USTS is currently engaged in the following businesses, which primarily
relate to transportation. USTS' transportation services consist of (i) bus and
other motor vehicle transportation services to customers such as businesses and
municipalities on a contract basis, (ii) chauffeured vehicle services, (iii)
over-the-road package delivery services for common carriers, (iv) five full-load
tractor-trailer businesses based in Syracuse, New York, Orlando, Florida,
Wisconsin Rapids, Wisconsin, Charleston, South Carolina, and Kansas City,
Missouri, and (v) a rental car brokerage business in Mesa, Arizona. The rental
car brokerage business will not be transferred to Acquisition but will be
retained by USTS and disposed of in the liquidation of USTS subsequent to the
Transfer.
USTS was incorporated under the laws of the State of Nevada in May 1975
under the name Holland Industries, Inc. USTS changed its name to U.S.
Transportation Systems, Inc. in November 1990. The corporate offices and all
operational activities of USTS and its subsidiaries are directed from its
headquarters located at 33 West Main Street, Elmsford, New York, 10523. The
telephone number at that address is (914) 345-3339.
3
<PAGE>
PRECEPT
Precept is a rapidly growing, independent distributor of custom and stock
business products and provider of document management services to businesses of
all sizes throughout the United States. Precept was founded in 1988 as a
regional business products distributor in Dallas, Texas, and since that time has
expanded rapidly both internally and through acquisitions, to 30 locations
throughout the United States. Business products distributed include custom
business forms, commercial printing/graphic arts, electronic forms, custom stock
labels, computer supplies, envelopes and advertising specialty products. Precept
provides comprehensive information solutions for its customers' business
products, inventory control and document management needs. In addition, Precept
provides electronic forms capabilities and integration of its customers
accounting operations to streamline information flow and reduce overall
operating costs. Precept's business strategy is (i) to act as a premier sole
source "corporate outsourcer" providing a broad array of business products to
its customers while reducing overall procurement costs and providing a high
level of customer service and (ii) to continue its expansion through strategic
acquisitions and internal growth. Precept also operates various corporate
transportation services within the Dallas/Fort Worth metropolitan area. Since
inception, Precept's revenues from its core, continuing operations have grown
from $3.8 million in fiscal year 1989 to $77.3 million in fiscal year 1997, a
46% compound annual growth rate.
Following the founding and development of Precept, Precept's goal has been
to acquire or establish centrally managed networks of regional offices and
warehouses in major metropolitan markets throughout the United States. As a
result, Precept has completed 15 acquisitions of these regional business
products distributors since inception. Once a regional office/warehouse is
acquired or established, Precept seeks to leverage its distribution capabilities
by acquiring smaller companies or opening satellite sales offices in the
surrounding areas. Precept also seeks to increase the sales and profitability of
its acquired companies by integrating the Precept business strategy and through
elimination of redundant operating expenses. Going forward, Precept plans to
continue to actively pursue this consolidation strategy within the business
products distribution and document management industries.
Precept believes that the acquisition and operational experience of its
management team provides it with the ability to execute upon the growth
component of its business strategy. Precept, in only its fifth year of
existence, was recognized as the largest independent business products
distributor by a national business products magazine and has retained this
status for five consecutive years. Precept's management team brings vast
experience in the acquisition and integration of businesses, previously with
MTech Corp. ("MTech") (sold to EDS in 1988), Affiliated Computer Services, Inc.,
(NYSE:AFA) ("ACS") and now at Precept. Management believes it can and will
become the "consolidator of choice" in the business products distribution and
document management industries.
The industry in which Precept operates is large, fragmented and, Precept
believes, rapidly consolidating. Precept believes that opportunities exist to
consolidate participants in the industry and that its principal competitors are
direct manufacturers and independent distributors of business products.
Management believes the market for the business products it distributes is in
excess of $20 billion annually with the top 100 independent distributors
representing $1.6 billion annually, or 7.8% of the total market. Over the last
three years, total revenues from the top 100 independent business products
distributors have grown by 16% annually as distributors continue to gain market
share from the direct manufacturers. In 1996, this trend resulted in independent
distributors surpassing direct manufacturers in market share by representing
approximately 55% of the total business products market. Precept believes
independent distributors' market share will continue to grow in the future as
more of its target customers make the decision to outsource the distribution of
their business products and document management needs.
Precept believes that similar consolidation possibilities exist in the
corporate transportation services industry. Precept management believes the
chauffeured vehicle service industry, in particular, presents an attractive
opportunity for consolidation. In 1996, the chauffeured vehicle service business
accounted for
4
<PAGE>
approximately $3.9 billion in revenues to roughly 9,000 companies throughout the
United States. Precept believes that no one company currently represents more
than 2% of the overall market.
Precept was incorporated under the laws of the State of Texas in May 1993.
Precept previously operated under the name "Precept Investors, Inc." which name
was changed to "Precept Business Services, Inc." on February , 1998. Precept's
principal corporate offices are located at 1909 Woodall Rodgers Frwy, Suite 500,
Dallas, Texas 75201, and its telephone number at that address is (214) 754-6600.
ACQUISITION
Acquisition is a Nevada limited liability company and wholly-owned
subsidiary of Precept organized on November 14, 1997 for the purpose of entering
into and consummating the Plan of Reorganization and the related transactions.
After completion of the Transfer, Acquisition will carry on the business now
conducted by USTS, other than USTS' rental car brokerage business.
Acquisition's principal corporate offices are located at 1909 Woodall
Rodgers Frwy, Suite 500, Dallas, Texas 75201, and its telephone number at that
address is (214) 754-6600.
RECOMMENDATION OF THE USTS BOARD OF DIRECTORS
The USTS Board of Directors has determined that the Plan of Reorganization
and the Plan of Liquidation are fair to, and in the best interests of, the
shareholders of USTS. Accordingly, the USTS Board has unanimously approved the
Transactions and recommends that the shareholders of USTS vote in favor of the
proposal to approve and adopt the Plan of Reorganization and the Plan of
Liquidation. The recommendation of the USTS Board is based on a number of
strategic, operating and financial factors described in "The Transactions--USTS
Reasons for the Transactions; Recommendations of the USTS Board." Among the
factors on which the recommendation of the USTS Board is based are:
- improved access to financing for the combined entities;
- economies of scale of the combined entities;
- increase in management resources available to the combined entities; and
- difficulties historically encountered by USTS in achieving growth as an
independent entity.
RECOMMENDATION OF THE FINANCIAL ADVISOR
M.H. Meyerson & Co., Inc. ("Meyerson") has delivered its opinion dated
October 16, 1997, which it has confirmed as of the date of this Proxy
Statement/Prospectus, to the USTS Board, to the effect that, as of such dates,
the Transactions are fair, from a financial point of view, to the common
shareholders of USTS. See "The Transactions--Opinion of USTS Financial Advisor."
A copy of the opinion of Meyerson which sets forth the assumptions made,
procedures followed, matters considered and limitations on the scope of the
review by Meyerson in rendering its opinion, is attached as Annex C to this
Proxy Statement/ Prospectus.
THE MEETING
PURPOSES OF THE MEETING
The purpose of the Meeting is to consider and vote to approve and adopt, as
a single proposal, the Plan of Reorganization, the Plan of Liquidation in
connection with the consummation of the Transfer, and the change of name of USTS
required by the Plan of Reorganization.
5
<PAGE>
DATE, TIME AND PLACE
The Meeting will be held on , 1998, at the , located
at at 10:00 a.m., local time.
RECORD DATE; SHARES ENTITLED TO VOTE
The USTS Board has established February 4, 1998, as the record date for the
determination of shareholders entitled to notice of and to vote at the Meeting.
Only holders of record of USTS Common Stock at the close of business on such
date are entitled to vote at the Meeting. On such date, there were approximately
8,979,187 shares of USTS Common Stock outstanding, each of which will be
entitled to vote on each matter to be acted upon or which may properly be
brought before the Meeting. Discretionary authority granted by proxies voted
against the Transactions will not be used to adjourn the meeting to solicit
additional votes.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the issued and
outstanding shares of USTS Common Stock is required to approve the Plan of
Reorganization, the Plan of Liquidation, and the Name Change.
For additional information concerning the special meeting, see "The
Meeting." For information concerning the security ownership of USTS and Precept
management and certain other persons, see "The Transactions--Interests of
Certain Persons in the Transactions" and "Security Ownership."
THE PLAN OF REORGANIZATION
TRANSFER
At the closing of the Transfer, USTS will transfer its business and
substantially all of its assets to Acquisition in exchange for 9,612,500 shares
(plus one additional share for each USTS Warrant or option exercised prior to
the Transfer) of Precept Class A Common Stock, and Acquisition will assume
certain liabilities and obligations of USTS. After the closing of the Transfer,
there will be 45,612,500 shares of Precept Common Stock outstanding. See "The
Plan of Reorganization--Terms of the Plan of Reorganization."
CONDITIONS TO THE TRANSFER
Consummation of the Transfer is subject to the satisfaction of a number of
conditions, including obtaining requisite shareholder approval. See "The Plan of
Reorganization--Terms of the Plan of Reorganization--Conditions."
TERMINATION OF THE PLAN OF REORGANIZATION
The Plan of Reorganization is subject to termination at the option of either
of the Boards of USTS or Precept if the Transfer is not consummated by January
31, 1998, and prior to such time upon the occurrence of certain specified
events. Under certain circumstances, Precept or USTS may become obligated to pay
to the other a termination fee of $1 million in the event the Transfer is not
consummated. See "The Plan of Reorganization--Terms of the Plan of
Reorganization--Termination."
AMENDMENT TO THE PLAN OF REORGANIZATION AND WAIVER
The Plan of Reorganization may be amended or supplemented at any time by
agreement of USTS and Precept, or any provision of the Plan of Reorganization
may be waived at any time by the Board of Directors of the party which is, or
whose shareholders are, entitled to the benefits thereof, by action taken by
their respective Boards of Directors; provided that, after shareholder approval
is obtained as described herein, no amendment or waiver may be made which
materially adversely affects the rights of the holders of the USTS Common Stock
without further shareholder approval. Neither USTS nor Precept has any
6
<PAGE>
current intention to seek an amendment to or waiver of any provision of the Plan
of Reorganization. See "The Plan of Reorganization--Terms of the Plan of
Reorganization--Other Matters."
REGULATORY APPROVAL
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Transfer may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. USTS and Precept
filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division on , 1998. On , 1998, the FTC notified
USTS and Precept that early termination of the HSR Act waiting period had been
granted.
EFFECT OF THE TRANSACTIONS ON USTS SHAREHOLDERS AND WARRANT HOLDERS
Promptly after the closing of the Transfer, USTS will distribute to its
shareholders of record (both Common and Preferred) all of the Shares it received
except for those which are to be retained as a Contingency Reserve. As a result,
each USTS shareholder on the record date for the distribution will receive
approximately one Share for each share of USTS Common and Preferred Stock held
on that date. The Shares received will be listed on Nasdaq and be immediately
saleable by the shareholders. Shortly after the Transfer, and no later than one
year after the date of the Meeting, USTS will close its stock record books and
will not permit any USTS Common Stock to be transferred except by will or other
legal proceeding. At the same time, USTS will transfer all of its assets and
liabilities to a liquidating trust and will dissolve and cease to exist.
Thereafter, those who were USTS shareholders when its stock records were closed
will retain only an interest in the liquidating trust. If, after all liabilities
assumed by the liquidating trust have been satisfied, there are any assets
remaining in the trust, those assets will be distributed pro rata to those who
were USTS shareholders when its stock records were closed.
As of the date of the closing (the "Closing Date"), each USTS Class C
Warrant held of record as of such date will automatically be converted into one
Precept Class A Warrant and shall become exercisable for shares of Precept Class
A Common Stock in lieu of the USTS Common Stock previously purchasable upon
exercise. Except for the fact that the Precept Class A Warrants shall be
exercisable for shares of Precept Class A Common Stock, the Precept Class A
Warrants shall have terms and conditions substantially the same as those of the
USTS Class C Warrants. See "Description of Precept Securities--Precept Class A
Warrants." Certificates representing such Precept Class A Warrants will be
distributed promptly after the Closing Date in exchange for and replacement of
current certificates representing outstanding USTS Class C Warrants.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Transactions are intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code (the "Code"). If the Transactions do
so qualify, neither USTS nor the shareholders of USTS will recognize taxable
gain or loss upon the receipt of shares of Precept Class A Common Stock in
connection with the Transfer or the subsequent dissolution of USTS, except with
respect to cash received in lieu of fractional shares and any cash subsequently
received in the liquidation of USTS. See "The Transactions--Certain Material
Federal Income Tax Consequences." The parties to the Plan of Reorganization have
not and do not intend to seek a ruling from the Internal Revenue Service (the
"IRS") as to the federal income tax consequences of the Transactions. Instead,
USTS has obtained the opinion of its legal counsel, Bressler, Amery & Ross, P.C.
("BA&R") as to certain of the expected federal income tax consequences of the
Transactions, a copy of which is attached as an exhibit to the Registration
Statement (the "Tax Opinion").
7
<PAGE>
The Tax Opinion is based on the Code, existing and proposed regulations
thereunder and current administrative rulings and court decisions, all as of the
date of the Tax Opinion and all of which are subject to change, possibly
retroactively. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE
TAX CONSEQUENCES OF THE TRANSFER AND SUBSEQUENT LIQUIDATION AND DISSOLUTION OF
USTS, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS WITH RESPECT TO THEIR OWN PARTICULAR
CIRCUMSTANCES. For a discussion of these and other material federal income tax
considerations in connection with the Transfer, see "The Transactions--Certain
Material Federal Income Tax Consequences."
NO APPRAISAL RIGHTS
Neither holders of USTS Common Stock nor holders of USTS Preferred Stock are
entitled to dissenters' appraisal rights under the Nevada General Corporation
Law, as amended (the "NGCL"), in respect of the Transfer, see "The Meeting" and
"The Transactions--No Dissenters' Rights of Appraisal."
COMPARISON OF SHAREHOLDER RIGHTS
The rights of USTS' shareholders currently are determined by reference to
the NGCL and USTS' Articles of Incorporation and Bylaws. Following the
Liquidating Distribution, the former USTS shareholders will become shareholders
of Precept, and their rights as shareholders will be determined by the Texas
Business Corporation Act, as amended (the "TBCA"), Precept's Restated and
Amended Articles of Incorporation (the "Precept Articles") and Precept's Bylaws.
See "Certain Differences in the Rights of Shareholders of USTS and Shareholders
of Precept."
LISTING OF PRECEPT CLASS A COMMON STOCK; CONTINGENT REVERSE STOCK SPLIT
Precept has applied for approval for listing of the Shares to be issued in
connection with the Transfer on Nasdaq, subject to notice of issuance and
requisite approval of the Transactions by the USTS shareholders. In connection
with Precept's Nasdaq listing application, Precept has indicated to Nasdaq that,
if required by Nasdaq, it will effect a reverse stock split as necessary for the
purpose of complying with the applicable, recently revised Nasdaq listing
criteria, including the requirement that the Precept Class A Common Stock trade
at or above $4 per share after the consummation of the Transactions. The
shareholders of Precept have approved an amendment to Precept's Articles of
Incorporation whereby such number of shares of Precept Common Stock between one
and two, consisting only of whole shares and tenths of shares, as shall be
determined by the Precept Board of Directors, shall be converted and
reconstituted into one share of Precept Common Stock in a reverse stock split of
the Precept Common Stock, if determined by the Precept Board of Directors that
such reverse stock split is required to maintain its eligibility to be listed on
Nasdaq. In the event of such a split, the number of Shares issuable to USTS in
the Transactions would be adjusted to reflect the reverse stock split. For
example, if the Precept Board of Directors were to approve a 1 for 2 reverse
stock split, each shareholder would receive one share of Precept Class A Common
Stock in exchange for every two shares previously held. See "Risk Factors--
Nasdaq Listing Application; Contingent Reverse Stock Split" and "The
Transactions--Reverse Stock Split."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
USTS MANAGEMENT
Pursuant to the Plan of Reorganization, Precept will enter into Employment
Agreements with each of Michael Margolies and Ron Sorci, who are the Chairman
and the President of USTS, respectively. Precept has also agreed with Mr.
Margolies that he will serve as Vice Chairman of the Board of Precept after the
Transfer and agreed with Robert Blackman, a member of the USTS Board, that Mr.
Blackman will serve
8
<PAGE>
on the Board of Directors of Precept after the Transfer. See "The Plan of
Reorganization--Terms of the Plan of Reorganization--Additional Conditions to
the Obligations of USTS" and "The Transactions-- Interests of Certain Persons in
the Transactions."
SECURITY OWNERSHIP OF THE MARGOLIES FAMILY
Michael Margolies, the Chairman of USTS, is the record owner of 1,835,116
shares of USTS Common Stock. Jay Owen Margolies, a son of Michael Margolies and
a member of the USTS Board, is the record owner of 286,054 shares of USTS Common
Stock. The Margolies Family Trust, the beneficiaries of which are the children
of Michael Margolies, is the owner of 855,000 shares of USTS Common Stock. In
total, the Margolies family owns an aggregate of 2,976,170 shares of USTS Common
Stock, or 33.1% of the outstanding USTS Common Stock. Accordingly, approximately
one-third of the benefit of the Transactions will inure to members of the
Margolies family.
Because Michael Margolies is an affiliate of USTS and will be an affiliate
of Precept after the Transfer, the Shares received by him through the
Transactions would be restricted shares, which could be sold only in limited
circumstances. Therefore, in order to induce Mr. Margolies to enter into an
employment agreement with Precept, Precept has agreed to enter into a
Registration Rights Agreement with Michael Margolies granting Mr. Margolies and
the Margolies Family Trust certain rights to register with the Securities and
Exchange Commission sales of the Shares received by them in connection with the
Transactions. See "The Plan of Reorganization--Terms of the Plan of
Reorganization-Additional Conditions to the Obligations of USTS" and "The
Transactions--Interests of Certain Persons in the Transactions."
PAYMENT OF MARGOLIES NOTE
Since the inception of USTS, Michael Margolies and members of his family
have provided loans to finance the operations of USTS, when needed. In 1994, the
outstanding balance of those loans, $707,676 at that time, was consolidated into
a promissory note bearing interest at 15% per annum. Since that time, additional
amounts have been added to the note, as USTS has continued to borrow from the
Margolies family. On July 7, 1997, a replacement note was issued in the
principal amount owed by USTS on that date, $1,039,794. As of September 30,
1997, the remaining unpaid balance of the note was $998,569.
The Plan of Reorganization provides that within ten days after the closing
of the Transfer, Percept will cause Acquisition to repay the principal balance
and all accrued interest on the note, unless Precept and Mr. Margolies have
agreed to restructure the note on mutually agreeable terms. See "The Plan of
Reorganization--Terms of the Plan of Reorganization--Post Closing Obligations"
and "The Transactions--Interests of Certain Persons in the Transactions."
THE PLAN OF LIQUIDATION
The parties to the Plan of Reorganization intend that the transactions
contemplated thereby and in the Plan of Liquidation shall qualify as a tax-free
reorganization within the meaning of Section 368(a) of Code. In order to
qualify, among other things, "substantially all of the properties" of USTS must
be transferred to Acquisition and USTS must be liquidated and dissolved.
Therefore, the Plan of Liquidation and the transactions contemplated therein are
an integral part of the transactions contemplated by the Plan of Reorganization.
9
<PAGE>
LIQUIDATING DISTRIBUTION
As soon as practicable after shareholder approval of the Plan of Liquidation
and consummation of the Transfer, USTS shall file a Certificate of Dissolution
and shall cease all business operations except as such operations relate to the
payment of obligations, distribution of remaining assets to USTS shareholders
and the winding up and dissolution of USTS. USTS shall distribute pro rata to
the USTS shareholders that portion of the Shares remaining after making
provision for the Contingency Reserve. The distribution may be made in a series
of distributions and, while intended to be made in Shares, may be made in cash,
in such manner as the USTS Board may determine. The Shares so distributed will
be listed for quotation on Nasdaq and will be freely tradeable, unless they are
held by persons who are affiliates of USTS prior to the Transfer or are
affiliates of Precept after the Transfer. The USTS Common Stock of USTS will
cease to trade and will not be transferable thereafter except by will or other
legal proceeding. The USTS Common Stock will have no continuing value except for
an interest in the Contingency Shares. See "The Transactions--Plan of
Liquidation--Liquidating Distribution."
LIQUIDATING TRUST
The Contingency Shares and any other assets of USTS remaining after the
Transfer will be deposited into a Liquidating Trust. The Liquidating Trust will
also assume all actual and contingent liabilities of USTS remaining after the
Transfer to Precept, and USTS will promptly dissolve. The Trustee of the
Liquidating Trust, who will initially be Michael Margolies, the present Chairman
of USTS, will be charged with responsibility for using the assets in the Trust
to satisfy the liabilities assumed by the Trust. Once the Trustee has determined
that all liabilities have been satisfied, and in any event no later than three
years after the Transfer, any assets remaining in the Trust will be distributed
to those persons who were shareholders of record of USTS when the Liquidating
Trust was established.
MARKETS AND MARKET PRICES
USTS Common Stock is traded on Nasdaq. On November 14, 1997, the last full
trading day prior to the public announcement of the execution of the Plan of
Reorganization, the last sale price for USTS Common Stock was $4.00 and on
, 1998, the last full trading day for which quotations were available
prior to the date of this Proxy Statement/Prospectus, the last sale price for
USTS Common Stock was .
For information relating to market prices of and dividends on USTS Common
Stock, see "Comparative Market Price Data." SHAREHOLDERS ARE URGED TO OBTAIN
CURRENT QUOTATIONS FOR THESE SECURITIES.
Precept is a privately-held corporation. There has never been a market for
the securities of Precept, and no market prices or other comparative price
information is available for the Precept Class A Common Stock. Prior to the
Liquidating Distribution of the Shares to the shareholders of USTS, the Shares
will be listed for trading on Nasdaq.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Proxy Statement/Prospectus includes "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact are "forward-looking statements" for purposes of these provisions,
including any projections of earnings, revenues or other financial items, any
statements of the plans and objectives of management for future operations, any
statements concerning proposed new products or services, any statements
regarding future economic conditions or performance, and any statement of
assumptions underlying any of the foregoing. In some cases, forward-looking
statements can be identified by use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative
10
<PAGE>
thereof or other comparable terminology. Although Precept believes that the
expectations reflected in the forward-looking statements contained herein are
reasonable, they can give no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Future financial condition and results, as well as any
forward-looking statements, are subject to inherent risks and uncertainties,
some of which are summarized in "Risk Factors" described herein. The safe harbor
for forward looking statements provided in Section 27A of the Securities Act and
Section 21E of the Exchange Act do not apply to initial public offerings such as
the offering of securities described herein.
PRECEPT
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents summary historical and pro forma financial
information for Precept. The financial information as of and for the four years
ended June 30, 1997 was derived from audited consolidated financial statements
of Precept. The financial information as of and for the year ended June 30, 1993
was derived from the unaudited divisional financial statements of Precept's
former parent company. The financial information as of and for the three months
ended September 30, 1997 and 1996 was derived from the unaudited consolidated
financial statements of Precept. In the opinion of management of Precept, the
financial information for the year ended June 30, 1993, and for the three months
ended September 30, 1997 and 1996 contains all adjustments, consisting only of
normal recurring accruals, necessary for the fair presentation of the results of
operations for such periods. Precept will be treated as the acquiror in the
Transfer for accounting and financial reporting purposes, and upon completion of
the Transfer, Precept will report the historical financial statements of Precept
as the historical financial statements of combined Precept-USTS.
The summary historical and pro forma financial information should be read in
conjunction with Unaudited Pro Forma Consolidated Financial Information and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Proxy Statement/Prospectus. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the future
operating results or financial position of combined Precept-USTS.
11
<PAGE>
PRECEPT
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------------------------ --------------------
HISTORICAL PRO FORMA HISTORICAL
----------------------------------------------------- ----------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1993 1994 1995 1996 1997 1997 1996 1997
--------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues................................. $ 40,459 $ 50,968 $ 59,075 $ 72,432 $ 77,344 $ 111,583 $ 19,813 $ 18,935
Income (loss) from continuing
operations............................. (1,321) 350 617 (266) 532 (4,725) 134 135
Income (loss) from continuing operations
per share(1)........................... (0.13) 0.03 0.05 (0.02) 0.05 (0.10) 0.01 0.01
Weighted average common outstanding
shares(1).............................. 10,457 11,667 11,625 11,524 11,516 45,937 11,516 11,516
FINANCIAL POSITION (AT PERIOD END):
Total assets............................. 16,510 24,951 25,627 32,691 29,291 50,828 31,835 30,477
Working capital.......................... 2,523 5,860 7,458 14,476 12,343 9,323 13,078 12,011
Long-term obligations.................... 663 707 543 5,260 7,502 13,575 5,307 7,955
Shareholders' equity(2).................. 729 17,537 17,032 16,582 13,305 17,623 16,803 13,275
<CAPTION>
PRO FORMA
-----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997
-----------
<S> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues................................. $ 26,958
Income (loss) from continuing
operations............................. (2,572)
Income (loss) from continuing operations
per share(1)........................... (0.06)
Weighted average common outstanding
shares(1).............................. 45,937
FINANCIAL POSITION (AT PERIOD END):
Total assets............................. 52,554
Working capital.......................... 9,196
Long-term obligations.................... 13,996
Shareholders' equity(2).................. 17,594
</TABLE>
- ------------------------------
(1) Weighted average common outstanding shares for the years ended June 30, 1994
and 1993 represent the number of shares outstanding as of June 30, 1994,
plus 1,297,800 shares underlying stock options granted in fiscal 1997 which
have been treated as outstanding for all periods presented, since the actual
weighted average common outstanding shares during those years in which
Precept was a division of a previous consolidated group is not useful. Pro
forma per share and weighted average common outstanding shares reflects a
3.15438 to 1 stock split to be effected prior to the effective date of this
Proxy Statement/Prospectus.
(2) Shareholders' equity as of June 30, 1993 reflects Precept divisional equity
balances under its former parent prior to capital contributions which
occurred with its reorganization on June 30, 1994.
12
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following tables set forth certain historical per share information of
USTS and Precept and combined per share information of USTS and Precept, on an
unaudited pro forma basis after giving effect to the Transactions, and unaudited
pro forma equivalent per share information of USTS. This data should be read in
conjunction with the selected historical consolidated financial information, the
unaudited pro forma consolidated combined financial statements, the USTS
consolidated financial statements and Notes thereto, and the Precept
consolidated financial statements and Notes thereto included elsewhere in this
Proxy Statement/Prospectus. This information is presented for illustrative
purposes only and is not necessarily indicative of the combined results of
operations or financial position that would have occurred if the Transfer had
occurred at the beginning of each period presented or on the dates indicated,
nor is it necessarily indicative of future operating results or the financial
position of Precept after the Transfer. Neither USTS nor Precept has ever
declared or paid cash dividends on its common stock.
COMPARATIVE PER SHARE INFORMATION
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
HISTORICAL USTS
Loss from continuing operations per share............ $ (1.04) $ (0.44)
Book value per share................................. $ 2.50 $ 1.44
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED JUNE THREE MONTHS ENDED
30, 1997 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
HISTORICAL PRECEPT
Income from continuing operations per share.......... $ 0.05 $ 0.01
Book value per share................................. $ 1.17 $ 1.17
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED JUNE THREE MONTHS ENDED
30, 1997 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
USTS AND PRECEPT PRO FORMA COMBINED(1)
Loss from continuing operations per share............ $ (0.10) $ (0.06)
Book value per share................................. $ 0.39 $ 0.39
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED JUNE THREE MONTHS ENDED
30, 1997 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
USTS PRO FORMA EQUIVALENTS(1)
Loss from continuing operations per share............ $ (0.11) $ (0.06)
Book value per share................................. $ 0.42 $ 0.42
</TABLE>
- ------------------------
(1) USTS pro forma equivalents represent the unaudited pro forma combined
earnings per share and book value per share calculated on the basis of a
1.071 exchange ratio (USTS to receive 9,612,500 shares of Precept Class A
Common Stock). Pro forma combined and pro forma equivalent per share
information reflects a 3.15438 to 1 stock split to be effected by Precept
prior to the effective date of this Proxy Statement/Prospectus.
13
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY THE SHAREHOLDERS OF
USTS IN CONNECTION WITH VOTING UPON THE PLAN OF REORGANIZATION AND RELATED
TRANSACTIONS. THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING
STATEMENTS ABOUT THE BUSINESS, OPERATIONS AND FINANCIAL CONDITION OF USTS AND
PRECEPT, INCLUDING VARIOUS STATEMENTS CONTAINED IN "SUMMARY--RECENT
DEVELOPMENTS"; "RECENT DEVELOPMENTS"; "USTS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"; AND "PRECEPT MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". THE
ACTUAL RESULTS OF USTS AND PRECEPT COULD DIFFER MATERIALLY FROM THOSE FORWARD
LOOKING STATEMENTS. THE FOLLOWING INFORMATION SETS FORTH CERTAIN FACTORS THAT
COULD CAUSE THE ACTUAL RESULTS OF EACH OF USTS AND PRECEPT (AND USTS AND PRECEPT
AS A COMBINED COMPANY) TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD
LOOKING STATEMENTS.
INTEGRATION OF THE BUSINESS
The Transfer involves the integration of two companies that have previously
operated independently. As soon as practicable following the Transfer, Precept
intends to integrate certain aspects of the operations of the combined company,
including sales, marketing, finance and administration. There can be no
assurance that Precept will successfully integrate the operations of USTS with
those of Precept. Any delays or unexpected costs incurred in connection with
such integration could have an adverse effect on the combined company's
business, operating results or financial condition. Furthermore, there can be no
assurance that the operations, management and personnel of the two companies
will be compatible or that Precept or Acquisition will not experience the loss
of key personnel.
PRESENT USTS SHAREHOLDERS WILL OWN ONLY 21% OF THE COMBINED ENTITY
After completion of the Transactions, USTS and the USTS shareholders will
own 9,612,500 shares of Precept Class A Common Stock. There will be an aggregate
of 45,612,500 shares of Precept Common Stock outstanding. Accordingly, the
present USTS shareholders will own 21% of the combined entity. In calculating
the percent of total voting power represented by the 9,612,500 shares of Precept
Class A Common Stock to be held by the USTS shareholders after completion of the
Transactions, the voting power of all outstanding shares of Precept Class A
Common Stock, having one vote per share, and all outstanding shares of Precept
Class B Common Stock, having ten votes per share, are aggregated. Accordingly,
while the USTS shareholders will own 21% of the outstanding Precept Common Stock
after completion of the Transactions, such shares will represent in the
aggregate approximately 7.0% of the total voting power of the Precept Common
Stock outstanding, and the USTS shareholders will effectively have no control
over Precept operations or its direction.
CONTINGENCY RESERVE
The amount of shares to be received by USTS shareholders in the Liquidating
Distribution is dependent upon the number of Contingency Shares retained by USTS
and placed in the Liquidating Trust to satisfy contingent liabilities of USTS
after consummation of the Transactions. It is currently estimated that the
number of Contingency Shares will be approximately 600,000, which would result
in USTS shareholders receiving approximately one share of Precept Class A Common
Stock for each share of USTS Common Stock held. Notwithstanding the foregoing,
the actual number of Contingency Shares shall be fixed by the USTS Board of
Directors, and there is no assurance that such number will be 600,000 shares;
the Plan of Reorganization provides that such number shall be no less than
500,000 nor more than 1,000,000. As a result, USTS shareholders may receive less
than one share of Precept Class A Common Stock for each share of USTS previously
held. For example, if the number of Contingency Shares were 1,000,000 (the
maximum), then USTS shareholders would receive approximately .96 shares of
Precept Class A Common Stock for each share of USTS Common Stock held. Upon
consummation of the Transfer (and prior to the set-aside of the Contingency
Shares and the subsequent Liquidating Distribution), the
14
<PAGE>
Liquidating Trust will initially hold approximately 1.071 shares of Precept
Class A Common Stock for each share of USTS Common Stock outstanding.
LIQUIDATING DISTRIBUTIONS MAY BE MADE IN CASH; POSSIBLE ADVERSE FEDERAL INCOME
TAX CONSEQUENCES
Management of USTS intends to immediately distribute the Precept Shares upon
consummation of the Transfer. However, not more than one year after the adoption
of the Plan of Liquidation and Dissolution, USTS will make a liquidating
distribution of the Precept Shares and any other remaining assets of USTS after
providing for a contingency reserve. The Liquidating Distribution may be made in
a series of distributions, and while intended to be made in shares, it may be
made in cash, and in such manner as the USTS Board may determine.
USTS shareholders who receive cash for their shares in the Liquidating
Distribution generally will recognize gain or loss in an amount equal to the
difference between the tax basis allocated to the shares and the cash received
in respect thereof. Any such gain will be capital gain if the shares are held as
capital assets.
DILUTION TO PRESENT USTS SHAREHOLDERS
As of September 30, 1997, the net worth of USTS was a total of $10,115,941,
or $1.44 per share of USTS Common Stock. On the same date, the net worth of
Precept was $13,275,098, or $0.37 per share for each of the 36,000,000 shares of
Precept Common Stock that will be outstanding immediately prior to the Transfer.
Contained within this Proxy Statement/Prospectus are certain pro forma
financial statements, which include a pro forma calculation of the balance sheet
of the combined entities, after taking into effect certain adjustments resulting
from the Transfer. That pro forma balance sheet indicates that the net worth of
the combined entities would be $17,645,098 or $0.39 for each of the 45,612,500
shares of Precept Common Stock that will be outstanding after the Transfer.
Accordingly, based upon that calculation and the assumption that the
Transactions will result in the conversion of each share of USTS Common Stock
into approximately one share of Precept Class A Common Stock, the holder of each
share of USTS Common Stock, which had a book value of $1.44 at September 30,
1997, will receive through the Transactions approximately one share of Precept
Class A Common Stock with a net worth of $0.39.
The holders of USTS Common Stock will, accordingly, experience a dilution in
the book value of their holdings to the extent of $1.05 per share by reason of
the Transactions. The holders of Precept Class A Common Stock will, at the same
time, experience a gain in the book value of their holdings, to the extent of
$0.02 per share, by reason of the Transactions.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS; EXERCISE OF REGISTRATION RIGHTS
After consummation of the Transactions, Precept will have outstanding (i)
Precept Class A Warrants to purchase 1,815,000 shares of Precept Class A Common
Stock except to the extent that USTS Class C Warrants are exercised prior to
consummation of the Transactions, (ii) a warrant held by First London Securities
Incorporated ("First London"), the underwriter of USTS' August 1996 public
offering, exercisable to purchase an aggregate of 340,000 shares of Precept
Class A Common Stock, assuming exercise of the underlying Class C Warrants;
(iii) warrants, held by Argent Securities, Inc. ("Argent"), the underwriter of
USTS' February 1995 public offering, exercisable to purchase an aggregate of
50,833 shares of Precept Class A Common Stock, and (iv) other options and
warrants held by certain other persons to purchase an aggregate of 289,663
shares of Precept Class A Common Stock. Holders of such options and warrants are
likely to exercise them when, in all likelihood, Precept could obtain additional
capital on terms more favorable than those provided by such options and
warrants. Further, while such options and warrants are outstanding, Precept's
ability to obtain additional equity financing on favorable terms may be
adversely affected. The holders of the First London Warrant and the warrant
issued to Argent have certain demand
15
<PAGE>
and "piggyback" registration rights with respect to their securities. Exercise
of such rights could involve substantial expense to Precept.
ABSENCE OF PRIOR PUBLIC MARKET FOR PRECEPT COMMON STOCK
Prior to this offering, there has been no public market for the Precept
Class A Common Stock. There can be no assurance that an active trading market
will develop after the Closing of the Transactions or, if developed, that it
will be sustained. There can be no assurance that the market price of the
Precept Class A Common Stock will not decline below its initial listing price.
VOLATILITY OF STOCK PRICE
The market price for USTS Common Stock is and has been volatile. After the
Closing, Precept Class A Common Stock could be subject to the same or additional
significant fluctuations in response to variations in Precept's operating
results and other factors, including among others, investor perceptions of
Precept and the industry in which it operates, and general market conditions.
Consequently, there can be no assurance that the market value of shares of
Precept Class A Common Stock will be maintained subsequent to the Transactions.
The stock market has, from time to time, experienced significant price and
volume fluctuations that may be unrelated to the operating performance of any
particular company. Various factors and events, including future announcements
of new service offerings by Precept or its competitors, developments or disputes
concerning, among other things, regulatory developments in the United States,
and economic and other external factors, as well as fluctuations in Precept's
financial results, could have a significant impact on the market price of
Precept's securities.
VOTING CONTROL
Precept is controlled by Darwin Deason, a Director and the Chairman of the
Executive Committee of the Board, who has voting control over an aggregate of
10,102,997 shares of Precept Class B Common Stock, which have an aggregate of
101,029,970 votes, or approximately 74.0% of the voting power of Precept. In
addition, Mr. Deason has irrevocable proxies to vote 12,737,780 shares of
Precept Class A Common Stock which have an aggregate of 12,737,780 votes,
resulting in Mr. Deason having the right to vote shares reflecting 83.3% of the
total voting power of Precept. Accordingly, Mr. Deason controls virtually all
decisions made with respect to Precept by its shareholders, including decisions
relating to the election of directors. Furthermore, as a result of his control
of the voting stock of Precept, Mr. Deason may, except as otherwise provided by
Texas law, without the concurrence of the remaining shareholders, amend the
Precept Articles of Incorporation, effect or prevent a merger, sale of assets,
or other business acquisition or disposition and otherwise control the outcome
of all actions requiring shareholder approval.
DEPENDENCE ON PRESENT MANAGEMENT
The success of Precept is dependent upon the services of its executive
officers. Precept does not carry key man insurance on these officers. There is
no assurance that Precept would be able to locate and retain qualified persons
to replace any member of management or to expand its current management. In
addition to the foregoing, Precept's operations are located in diverse
geographical locations throughout the United States further taxing the members
of Precept's management team. The prolonged unavailability of any current member
of senior management, whether as a result of death, disability or otherwise,
could have an adverse effect upon the business of Precept. See "Precept
Management."
LACK OF DIVIDENDS
USTS has never paid dividends on USTS Common Stock and Precept does not plan
to pay in the foreseeable future any dividends on Precept Class A Common Stock
or Class B Common Stock. It is
16
<PAGE>
currently anticipated that earnings, if any, will be used to finance the
development and expansion of Precept's business.
NASDAQ LISTING APPLICATION; CONTINGENT REVERSE STOCK SPLIT
Precept has applied to the Nasdaq that the Shares to be issued in connection
with the Transfer be approved for listing on Nasdaq, subject to notice of
issuance and approval of the Transactions by USTS' shareholders. In connection
with Precept's Nasdaq listing application, Precept has indicated to the NASD
that, if required by Nasdaq, it will effect a reverse stock split as necessary
for the purpose of complying with the recently revised applicable Nasdaq listing
criteria, including the requirement that the Precept Class A Common Stock trade
at or above $4 per share after the consummation of the Transactions. The
shareholders of Precept have approved an amendment to Precept's Articles of
Incorporation whereby such number of shares of Precept Common Stock between one
and two, consisting only of whole shares and tenths of shares, as shall be
determined by the Precept Board of Directors, shall be converted and
reconstituted into one share of Precept Common Stock in a reverse stock split of
the Precept Common Stock, if determined by the Precept Board of Directors that
such reverse stock split is required to maintain its eligibility to be listed on
Nasdaq. The number of Shares issuable to USTS in the Transactions will be
adjusted to reflect the reverse stock split. There can be no assurance, however,
that the price of Precept Class A Common Stock resulting from the reverse stock
split will increase proportionately with the decrease in the number of shares,
or that any price increase resulting from the reverse stock split can be
sustained for any period of time. Accordingly, subsequent reverse stock splits
could be required in order to comply with the minimum bid requirements for
Nasdaq listing. Additional reverse stock splits could result in Precept failing
to meet the minimum public float requirement. Accordingly, there can be no
assurance that Precept will be capable of complying with all of the listing
criteria required to be complied with to continue as a Nasdaq listed company.
After the consummation of the Transactions, to meet the current Nasdaq
requirements for the Precept Class A Common Stock to continue to be listed on
the Nasdaq, (i) Precept (as a combined company) will have to maintain at least
$2 million in total assets and $1 million in capital and surplus; (ii) the
minimum bid price of the Precept Class A Common Stock will have to be at least
$1.00 per share; (iii) there will have to be at least 100,000 shares in the
public float valued at $200,000 or more; (iv) the Precept Class A Common Stock
will have to have at least two active market makers; and (v) Precept Class A
Common Stock will have to be held by at least 300 holders. Nasdaq recently
adopted new requirements for continued listing on the Nasdaq. Commencing
February 22, 1998, Precept will have to maintain (a) (i) at least $2 million in
net tangible assets, (ii) $35 million in market capitalization, or (iii)
$500,000 in net income (over two of the last three years), (b) a public float of
at least 500,000 shares valued at $1 million or more and (c) a minimum bid price
of $1.00. The shareholder and market maker requirements will not be altered.
There can be no assurance that Precept will be capable of complying with all of
the listing criteria required to be complied with to continue as a Nasdaq listed
company.
INTEGRATION OF ACQUISITIONS
To expand its services and geographic presence, diversify its business mix
and lead the consolidation trend in the business products, document management
and corporate transportation industries, Precept's business strategy includes
growth through acquisitions. No assurance can be given that Precept will be able
to successfully integrate its future acquisitions without substantial costs,
delays or other problems. The costs of such acquisitions and their integration
could have an adverse effect on short-term operating results. Such costs could
include severance payments to employees of such acquired companies,
restructuring charges associated with the acquisitions and other expenses
associated with a change of control, as well as non-recurring acquisition costs
including accounting and legal fees, investment banking fees, recognition of
transaction-related obligations and various other acquisition-related costs.
Increased competition for acquisition candidates may develop, in which event
there may be fewer acquisition opportunities available
17
<PAGE>
to Precept as well as higher acquisition costs for the opportunities that are
available. There can be no assurance that Precept will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into Precept without substantial costs, delays, or other
operational or financial problems.
Precept may not be able to execute successfully its consolidation strategy
or anticipate all of the changing demands that successive consolidation
transactions will impose on its management personnel, operational and management
information systems, and financial systems. Customer dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on the reputation of Precept and Precept's sales and marketing initiatives.
There can be no assurance that any businesses acquired in the future will
achieve anticipated revenues and earnings. Moreover, it is possible that neither
management of Precept nor management of any of the acquired companies will have
the necessary skills to manage a company intending to implement an aggressive
acquisition program. Precept may seek to recruit additional managers to
supplement the incumbent management of the acquired companies but Precept may
not have the ability to recruit additional managers with the skills necessary to
enhance the management of the acquired companies. Further, acquisitions involve
a number of special risks, including possible adverse effects on Precept's
operating results, diversion of management's attention, failure to retain key
personnel at an acquired company, risks associated with unanticipated events or
liabilities and amortization of goodwill or other acquired intangible assets,
some or all of which could have a material adverse effect on Precept's business,
financial condition and results of operations. Any or all of these factors could
have a material adverse effect on Precept's business, financial condition and/or
results of operations.
COMPETITION
Precept may encounter intense competition from other consolidators having a
business objective similar to that of Precept. Many of these entities are well
established and have extensive experience in effecting business combinations
directly or through affiliates. Many of these competitors possess greater
financial, personnel and other resources than Precept expects to have and there
can be no assurance that Precept will be able to compete successfully.
Competition with other consolidators to buy a limited number or an identifiable
set of businesses could lead to higher prices being paid for acquired companies.
CONSIDERATION FOR OPERATING COMPANIES MAY EXCEED ASSET VALUE; AMORTIZATION
CHARGES
The purchase prices of Precept's acquisitions will not be established by
independent appraisals, but generally through negotiations between Precept's
management and representatives of such companies. The consideration paid for
each such company will be based primarily on the value of such company as a
going concern and not on the value of the acquired assets. Valuations of these
companies determined solely by appraisals of the acquired assets are likely to
be less than the consideration that is paid for the companies. The future
performance of such companies may not be commensurate with the consideration
paid.
Precept expects to incur significant amortization charges resulting from
consideration paid in excess of the fair value of the net assets of the
companies acquired in business combinations accounted for under the purchase
method of accounting ("goodwill"). Precept will be required to amortize the
goodwill from acquisitions accounted for under the purchase method over a period
of time, with the amount amortized in a particular period constituting an
expense that reduces Precept's net income for that period. The amount amortized,
however, will not give rise to a deduction for tax purposes. A reduction in net
income resulting from amortization charges may have a material and adverse
impact upon the market price of Precept Class A Common Stock.
18
<PAGE>
ADDITIONAL SHARES REGISTERED FOR ISSUANCE IN FUTURE ACQUISITIONS; RISKS RELATED
TO ACQUISITION FINANCING
The Registration Statement also covers the issuance of up to 20,000,000
additional shares of Precept Class A Common Stock from time to time in the
future, in one or more business combination transactions. Precept anticipates
issuing some or all of such shares in one or more acquisitions in the future.
Precept may also file additional registration statements in the future covering
the issuance of additional shares in such acquisitions. The use of shares of
Precept Class A Common Stock for a portion or all of the consideration to be
paid in future acquisitions could result in dilution to the holders of the
outstanding Precept Class A Common Stock.
Precept may also use existing cash resources, incur additional long-term
indebtedness, or use a combination thereof for all or a portion of the
consideration to be paid in future acquisitions. In the event that the Precept
Class A Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Precept Class A Common
Stock as part of the consideration for the sale of their businesses, Precept
might not be able to utilize Precept Class A Common Stock as consideration for
acquisitions and would be required to utilize more of its cash resources, if
available, in order to maintain its acquisition program. If Precept does not
have sufficient cash resources, its growth could be limited unless it is able to
obtain additional capital through debt or equity financings. While Precept
continuously evaluates opportunities to make strategic acquisitions, it has no
present commitment or agreements with respect to any material acquisitions.
There can be no assurance that such financing will be available if and when
needed or on terms acceptable to Precept. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Among the possible adverse effects of borrowings to consummate acquisitions
for other capital requirements are: (i) if Precept's operating revenues after
acquisitions were to be insufficient to pay debt service, there would be a risk
of default and foreclosure on Precept's assets; (ii) if a loan agreement
contains covenants that require the maintenance of certain financial ratios or
reserves, and any such covenant were breached without a waiver or renegotiation
of the terms of that covenant, then the lender could have the right to
accelerate the payment of the indebtedness even if Precept has made all
principal and interest payments when due; (iii) if the terms of a loan did not
provide for amortization prior to maturity of the full amount borrowed and the
"balloon" payment could not be refinanced at maturity on acceptable terms,
Precept might be required to seek additional financing and, to the extent that
additional financing were not available on acceptable terms, to liquidate its
assets; and (iv) if the interest rate of a loan is variable, Precept would be
subject to interest rate fluctuations which could increase Precept's debt
service obligations. The level of indebtedness that Precept may incur cannot be
predicted and will depend upon these factors and the relevant business
characteristics of the acquisition candidates for which such indebtedness will
be undertaken.
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION AND BYLAWS AND OTHER
STOCKHOLDER PROTECTION MECHANISMS
Certain provisions of the Precept Amended and Restated Articles of
Incorporation and Bylaws may delay, defer, or prevent a tender offer or takeover
attempt that a shareholder might consider to be in such shareholder's best
interest, including attempts that might result in a premium over the market
price for the Precept Class A Common Stock. In this regard, the Precept Articles
provide that the removal of any director or directors, with or without cause,
requires the affirmative vote of a least 80% of the combined voting stock of
Precept, giving effect to the number of votes per share attributable to such
stock. Such provision would restrict the ability of a party to gain control of
the Precept Board by acquiring a majority of the Precept voting stock, removing
all of the directors and then replacing them with the directors seeking to
benefit such party. Additionally, Precept's Bylaws provide that the number of
directors shall be fixed, from time to time, by resolution of the Precept Board.
Currently, such number of directors of
19
<PAGE>
Precept is divided into three classes that are elected for staggered three-year
terms. Thus, in any given year, only a portion of the Precept directors would be
eligible for election, therefore eliminating the ability of a hostile party to
gain control of the Precept Board in a single proxy contest, making any
unsolicited takeover attempt (including an attempt that a Precept shareholder
might consider in such shareholder's best interest) more expensive and more
difficult. Precept's Bylaws provide for advance notice procedures with respect
to the submission by shareholders of proposals to be acted on at shareholder
meetings and of nominations of candidates for election as directors. The
establishment of such procedures removes any ambiguity with respect to how
matters can be so submitted by shareholders. Further, the Precept Articles
permit the Precept Board to establish by resolution one or more series of
preferred stock ("Precept Preferred Stock") and to establish the powers,
designations, preferences and relative, participating, optional, or other
special rights of each series of Precept Preferred Stock. The Precept Preferred
Stock could be issued on terms that are unfavorable to the holders of Precept
Class A Common Stock or that could make a takeover or change in control of
Precept more difficult. Further, Precept has instituted a shareholder rights
plan, which plan may have the effect of discouraging an unsolicited takeover
proposal. Moreover, Precept is subject to the Texas Business Combination Law,
which places restrictions on certain business combinations with certain
stockholders that could render more difficult a change in control of Precept.
The Precept Bylaws, together with the provision of the Precept Articles setting
forth that the removal of directors requires the affirmative vote of 80% of the
combined voting stock of Precept, the shareholder rights plan and other
provisions of the Precept Articles and the TBCA, may have the effect of
discouraging a future takeover attempt by a third party that is not approved by
the Precept Board and render the removal of the incumbent management more
difficult. Counterbalancing the effects of such provisions is the positive
effect that these protections contribute to an environment where the interests
of the Precept shareholders and Precept can be addressed in an orderly and
well-informed manner.
THE MEETING
This Proxy Statement/Prospectus is being furnished to the holders of USTS
Common Stock in connection with the solicitation of proxies by the USTS Board
for use at the USTS Meeting to be held on , 1998, at the
located at , commencing at 10:00 a.m. local time, and at any
adjournment or postponement thereof.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, shareholders of USTS will consider and vote, as a single
proposal, upon the proposal to approve and adopt the Plan of Reorganization and
the Plan of Liquidation, and to change the name of USTS to . The
shareholders of USTS will also vote on such other matters as may be properly
brought before the USTS Meeting. Discretionary authority granted by proxies
voted against the Transactions will not be used to adjourn the meeting to
solicit additional votes.
THE USTS BOARD HAS APPROVED THE PLAN OF REORGANIZATION, THE PLAN OF
LIQUIDATION, AND THE NAME CHANGE, AND RECOMMENDS THAT USTS' SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE MATTERS SUBMITTED TO USTS SHAREHOLDERS AS DESCRIBED IN
THIS PROXY STATEMENT/PROSPECTUS.
20
<PAGE>
VOTING AT MEETING; RECORD DATE
The USTS Board has established February 4, 1998, as the record date for the
determination of shareholders entitled to notice of and to vote at the Meeting.
Only holders of record of USTS Common Stock at the close of business on such
date are entitled to vote at the USTS Meeting. On such date, there were
approximately 8,979,187 shares of USTS Common Stock outstanding, each of which
will be entitled to vote on each matter to be acted upon or which may properly
be brought before the USTS Meeting.
In determining whether the proposals have received the requisite number of
affirmative votes, abstentions and broker non-votes will have the same effect as
a vote against the proposal.
As of February 4, 1998, directors and executive officers of USTS and their
affiliates beneficially owned approximately 34.3% of the outstanding shares of
USTS Common Stock. Each of the directors and executive officers has advised USTS
that he intends to vote or direct the vote of all shares of USTS Common Stock
over which he has voting control for approval of the Transactions.
USTS PROXIES
Shares of USTS Common Stock represented by proxies received by USTS prior to
or at the Meeting will be voted in accordance with the instructions contained
therein. Shares of USTS Common Stock represented by proxies for which no
instruction is given will be voted "FOR" the Plan of Reorganization, the Plan of
Liquidation and the Name Change.
Holders of USTS Common Stock are requested to complete, sign and date the
enclosed proxy card and promptly return it in the postage paid envelope provided
for this purpose in order to ensure that the shares are voted. A proxy may be
revoked at any time prior to the exercise of the authority granted thereunder.
Revocation may be accomplished by the granting of a later proxy with respect to
the same shares or by giving notice thereof to USTS in writing at the Meeting at
any time prior to the vote on the matters to be considered. Presence at the
Meeting of a shareholder who signed a proxy does not in itself revoke the proxy.
The USTS Board is aware of no matters to be presented at the Meeting other
than those described in this Proxy Statement/Prospectus. If other matters are
properly brought before the Meeting, it is the intention of the persons named in
the proxies to vote the shares to which said proxies relate in accordance with
their judgment.
SOLICITATION OF PROXIES
USTS will bear the cost of the solicitation of proxies from the USTS
shareholders. Officers and regular employees of USTS, who will receive no
compensation in excess of their regular salaries for their services, may solicit
proxies from the USTS shareholders by telephone, telegram or otherwise. USTS
will also reimburse brokers and other nominees for their reasonable expenses in
communicating with the persons for whom they hold USTS Common Stock.
THE TRANSACTIONS
BACKGROUND OF TRANSACTIONS
The acquisition discussions were initiated by Precept through First
Southwest Company ("First Southwest") by a telephone conference between First
Southwest and USTS during the week of January 6, 1997. On January 11, 1997,
representatives of each of USTS, including Michael Margolies, Chairman of USTS,
Ron Sorci, Controller of USTS, and Terry Watkins, Chief Financial Officer of
USTS; Precept, including David Neely, Chairman and Chief Executive Officer of
Precept, and Scott Walker, Chief Financial Officer of Precept, and
representatives of First Southwest met in Tampa, Florida to discuss a possible
business combination. Shortly thereafter, confidentiality agreements were
executed. During
21
<PAGE>
January and February, USTS and Precept negotiated the terms for, and entered
into, a letter of intent, which was signed on March 7, 1997 (the "Letter of
Intent"). The Letter of Intent provided for the merger of Precept into USTS and
the issuance of 36,000,000 shares of USTS common stock to the shareholders of
Precept. Thereafter, the parties commenced due diligence investigations of their
respective business, operations and financial information.
After conducting its due diligence investigation, Precept concluded, in
July, that it was unwilling to proceed with the transaction as set forth in the
Letter of Intent. Precept proposed an alternative structure in which Precept
would acquire substantially all of the assets of USTS and assume certain USTS
liabilities in exchange for 9,000,000 shares of Precept Class A Common Stock in
a transaction intended to qualify as a "tax free" reorganization. When
negotiating the revised transaction with USTS, Precept determined a net value
for the assets of USTS being acquired. Precept then evaluated its implied equity
value in order to determine the number of shares of common stock Precept was
willing to issue in the transaction. Based upon advice from its financial
advisors, Precept arrived at its implied equity value by utilizing both a
comparable company analysis and a discounted cash flow analysis. Based on these
analyses, Precept concluded that the issuance of approximately 20% of its common
stock reflected fair consideration for the acquisition of the USTS assets.
Representatives of USTS and Precept continued arm's-length negotiations and
ultimately, in August, agreed in principle that Precept would issue 9,500,000
shares of Precept Class A Common Stock and assume certain warrants and options
to purchase USTS Common Stock (converted into the right to purchase Precept
Class A Common Stock on a share-for-share basis) in consideration for the
acquisition of substantially all of the assets of USTS and the assumption of
certain USTS liabilities. The parties continued to negotiate the specific terms
and structure of a definitive agreement. On November 16, 1997, the Plan of
Reorganization was executed by USTS, Precept and Acquisition.
USTS REASONS FOR THE TRANSACTIONS; RECOMMENDATIONS OF THE USTS BOARD
The USTS Board has approved the Plan of Reorganization and the Plan of
Liquidation and the other Transactions and has recommended that the USTS
stockholders vote "FOR" approval of the matters described in this Proxy
Statement/Prospectus for the following reasons:
- USTS has, historically, found it difficult and expensive to obtain the
debt and equity financing required to expand and enhance its operations.
The combined entity is expected to have greater revenues and operating
cash flows than either USTS or Precept on a stand-alone basis, which is
expected to result in enhanced financial flexibility and improved access
to financing on more favorable terms than are currently available to
either company on a stand-alone basis;
- USTS has only two executive officers: its Chairman, Michael Margolies, and
its President, Ronald P. Sorci. Were USTS to expand independently, it
would be necessary to retain additional skilled executives, which could be
very difficult. The combination of USTS with Precept will immediately
expand the management resources available to chart the growth of the
combined entities.
- USTS is involved in a highly competitive industry, i.e. ground
transportation. Although USTS has made acquisitions of businesses in
industries that generally offer higher gross margin than ground
transportation, it has not successfully established itself in any of those
areas, and relies generally on business which is relatively stable but
which generates relatively low profit margins. The combined Precept/USTS
will be involved in a range of business areas, some of which offer
opportunities for increased profit margins.
- There is expected to be marketing synergy between the existing operations
of USTS and the existing operations of Precept. In particular, management
intends to market the Precept business product services to the USTS
transportation customers, and vice versa. This synergy should result in
expansion of both operations with a relatively low increase in marketing
and administrative expenses.
22
<PAGE>
- The Transfer presents opportunities to realize economies of scale and
operating efficiencies. Operating efficiencies may result from the
integration of certain operations and the elimination of facilities'
costs. The extent to which these possible economies of scale and operating
efficiencies may be realized is uncertain, and no assurances can be made
with respect thereto.
In reaching these conclusions, the USTS Board considered, among other
things, (i) expected operating and financial characteristics of a combined
entity, and the operating efficiencies and economies of scale associated with
the combination, (ii) the experience and performance of Precept management,
(iii) the capital structure and financial performance of Precept, and (iv) the
opinion of Meyerson, financial advisor to USTS for the Transfer, that, as of the
date of such opinion, the Transactions are fair, from a financial point of view,
to the common shareholders of USTS. At the same time, the USTS Board also
considered each of the negative factors which are described in this Proxy
Statement/Prospectus under the heading "Risk Factors," giving special attention
to the loss of voting control and the dilution which USTS shareholders will
suffer as a result of the Transactions. The USTS Board determined, however, that
the perceived advantages to the USTS shareholders of the Transactions outweighed
the negative factors, and, accordingly, voted to recommend the Transactions to
the USTS shareholders.
PRECEPT REASONS FOR THE TRANSACTIONS
On October 27, 1997, the Precept Board met to consider the advisability of
the proposed Transactions and the terms of the proposed Plan of Reorganization.
The Precept Board concluded that the Transactions were advisable and in the best
interests of Precept and its shareholders because the Precept Board believes
that the Transactions will further Precept's long term strategic objectives. The
Precept Board's conclusions are based on (i) the advantages of having publicly
traded shares that will enable Precept to execute the consolidation component of
its business strategy, (ii) the judgment, advice and analysis of its management,
(iii) the synergies, cost reductions, and operating efficiencies that should
become available to the combined enterprise as a result of the Transactions,
(iv) the strategic benefits of the Transactions, (v) the express terms and
conditions of the Plan of Reorganization, which were viewed as providing an
equitable basis of the Transactions from the standpoint of Precept and (vi) the
significant enhancement of the market position of the combined enterprise.
With respect to the synergies, cost reductions and operating efficiencies
that should become available, Precept believes that its management experience,
philosophy and extensive corporate resources, when applied to USTS' current
operating businesses, will result in measurable cost reductions and operating
efficiencies. Furthermore, Precept believes that its lower cost of capital and
expected ability to acquire profitable operating entities for long-term
investment will eliminate the substantial expense USTS has incurred in its
constant turnover of businesses. In addition, personnel and system redundancies
will be eliminated by Precept as part of the overall integration process.
Precept believes that the strategic benefits of the Transactions arise from
Precept's business strategy to capitalize on the current trend of commercial
outsourcing of business services. Precept believes that it has offered and will
continue to offer its customers various "mission critical" services that can be
outsourced. Precept has interests in business products, chauffeured vehicle and
package delivery operations, with business products being the dominant segment
of Precept's operations. Combining USTS' transportation operations with those of
Precept not only enhances the transportation segment of Precept's operations but
brings a relative balance to the business services offered by Precept. Since
Precept's transportation services are currently focused in the southwest United
States, Precept believes that adding a presence in the eastern United States,
particularly New York City, will give Precept's transportation services
component enhanced credibility and service offerings as a national rather than
regional provider in this business segment.
Because of the strategic benefits explained above, Precept expects that it
will be able to offer a more complete selection of business services on a more
enhanced geographical basis. Precept believes that having operations in the
southwest and eastern United States will enable Precept to not only offer better
23
<PAGE>
service to its customers, but also provide a more complete platform on which to
build or consolidate the business products and transportation services segments
of its business and ultimately enhance the market position of the combined
enterprise.
The foregoing discussion of the information and factors considered and given
weight by the Precept Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the
Transactions, the Precept Board did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors and
information considered in reaching its determination. Further, individual
members of the Precept Board may have given different weights to different
factors. In addition, there can be no assurance that any of the expectations set
forth in the preceding paragraphs will be fulfilled or that any of the expected
benefits of the Transactions will be realized.
NO DISSENTERS' RIGHTS OF APPRAISAL
Neither holders of USTS Common Stock nor holders of USTS Preferred Stock are
entitled to dissenters' appraisal rights under the NGCL in connection with the
matters to be considered at the Meeting.
ACCOUNTING TREATMENT
The acquisition of substantially all of the assets of USTS in the Transfer
will be accounted for using the purchase method of accounting.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
This section is a summary of the tax opinion of USTS' legal counsel, BA&R,
as to certain of the material federal income tax consequences of the
Transactions, and of certain other material federal income tax consequences
relevant to holders of USTS Common Stock and USTS Preferred Stock (collectively,
the "USTS Stock") which are expected to result from the Transactions and the
issuance of the securities offered by this Proxy Statement/Prospectus. It is
impracticable to comment on all aspects of federal, state, local and foreign
laws that may affect the tax consequences of the transactions contemplated
hereby as they relate to the particular circumstances of each shareholder or
potential shareholder. The federal income tax discussion set forth below applies
only to holders of shares of USTS Common Stock who hold such shares as capital
assets. The federal income tax consequences to any particular shareholder may be
affected by matters not discussed below. For example, certain types of holders
(including foreign persons, life insurance companies, tax exempt organizations
and taxpayers who may be subject to the alternative minimum tax) may be subject
to special rules not addressed herein. Furthermore, the discussion may not be
applicable with respect to shares received pursuant to the exercise of employee
stock options or otherwise as compensation.
This discussion does not address the tax consequences that are expected to
result from the Transactions to holders of USTS Warrants. Holders of the USTS
Warrants should consult their tax advisors to determine the tax consequences of
the Transactions to them.
This summary is based on the current provisions of the Code, existing and
proposed regulations thereunder and current administrative rulings and court
decisions, all of which are subject to changes that may or may not be
retroactively applied. Many of the provisions of the Code which have been
recently enacted or amended have not been interpreted by the courts or the IRS.
No ruling has been requested from the IRS with respect to any of the matters
discussed herein and thus no assurance can be provided that opinions and
statements set forth herein (which do not bind the IRS or the courts) will not
be challenged by the IRS or would be sustained by a court if so challenged.
24
<PAGE>
THE DISCUSSION SET FORTH BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF GENERAL APPLICABILITY WHICH ARE EXPECTED TO RESULT FROM THE
TRANSACTIONS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE
TAX CONSEQUENCES OF THE TRANSACTIONS, HOLDING AND DISPOSITION OF THE SECURITIES
OFFERED HEREBY, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS WITH RESPECT TO THEIR OWN PARTICULAR
CIRCUMSTANCES.
TAX OPINION
USTS has obtained the Tax Opinion of its legal counsel, BA&R, as to certain
of the expected federal income tax consequences of the Transactions, a copy of
which is attached as an exhibit to the Registration Statement. The Tax Opinion
is subject to certain assumptions and qualifications, including the present and
continuing accuracy of (i) the description of the facts relating to the
Transactions contained in this Proxy Statement/Prospectus, (ii) the factual
representations contained in the Plan of Reorganization and related documents,
and (iii) certain factual matters addressed by representations made by certain
executive officers of USTS and Precept, as further described in the Tax
Opinions.
The following discussion represents a summary of the Tax Opinion, a copy of
which is filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part. Subject to the conditions, qualifications and
assumptions contained herein, in the representation letters provided to BA&R by
USTS and Precept, and in the Tax Opinion, BA&R has opined that the material
federal income tax consequences associated with the Transactions are as follows:
(i) Holders of USTS Stock generally will not recognize gain or loss upon
their receipt solely of Precept Class A Common Stock in exchange for USTS Stock
in the Liquidating Distribution. As described more fully below, however, gain
may be recognized to the extent that a USTS shareholder receives or is deemed to
receive property other than Precept Class A Common Stock in the Liquidating
Distribution, including as a consequence of receiving cash in lieu of a
fractional share of Precept Class A Common Stock.
(ii) The aggregate tax basis of the Precept Class A Common Stock received by
USTS shareholders in the Liquidating Distribution generally will be the same as
the aggregate tax basis of the USTS Common Stock delivered in exchange therefor,
increased by the amount of any gain that is recognized on the exchange (as
described above), and decreased by the amount of any cash or property other than
Precept Class A Common Stock received in the Liquidating Distribution.
(iii) The holding period of the Precept Class A Common Stock received by the
USTS shareholders in the Liquidating Distribution will include the period for
which the USTS Stock was held, provided that the USTS Common Stock is held as a
capital asset at the time of the Liquidating Distribution.
(iv) Neither Precept nor USTS will recognize gain solely as a result of the
Transactions.
(v) USTS will not recognize gain solely as a result of the Liquidating
Distribution except to the extent that (i) in conjunction with the Liquidating
Distribution, USTS transfers any appreciated assets (other than Precept Class A
Common Stock) to its shareholders or (ii) USTS sells Precept Class A Common
Stock to satisfy certain of its liabilities.
The Tax Opinion represents only such counsel's best judgment as to the
expected federal income tax consequences of the Transactions and are not binding
on the IRS. The IRS may challenge the conclusions stated therein and USTS and
shareholders of Precept may incur the cost and expense of defending positions
taken by them with respect to the Transactions.
25
<PAGE>
CASH IN LIEU OF FRACTIONAL SHARES
USTS shareholders who receive cash in lieu of fractional shares of Precept
Class A Common Stock generally will recognize capital gain or loss with respect
to those fractional shares in an amount equal to the differences between the tax
basis allocated to such fractional shares (as determined above) and the cash
received in respect thereof. Any such gain or loss will be capital gain or loss
if such fractional shares are held as capital assets.
TAX CONSEQUENCES ATTRIBUTABLE TO THE LIQUIDATING TRUST
Some of the Precept Class A Common Stock received by USTS in the
Transactions, and some amount of cash, may be placed into the Liquidating Trust
to provide for any liabilities, including any contingent liabilities, of USTS.
For federal income tax purposes, a pro rata share of such assets will be deemed
to have been distributed to each USTS shareholder and contributed by such
shareholder to the Liquidating Trust. The Liquidating Trust will not itself be
subject to tax; rather, each holder of a beneficial interest in the Liquidating
Trust will be treated as owning a pro rata share of the assets of the
Liquidating Trust, and will be required to take into account the holder's
proportionate share of each of the Liquidating Trust's items of income or
deduction. Since the Transactions and the Liquidating Distribution will
constitute a tax-free reorganization, as described above, USTS shareholders will
not recognize any gain or loss to the extent that the assets deemed distributed
to the, and contributed by them to the Liquidating Trust, consist solely of
Precept Class A Common Stock. If a USTS shareholder, however, realizes gain in
the Liquidation, (i.e., if the total value of all the consideration received by
such shareholder in the Liquidation, including Precept Class A Common Stock,
exceeds the holder's adjusted basis in the holder's shares of USTS Stock), the
holder must recognize such gain to the extent that cash is actually distributed
to the holder and to the extent that the holder's pro rata share of the assets
of the Liquidating Trust are deemed to have been distributed by the holder to
the Liquidating Trust. In determining the amount of gain or loss realized and
recognized as a result of the Liquidation, the amount of any fixed or contingent
liabilities assumed by the Liquidating Trust will not be treated as decreasing
the amount of Boot that a USTS shareholder is deemed to receive as a result of
the receipt of an interest in the Liquidating Trust.
OTHER TAX MATTERS
The Plan of Reorganization provides that either USTS or Precept may waive
any condition to Closing that is contained therein. The USTS Board has
determined, however, that if it is advised, by BA&R or otherwise, that the
material federal income tax consequences associated with the Transactions would
be other than as set forth above, the USTS Board will not recommend that USTS
shareholders approve the Transactions.
USTS has available for tax purposes certain net operating loss ("NOL")
carryforwards. The availability of future use of these NOLs by the combined
entity will be somewhat restricted by the Code, including the requirement that
operations of USTS acquired by Precept generate future taxable income on a stand
alone basis. Due to the uncertainty of the future availability of these NOLs, no
value will be assigned to them in the purchase method of accounting.
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Transfer may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. USTS and Precept
filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division on , 1997. On , 1998, the FTC notified
USTS and Precept that early termination of the HSR Act waiting period had been
granted.
26
<PAGE>
FEDERAL SECURITIES LAWS CONSEQUENCES
All Shares received or held by USTS shareholders in connection with the
Transfer will be freely transferable under the federal securities laws, except
that Shares received or held by persons who are deemed to be "affiliates" (as
such term is defined under the Securities Act) of USTS prior to the Transfer may
be resold by them only in transactions permitted by the resale provisions of
Rule 145 promulgated under the Securities Act (or Rule 144 in the case of such
persons who become affiliates of Precept) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of USTS or Precept
generally include individuals or entities that control, are controlled by, or
are under common control with, such party and may include certain officers and
directors of such party as well as principal stockholders of such party. The
Plan of Reorganization requires USTS to cause each of its affiliates to execute
a written agreement to the effect that such person will not offer or sell or
otherwise dispose of any shares of Precept Class A Common Stock issued to such
person in or pursuant to the Transfer in violation of the Securities Act or the
rules and regulations promulgated thereunder by the Commission.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
EMPLOYMENT AGREEMENT WITH MICHAEL MARGOLIES AND RONALD SORCI
At or prior to the closing of the Transfer, Precept will enter into a
five-year employment agreement with Michael Margolies, pursuant to which Mr.
Margolies will serve as Vice Chairman of the Board of Precept. Under the terms
of the employment agreement, Mr. Margolies will receive an annual salary of
$240,000, to be increased annually in accordance with Precept's overall
compensation pool and in accordance with Mr. Margolies performance. Mr.
Margolies will be entitled to receive performance-based cash bonuses, and such
health, medical, disability and life-insurance benefits as are made available to
senior executive management of Precept. In addition, Precept will pay the
premiums (previously paid by USTS) with respect to Mr. Margolies current
personal life insurance policy (approximately $50,000 per year for two years),
and thereafter Precept will pay for and maintain during the term of his
employment agreement an additional insurance policy on the life of Mr. Margolies
with coverage equal to one year's annual base salary, as such salary may exist
from year to year. Precept will also provide Mr. Margolies with the use of an
automobile, and pay all maintenance, repair, insurance, and other costs
associated with the use of such automobile.
At or prior to the closing of the Transfer, Precept will enter into a
five-year employment agreement with Ronald Sorci, pursuant to which Mr. Sorci
will serve as President of the Transportation Division of Precept. Under the
terms of the employment agreement, Mr. Sorci will receive an annual salary of
$170,000, to be increased annually in accordance with Precept's overall
compensation pool and in accordance with Mr. Sorci's performance. Mr. Sorci will
be entitled to receive performance-based cash bonuses, and such health, medical,
disability and life insurance benefits as are made available to senior executive
management of Precept.
REGISTRATION RIGHTS AGREEMENT OF MICHAEL MARGOLIES
Because Michael Margolies will be an affiliate of Precept, Vice Chairman,
after the Transfer, shares of Precept Class A Common Stock received by him
through the Transactions would be restricted shares, which could be sold only in
limited circumstances. Therefore, in order to induce Mr. Margolies to enter into
an employment agreement with Precept, Precept has agreed to enter into a
Registration Rights Agreement with Michael Margolies granting Mr. Margolies
certain rights to register with the Securities and Exchange Commission the
Shares received by Mr. Margolies and the Margolies Family Trust (collectively,
the "Stockholder") in connection with Transactions (the "Registrable Shares").
At any time from the date of the Registration Rights Agreement (the closing date
of the Transfer) through the eighteen month anniversary thereof (the "Piggyback
Expiration Date"), if Precept proposes to register any Precept Class A Common
Stock for its own or others' account under the Securities Act of 1933, as
amended (the
27
<PAGE>
"Securities Act"), in a public offering for cash (an "Offering"), the
Stockholder will have certain "piggyback rights" to participate on the same
terms and conditions as Precept in the public offering (subject to limitations
imposed by the underwriter, if any). In addition, the Stockholder will have a
"demand right" to request that Precept cause a registration statement covering
the sale of the Registrable Shares to be declared effective by the SEC on or
before the Piggyback Expiration Date. In the event that the Stockholder makes
such a request and Precept fails to cause such a registration statement to be
declared effective by such date, then the Stockholder will have a ninety day
option to require Precept to purchase all or any portion of any Registrable
Shares then held by the Stockholder at a price per share equal to the average
closing price for Precept Class A Common Stock over the 30 trading days ending
three (3) trading days prior to the date Precept receives notice of the exercise
of such right. Both the "piggyback" and "demand" registration rights granted
pursuant to the Registration Rights Agreement would expire if, at any time after
the eight (8) month anniversary of the date of the Agreement, the Stockholder
failed to include all of the Registrable Shares in any Offering with respect to
which the Stockholder was entitled to include all such shares.
SECURITY OWNERSHIP OF THE MARGOLIES FAMILY
Michael Margolies, the Chairman of USTS, is the record owner of 1,835,116
shares of USTS Common Stock. Jay Owen Margolies, a son of Michael Margolies and
a member of the USTS Board, is the record owner of 286,054 shares of USTS Common
Stock. The Margolies Family Trust, the beneficiaries of which are the children
of Michael Margolies, is the owner of 855,000 shares of USTS Common Stock. In
total, the Margolies family owns an aggregate of 2,976,170 shares of USTS Common
Stock, or 33.1% of the outstanding USTS Common Stock. Accordingly, approximately
one-third of the benefit of the Transactions will flow to members of the
Margolies family. As a result of the Transactions, the Margolies family will own
an aggregate of 2,976,170 shares of Precept Class A Common Stock, or 2.1% of the
total voting power of Precept.
PAYMENT OF MARGOLIES NOTE
Throughout the life of USTS, Michael Margolies and members of his family
have provided loans to finance the operations of USTS, when needed. In 1994 the
outstanding balance of those loans, $707,676 at that time, was consolidated into
a promissory note bearing interest at 15% per annum. Since that time, additional
amounts have been added to the note, as USTS has continued to borrow from the
Margolies family. On July 7, 1997, a replacement note was issued in the
principal amount owed by USTS on that date, $1,039,794. As of September 30,
1997, the remaining unpaid balance of the note was $998,569.
The Plan of Reorganization provides that within ten days after the closing
of the Transfer, Percept will cause Acquisition to repay the principal balance
and all accrued interest on the note, unless Precept and Mr. Margolies have
agreed to restructure the note on mutually agreeable terms.
OPINION OF USTS FINANCIAL ADVISOR
M.H. Meyerson & Co., Inc. ("Meyerson"), an investment banking firm and
member of the National Association of Securities Dealers since 1960 was retained
by USTS on September 9, 1997 to evaluate the fairness of the Transactions from a
financial point of view to the common shareholders of USTS.
The full text of the written opinion of Meyerson dated October 16, 1997,
which sets forth assumptions made, factors considered and limitations on the
review undertaken by Meyerson, is included as Appendix C to this Proxy
Statement/Prospectus. USTS shareholders are urged to read such opinion carefully
and in its entirety.
No limitations were imposed by USTS on the scope of Meyerson's investigation
or the procedures to be followed by Meyerson in rendering its opinion. In
arriving at its opinion, Meyerson made its determination as to the fairness of
the Transfer, from a financial point of view, on the basis of the financial and
28
<PAGE>
comparative analysis referred to below. Meyerson was not required to opine as
to, and its opinion does not address, USTS' underlying business decision to
proceed with or effect the Transfer.
In arriving at its opinion, Meyerson reviewed and analyzed: (i) the
Agreement and Plan of Reorganization; (ii) the USTS Plan of Liquidation; (iii)
the Registration Statement on Form S-4 of Precept Business Services, Inc.; (iv)
the Registration Rights Agreement; (v) audited financial statements for Precept
for the years ended June 30, 1996 and 1997; (vi) certain operating and financial
information, including projections relating to the business, operations and
prospects of Precept, furnished by Precept; (vii) meetings with certain members
of Precept's management at which the historical and current operations,
financial conditions and future prospects of Precept were discussed as were the
benefits expected to result from the Transfer; (viii) the pro forma financial
results of the companies after the Transfer; (ix) the relative financial
conditions of each of the companies to the combined entity after the Transfer;
(x) certain operating and financial information including publicly available
disclosure information, projections relating to the business, operations and
prospects of USTS, furnished by USTS; (xi) meetings with certain members of
USTS' management at which the historical and current operations, financial
conditions, and future prospects of USTS were discussed as were the benefits
expected to result from the Transfer; (xii) comparisons of historical financial
results of Precept with those of publicly traded companies which Meyerson
believed to be relevant; and (xiii) results of such other studies, analysis,
inquiries and investigations of Meyerson deemed appropriate.
In connection with its review, Meyerson relied upon and assumed, without
independent verification, the accuracy of the information supplied by Precept's
and USTS' respective management. Meyerson further relied upon the assurances of
the managements of Precept and USTS that they are not aware of any facts that
would make such information incomplete or misleading. On October 16, 1997,
Meyerson delivered its opinion, which has been confirmed as of the date of this
Proxy Statement/Prospectus, to the Board of Directors of USTS, to the effect
that, as of such date, that the Transactions are fair, from a financial point of
view, to the common shareholders of USTS.
RELATIVE CONTRIBUTION ANALYSIS
Meyerson analyzed the relative contribution of Precept and USTS to the
revenues, gross profit, and total net income of the combined entity for the
period ended June 30, 1997. Meyerson assumed that Precept will issue 9,612,500
shares of its Precept Class A Common Stock (at least 500,000 of which will be
held back in a trust to satisfy contingent liabilities of USTS) to the USTS
shareholders for the transfer of its business and substantially all of its
assets. Following the Transfer there will be 45,612,500 shares of Precept Common
Stock outstanding. Based on the twelve months ended June 30, 1997, Precept's
revenue and gross profit represent 78% and 57% respectively of the combined
total. Only Precept had an operating profit. The shares of Precept Class A
Common Stock issued in the Transfer and immediately issued to USTS shareholders
(not more than 9,112,500 shares) will represent approximately 21% of the
45,612,500 total shares of Precept Common Stock outstanding following this
transaction, which corresponds approximately to the relative contributions of
Precept and USTS to the historical revenues of the combined entities.
BALANCE SHEET ANALYSIS
As of June 30, 1997, USTS had shareholders' equity of $16,794,138. On the
same date, the shareholders equity of Precept was $13,304,967. Meyerson noted
that $6,093,320 of the assets of USTS are notes receivable and that intangible
assets include $1,909,214 of goodwill and $1,054,131 represents other intangible
assets. Shareholders' equity of USTS net of these items is $7,737,473. These
USTS notes receivable arise principally from the sale of unprofitable or
non-strategic business units and the collection of these notes may be
principally dependant upon the commercial success of those units.
29
<PAGE>
As a condition of the Transfer, Precept has agreed to repay certain notes
owed to the family of Michael Margolies and to assume all other USTS debt.
On the basis of the relative balance sheets as presented, USTS shareholders'
equity represents 56% of the combined $30,099,105 in shareholders' equity as of
June 30, 1997. On the basis of removing notes receivable, goodwill and other
intangible assets from the USTS balance sheet, USTS shareholders' equity
represents 37% of the combined $21,042,440 in shareholders' equity. This ratio
of 63 to 37 of the relative contributions of Precept and USTS to the
shareholders' equity of the combined entity does not independently justify
allocating to USTS shareholders 21% of the shares in the combined entity.
However, the historical and projected return on shareholders' equity of Precept
far exceeds that of USTS, which supports a disproportionate allocation of shares
in the combined entity.
PRECEPT COMPARABLE COMPANY ANALYSIS
The business products and office supply industry is very competitive.
According to Sarkans and Associates, a consulting service for printing and
document management, the production of forms and products distributed by
products industry participants reached a retail value of $20.4 billion in 1996.
Meyerson compared four publicly traded companies, Corporate Express, U.S. Office
Products, BT Office Products International and Boise Cascade Office Products,
that distribute and in some cases manufacture business forms and office
products. The companies in Precept's peer group ranged in revenue from $1.4
billion to $3.1 billion for fiscal 1996. For each company Meyerson reviewed
publicly available financial data for the fiscal year 1996 and for the six
months ended June 30, 1997. Meyerson looked particularly at revenue, net income,
return on equity, earnings per share for the trailing twelve months and the
price to earnings ratio for the trailing twelve months.
After comparing the business plan of Precept, which anticipates growth
through acquisition and consolidation of individual business products
distributors, with those of its peer group, Meyerson determined that the Precept
business plan most closely resembled those of Corporate Express and U.S. Office
Products Company, which have also grown through acquisitions. The average price
earnings multiple for these two companies is 53 times trailing earnings.
Given the current financial difficulties of USTS and its historic problems
in attracting adequate financing, Meyerson found no reason to anticipate that
the market value of USTS would increase over the next five years if USTS
continued to operate independently.
SUMMARY ANALYSIS
In summary, the three methods of analysis utilized by Meyerson led to the
conclusion that the allocation of 79% of the equity of the combined entity to
Precept and 21% to USTS was justifiable on the basis of the relative
contributions of each to the combined entity Based on these analyses, as well as
on a comparison of the benefits and risks to USTS of the Transactions, as
described above (see "USTS Reasons For The Transactions," "Precept Reasons For
The Transactions," and "Risk Factors"), Meyerson concluded that the Transactions
are fair, from a financial point of view, to the common shareholders of USTS.
RECENT MARKET DEVELOPMENTS
When confirming its opinion as of the date of this Proxy
Statement/Prospectus, Meyerson noted to USTS that, with respect to the Precept
comparable company analysis, the average price earnings multiple for Corporate
Express and U.S. Office Products Company declined to approximately 27 times
trailing earnings. Notwithstanding this decrease, Meyerson confirmed its opinion
that the Transactions are fair, from a financial point of view, to the common
shareholders of USTS.
30
<PAGE>
TERMS OF THE PLAN OF REORGANIZATION
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE PLAN OF
REORGANIZATION, THE FULL TEXT OF WHICH IS ATTACHED HERETO AND INCORPORATED
HEREIN BY REFERENCE AS ANNEX A. THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PLAN OF REORGANIZATION.
THE TRANSFER. The Plan of Reorganization provides that at the closing (the
"Closing"), USTS shall transfer to Acquisition the business and substantially
all of the assets of USTS (the "Assets"), including all of the operating assets
of USTS, except for (i) its rights arising under the Plan of Reorganization,
(ii) its corporate minute books, stock records, tax and other corporate records,
and (iii) the capital stock of BancPro Transportation, Inc., and (iv) $175,000
in cash to permit USTS to pay its liabilities for certain expenses and costs
incurred in connection with the Plan of Reorganization and the transactions
contemplated therein, including the Plan of Liquidation (collectively, the
"Excluded Assets").
CONSIDERATION. The consideration for the Assets shall be the delivery to
USTS of a total of 9,612,500 shares of Precept Class A Common Stock plus one
share for each USTS warrant or option exercised prior to the Transfer (the
"Shares"). Precept will also issue stock options and warrants to replace the
outstanding options and warrants for USTS Common Stock. In addition, on the date
of Closing (the "Closing Date"), Acquisition shall assume only those certain
liabilities and obligations of USTS specified in the Plan of Reorganization (the
"Assumed Liabilities"), including certain liabilities and obligations arising
under certain USTS contracts (the "Assumed Contracts"), including the
obligations of USTS under its outstanding warrants and stock options, and
certain other liabilities set forth in its closing balance sheet. Acquisition
will not assume (i) any intercompany payable balances owed by USTS or any
subsidiary of USTS to any affiliate of USTS other than a promissory note dated
July 7, 1997 payable by USTS to Michael Margolies in the original principal
amount of $1,039,794 (the principal balance of which was $998,569 at September
30, 1997), (ii) any liabilities with respect to any legal proceedings threatened
or pending against USTS, (iii) any liabilities or obligations arising out of or
relating to any of the Excluded Assets, (iv) the promissory note in the amount
of $1,150,000 payable to the corporation from which USTS purchased BancPro
Transportation, Inc., (v) any liabilities or obligations exceeding an aggregate
amount of $20,000 arising out of or relating to any breach, default, or failure
to perform under any of the Assumed Contracts prior to and including the Closing
Date, (vi) any liabilities arising out of the violation of any environmental
laws, (vii) any liabilities of USTS for unpaid taxes for periods prior to the
Closing Date, or (viii) any other liabilities of USTS other than the Assumed
Liabilities.
CLOSING DATE. The Closing is expected to take place promptly after the
Transactions are approved by the USTS shareholders, subject to the prior
satisfaction of all conditions of Closing.
REPRESENTATIONS. The Plan of Reorganization contains customary
representations and warranties of the parties, including such matters as their
organization and capitalization; authorization and validity of the Plan of
Reorganization; absence of conflict with charter documents or agreements by
which the parties are bound or laws or judgments applicable to the parties;
governmental approvals and third party consents; filings with the Commission and
the accuracy of the information contained therein; financial statements; the
absence of any material adverse changes; payment of taxes; litigation; employee
plans; and broker's fees. The Plan of Reorganization also contains
representations by USTS and Precept with respect to real and personal property
holdings and the absence of environmental problems at the companies' respective
lease sites.
CONDUCT OF PRECEPT'S BUSINESS PRIOR TO TRANSFER. Pursuant to the Plan of
Reorganization, Precept has agreed that, among other things, during the period
from the date of the Plan of Reorganization until the Closing Date, unless
otherwise agreed in writing by USTS: (a) to the extent reasonably practicable,
the business of Precept shall be conducted only in the ordinary course of
business and consistent with past practices, and Precept shall use its
commercially reasonable efforts to maintain and preserve its business
organization, assets, prospects, employees and advantageous business
relationships; (b) Precept will, and
31
<PAGE>
will cause its subsidiaries to, conduct its and their business in the ordinary
course, consistent with past practice, between the date of the Plan of
Reorganization and the Closing; and (c) Precept will not, and will not permit
its subsidiaries to (i) declare, pay or make any dividends or distributions on
its capital stock; (ii) enter into any agreement (oral or written) with its
directors, officers, or salaried employees (except for employees in the ordinary
course of business); (iii) increase the compensation of its directors, officers,
or employees (except for employees in the ordinary course of business); (iv)
make capital expenditures (or enter into commitments to make capital
expenditures) in excess of $100,000 (either individually or in the aggregate);
(v) issue any capital stock or any securities or other instruments convertible,
exercisable or exchangeable for shares of its capital stock; (vi) incur
indebtedness or other liabilities other than in the ordinary course of business
and consistent with past practice; (vii) redeem any capital stock or pay any
principal of any indebtedness to any director, executive officer or shareholder;
(viii) enter into any agreement or arrangement to sell any assets or any of its
capital stock or merge with any entity, except for sales of assets in the
ordinary course of business; or (ix) enter into any agreement or arrangement to
purchase any securities or assets of any entity or to merge or otherwise combine
with any entity.
CONDUCT OF USTS' BUSINESS PRIOR TO TRANSFER. USTS has agreed that, among
other things, during the period from the date of the Plan of Reorganization
until the Closing Date, except in connection with the transactions contemplated
by the Plan of Reorganization and except as Precept shall otherwise agree in
writing: (a) To the extent reasonably practicable, the business of USTS shall be
conducted only in the ordinary course of business and consistent with past
practices, and USTS shall use its commercially reasonable efforts to maintain
and preserve its business organization, assets, prospects, employees and
advantageous business relationships; (b) USTS will, and will cause its
subsidiaries to, conduct its business in the ordinary course, consistent with
past practice; and (c) USTS will not, and will not permit its subsidiaries to,
(i) declare, pay or make any dividends or distributions on its capital stock;
(ii) enter into any agreement (oral or written) with its directors, officers, or
salaried employees (except for employees in the ordinary course of business);
(iii) increase the compensation of its directors, officers, or employees (except
for employees in the ordinary course of business); (iv) make capital
expenditures (or enter into commitments to make capital expenditures) in excess
of $100,000 (either individually or in the aggregate); (v) issue any capital
stock or any securities or other instruments convertible, exercisable or
exchangeable for shares of its capital stock; (vi) incur indebtedness or other
liabilities other than in the ordinary course of business and consistent with
past practice; (vii) redeem any capital stock or pay any principal of any
indebtedness to any director, executive officer or stockholder; (viii) enter
into any agreement or arrangement to sell any assets or any of its capital stock
or merge with any entity, except for sales of assets in the ordinary course of
business; or (ix) enter into any agreement or arrangement to purchase any
securities or assets of any entity or to merge or otherwise combine with any
entity.
CONDITIONS TO THE OBLIGATIONS OF EACH PARTY TO EFFECT TRANSFER. Pursuant to
the Plan of Reorganization, the respective obligations of the parties to effect
the Transfer will be subject to the fulfillment at or prior to the Closing Date
of the conditions that, among other things, (i) the Plan of Reorganization shall
have been approved and adopted by the requisite vote of the shareholders of USTS
required by applicable law; (ii) any applicable waiting period or extension
thereof under the HSR Act relating to the Transfer shall have expired or been
terminated; (iii) no judgment, injunction, order, decree or ruling issued by a
court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, nor any statute, rule, regulation or
executive order promulgated or enacted by any governmental authority shall be in
effect that would make the acquisition or holding by USTS of the Shares illegal,
or otherwise prohibit the consummation of the Transfer; (iv) the Shares shall
have been approved for listing on Nasdaq subject to official notice of issuance
by Precept; and (v) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required to permit the execution, delivery and performance of
the Plan of Reorganization shall have been obtained or made, except for filings
in connection with the Transfer and any other documents required to be filed
after the Closing Date, and except where the failure to have obtained or made
any such consent, authorization, order, approvals, filing or registration would
not have a material adverse effect on Precept.
32
<PAGE>
ADDITIONAL CONDITIONS TO THE OBLIGATION OF ACQUISITION AND PRECEPT. The
obligation of Acquisition and Precept to effect the Transfer is also subject to
the fulfillment at or prior to the Closing Date of certain additional
conditions, (unless waived), including, without limitation, (i) USTS shall in
all material respects have performed each obligation to be performed by it under
the Plan of Reorganization on or prior to the Closing Date, (ii) the
representations and warranties of USTS in the Plan of Reorganization shall be
true and correct in all material respects when made and at the Closing Date with
the same force and effect as though made at such time, (iii) there shall have
been no material adverse change in the condition (financial or otherwise),
operations, assets, liabilities or prospects of USTS since June 30, 1997, (iv)
USTS shall have delivered to Acquisition all necessary consents, authorizations
and approvals required by the Plan of Reorganization, and (v) USTS shall have
furnished to Acquisition at least three (3) business days prior to Closing a
preliminary balance sheet of USTS as of the Closing Date, prepared in accordance
with GAAP, and (vi) the adversary proceeding (the "Litigation") filed in the
United States Bankruptcy Court for the Southern District of New York (White
Plans Division) (the "Court") and styled UNITED ACQUISITION II CORPORATION V.
MID AMERICA TRANSPORTERS GROUP, INC., ET. AL., and naming USTS as a defendant,
must be settled by the parties thereto and the settlement thereof must, among
other things, (a) provide that United Acquisition II Corporation has no interest
in the capital stock of each of Gulf Northern Transport, Inc. and Mencor, Inc.,
two subsidiaries of USTS, and (b) be approved by the bankruptcy court in
connection with the bankruptcy case styled IN RE UNITED ACQUISITION II CORP.,
Case No. 97-B-20503 ASH, Chapter 11, relating to United Acquisition II
Corporation.
ADDITIONAL CONDITIONS TO THE OBLIGATION OF USTS. The obligation of USTS to
effect the Transfer is also subject to the fulfillment at or prior to the
Closing Date of certain additional conditions, (unless waived), including,
without limitation, (i) Acquisition and Precept shall in all material respects
have performed each obligation to be performed by it under the Plan of
Reorganization on or prior to the Closing Date, (ii) the representations and
warranties of Acquisition and Precept in the Plan of Reorganization shall be
true and correct in all material respects when made and at the Closing Date with
the same force and effect as though made at such time, (iii) there shall have
been no material adverse change in the condition (financial or otherwise),
operations, assets, liabilities or prospects of Precept since June 30, 1997,
(iv) Precept shall have entered into the Registration Rights Agreement with
Michael Margolies, (v) Precept shall have entered into Employment Agreements
with Michael Margolies and Ron Sorci, and (vi) Precept shall either pay all of
USTS' outstanding obligations under that certain Loan and Security Agreement,
dated October 7, 1996 by and between USTS and Israel Discount Bank of New York
("IDB") (approximately $ unpaid principal amount at , 1998) or
provide IDB with an irrevocable standby letter of credit from a financial
institution reasonably satisfactory to IDB for the full amount of the
obligations plus ninety (90) days interest on the principal amount of the loan.
MUTUAL INDEMNIFICATION. USTS shall indemnify and hold Precept, Acquisition,
the Liquidating Trust, and their respective officers, directors, shareholders,
affiliates, employees and agents ("Precept Indemnitees") harmless from certain
liabilities, including, without limitation, any and all damages, losses, claims
and certain other liabilities directly or indirectly resulting from or arising
out of any breach or inaccuracy in any representation or warranty of USTS in the
Plan of Reorganization, any breach or non-performance by USTS of any provision
of the Plan or Reorganization, any violation or non-compliance with any
environmental law, any contracts, agreements, or other obligation of USTS other
than the Assumed Liabilities, and from all of the Excluded Liabilities. Such
indemnification (i) shall be paid out of, and is limited to, the Shares held in
the Contingency Reserve, (ii) except for claims by any Precept Indemnitees, or
any USTS Subsidiaries relating to or arising out of the William Orr litigation
(see "Business of USTS--Litigation"), USTS is only required to satisfy claims
for indemnification by Precept Indemnitees no earlier than the date of the one
year anniversary of the Closing Date, and after all other pending claims against
USTS (or the Liquidating Trust) have been disposed of, and (iii) USTS (or the
Liquidating Trust) shall only be required to indemnify Precept Indemnitees for
claims made on or before the two year anniversary of the Closing Date. In
addition, Precept and Acquisition shall indemnify and hold USTS and the
Liquidating Trust and their respective officers, directors, shareholders,
trustees, Affiliates, employees and agents harmless from
33
<PAGE>
any and all damages, losses, claims and certain other liabilities relating to,
resulting from or arising out of any breach or inaccuracy of any representation
or warranty of Precept contained in the Plan of Reorganization.
TERMINATION. The Plan of Reorganization may be terminated at any time prior
to the Closing Date:
- by agreement of the Boards of Directors of USTS and Precept;
- by either Board if the other party has made an untrue representation in
the Agreement or has breached a covenant in the Agreement and is unable to
cure the problem within five days after being notified of it;
- by either Board if the Closing Date has not occurred by January 31, 1998,
except not by a party which was responsible for the delay;
- by either Board if a court enjoins the Transfer;
- by either Board if the closing price of USTS Common Stock falls below
$1.65 for more than ten consecutive trading days; or
- by the USTS Board if USTS receives a proposal from a third party to
acquire USTS or its assets and the USTS Board determines that the proposal
is more advantageous to the shareholders of USTS than the Transactions
would be.
TERMINATION FEE. If the Plan of Reorganization is terminated because (i)
USTS shall have entered into, or shall have publicly announced its intention to
enter into, an agreement or an agreement in principle with respect to any tender
or exchange offer, merger, consolidation, or other business combination which
the USTS Board has determined is more favorable to USTS' shareholders than the
transactions contemplated by the Plan of Reorganization, or the USTS Board shall
have withdrawn or materially modified in any manner adverse to Precept the USTS
Board's approval or recommendation of the Transfer, (ii) any person or group
shall have become the beneficial owner of a majority of the USTS Common Stock,
or (iii) the failure to consummate the Transfer by January 31, 1998 as a result
of USTS' breach or failure to perform in any material respect any of its
covenants or agreements under the Plan of Reorganization, then USTS will be
required to pay Precept a termination fee of $1,000,000 (the "Termination Fee").
Similarly, if (i) any person or group shall have become the beneficial owner of
a majority of the Precept Class A Common Stock, or (ii) the failure to
consummate the Transfer by January 31, 1998 as a result of Precept's breach or
failure to perform in any material respect any of its covenants or agreements
under the Plan of Reorganization, then Precept will be required to pay USTS a
termination fee of $1,000,000.
AMENDMENT; OTHER MATTERS. The Plan of Reorganization may be amended by USTS
and Precept at any time before the Closing Date; provided, however, that after
approval by the shareholders of USTS, no amendment may be made that changes the
form or reduces the amount of consideration to be paid to the shareholders or
that in any other way materially adversely affects the rights of such
shareholders (other than a termination of the Plan of Reorganization in
accordance with the provisions thereof) without the further approval of such
shareholders.
POST CLOSING OBLIGATIONS. On or immediately after the Closing Date, USTS
will amend its Articles of Incorporation to change its corporate name to
. As promptly as practicable after the Closing Date, but in no event
later than 45 days after the Closing Date, USTS will deliver to Acquisition the
Final Closing Balance Sheet which shall update the Preliminary Closing Balance
Sheet. To the extent that Acquisition disputes any items or amounts reflected on
the Final Closing Balance Sheet which, in the aggregate, exceed $900,000,
Acquisition shall notify USTS in writing within 15 days after Acquisition
receives the Final Closing Balance Sheet. If Acquisition and USTS are unable to
reach a resolution of such dispute within 15 days after the receipt by USTS of
Acquisition's written notice of dispute, Acquisition and
34
<PAGE>
USTS shall submit the items remaining in dispute for resolution to an
independent accounting firm, which shall act as arbitrator and shall determine
and report to the parties upon such remaining disputed items with respect to the
differences which are in excess of $900,000, and such report shall be final,
binding and conclusive on the parties. The fees of the independent accounting
firm in connection with such determination shall be shared equally by
Acquisition and USTS.
Within ten (10) business days after the Closing Date, Precept shall cause
Acquisition to repay all principal and accrued and unpaid interest due on the
Margolies Note unless, prior to such date, Margolies and Acquisition have
restructured the Margolies Note on terms and conditions acceptable to each of
Margolies and Precept.
TERMS OF THE PLAN OF LIQUIDATION
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE PLAN OF
LIQUIDATION, THE FULL TEXT OF WHICH IS ATTACHED HERETO AND INCORPORATED HEREIN
BY REFERENCE AS ANNEX B. THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE PLAN OF REORGANIZATION.
EFFECTIVE DATE. The Plan of Liquidation shall be effective on the date (the
"Effective Date") on which it is adopted by the affirmative vote of the holders
of a majority of the USTS shareholders at the Meeting, subject to consummation
of the Transfer.
CESSATION OF BUSINESS; DISSOLUTION. After the Effective Date, the USTS
shall not engage in any business activities except for the purposes of (i)
prosecuting or defending lawsuits to which the USTS is a party, (ii) disposing
of and conveying its property, discharging its liabilities and winding up its
business and affairs, and (iii) making the Liquidation Distribution. BancPro
Transportation, Inc. ("BancPro"), a subsidiary of USTS, will continue to carry
on business activities as necessary to preserve its business pending disposition
by USTS of that asset. However, within one year after the Effective Time, USTS
will either dispose of BancPro or liquidate it. As soon as practicable after the
Effective Date, USTS shall file a Certificate of Dissolution with the Nevada
Secretary of State.
CONTINGENCY RESERVE. USTS shall make proper provision for the payment of
all known or ascertainable liabilities of USTS, including all amounts estimated
by the USTS Board to be necessary, appropriate or desirable for the payment of
estimated expenses, taxes and contingent liabilities (including expenses of
dissolution, liquidation and termination of existence) by setting aside a
portion of the Shares received by USTS in the Transfer (not less than 500,000
Shares nor more than 1,000,000 Shares), cash or other property of USTS (the
"Contingency Reserve").
LIQUIDATING DISTRIBUTION. As soon as practicable after the Effective Date,
USTS shall distribute pro rata to the USTS shareholders that portion of the
Shares remaining after making provision for the Contingency Reserve. The
distribution may be made in a series of distributions and, while intended to be
made in Shares, may be made in cash, in such manner as the USTS Board may
determine. USTS will establish a liquidating trust to receive all remaining
assets for the benefit of the USTS shareholders, subject to the payment of
expenses, taxes and contingent liabilities of USTS. The Liquidating Distribution
shall be in complete redemption and cancellation of all outstanding USTS Common
Stock.
AMENDMENTS. Notwithstanding the adoption of the Plan of Liquidation by the
USTS shareholders, the USTS Board may modify or amend the Plan of Liquidation at
any time and, prior to the filing of a Certificate of Dissolution with the
Secretary of State of Nevada, may abandon the Plan, in each case with no further
action by the USTS stockholders to the extent permitted by applicable law.
LIQUIDATING TRUST. Under a Liquidating Trust Agreement between USTS and
Michael Margolies, as liquidating trustee, the Contingency Reserve will be held
by the liquidating trust subject to the satisfaction of any liabilities or
obligations of USTS for up to three years, after which any remaining assets will
be distributed on a pro rata basis to the stockholders of USTS. The liquidating
trustee shall have the power,
35
<PAGE>
among other things, to pay from the trust corpus unpaid claims, liabilities,
debts and obligations of the trust, contingencies, and the expenses of
administering the trust, to sell, transfer, assign, borrow against, pledge,
hypothecate or deal in any other manner with any of the trust corpus, in such
manner as the trustee may deem advisable for any purpose. The trust shall
distribute at least annually to the USTS shareholders its net income plus all
net proceeds from the sale of any assets, except that the trust may retain an
amount of net income or net proceeds reasonably necessary to maintain the value
of the trust corpus or to meet claims and contingent liabilities. If, at any
time, the trustee determines that all claims, debts, liabilities, and
obligations of the trust have been paid or discharged and that the remaining
assets of the trust may be conveniently distributed in kind, the trustee shall
distribute the trust corpus to the beneficiaries of record on the close of
business on such record date as the trustee may determine. After the end of each
fiscal year of the trust, the trustee shall submit a written report to the
beneficiaries showing the assets and liabilities of the trust, any changes in
the trust corpus which have not been previously reported, and any action taken
by the trustee in the performance of his duties under the Liquidating Trust
Agreement.
EFFECT OF THE TRANSACTIONS ON USTS SHAREHOLDERS AND USTS CLASS C WARRANTHOLDERS
Promptly after the Closing Date, USTS will distribute to its shareholders of
record (both Common and Preferred) all of the Shares it received except for
those which are to be retained as a Contingency Reserve. As a result, each USTS
shareholder on the record date for the distribution will receive approximately
one Share for each USTS share held on that date. The Shares received will be
listed on Nasdaq and be immediately saleable by the shareholders. Because the
Transfer has been structured as a tax-free reorganization, the distribution of
Shares to the USTS Shareholders will not result in any tax liability for the
USTS shareholders.
Those who are shareholders of USTS after the Transfer will remain USTS
shareholders, as well as Precept shareholders, unless they sell their shares.
Shortly after the Transfer, however, and no later than one year after the date
of the Shareholders Meeting, USTS will close its stock record books and will not
permit any USTS Common Stock to be transferred except by will or other legal
proceeding. At the same time, USTS will transfer all of its assets and
liabilities to the Liquidating Trust and will dissolve and cease to exist.
Thereafter, those who were USTS shareholders when its stock records were closed
will retain only an interest in the Liquidating Trust. If, after all liabilities
assumed by the Trust have been satisfied, there are assets left in the
Liquidating Trust, those assets will be distributed pro rata to those who were
USTS shareholders when its stock records were closed.
In addition, as of the Closing Date, each USTS Class C Warrant held of
record as of such date will automatically be converted into one Precept Class A
Warrant and shall become exercisable for shares of Precept Class A Common Stock
in lieu of the USTS Common Stock previously purchasable upon exercise. Except
for the fact that the Precept Class A Warrants shall be exercisable for shares
of Precept Class A Common Stock, the Precept Class A Warrants shall have terms
and conditions substantially the same as those of the USTS Class C Warrants. See
"Description of Precept Securities--Precept Class A Warrants." Certificates
representing such Precept Class A Warrants will be distributed promptly after
the Closing Date in exchange for and replacement of current certificates
representing outstanding USTS Class C Warrants.
REVERSE STOCK SPLIT
In connection with Precept's Nasdaq listing application, Precept has
indicated to the Nasdaq that it intends to effect a reverse stock split if
necessary for the purpose of complying with the applicable Nasdaq listing
criteria, including the requirement that the Precept Class A Common Stock trade
at or above $4 per share after the consummation of the Transactions. On
, 1997, the shareholders of Precept approved an amendment to
Precept's Articles of Incorporation whereby such number of shares of Precept
Common Stock between one and two, consisting only of whole shares and tenths of
shares (the "Split Ratio"), as shall be determined by the Precept Board of
Directors, shall be converted and reconstituted
36
<PAGE>
into one share of Precept Common Stock in a reverse stock split of the Precept
Common Stock (the "Reverse Stock Split"). No fractional shares will be issued in
the Reverse Stock Split and an amount of cash equal to the fair market value of
any fractional shares resulting from the Reverse Stock Split (as determined by
the Board of Directors of Precept) will be paid to holders thereof in lieu of
such fractional shares. The number of Shares issuable to USTS in the Transaction
will be adjusted to reflect the Reverse Stock Split. The Reverse Stock Split
will become effective upon the filing of Restated and Amended Articles of
Incorporation of Precept with the Secretary of State of the State of Texas on
any date selected by the Board of Directors on or prior to the delivery of the
Shares to USTS in the Transfer. To the extent that, in the discretion of the
Precept Board of Directors, the Reverse Stock Split is not required to obtain
listing on the Nasdaq, the Precept Board of Directors may determine the Split
Ratio to be equal to one, and no change to Precept's Articles of Incorporation
need be made as a result thereof. The number of shares of Precept Common Stock
outstanding at the Closing Date will be 45,612,500, and such number could
potentially be changed by the Reverse Stock Split.
The USTS shareholders, by approving the Transactions, are approving the
receipt by USTS of the Shares in the Transfer subject to the effects, if any, of
the Reverse Stock Split. Consummation of the Reverse Stock Split would, in and
of itself, not result in a change in the relative equity position or voting
power of the holders of Precept Class A Common Stock. As a result, however, of
the fact that the Reverse Stock Split would likely reduce the number of issued
and outstanding shares of Precept Class A Common Stock without changing the par
value of such stock, the Reverse Stock Split would result in a decrease in
Precept's stated capital. The Precept Board of Directors believes that the
Reverse Stock Split would have the effect of increasing the market price per
share of Precept Class A Common Stock. However, there can be no assurances that
any such increase would occur, that such increase would be proportionate to the
reduction in the number of shares of Precept Class A Common Stock, or that any
such increase would be sustained for a prolonged period of time. The Reverse
Stock Split could result in a decrease in the trading volume of Precept Class A
Common Stock due to the decrease in the number of outstanding shares. There can
be no assurance that Precept would, as a result of the Reverse Stock Split,
continue to meet the maintenance listing requirements of Nasdaq.
37
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The acquisition of USTS ("USTS Acquisition") will be accounted for by the
purchase method of accounting and, accordingly, the purchase price of $4.4
million plus approximately $1.7 million of fees and expenses has been allocated
on a preliminary basis to the assets acquired and liabilities assumed based upon
their estimated fair value at the closing date of the USTS Acquisition. The
excess of purchase price over the estimated fair values has been preliminarily
recognized as goodwill, which will be amortized over 20 years.
The Unaudited Pro Forma Consolidated Statement of Operations does not
purport to represent what Precept's results of operations actually would have
been if the events described above had occurred as of the date indicated or what
results will be for any future periods. The Unaudited Pro Forma Consolidated
Financial Information is based upon assumptions that Precept believes are
reasonable.
The following Unaudited Pro Forma Consolidated Balance Sheet as of September
30, 1997 gives effect to the USTS Acquisition as though it had occurred on that
date. The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended June 30, 1997 (which combines USTS' financial information for the
six-months ended December 31, 1996 and six-months ended June 30, 1997) and for
the three months ended September 30, 1997, gives effect to the USTS Acquisition
as though it had occurred on July 1, 1996. The Unaudited Pro Forma Statement of
Operations for the year ended June 30, 1997 also gives effect to the USTS
acquisition of Gulf Northern and Mencor as if they had occurred on July 1, 1996.
The Unaudited Pro Forma Consolidated Financial Information should be read in
conjunction with the Consolidated Financial Statements of Precept and USTS and
the Notes thereto included elsewhere in this Proxy Statement/Prospectus.
38
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
<S> <C> <C> <C> <C> <C> <C>
B
A BLACK & WHITE PRO FORMA
PRECEPT USTS BANCPRO CAB COMPANY ADJUSTMENTS FOOTNOTE
------------ ------------ ------------ -------------- ------------- ---------
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,704,676 $ 905,242 $ 81,945 $ (59,294) $ (175,000) D
Cash--restricted............................ -- 232,879 -- -- --
Accounts receivable, net of allowance....... 10,119,761 8,014,234 (2,822,543) (209,878) -- D
Accounts receivable from affiliates......... 524,174 -- -- -- --
Notes and other receivables................. 520,812 1,109,063 -- (94,478) (280,218) D
Inventory................................... 2,828,884 393,943 -- (1,420) (37,722) D
Net investment in sale type leases.......... -- 937,233 -- -- (937,233) C
Assets held for sale........................ -- -- -- -- 748,333 C
Income taxes refundable..................... 215,830 -- --
Deferred income taxes....................... 1,090,886 -- --
Net assets of discontinued operations....... 3,622,019 -- -- --
Prepaid and other........................... 630,042 836,795 -- (11,988) (178,620) C
Prepaid and other........................... -- -- -- -- (128,190) D
------------ ------------ ------------ -------------- -------------
Total current assets.......................... 21,257,084 12,429,389 (2,740,598) (377,058) (988,650)
Property, plant and equipment, net............ 1,803,387 9,899,504 (10,972) (46,532) (200,000) D
Intangible assets, net........................ 5,474,760 2,847,728 (391,998) -- (2,455,730) D
USTS acquisition goodwill..................... -- -- 0 0 3,136,479 E
Net investment in sales type leases........... -- 1,148,986 -- -- (1,148,986) C
Notes receivable.............................. -- 239,432 -- -- --
Deferred income taxes......................... 615,019 -- -- -- --
Other assets.................................. 1,326,288 1,146,483 -- (1,000) (409,034) D
------------ ------------ ------------ -------------- -------------
Total assets.................................. $ 30,476,538 $ 27,711,522 $ (3,143,568) $ (424,590) $ (2,065,921)
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
LIABILITIES
Current liabilities:
Current portion of long term debt and
capitalized lease......................... $ 230,970 $ -- $ -- $ -- $ --
Cash overdraft.............................. -- 13,679 -- -- --
Note payable and line of credit............. -- 7,898,433 (947,006) -- --
Due to related party........................ -- 181,257 -- -- --
Accounts payable and accrued expenses....... 9,015,110 2,881,687 (352,974) (27,739) 1,490,966 D
------------ ------------ ------------ -------------- -------------
Total current liabilities..................... 9,246,080 10,975,056 (1,299,980) (27,739) 1,490,966
Due to related party.......................... -- 817,312 -- -- --
Long term obligations......................... 7,955,360 5,223,088 -- -- --
------------ ------------ ------------ -------------- -------------
Total liabilities............................. 17,201,440 17,015,456 (1,299,980) (27,739) 1,490,966
Minority Interest in Subsidiary............... -- 580,125 -- -- --
Shareholder's equity:
Preferred stock............................. -- 1,800,000 -- -- (1,800,000) D
Common stock................................ 115,644 70,207 -- -- 270,274 D
Additional paid in capital.................. 17,676,797 29,964,698 -- -- (25,986,564) D
Stock subscription receivable............... -- (25,785) -- -- 25,785 D
Deferred compensation....................... -- (456,697) -- -- 456,697 D
Accumulated deficit......................... (3,505,036) (21,236,482) (1,843,588) (396,851) 23,476,921 D
------------ ------------ ------------ -------------- -------------
14,287,405 10,115,941 (1,843,588) (396,851) (3,556,887)
Treasury stock.............................. (191,271) -- -- -- --
Shareholder notes........................... (821,036) -- -- -- --
------------ ------------ ------------ -------------- -------------
Total shareholders' equity.................... 13,275,098 10,115,941 (1,843,588) (396,851) (3,556,887)
------------ ------------ ------------ -------------- -------------
Total liabilities & shareholders' equity...... $ 30,476,538 $ 27,711,522 $ (3,143,568) $ (424,590) $ (2,065,921)
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
<CAPTION>
<S> <C>
PRO FORMA
CONSOLIDATED
-------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 2,457,569
Cash--restricted............................ 232,879
Accounts receivable, net of allowance....... 15,101,574
Accounts receivable from affiliates......... 524,174
Notes and other receivables................. 1,255,179
Inventory................................... 3,183,685
Net investment in sale type leases.......... --
Assets held for sale........................ 748,333
Income taxes refundable..................... 215,830
Deferred income taxes....................... 1,090,886
Net assets of discontinued operations....... 3,622,019
Prepaid and other........................... 1,148,039
Prepaid and other........................... --
-------------
Total current assets.......................... 29,580,167
Property, plant and equipment, net............ 11,445,387
Intangible assets, net........................ 5,474,760
USTS acquisition goodwill..................... 3,136,479
Net investment in sales type leases........... --
Notes receivable.............................. 239,432
Deferred income taxes......................... 615,019
Other assets.................................. 2,062,737
-------------
Total assets.................................. $52,553,981
-------------
-------------
LIABILITIES
Current liabilities:
Current portion of long term debt and
capitalized lease......................... $ 230,970
Cash overdraft.............................. 13,679
Note payable and line of credit............. 6,951,427
Due to related party........................ 181,257
Accounts payable and accrued expenses....... 13,007,050
-------------
Total current liabilities..................... 20,384,383
Due to related party.......................... 817,312
Long term obligations......................... 13,178,448
-------------
Total liabilities............................. 34,380,143
Minority Interest in Subsidiary............... 580,125
Shareholder's equity:
Preferred stock............................. --
Common stock................................ 456,125
Additional paid in capital.................. 21,654,931
Stock subscription receivable............... --
Deferred compensation....................... --
Accumulated deficit......................... (3,505,036)
-------------
18,606,020
Treasury stock.............................. (191,271)
Shareholder notes........................... (821,036)
-------------
Total shareholders' equity.................... 17,593,713
-------------
Total liabilities & shareholders' equity...... $52,553,981
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated balance sheet.
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Pro forma adjustments are made to exclude the BancPro assets and
liabilities included in the USTS historical financial statements as of September
30, 1997, which are not a part of the Transfer.
(B) Pro forma adjustments are made to exclude the Black & White Cab Company
assets and liabilities included in the USTS historical financial statements as
of September 30, 1997, which are not a part of the Transfer (Black & White Cab
Company was sold by USTS subsequent to September 30, 1997).
(C) Pro forma adjustments are made to record Net Investment in Sales Type
Leases, including related accrued interest, at their liquidation value plus
estimated future cash flows prior to disposal of these leases and to record this
investment as Assets Held for Sale as Precept intends to cease operating in this
line of business. The following is a detail of these adjustments:
<TABLE>
<S> <C> <C>
USTS Acquisition Goodwill................... $ 1,516,506
Assets Held for Sale--Current............... 748,333
Net Investment in Sales Type
Leases--Current......................... 937,233
Net Investment in Sales Type Leases--Non
Current................................. 1,148,986
Prepaid and Other......................... 178,620
</TABLE>
(D) Pro forma adjustments are made to record the issuance of 9,612,500
shares of Precept Class A Common Stock, valued at $0.42 per share, the issuance
of warrants and options, and the estimated transaction costs in connection with
the Transfer. Pro forma adjustments are also made to allocate the purchase price
to the fair value of the remainder of those assets acquired and the liabilities
assumed in the Transfer. Finally, pro forma adjustments are made to eliminate
the equity structure of USTS as a result of the Transfer. The following is a
detail of these adjustments:
<TABLE>
<S> <C> <C>
Preferred Stock............................. $ 1,800,000(a)
Additional Paid in Capital.................. 25,986,564(a)(b)(c)
USTS Acquisition Goodwill................... 1,619,973
Cash and Cash Equivalents................. 175,000(d)
Notes and Other Receivables................ 280,218(e)
Inventory................................. 37,722(f)
Prepaid and Other......................... 128,190(g)
Property, Plant and Equipment, Net........ 200,000(h)
Intangible Assets, Net.................... 2,455,730(i)
Other Assets.............................. 409,034(j)
Accounts Payable and Accrued Expenses..... 1,490,966(j)(k)
Common Stock.............................. 270,274(a)(b)(c)
Subscription Stock Receivable............. 25,785(a)
Deferred Compensation..................... 456,697(a)
Accumulated Deficit....................... 23,476,921(a)
</TABLE>
The following is a detail of these adjustments:
(a) To eliminate historical USTS shareholders' equity accounts, after
reductions for BancPro and Black & White Cab Company.
40
<PAGE>
(b) To record estimated purchase price, as follows:
<TABLE>
<S> <C> <C> <C>
9,612,500 shares of Precept's Class A Common Stock, valued at $0.42
per share(1)...................................................... $4,037,250
1,815,000 Class C warrants(2)....................................... 157,000
Other warrants and options(2)....................................... 124,365
---------
$4,318,615
---------
---------
Allocated within equity as follows:
Common Stock........................... $ 96,125
Paid in Capital........................ 4,222,490
---------
$4,318,615
---------
---------
</TABLE>
(1) The determination of the valuation of Precept Class A Common Stock at
$0.42 per share is based upon a valuation analysis, which included a
comparable company analysis and a discounted cash flow analysis.
(2) All warrants and options were valued utilizing an option pricing
model. Other warrants and options include 482,500 warrants and 94,996
options, all of which are vested, and have an average value of
approximately $0.21.
(c) To reclassify $244,356 from additional paid in capital to common stock
as a result of an approximate 3.154 to 1 stock split on the Precept
Common Stock expected to occur prior to the effective date of the Proxy
Statement/Prospectus.
(d) To exclude cash to be retained by USTS of $175,000.
(e) To write down notes and other receivables to estimated fair market value
based on Precept's estimate of what it believes it will collect after it
assumes ownership of the receivables.
(f) To write down inventory to estimated fair market value.
(g) To eliminate prepaid expenses related to prepaid consulting services
which will not be utilized by the combined company. Thus, the amount
recorded has no future value.
(h) To record property, plant, and equipment at fair market value.
(i) To eliminate USTS historical intangible assets of $2,455,730, after
reduction for BancPro.
(j) To record estimated transaction fees and expenses of $1,700,000. Of this
amount, $409,034, representing transaction costs incurred, is reflected
at September 30, 1997 as other assets.
(k) To record estimated severance and other costs (total of $200,000)
relating to the closing of USTS corporate offices expected to occur
shortly following the closing of the Transactions.
(E) Pro forma adjustments are made to record goodwill equal to the excess of
the purchase price over the fair values assigned to assets acquired and
liabilities assumed by Precept (total of items (C) and (D) above). Goodwill is
to be amortized over twenty years, which is consistent with prior estimated
lives used by the two companies.
41
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
A
HISTORICAL BLACK &
-------------------------- A WHITE CAB PRO FORMA PRO FORMA
PRECEPT USTS BANCPRO COMPANY ADJUSTMENTS FOOTNOTE CONSOLIDATED
------------ ------------ ---------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Business products................. $ 17,296,931 $ -- $ -- $ -- $ -- $17,296,931
Transportation.................... 1,638,547 8,742,778 (635,070) (85,598) -- 9,660,657
------------ ------------ ---------- ----------- ----------- ------------
Total revenues.................. 18,935,478 8,742,778 (635,070) (85,598) -- 26,957,588
EXPENSES:
Cost of goods and services sold... 11,797,855 -- -- -- 11,797,855
Selling, general and
administrative.................. 6,538,777 10,738,639 (472,472) (76,973) 16,727,971
Depreciation and amortization..... 245,277 654,471 (14,942) (1,969) (254,457) B 628,380
------------ ------------ ---------- ----------- ----------- ------------
Total expenses.................. 18,581,909 11,393,110 (487,414) (78,942) (254,457) 29,154,206
Operating income (loss)............. 353,569 (2,650,332) (147,656) (6,656) 254,457 (2,196,618)
Other income (expenses):
Interest expense.................. (125,359) (340,815) -- -- -- (466,174)
Interest income................... -- 51,517 -- -- -- 51,517
Other............................. -- 172,497 -- -- -- 172,497
------------ ------------ ---------- ----------- ----------- ------------
Total other expenses............ (125,359) (116,801) -- -- -- (242,160)
Income (loss) from continuing
operations before income taxes.... 228,210 (2,767,133) (147,656) (6,656) 254,457 (2,438,778)
Income tax provision................ 93,102 -- (59,062) (2,662) 101,783 C 133,161
------------ ------------ ---------- ----------- ----------- ------------
Net income (loss) from continuing
operations........................ $ 135,108 $ (2,767,133) $ (88,594) $ (3,994) $ 152,674 $(2,571,939)
------------ ------------ ---------- ----------- ----------- ------------
------------ ------------ ---------- ----------- ----------- ------------
Net income (loss) from continuing
operations per share.............. $ 0.01 $ (0.06)
------------ ------------
------------ ------------
Weighted average common outstanding
shares............................ 11,515,687 45,937,402
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
operations.
42
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- A
GULF BLACK &
NORTHERN/ A WHITE CAB A PRO FORMA
PRECEPT USTS MENCOR BANCPRO COMPANY ATAB ADJUSTMENTS
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Business products................. $70,778,087 $ -- $ -- $ -- $ -- $ -- $ --
Transportation.................... 6,565,838 29,930,630 8,732,843 (1,917,875) (284,628) (2,222,112) --
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total revenues.................. 77,343,925 29,930,630 8,732,843 (1,917,875) (284,628) (2,222,112) --
EXPENSES:
Cost of goods and services sold... 50,157,418 20,261,902 6,804,625 (1,221,376) -- (838,784) --
Selling, general and
administrative.................. 24,350,230 11,601,558 1,194,857 (231,733) (404,675) (829,312) --
Depreciation and amortization..... 1,498,473 1,982,274 619,396 (39,551) (5,413) (65,671) (958,571)
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total expenses.................. 76,006,121 33,845,734 8,618,878 (1,492,660) (410,088) (1,733,767) (958,571)
Operating income (loss)............. 1,337,804 (3,915,104) 113,965 (425,215) 125,460 (488,345) 958,571
Other income (expenses):
Interest expense.................. (425,314) (903,458) (313,931) -- (1,406) -- --
Interest income................... -- 579,089 70,013 -- -- -- --
Other............................. -- (280,418) (16,905) -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total other expenses............ (425,314) (604,787) (260,823) -- (1,406) -- --
Income (loss) from continuing
operations before income taxes.... 912,490 (4,519,891) (146,858) (425,215) (124,054) (488,345) 958,571
Income tax provision (benefit)...... 380,884 750,000 (58,743) (170,086) 49,622 (195,338) 383,429
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net income (loss) from continuing
operations........................ $ 531,606 $(5,269,891) $ (88,115) $ (255,129) $ 74,432 $ (293,007) $ 575,142
----------- ----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net income (loss) from continuing
operations per share.............. $ 0.05
-----------
-----------
Weighted average common outstanding
shares............................ 11,515,687
-----------
-----------
<CAPTION>
PRO FORMA
FOOTNOTE CONSOLIDATED
------------- -------------
<S> <C> <C>
REVENUES:
Business products................. $70,778,087
Transportation.................... 40,804,696
-------------
Total revenues.................. 111,582,783
EXPENSES:
Cost of goods and services sold... 75,163,785
Selling, general and
administrative.................. 35,680,925
Depreciation and amortization..... B 3,030,937
-------------
Total expenses.................. 113,875,647
Operating income (loss)............. (2,292,864)
Other income (expenses):
Interest expense.................. (1,644,109)
Interest income................... 649,102
Other............................. (297,323)
-------------
Total other expenses............ (1,292,330)
Income (loss) from continuing
operations before income taxes.... (3,585,194)
Income tax provision (benefit)...... C 1,139,768
-------------
Net income (loss) from continuing
operations........................ $(4,724,962)
-------------
-------------
Net income (loss) from continuing
operations per share.............. $ (0.10)
-------------
-------------
Weighted average common outstanding
shares............................ 45,937,402
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
operations.
43
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(A) Pro forma adjustments are made to remove the operations of BancPro, ATAB and
Black & White Cab Company from the historical statement of operations of
USTS. These operations were not acquired as part of the Transfer.
(B) Pro forma adjustment to reflect the change in depreciation and amortization
expense as a result of the Transfer is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------- -------------
<S> <C> <C>
Historical depreciation and amortization expense recorded
by USTS, after reductions for BancPro, ATAB and Black &
White Cab Company....................................... $ (637,560) $ (1,871,638)
Historical depreciation and amortization expense recorded
by Gulf Northern and Mencor prior to their acquisition
by USTS................................................. -- (619,346)
Depreciation expense relating to the fair value of
property, plant and equipment from the Transfer to be
amortized over periods ranging from 1 to 15 years(a).... 343,897 1,375,590
Amortization expense related to goodwill resulting from
the Transfer, to be amortized over 20 years............. 39,206 156,823
---------- -------------
Pro forma adjustment to depreciation and amortization..... $ (254,457) $ (958,571)
---------- -------------
---------- -------------
(a) Property, plant and equipment to be acquired (with
applicable estimated average remaining useful lives)
include highway coaches (8 years), school buses,
tractor-trailers and other revenue equipment (4 years)
and other depreciable assets (7 years).
</TABLE>
(C) Pro forma adjustment to income taxes is to apply the effective income tax
rate (40%) to net adjustments made to Income (loss) from continuing
operations.
44
<PAGE>
USTS BUSINESS
USTS is currently engaged in the following business areas, which primarily
relate to transportation. USTS' transportation services consist of (i) bus and
other motor vehicle transportation services to customers such as businesses and
municipalities on a contract basis, (ii) chauffeured vehicle services, (iii)
over-the-road package delivery services for common carriers, (iv) five full-load
tractor-trailer operations (operated as one division), based in Syracuse, New
York, Orlando, Florida, Wisconsin Rapids, Wisconsin, Charleston, South Carolina,
and Kansas City, Missouri, and (v) a car rental brokerage firm in Mesa, Arizona.
Until recently, USTS was also engaged in certain custom equipment
manufacturing operations, manufacturing electrical harnesses for transportation
vehicles, taxi services, and ticket brokerage. However, during 1997, USTS
streamlined its operations by eliminating a number of businesses that were not
contributing to profitability and by consolidating its tractor trailer
operations and its package delivery services under the control of a 75% owned
subsidiary, US Trucking, Inc. The result of this process on the corporate
structure of USTS is shown in the chart below:
USTS SUBSIDIARIES
<TABLE>
<S> <C>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
OWNED 100% BY USTS OWNED 100% BY USTS
Jetport, Inc. Jetport, Inc.
Shortway River Rouge, Inc. Shortway River Rouge, Inc.
Transportation Systems Corp. Transportation Systems Corp.
d/b/a Westchester Express d/b/a Westchester Express
BancPro Transportation, Inc. BancPro Transportation, Inc.
Bus Properties, Inc. Bus Properties, Inc.
Jay & Jay Transportation, Inc.
OWNED 75% BY USTS Translynx Express, Inc.
US Trucking, Inc. Black & White Cab Company, Inc.
(taxi cab services)
OWNED 100% BY US TRUCKING, INC. Priority Express Service, Inc.
Jay & Jay Transportation, Inc. (package delivery)
Translynx Express, Inc. Advance Technologies For American
Mencor, Inc. Business, Inc.
Gulf Northern Transportation, (electrical harness manufacturing)
Inc. Downtown Theatre Ticket Agency,
Priority Express Service, Inc. Inc.
Avanti Delivery Services, Inc. (entertainment ticket brokerage)
Avanti Delivery Services, Inc.
</TABLE>
TRANSPORTATION SERVICES
CONTRACT TRANSPORTATION SERVICES
This segment of USTS' business consists of supplying buses, vans or
customized vehicles to customers pursuant to written contracts or purchase
orders which are generally awarded on a competitive bid basis. Customers include
governmental agencies and private industry.
During the past 15 years, USTS has developed an infrastructure to support
its contract transportation activities. This infrastructure consists of major
garage facilities, repair shops, contiguous parking areas and computerized
dispatch and communications capacity, all staffed by an experienced group of
maintenance, operational and administrative personnel. While such support
structures exist in all locations in which USTS operates, its most extensive
hubs are centered in the areas of Dearborn, Michigan, Wisconsin Rapids,
Wisconsin, Kansas City, Missouri, Cincinnati, Ohio and Syracuse, New York. In
all of its locations,
45
<PAGE>
USTS has established sources for operational supplies and repair parts, with
around-the-clock dispatching, maintenance and road service.
Most of the transportation contracts which USTS seeks to obtain are awarded
on a competitive bid basis. Typically, a municipality, public authority or
private corporation sets forth the specifications for its transportation
requirements, and USTS and its competitors submit bids specifying prices for the
services and other terms requested in the solicitation of bids. The contract is
then awarded on the basis of price, financial reliability of the bidder, and
other considerations.
Upon the award of a competitive bid contract or in cases where USTS obtains
a contract by private negotiation, upon the signing of the contract, in an area
where USTS does not have an existing facility, USTS may have to make significant
capital expenditures to establish the facility (including garage, tools, and
related costs) and obtain the equipment (generally buses and spare parts)
necessary to carry out USTS' obligations under the contract. The major portion
of these expenditures are properly capitalized and depreciated over the term of
the contract, thereby avoiding a substantial up-front charge against the profits
from the contract.
USTS' largest transportation contract is with the Ford Motor Company. Under
this contract, USTS has operated an internal bus transportation system for 18
years for over 20,000 employees at Ford's River Rouge plant in Dearborn,
Michigan. Under the terms of the contract, Ford pays USTS a monthly fee for the
bus transportation service, which service operates 24 hours a day, 365 days a
year. The contract expires on June 30, 1998. Revenues from this contract
provided approximately 7% of USTS' gross revenue in the first nine months of
1997, 12% of USTS' gross revenue in 1996 and 17% of USTS' gross revenue in 1995.
Other contract transportation services offered by USTS include an
arrangement with the City of Cincinnati, Ohio, to provide transportation between
the airport (located in Boone County, Kentucky) and various city locations. For
the past 15 years, USTS has had this arrangement with the City of Cincinnati
which gives USTS the exclusive right to perform this service. The contract
requires USTS to charge a "fair rate" to passengers. USTS also runs a shuttle
service for long-term parking facilities at the airport under a separate
contract with the City of Cincinnati. USTS provides around-the-clock shuttle
service between the various terminals and parking lots, and is paid by the City
on an hourly basis. The terms of USTS' contracts with the City of Cincinnati
continue through August 2000.
PACKAGE DELIVERY SERVICES
In recent years USTS acquired the business of Armstrong Freight Service,
Falcon Freight, Krogel, U&M Express and Eagle Air Express, and consolidated
these operations into its Armstrong division ("Armstrong"). These acquisitions
allowed USTS to participate in the growing package delivery industry without
making the capital investment required to establish a package delivery carrier.
The primary business of Armstrong is ground delivery of packages under contracts
from other common carriers. USTS believes that these carriers utilize Armstrong
to improve their operating efficiencies. In October 1997, USTS sold the
Armstrong Division to U. S. Trucking, Inc., a 75%-owned subsidiary of USTS
("USTI"), for a promissory note and the assumption of debt in the amount of
approximately $1,300,000.
TRACTOR-TRAILER OPERATIONS
In 1996, USTS expanded into tractor-trailer operations. USTS, through USTI,
(i) operates a full-load tractor-trailer business through its wholly-owned
subsidiaries, Gulf Northern Transport, Inc. ("Gulf Northern") and Jay and Jay
Transportation, Inc. ("Jay and Jay") from a base in Charleston, South Carolina
with major facilities in Wisconsin Rapids, Wisconsin, Kansas City, Missouri, and
Syracuse, New York, (ii) owns Trans Lynx Express, which provides containerized
air cargo tractor-trailer delivery services under contract from overnight
couriers, and (iii) owns Mencor, Inc. ("Mencor"), a tractor-trailer
transportation logistics company. In 1996, the tractor-trailer operations
accounted for approximately 18.7% of USTS' revenue and for the first nine months
in 1997 accounted for approximately 15.3% of USTS' revenue.
46
<PAGE>
CHAUFFEURED VEHICLE SERVICES
USTS' chauffeured vehicle service operations are located in Westchester
County, New York and are performed for the general public by Transportation
Systems Corp., a wholly-owned subsidiary. Transportation Systems Corp. maintains
a fleet of 45 vehicles, a mixture of town cars, vans and stretch limousines, all
of which are driver-owned or driver-leased. Transportation Systems Corp.
accounted for approximately 13% and 9% of USTS' revenues from continuing
operations in 1996 and for the first nine months of 1997, respectively.
RENTAL CAR BROKERAGE
In September 1996, USTS acquired BancPro-Transportation, Inc., which
operates a car rental brokerage business from headquarters in Mesa, Arizona and
services customers located primarily in Phoenix, Arizona and Las Vegas, Nevada.
EQUIPMENT
USTS owns and maintains a fleet of 458 vehicles. To maintain its fleet, USTS
operates a number of vehicle repair centers staffed by mechanics and trained
servicemen.
GOVERNMENT REGULATION
USTS is subject to regulation by various agencies including the New York
State Department of Transportation, the Port Authority of New York and New
Jersey, the U.S. Department of Transportation and the Federal Highway
Administration, as well as other state and local authorities. Each of these
agencies regulates various aspects of licensing, permitting and operations of
USTS' trucking, package delivery and bus services.
EMPLOYEES
USTS and its subsidiaries employ 431 people. Approximately 175 of these
employees perform office and administrative functions. USTS has contracts with
two unions; however, less than 17% of USTS' employees belong to a union. USTS
believes its present relations with its unions and other employees are good.
PROPERTIES
The real property owned by USTS is as follows: (1) a parcel of 4.25 acres at
One Keeshin Drive, Toledo, Ohio; (2) a parcel of 9.627 acres at 2305 Pyka Road,
Sealy, Texas, from which a discontinued business conducted its operations; and
(3) three parcels in Savannah, New York from which Jay and Jay Transportation
operates.
The real property owned by USTS is subject to the following mortgages: (1)
the Savannah property is mortgaged to Savannah Bank, N.A. to secure a debt
requiring annual payments of $22,545, which has a term of 70 months remaining;
and (2) the Toledo property is mortgaged to Mid-American Bank & Trust Co. to
secure a debt of approximately $58,000 due in ten months. USTS is in default
with respect to its payment obligations on the Savannah property, and Savannah
Bank, N.A. has commenced foreclosure proceedings.
47
<PAGE>
The table below sets forth and identifies the properties leased by USTS,
through USTI, for an annual rental of $50,000 or more. USTS believes that these
facilities are adequate for its operations as presently structured.
<TABLE>
<CAPTION>
TERM AND
ANNUAL
COMPANY LESSOR PREMISES RENTAL
- --------------------------- ---------------------------------- -------------------------- -------------------
<S> <C> <C> <C>
USTI....................... Ensign Properties 6022 Benjamin Month to Month
Tampa, FL $67,089
USTI....................... South Orlando Industrial, L.P. 8870 Bossy Creek Road 11/1/96 to 10/31/01
Orlando, FL $197,254
USTI....................... D. Pixler & Seebrite Insurance 810 25th Ave. No. 1/1/97 to 1/1/02
Wisconsin Rapids, WI $72,000
</TABLE>
LEGAL PROCEEDINGS
GULF NORTHERN TRANSPORT INC.
On January 30, 1997, USTI, acquired 100% of the capital stock of Gulf
Northern and 100% of the capital stock of Mencor. In exchange for the stock of
these corporations USTS issued 25% of the capital stock of USTI, 37,500 shares
of the USTS Common Stock, $295,000 in cash, and an indemnity of Gulf Northern's
secured debt in the amount of $4,520,883. USTI acquired Gulf Northern from
Logistics Management, L.L.C., a Kentucky limited liability company
("Logistics"), in a transaction in which Logistics represented to USTS that it
had acquired ownership of Gulf Northern, free of liens or claims, from
Mid-America Transporters Group, Inc. ("MATG").
On April 16, 1997, United Acquisition II Corporation ("UACQ"), which is the
subject of a bankruptcy petition in the United States Bankruptcy Court for the
Southern District of New York (White Plains Division), commenced an adversary
proceeding in that Court against USTS, its Chairman and other corporate and
individual defendants. UACQ alleges that it acquired ownership of MATG through
certain agreements prior to the transfer of Gulf Northern to Logistics, and that
Gulf Northern was acquired by Logistics from MATG without the consent of UACQ.
UACQ further alleges that the defendants conspired to deprive UACQ of its
interest in Gulf Northern. The complaint seeks declaratory relief, the avoidance
of the alleged fraudulent transfer of Gulf Northern, damages for fraud, and the
imposition of a constructive trust. The defendants in this action allege that
the agreements pursuant to which UACQ claims ownership of MATG were rescinded
and revoked pursuant to the applicable laws.
An agreement settling the action has been negotiated and executed. On
December 16, 1997 the Bankruptcy Court granted its approval of the settlement
and the consummation of the settlement is expected to take place in January,
1998. See Note 5 to the Notes to USTS Consolidated Financial Statements for the
Nine Months Ended September 30, 1996 and 1997.
KAC, INC.
In March 1997, USTS sold Automated Solutions, Inc. ("ASI") to KAC, Inc., for
consideration of $100,000 cash; a 10.5% interest bearing note of approximately
$5,200,000 with monthly payments of approximately $80,000, the unpaid principal
fully due on April 1, 1999; and a deferred payment of $685,000 also due April 1,
1999. In September 1997, USTS declared the notes in default due to non-payment.
USTS commenced a foreclosure action against KAC, Inc. in the Superior Court of
Arizona, seeking foreclosure on the capital stock of ASI, all of which is
pledged as security for the notes. USTS also commenced an action in that court
against the owners of KAC, Inc., who had personally guaranteed the note.
48
<PAGE>
AUTOMATED SOLUTIONS, INC.
In 1995, USTS purchased all of the outstanding shares of Automated
Solutions, Inc. ("ASI") from three members of ASI's management in exchange for
300,000 shares of USTS Common Stock. In March 1997, USTS commenced a lawsuit now
pending in the United States District Court for the District of Arizona against
the three former owners of ASI alleging that they made fraudulent
misrepresentations to USTS in connection with the sale of ASI to USTS. USTS
alleges damages of $4,469,000 plus the 300,000 shares of USTS Common Stock
issued for ASI. The three former owners have counterclaimed, alleging that they
are entitled to receive 166,667 shares of USTS Common Stock under a Contingent
Stock Grant Program adopted when USTS acquired ASI.
WILLIAM ORR
In June 1996, USTS acquired certain trucking assets from Jackson & Johnson,
Inc. and agreed to certain other contractual arrangements with William Orr, the
principal of Jackson & Johnson. In April 1997, Mr. Orr and Jackson & Johnson
commenced legal action against USTS, its subsidiary Jay & Jay Transportation,
Inc. and Michael Margolies, USTS' Chairman. The action alleges that USTS
breached an agreement to pay $160,000 for certain trucks purchased from Jackson
& Johnson, breached an employment agreement with William Orr pursuant to which
he would be paid $90,000 a year for three years, and breached a restrictive
covenant agreement pursuant to which Mr. Orr was to receive certain percentages
(from 3/4% to 2%) of the gross revenues of Jay & Jay Transportation and other
trucking operations subsequently acquired by USTS. USTS has denied the
allegations, and alleged that in connection with the sale of the Jackson &
Johnson assets, Mr. Orr failed to disclose certain liabilities which exceeded in
magnitude the amounts which USTS had agreed to pay Mr. Orr. In addition, USTS
has paid for various items relating to Jackson & Johnson which exceed $160,000
and believes that such items will serve as an offset to the $160,000 purchase
price.
ACCIDENT CLAIMS
USTS is subject to claims from accidents involving USTS' transportation
vehicles. Generally, USTS' liability insurance covers each of these claims. USTS
is responsible, however, for the amount of the deductibles from insurance
coverage as to these claims. At December 31, 1996, the total amount of the
deductibles for which USTS was responsible in connection with pending claims was
approximately $67,000. USTS has recorded a liability of $55,000, which USTS
believes is a reasonable estimate of the loss it will incur in connection with
settlement of these claims, based on the advice of USTS' insurance carriers as
to the likelihood that an adverse result will occur.
OTHER
USTS is party to various matters in litigation. Management believes that
USTS' insurance coverage is adequate with respect to the alleged claims made in
the pending litigation.
49
<PAGE>
USTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of USTS and related Notes included elsewhere
in this Proxy Statement/Prospectus. All references in this Proxy
Statement/Prospectus to numbers of shares have been adjusted to take into effect
a one-for-six reverse split of the USTS Common Stock which was effected on
August 27, 1996.
OVERVIEW
The business of USTS has undergone significant changes resulting from the
acquisitions of certain businesses and the dispositions or discontinuation of
certain other businesses. As a result, comparison of USTS operations from year
to year is difficult. The results of operations for each year includes a
separate item for the results of discontinued operations. In addition, the
overall effect of these many major transactions on the USTS balance sheets and
the continuing operations is often significant, thus reducing the relevance of
USTS' past performance to a prediction of the results to be expected in the
future.
USTS was previously engaged in the contract transportation, charter bus
services, and entertainment ticket brokerage businesses. Charter bus services,
which had in the late 1980's represented over 50% of USTS' revenues, were
discontinued at the end of 1993. The ticket brokerage business, which in most
years produced approximately 10% of USTS revenues, was discontinued at the end
of 1996 and sold in January of 1997.
At the same time that these traditional businesses of USTS were being
discontinued, USTS became involved in a variety of other transportation-related
businesses. In 1994, USTS acquired American Trade-A-Bus of Texas, Inc. ("ATAB"),
which manufactured wire harnesses for military equipment. The ATAB business
produced 13% of USTS revenues in 1996, but has since ceased operations. In 1995,
USTS became involved in short-haul package delivery when it acquired the
business of Armstrong which produced 28% of 1996 revenues. In the same year,
USTS acquired ASI, which manufactures equipment for automobile airbags. ASI was
discontinued at the end of 1996 and sold in March of 1997. In June 1996, USTS
began acquiring tractor-trailer operations, and that business now represents
approximately 50% of USTS' revenues. The tractor-trailer acquisitions were (i)
Jay and Jay, acquired in June 1996, (ii) Mencor, acquired in January 1997 and
(iii) Gulf Northern, acquired in January 1997. USTS acquired BancPro in
September 1996 and it produced 7% of USTS' revenues for the first nine months of
1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30,
1996
USTS' revenues increased 94.5% from $13,065,678 in the first nine months of
1996 to $25,417,444 in the first nine months of 1997. The increase was
attributable primarily to the acquisition of the tractor-trailer operations by
USTI, the greater portion of which were acquired in January 1997, and the
acquisition of BancPro in September 1996. As a result of these tractor-trailer
acquisitions, the USTS' tractor-trailer operations had revenues of $12,837,190
during the first nine months of 1997, as compared to $1,855,956 in the first
nine months of 1996. During the first nine months of 1997, BancPro had revenues
of $1,872,050, compared to revenues of $157,612 recorded in the comparable
period of 1996.
Revenue increases from USTS' other operations were offset, in part, by the
elimination of revenue from ATAB. During the first nine months of 1996, ATAB
produced revenues totaling $2,528,477. All of the ATAB revenues were generated
from sales to Stewart & Stephenson, Inc., ATAB's only customer. Early in 1997,
Stewart & Stephenson terminated its contract with ATAB. As a result, ATAB
generated only $815,675 in revenue during the first nine months of 1997. ATAB
ceased operating in July 1997.
50
<PAGE>
USTS realized a loss from continuing operations during the first nine months
of 1997 totaling $3,021,704, compared to income from continuing operations of
$236,756 during the comparable period of 1996. The primary reasons for the
losses during the current period were:
ACQUISITIONS. Operating expenses increased over 100%, from $8,651,788
to $17,328,872. The increase was attributable in large part to the
additional expenses of the new business, as the operating expenses of USTI
totaled $9,621,723 during the first nine months of 1997 and the operating
expenses of BancPro were $1,173,693 in the same period. Included in these
expenses were administrative expenses and other inefficiencies relating to
overhead expense disproportionate to the business base and high equipment
financing costs that USTS management believes will be eliminated by the
integration of the new trucking businesses under the USTI umbrella, as well
as non-recurring expenses caused by that integration. In addition, within
the past year USTS became involved in litigation relating to its
acquisitions of Jay & Jay, Gulf Northern and BancPro. See: "USTS Business--
Legal Proceedings." As a result, during the nine months ended September 30,
1997, USTS incurred legal expenses in connection with litigation totaling
$328,253.
ARMSTRONG. During the first nine months of 1996, Armstrong reported a
loss from operations totaling $289,808. During the first nine months of
1997, the loss from operations increased to $574,938. Armstrong undertook
one major contract midway through 1996, which proved to be unprofitable, as
management's original assessment of its profit potential proved to be
incorrect. The contract was for a large volume of work for a group of new
customers acquired from a defunct competitor, and the prices charged to
these new customers were at a substantial discount from Armstrong's regular
pricing schedule. Management believed that the volume of work would
compensate for the effect of the reduced prices, but was wrong. Accordingly,
the contract was not renewed on its expiration date. Management does not
believe that its arrangements with its other customers (who number over 200)
will lead to similar outcomes, as all of these arrangements involve
substantially higher prices.
Armstrong experienced problems with respect to collection of certain
receivables, which was a major factor in USTS' decision to increase its bad
debt reserve by $400,000. The collection problem stemmed largely from the
doubling of Armstrong's sales by the addition of the contract discussed in
the preceding paragraph. Armstrong's computer processing systems and
bookkeeping staff proved incapable of adequately handling this sudden
increase in volume, which led to problems in accounting for and enforcing
collections. Recently, control of Armstrong has been transferred to USTI,
which has the staff, the expertise, and the sophisticated computer systems
necessary to reduce such collection problems to a minimum.
ATAB. During the first nine months of 1996, ATAB generated income from
operations totaling $1,187,709. In the first nine months of 1997, ATAB was
responsible for a loss from operations totaling $34,932, due to the
termination of the Stewart & Stephenson contract.
COSTS ATTRIBUTABLE TO NEGOTIATIONS WITH PRECEPT. The process of
negotiating the Agreement with Precept commenced in January, 1997. During
the period that led up to the execution of the Agreement on November 16,
1997, USTS incurred administrative costs totaling approximately $350,000 in
connection with those negotiations, including legal and accounting costs, as
well as fees paid to consultants who advised USTS regarding the
negotiations.
USTS' discontinued operations produced a loss during the first nine months
of 1997 of $4,699,207, compared to income of $590,590 in the comparable period
of 1996. The discontinued operations affecting 1997 results were ASI, which was
sold in March of 1997, the ticket brokerage business, which was sold in January
of 1997, and ATAB, which ceased operating in July of 1997. The income recognized
during 1996 was principally a result of income generated by ATAB of $1,187,709
during the first nine months of 1996. The primary reason for the loss in 1997
was a write-down of the value of the promissory notes which USTS
51
<PAGE>
received for the sale of ASI. These notes were written-down as a result of a
default by KAC, Inc., which purchased ASI from USTS. In September 1997, USTS
commenced legal action against KAC, Inc. and its owners, based on the default.
Accordingly, management of USTS determined that it was appropriate to write-down
the notes by $4,517,331 to $500,000. See: "USTS Business--Legal
Proceedings--KAC, Inc."
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
USTS' acquisitions had a positive effect on revenue in 1996, resulting in an
increase from $13,670,321 in 1995 to $21,509,751 in 1996. The greater part of
the increase was attributable to the acquisition of Jay & Jay and BancPro, and
the growth of Armstrong, which was acquired in July 1995. These three operations
produced $8,811,558 in revenue in 1996, compared to $1,114,842 from Armstrong
alone for half of 1995.
The operations which were discontinued at the end of 1996, ASI and the
ticket brokerage business, generated a loss of $2,668,216. While that loss could
be accounted for as a "loss from discontinued operations," these operations had
a significant effect on results of continuing operations as well. The debt
incurred by USTS so that it could advance approximately $5,000,000 to fund the
operations of ASI continued to accrue interest, resulting in an 82% increase in
total interest and bridge loan expense in 1996 from $339,042 to $617,029.
An additional negative impact of the expansion strategy was felt when it was
determined that ATAB would lose its business relationship with Stewart &
Stephenson. Although ATAB itself generated $873,163 in income during 1996, the
loss of the Stewart & Stephenson business in 1997 made it appropriate that a
write-off of $782,410 in the value of certain ATAB equipment be made at year-end
1996.
USTS realized a $4,206,232 reduction in income from operations, despite the
increase in revenues described above. Income from continuing operations fell
$5,187,477, and USTS realized a net loss of $6,694,451 in fiscal 1996 compared
to net income of 1,123,918 in fiscal 1995.
In order to fund its expansion plans, USTS engaged in a bridge financing in
April of 1996 ("Bridge Notes") and a public offering in August of 1996. In the
bridge financing, USTS issued an aggregate of $1,200,000 principal amount of
Bridge Notes. USTS received net proceeds of $982,000, after deducting the
placement agent's discount and expense allowance and other expenses of the
offering. Upon repayment of the Bridge Notes, USTS recognized a charge to
operations of $441,038, including interest and the difference between the
discounted proceeds of the Bridge Notes and the principal repaid. All of that
amount is included in "Interest Expense."
Finally, the plan to expand USTS into a multi-faceted entity led to
increased corporate overhead expense, expenses relating to senior management and
salaried employees and consulting fees. USTS also incurred $1,562,500 in
compensation expense resulting from the accounting treatment for certain equity
incentives built into the Chairman's new long-term employment contract and
$680,000 in expense resulting from the conversion of Series C Preferred Stock
held by members of the Margolies family into Series M Preferred Stock. See Note
9 in Notes to USTS Consolidated Financial Statements for an explanation of the
accounting treatment of these events.
For the above reasons, a pre-tax loss from continuing operations totaling
$3,276,235 was reported for 1996 compared to income from continuing operations
of $797,242 in 1995. In 1996, USTS increased its deferred tax valuation
allowance by $750,000, eliminating the deferred tax asset in that amount which
had been recorded in prior years. The deferred tax asset had represented
management's estimate of the future value of USTS' net operating loss
carryforwards ("NOL's"). Based upon the substantial losses incurred in 1996 and
the elimination of revenues from ATAB, management determined that the
realization of value from its NOL's was no longer sufficiently certain to
warrant carrying a deferred tax asset. See Note 6 in the Notes to USTS
Consolidated Financial Statements. With the increase in the deferred tax
valuation allowance, the loss from continuing operations totalled $4,026,235.
When losses totaling $2,668,216 from
52
<PAGE>
the operations of the discontinued operations were added in, USTS had recorded a
net loss for 1996 of $6,694,451.
USTS incurred substantial losses in the fourth quarter of 1996, a net loss
of $7,521,797 in the fourth quarter versus net income of $827,346 realized for
the nine months ended September 30, 1996. This loss was attributable primarily
to the substantial losses in the segments which USTS's management decided to
discontinue, which contributed materially to such decision to discontinue.
Fourth quarter losses were also attributable to certain factors impacting
continuing operations. See "Fourth Quarter Loss," below.
FOURTH QUARTER LOSS
USTS incurred a loss of $6,694,451 for the year ended December 31, 1996, as
compared to net income of $827,346 reported by USTS for the nine months ended
September 30, 1996, as shown in the table below.
U.S. TRANSPORTATION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE THREE
MONTHS MONTHS YEAR
ENDING ENDING ENDED
09-30-96 12-31-96 12-31-96
---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Revenue............................................... $15,403,166 $6,106,585 $21,509,751
Operating Expenses.................................... 13,420,885 10,905,162 24,326,047
---------- ---------- ----------
Operating Income/(Loss)............................... 1,982,281 (4,798,577) (2,816,296)
Other Income/(Expense)................................ (557,814) 97,875 (459,939)
---------- ---------- ----------
Income/(Loss) from Continuing Operations Before Income
Taxes............................................... 1,424,467 (4,700,702) (3,276,235)
Income Tax Expense.................................... 0 750,000 750,000
---------- ---------- ----------
Income/(Loss) from Continuing Operations.............. 1,424,467 (5,450,702) (4,026,235)
Losses from Discontinued Operations................... (597,121) (2,071,095) (2,668,216)
---------- ---------- ----------
Net Income/(Loss)..................................... $ 827,346 $(7,521,797) $(6,694,451)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Substantial losses were incurred by the discontinued segments, a fact which
contributed to management's decision to discontinue such segments: ASI incurred
an operating loss of $1,565,927 in the fourth quarter, primarily due to a
substantial downturn in business and the discontinued entertainment segment
incurred a fourth quarter loss of $308,325, primarily related to a continuing
erosion of profit margins. Additionally, at December 31, 1996, USTS recorded
$196,843 for estimated losses by ASI during the
53
<PAGE>
phase-out period. The fourth quarter loss is also attributable to a number of
factors impacting continuing operations, as listed below.
<TABLE>
<S> <C>
Loss on settlement of Mountain View receivable.................. $ 215,500
Write-off of notes and other receivables due to a year-end
assessment of the associated collectibility................... 339,969
Expense related to valuation differential resulting from change
in features of preferred stock held by USTS's Chairman or by
persons or entities related to the Chairman................... 680,000
Expense related to obligations to issue 1,000,000 common shares
in regards to a long-term employment agreement entered into
with USTS's Chairman.......................................... 1,562,500
Expense of consulting fees...................................... 594,659
Increase in corporate wages, resulting from management staff
being increased in line with USTS's strategic growth plan..... 200,000
Operating loss incurred at ATAB, resulting from work with
substantially lower profit margins............................ 171,052
Write-off of certain assets as a result of management
determination of a permanent impairment in the ATAB's future
profitability................................................. 782,410
Losses incurred by USTS's trucking divisions:
Write-down of previously capitalized expenses, determined at
year-end to possess no tangible future benefit; and......... 161,800
Costs incurred establishing a more profitable routing
structure................................................... 320,000
Increase in deferred tax valuation allowance, resulting in a
write-off of previously recorded deferred tax asset........... 750,000
---------
Total........................................................... $5,777,890
---------
---------
</TABLE>
As most of the factors impacting upon fourth quarter operations are
non-recurring items, USTS anticipates improvement in results from continuing
operations in 1997 as compared to the fourth quarter of 1996. However, while
USTS adjusts to its new focus and recent large acquisitions, income will be
limited. The loss of ATAB's aforementioned contract with Stewart and Stevenson,
alone, represents a loss of approximately $900,000 in net income for 1996 prior
to certain asset realization adjustments noted above, and none of USTS's recent
acquisitions is expected to generate an equivalent amount of income in 1997.
At December 31, 1996, for United States federal income tax purposes, USTS
had consolidated net operating loss ("NOL") carryforwards of approximately
$12,100,000 due to expire commencing in 2002. USTS also had tax credit
carryforwards of approximately $470,000 due to expire commencing in 1997. The
availability of these NOL and tax credit carryforwards to reduce or offset
future taxable income and tax liability of USTS is subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
Because the substantial portion of the tax credits expire in the next five
years, and as USTS is required to first utilize its NOL carryforward to offset
future earnings, USTS does not anticipate realizing any material benefit from
its tax credits. Further, USTS's ability to utilize the NOL carryforward is
restricted upon the occurrence of an "ownership change" within the meaning of
section 382 of the Code. Although the determination of whether an ownership
change has occurred is subject to factual and legal uncertainties, USTS believes
that an ownership change has occurred as a result of various stock transactions
in which it engaged during 1996. As a result of the ownership change, USTS will
generally be permitted to utilize NOL carryforwards (available on the date of
such change) in any year thereafter to reduce its income to the extent that the
amount of such income does not exceed the product of (the "Section 382 Limit")
(i) the fair market value of USTS's outstanding equity at the time of the
ownership change and (ii) a long-term tax-exempt rate published by the Internal
Revenue Service. USTS's use of its
54
<PAGE>
accumulated NOL will be thereby limited to approximately $605,000 per year. As a
result, USTS believes that it may not utilize its full NOL carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Despite the large losses recorded in 1996 and 1997, USTS' working capital
remains positive. This situation results primarily from USTS' utilization of the
proceeds of equity financing to reduce equipment debt, resulting in
significantly lower outstanding principal balances due to third party creditors.
This form of debt previously represented the majority of USTS' current liability
position.
In August 1996, USTS completed a public offering of 1,815,000 Units of
securities, each "Unit" consisting of one share of USTS Common Stock and one
USTS Common Stock Purchase Warrant. The net proceeds obtained by USTS from the
offering totaled $5,013,056. In addition, early in 1996 convertible debentures
issued by USTS in the principal amount of $3,150,000 and convertible preferred
stock issued for net proceeds of $256,728 were converted into a total of 842,556
shares of USTS Common Stock, further increasing USTS' liquidity.
In October 1996, USTS refinanced its line of credit by entering into a three
year agreement with Israel Discount Bank. The agreement was modified in October
1997. The new agreement, as modified, has a maximum borrowing balance of
$3,000,000 secured by accounts receivable and sales-type leases receivable, and
an additional maximum borrowing balance of $1,500,000 secured by equipment. The
borrowings are further secured by property belonging to Michael Margolies,
Chairman of USTS. The interest rate on the new agreement is 1 1/2 percent over
prime. The agreement terminates on September 1, 1999.
USTS' decision to discontinue the operations of ASI and the entertainment
division near the end of 1996 should have a positive effect on cash flow for the
future. During 1996, USTS' continuing operations provided $718,628 in net cash
to USTS. The discontinued operations used a total of $3,561,579 in cash during
1996 and used $1,278,470 during the first nine months of 1997. The sale of both
ASI and the ticket brokerage division in early 1997 have lessened that burden on
cash flow. USTS' continuing operations used $216,875 in cash during the first
nine months of 1997.
In March 1997, USTS sold ASI and received $100,000 in cash, secured notes of
$5,160,868 and a deferred payment of $685,000 due April 1, 1999. The note, which
accrues interest, is paid at the rate of approximately $80,000 per month for a
two year period with a balloon payment of the unpaid principal on April 1, 1999.
In September, however, USTS declared the note to be in default and commenced
litigation to foreclose on the collateral, which is the capital stock of ASI.
Due to this situation, the book value of the notes has been reduced to $500,000.
It is impossible to determine at this time what effect the foreclosure action
will have on the liquidity of USTS.
USTS has no significant commitments at this time which would require that it
expend capital and believes its current facilities and capital equipment are
adequate for USTS as currently structured. The aforementioned refinancing of
USTS' line of credit significantly increased USTS' credit availability and,
combined with the proceeds of the recent public and private offerings of
securities, have sustained USTS' working capital balance despite the losses from
operations. USTS believes that this capital is sufficient to fund USTS'
operations for the coming year.
55
<PAGE>
USTS EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid by USTS to the following persons for services rendered in all capacities to
USTS during each of the fiscal years ended December 31, 1996, 1995 and 1994: (1)
USTS' Chief Executive Officer, and (2) each of the other executive officers
whose total salary and bonus for the fiscal year ended December 31, 1996
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(A) (D)
NAME AND (B) (C) RESTRICTED (E)
PRINCIPAL POSITION YEAR SALARY STOCK AWARD(1) OTHER
------------------ --------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Michael Margolies ......................... 1996 $ 230,000 $ 600,000 $ 2,292,500(2)
Chairman of the Board, Chief Executive 1995 $ 230,000 $ 50,000
Officer 1994 $ 230,000 $ 50,000
Terry A. Watkins .......................... 1996 $ 112,000
Chief Financial Officer(3)
</TABLE>
- ------------------------
(1) Represents the market value of shares granted under the Restricted Stock
Grant Program. Aggregate Restricted Stock Grants were 183,333 shares at
December 31, 1996, with a value on that date of $297,916. None of the stock
grants vest prior to August 31, 1998. They then vest in 25% increments until
August 31, 2001. No dividends are to be paid with respect to unvested
shares. On January , 1998, Michael Margolies held 133,333 shares subject
to the Program, with a market value of $ .
(2) A change in the features of the preferred stock resulted in additional
compensation of $680,000 plus the required issuance of USTS Common Stock
pursuant to the terms of Michael Margolies' long term Employment Agreement
resulted in additional compensation of $1,562,500. Included in above
compensation is a $50,000 premium for life insurance which is paid by USTS
on behalf of Michael Margolies.
(3) Mr. Watkins terminated his employment with USTS in July, 1997.
EMPLOYMENT AGREEMENTS
Michael Margolies, Chairman of USTS, has an employment agreement with USTS
dated November 18, 1996. Pursuant to the Agreement, Mr. Margolies will serve as
Chief Executive Officer through December 31, 2007. USTS will pay him a salary of
$250,000 per annum plus annual increases at least equal to the CPI. USTS will
also pay him a bonus equal to eight percent of USTS' pre-tax income. At the time
of the Agreement, USTS awarded Mr. Margolies the right to receive one million
shares of USTS Common Stock, which he exercised in February, 1997, when the
market price of the USTS Common Stock was $1.5625 per share. The Agreement
further provides that in the event of a change in control of USTS, USTS must (i)
repurchase all shares of capital stock owned by Mr. Margolies or members of his
family, (ii) pay Mr. Margolies ten times his last annual salary, (iii) issue to
Mr. Margolies 25% of the USTS Common Stock, and (iv) repay all loans by the
Margolies family to USTS. The Transfer does not constitute a "change in control"
within the meaning of these provisions.
REMUNERATION OF DIRECTORS
Each of the Directors of USTS received cash compensation of $500 per month
for their services from January through July of 1997. They are also reimbursed
for out-of-pocket expenses incurred on USTS' behalf. In addition, in October
1997, USTS issued 10,000 shares of USTS Common Stock to each of the four outside
directors in compensation for their services.
56
<PAGE>
EMPLOYEE STOCK AND STOCK OPTION PLAN
In September 1996, USTS established the U.S. Transportation Systems, Inc.
Employee Stock and Stock Option Plan. On October 16, 1996, USTS registered
2,000,000 shares of its common stock pursuant to a Form S-8 filing with the
Securities and Exchange Commission. The USTS Common Stock is reserved for
issuance to USTS' employees, directors, officers, or in consideration for bona
fide services provided to USTS by consultants or advisors. USTS' Board has sole
discretion in determining when to issue such shares. As of February 4, 1998,
USTS had issued 590,167 shares of USTS Common Stock so registered under such
Form S-8 filing. USTS had no commitment at February 4, 1998 to issue any
additional shares.
RESTRICTED STOCK GRANT PROGRAMS
On January 18, 1994, the Board of Directors of USTS adopted a Restricted
Stock Grant Program (the "Program") pursuant to which 183,333 shares of USTS
Common Stock were reserved for issuance. The Program provided that if USTS
recorded more than $12,000,000 in sales during the twelve months ending on June
30, 1994, the shares would be issued to each of USTS' three officers (the
"Grantees") who remained employed by USTS on that date. Those conditions were
satisfied, and the shares were issued as follows:
Michael Margolies--133,333 shares
Jay Owen Margolies--40,667 shares
Terry A. Watkins--9,333 shares
The terms of the Program were amended in April 1995. Under the amended
terms, the shares issued under the Program are subject to the following
restrictions:
After each of the fiscal years from 1996 through 1998, one-fifth of the
shares granted (36,666 associated with each year) are subject to forfeiture, as
follows:
- 12,222 will be forfeited if USTS' sales in that year are less than
$15,000,000.
- 12,222 will be forfeited if USTS' income from continuing operations before
income tax fails to exceed an "income standard." The "income standards"
will be: 1996--$990,000; 1997--$1,089,000; and 1998--$1,197,900.
- 12,222 will be forfeited if USTS' earnings per share fail to exceed an
"earnings standard." The "earnings standards" (based on 1,222,198 shares
of USTS Common Stock outstanding) will be: 1996--$.78; 1997--$.84; and
1998--$.96. For 1996 the earnings per share standards refer to income
after taxes; for 1997 and 1998, the earnings per share standards refer to
income before taxes.
If any shares are subject to forfeiture in any one year due to failure to
meet the standards set forth above, but the average of that year and the other
three years would exceed the standard in that year, then the shares will not be
forfeited.
All shares held by a grantee shall be forfeited if his employment by USTS
terminates prior to the date the restrictions lapse. Further, the shares are
restricted from transfer, provided that with respect to 25% of the number of
shares granted under the Program, such shares will become unrestricted stock on
August 15, 1998. The restriction will lapse with respect to each additional 25%
of such number of shares on August 15 of each successive year. The restriction
will also lapse as to all shares granted to a grantee on the first to occur of
(i) the termination of that grantee's employment with USTS by reason of
disability, (ii) the grantee's death, (iii) termination of the grantee's
employment by USTS without good reason, or (iv) a change of control of USTS.
During any tax year in which a Grantee realizes taxable income by reason of
the lapse of the restrictions on the shares granted under the Program, USTS will
pay to such Grantee a "Gross-Up Bonus" in cash equal to the aggregate of (i) the
additional federal, state and local income taxes incurred by Grantee as a result
of realization of such taxable income, and (ii) the federal, state and local
income tax
57
<PAGE>
incurred by the Grantee as a result of the Gross-Up Bonus. In no event will the
Gross-Up Bonus exceed the aggregate of (i) the amount of the tax deduction for
which USTS receives a benefit for the tax year of USTS beginning during the tax
year of the Grantee in which the Grantee realizes taxable income by virtue of
the lapse of the restrictions referred to above, and (ii) the amount of the tax
deduction for which USTS receives a benefit for such tax year of USTS by virtue
of the Gross-Up Bonus.
There is no requirement under law for USTS' Board of Directors to obtain
shareholder approval of the Program. Accordingly, the Board did not seek such
approval. The failure to obtain shareholder approval will adversely affect USTS
only if in any year the total compensation paid by USTS to any of its officers
(including taxable "compensation" occurring by reason of the lapse of
restrictions on shares granted under the Programs) exceed $1,000,000. In that
case, USTS would not be able to take a deduction on its tax return for the
excess compensation by reason of its failure to obtain shareholder approval of
the Program. The Board of Directors decided, however, that the likelihood of
total compensation to any officer exceeding $1,000,000 is sufficiently small
that it did not warrant obtaining shareholder approval for the Program.
MARKET PRICE DATA
USTS COMMON STOCK
USTS Common Stock is quoted on the Nasdaq under the symbol USTS. On November
14, 1997, the last full trading day prior to the public announcement of the
signing of the Plan of Reorganization, the last sale price per share of USTS
Common Stock as quoted on the Nasdaq was $ . On , 1998, the
last full trading day for which quotations were available prior to the date of
this Proxy Statement/ Prospectus, the last sale price per share of USTS Common
Stock as quoted on the Nasdaq was $ . SHAREHOLDERS ARE URGED TO OBTAIN
CURRENT QUOTATIONS FOR USTS SHARES.
The following table sets forth high and low bid information for the USTS
Common Stock as quoted on the Nasdaq under the symbol "USTS". The prices for
periods before August 27, 1996 take into account the one-for-six reverse stock
split on August 27, 1996.
<TABLE>
<CAPTION>
QUARTER ENDING HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1997
December 31............................................................... $ 4.50 $ 2.75
September 30.............................................................. $ 5.00 $ 3.38
June 30................................................................... $ 4.44 $ 2.00
March 31.................................................................. 5.38 $ 1.50
1996
December 31............................................................... $ 2.44 $ 1.16
September 30.............................................................. $ 7.69 $ 2.06
June 30................................................................... $ 10.13 $ 4.31
March 31.................................................................. $ 6.00 $ 3.00
1995
December 31............................................................... $ 9.38 $ 5.06
September 30.............................................................. $ 11.81 $ 4.88
June 30................................................................... $ 6.75 $ 2.81
March 31.................................................................. $ 6.94 $ 3.56
</TABLE>
The foregoing quotations represent prices between dealers and do not include
retail mark-up, mark-down, or commissions, and may not necessarily represent
actual transactions.
As of January 23, 1998, the Company had 3,317 USTS Common Stock shareholders
of record.
58
<PAGE>
DESCRIPTION OF USTS SECURITIES
The total authorized capital stock of USTS consists of 50,000,000 shares of
USTS Common Stock and 10,000,000 shares of USTS Preferred Stock. As of February
4, 1998, there were 8,979,187 shares of USTS Common Stock held by 3,317
shareholders of record and 105,000 shares of USTS Preferred Stock held by 2
shareholders of record. The following descriptions of the capital stock are
qualified in all respects by reference to the Articles of Incorporation, as
amended (the "Articles of Incorporation"), and Bylaws of USTS (the "USTS
Bylaws").
USTS COMMON STOCK
The holders of outstanding shares of USTS Common Stock are entitled to share
ratably on a share-for-share basis with respect to any dividends when, as and if
declared by the board of directors out of funds legally available therefore.
Each holder of USTS Common Stock is entitled to one vote for each share held of
record and is not entitled to cumulative voting rights. The USTS Common Stock is
not entitled to conversion or preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding up of USTS, and subject to
the prior rights of holders of USTS Preferred Stock, the holders of USTS Common
Stock are entitled to receive pro rata all of the net assets of USTS available
for distribution to its shareholders. All outstanding shares of USTS Common
Stock are fully paid and nonassessable. The transfer agent and registrar for the
USTS Common Stock is Continental Stock Transfer & Trust Company.
USTS PREFERRED STOCK
The USTS Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the board of directors,
without further action by shareholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion rights, redemption rights and sinking fund
provisions. USTS does not have any current plans to issue any preferred stock.
The only USTS Preferred Stock currently outstanding is the Series E through
Series L Preferred Stock, all of which is owned by two shareholders:
Consolidated Financial Management, Inc. ("CFM") and Tim Balch. CFM sold
BancPro-Transportation, Inc. ("BancPro") to USTS in 1996 and received the USTS
Preferred Stock as a consulting fee. Mr. Balch is the President of BancPro.
The Series E through Series L Preferred Stock is non-voting (except as
required by law) and non-dividend-bearing. Upon liquidation, each of the 105,000
outstanding shares of the Series E through Series L Preferred Stock will be
treated as equal to one share of USTS Common Stock. USTS Preferred Stock is
convertible into a maximum of 787,500 shares of USTS Common Stock (less if at
the time of conversion the market price of the USTS Common Stock exceeds $9.00),
if in any 12 month period prior to August 31, 2001 BancPro's revenues exceed the
thresholds set forth below:
<TABLE>
<CAPTION>
CUMULATIVE
BANCPRO SHARES OF COMMON
REVENUES STOCK ISSUABLE
- ------------- -----------------
<S> <C>
$ 2,500,000 50,000
4,000,000 112,500
6,000,000 193,750
8,500,000 287,500
11,000,000 393,750
14,000,000 512,500
18,000,000 643,750
22,000,000 787,500
</TABLE>
59
<PAGE>
The Plan of Liquidation being voted on by the USTS shareholders provides
that in distributing the
Shares and other net assets of USTS, the 105,000 outstanding shares of Series E
through Series L Preferred Stock will be added to the outstanding USTS Common
Stock and treated equally share-for-share.
USTS WARRANTS
There are currently outstanding 1,815,000 USTS Class C Common Stock Purchase
Warrants. The USTS Class C Warrants are listed for trading on the Nasdaq. Each
USTS Class C Warrant allows the holder to purchase one share of USTS' Common
Stock at a price of $3.82 per share. The USTS Class C Warrants expire on August
26, 1999. USTS may redeem the USTS Class C Warrants at a price of $.01 per USTS
Class C Warrant if the closing bid price for USTS Common Stock equals or exceeds
$5.157 for at least ten consecutive trading days.
The Plan of Reorganization provides that if any of the USTS Class C Warrants
are exercised prior to the Closing Date for the Transfer, one additional share
of Precept Class A Common Stock will be delivered to USTS for every USTS Common
Stock issued upon exercise of the USTS Class C Warrants. At the Closing of the
Transfer, Precept will issue to the holders of any USTS Class C Warrants then
outstanding a replacement warrant, which will allow the holder to purchase one
share of Precept Class A Common Stock on the same terms as governed the purchase
of one USTS Common Stock under the USTS Class C Warrant.
60
<PAGE>
OFFICERS AND DIRECTORS OF USTS
The following table sets forth certain information regarding the officers
and directors of USTS as of February 4, 1998:
<TABLE>
<CAPTION>
NAME POSITION
- -------------------------------------------------- -----------------------------------------
<S> <C>
Michael Margolies................................. Chairman of the Board and Chief Executive
Officer
Ronald P. Sorci................................... President and Treasurer
Jay Owen Margolies................................ Director
K. Thomas Wegerbauer.............................. Director
Stanley Chason.................................... Director
Robert I. Blackman................................ Director
</TABLE>
Directors hold office until the annual meeting of USTS' shareholders and the
election and qualification of their successors. Officers hold office, subject to
removal at any time by the Board, until the meeting of directors immediately
following the annual meeting of shareholders and until their successors are
appointed and qualified.
MICHAEL MARGOLIES, age 69, has been a director of USTS since 1975. He has
been the Chairman of the Board and Chief Executive Officer of USTS since 1978.
Mr. Margolies is the father of Jay Owen Margolies, the past President and one of
USTS' Directors.
RONALD P. SORCI, age 47, has served as President and Treasurer (Chief
Financial Officer) of USTS since August, 1997. From July 10, 1996 until his
election to the Presidency, Mr. Sorci was the Controller of USTS. Prior to
joining USTS, Mr. Sorci was President and owner of RPS Executive Limousines
Ltd., a luxury town car and limousine service.
JAY OWEN MARGOLIES, age 46, has been a director of USTS since 1979. He is
currently employed as Senior Advisor by USTS on a part-time basis, advising USTS
regarding operations management. From 1988 until June 1995 he was the President
and Chief Operating Officer of USTS. Jay Owen Margolies is the son of Michael
Margolies, USTS' Chief Executive Officer.
K. THOMAS WEGERBAUER, age 59, has been a director of USTS since 1976. He
served as the President and Chief Operating Officer of USTS from 1976 to 1987.
He now serves as a consultant to USTS on a part-time basis, primarily advising
USTS regarding contract bidding and labor relations.
STANLEY CHASON, age 69, has been a director of USTS since July 1996. From
1962 until his retirement in 1984, Mr. Chason held various positions with Gelco
Corporation ("Gelco"), a company listed on the New York Stock Exchange which is
engaged in all aspects of vehicle leasing. His last position with Gelco was as
Executive Vice President and a member of the Board of Directors. Mr. Chason was
also Chairman and Chief Executive Officer of the Fleet and Management Services
Division of Gelco.
ROBERT I. BLACKMAN, age 69, has been a director of USTS since July 1996. For
more than the past five years, Mr. Blackman has been the President and Chief
Executive Officer of the Best of Brooklyn Properties, Inc., a private real
estate investment firm.
61
<PAGE>
USTS SECURITY OWNERSHIP
The following table sets forth certain information, with respect to the
beneficial ownership of USTS Common Stock, as of February 4, 1998, by (i) all
persons who are known by USTS to be beneficial owners of 5% or more of such
stock, (ii) each director of USTS, (iii) certain executive officers and (iv) all
executive officers and directors of USTS as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares. No effect has been given to shares reserved for issuance under
outstanding stock options except where otherwise indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED TOTAL
- ------------------------------------------------------ ----------------- -------------
<S> <C> <C>
OFFICERS AND DIRECTORS:
Michael Margolies(1).................................. 2,690,116(2)(3) 30.0%
Jay Owen Margolies(1)................................. 296,054(2) 3.3%
K. Thomas Wegerbauer.................................. 11,000 0.1%
Stanley Chason........................................ 18,749 0.2%
Robert Blackman....................................... 10,000 0.1%
All officers and directors as a group (5 persons)..... 3,040,919(2) 33.9%
OTHER 5% SHAREHOLDERS:
Margolies Family Trust(4)............................. 855,000 9.5%
</TABLE>
- ------------------------
(1) Michael Margolies and Jay Owen Margolies are father and son. Each, however,
specifically disclaims any present ownership interest in the securities of
USTS owned by the other.
(2) Includes shares of USTS Common Stock issued pursuant to the Restricted Stock
Grant Program as follows: Michael Margolies--133,333 shares, Jay Owen
Margolies--40,666 shares. See: "Management--Restricted Stock Grant
Programs."
(3) Includes 855,000 shares held by the Margolies Family Trust.
(4) The trustee of the Margolies Family Trust is Elaine Margolies, wife of
Michael Margolies. The beneficiaries of the Margolies Family Trust are Mrs.
Margolies and children of Michael Margolies.
62
<PAGE>
USTS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Throughout the life of USTS, Michael Margolies and members of his family
have provided loans to finance USTS' operations when needed. In 1994, the
outstanding balance of these loans, $707,676 at that time, was consolidated into
a promissory note bearing interest at 15% per annum. Since that time additional
amounts have been added to the note, as USTS has borrowed from the Margolies
family. On April 12, 1996, USTS purchased two buses from a corporation
controlled by Michael Margolies for the sum of $240,000. The $240,000 is
included in the balance due Mr. Margolies in the amount of $1,105,114 as of
December 31, 1996. On July 7, 1997 a replacement note was issued in the
principal amount of $1,039,794. At October 1, 1997, USTS had a balance due on
the note of $998,569.
On December 26, 1994, USTS entered into an agreement to purchase all of the
outstanding capital stock of Camelot Consultants, Inc. ("Camelot") from the
Margolies family. The principal assets of Camelot were buses leased to USTS and
to third parties and certain real estate used by USTS at that time. Independent
appraisals of the net assets of Camelot valued Camelot at between $1,800,000 and
$1,900,000. USTS acquired Camelot in order to take advantage of Camelot's stream
of lease revenues and to eliminate rental payments to Camelot, the combination
of which increased USTS' cash flow by approximately $300,000 annually. The
purchase of Camelot by USTS was completed on December 31, 1994, at which time
USTS issued 180,000 shares of its Series C Preferred Stock in payment for
Camelot. The Series C Preferred Stock paid a dividend of 10.65% per annum and
had a liquidation preference of $10 per share. Each share of Series C Preferred
Stock had voting rights equal to 3.33 shares of USTS Common Stock.
On November 18, 1996, USTS and the holders of the USTS Series C Preferred
Stock agreed to exchange the USTS Series C Preferred Stock for an equal number
of shares of USTS Series M Preferred Stock. The terms of each share of the USTS
Series M Preferred Stock are that it had no dividend rights, no voting rights, a
liquidation preference of $10 per share, and was convertible into 9.5 shares of
USTS Common Stock. USTS entered into an eleven year employment agreement,
starting January 1, 1997, with Michael Margolies, which agreement, among other
things, grants Mr. Margolies an issuance of 1,000,000 shares of USTS Common
Stock. This issuance took place in February 1997. The 1,000,000 shares on
November 18, 1996 had a market value of $1,562,000 and USTS expensed this amount
to its consolidated statement of operations for the year ended December 31,
1996.
The Plan of Reorganization provides that the obligation of Precept and
Acquisition to effect the Transfer is subject to the exchange and conversion of
the USTS Series M Preferred Stock into 1,710,000 shares of USTS Common Stock at
or prior to the Closing Date. The Margolies family members who held the stock
agreed with the USTS Board that the date on which the Series M Preferred Stock
could be converted into common stock would be accelerated. Accordingly, the USTS
Series M Preferred Stock was converted into 1,710,000 shares of USTS Common
Stock on January , 1998.
USTS believes that the terms of all of the transactions discussed in this
section were no less favorable to USTS than those which could have been obtained
from non-affiliated parties.
63
<PAGE>
PRECEPT
SELECTED CONSOLIDATED
FINANCIAL INFORMATION
The following table presents selected consolidated financial information as
of and for the four years ended June 30, 1997, which information was derived
from audited consolidated financial statements of Precept. The consolidated
financial information as of and for the year ended June 30, 1993 was derived
from the unaudited divisional financial statements of Precept's former parent
company. The financial information for the three months ended September 30, 1997
and 1996 was derived from the unaudited consolidated financial statements of
Precept. In the opinion of management of Precept, the financial information for
the year ended June 30, 1993 and for the three months ended September 30, 1997
and 1996 contains all adjustments, consisting only of normal recurring accruals,
necessary for the fair presentation of the results of operations for such
periods. The selected financial information should be read in conjunction with
the consolidated Financial Statements and Notes thereto, included in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL HISTORICAL
----------------------------------------------------- --------------------
<CAPTION>
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues....................................... $ 40,459 $ 50,968 $ 59,075 $ 72,432 $ 77,344 $ 19,813 $ 18,935
Income (loss) from continuing operations....... (1,321) 350 617 (266) 532 134 135
Income (loss) from continuing operations per
share........................................ (0.13) 0.03 0.05 (0.02) 0.05 0.01 0.01
Weighted average shares(1)..................... 10,457 11,667 11,625 11,524 11,516 11,516 11,516
FINANCIAL POSITION (AT PERIOD END):
Total assets................................... 16,510 24,951 25,627 32,691 29,291 31,835 30,477
Working capital................................ 2,523 5,860 7,458 14,476 12,343 13,078 12,011
Long-term obligations.......................... 663 707 543 5,260 7,502 5,307 7,955
Shareholders' equity(2)........................ 729 17,537 17,032 16,582 13,305 16,803 13,275
</TABLE>
- ------------------------
(1) Weighted average shares for the years ended June 30, 1994 and 1993 represent
the number of shares outstanding as of June 30, 1994, plus 1,297,800 shares
underlying stock options granted in fiscal 1997 which have been treated as
outstanding for all periods presented, since the actual weighted average
shares during those years which Precept was a division of a previous
consolidated group is not useful.
(2) Shareholders' equity as of June 30, 1993 reflects Precept divisional equity
balances under its former parent prior to capital contributions which
occurred with its reorganization on June 30, 1994.
64
<PAGE>
BUSINESS OF PRECEPT
GENERAL
Precept is a rapidly growing, independent distributor of custom and stock
business products and provider of document management services to businesses of
all sizes throughout the United States. Precept was founded in 1988 as a
regional business products distributor in Dallas, Texas, and since that time has
expanded rapidly both internally and through acquisitions, to 30 locations
throughout the United States. Business products distributed include custom
business forms, commercial printing/graphic arts, electronic forms, custom stock
labels, computer supplies, envelopes and advertising specialty products. Precept
provides comprehensive information solutions for its customers' business
products, inventory control and document management needs. In addition, Precept
provides electronic forms capabilities and integration of its customers
accounting operations to streamline information flow and reduce overall
operating costs. Precept's business strategy is (i) to act as a premier sole
source "corporate outsourcer" providing a broad array of business products to
its customers while reducing overall procurement costs and providing a high
level of customer service and (ii) to continue its expansion through strategic
acquisitions and internal growth. Precept also operates various corporate
transportation services within the Dallas/Fort Worth metropolitan area. Since
inception, Precept's revenues from its core, continuing operations have grown
from $3.8 million in fiscal year 1989 to $77.3 million in fiscal year 1997, a
46% compound annual growth rate.
Following the founding and development of Precept, Precept's goal has been
to acquire or establish centrally managed networks of regional offices and
warehouses in major metropolitan markets throughout the United States. As a
result, Precept has completed 15 acquisitions of these regional business
products distributors. Once a regional office/warehouse is acquired or
established, Precept seeks to leverage its distribution capabilities by
acquiring smaller companies or opening satellite sales offices in the
surrounding areas. Precept also seeks to increase the sales and profitability of
its acquired companies by integrating the Precept business strategy and through
elimination of redundant operating expenses. Going forward, Precept plans to
continue to actively pursue this consolidation strategy within the business
products distribution and document management industries.
Precept believes that the acquisition and operational experience of its
management team provides it with the ability to execute upon the growth
component of its business strategy. Precept, in only its fifth year of
existence, was recognized as the largest independent business products
distributor by a national business products magazine and has retained this
status for five consecutive years. Precept's management team brings vast
experience in the acquisition and integration of businesses, previously with
MTech (sold to EDS in 1988), ACS (NYSE:AFA), and now at Precept. Management also
believes it can and will become the "consolidator of choice" in the business
products distribution and document management industries.
The industry in which Precept operates is large, fragmented and, Precept
believes, rapidly consolidating. Precept believes that opportunities exist to
consolidate participants in the industry and that its principal competitors are
direct manufacturers and other, smaller independent distributors of business
products. Management believes the market for the business products it
distributes is in excess of $20 billion annually with the top 100 independent
distributors representing $1.6 billion annually, or 7.8% of the total market.
Over the last three years, total revenues from the top 100 independent business
products distributors have grown by 16% annually as distributors continue to
gain market share from the direct manufacturers. In 1996, this trend resulted in
independent distributors surpassing direct manufacturers in market share by
representing approximately 55% of the total business products market. Precept
believes independent distributors' market share will continue to grow in the
future as more of its target customers make the decision to outsource the
distribution of their business products and document management needs.
Precept believes that similar consolidation possibilities exist in the
corporate transportation services industry. Precept management believes the
chauffeured vehicle service industry, in particular, presents an
65
<PAGE>
attractive opportunity for consolidation. In 1996, the chauffeured vehicle
service business accounted for approximately $3.9 billion in revenues to roughly
9,000 companies throughout the United States. Precept believes that no one
company currently represents more than 2% of the overall market.
PRECEPT BUSINESS PRODUCTS SERVICES
Precept's business philosophy lies in the provision of services and
distribution, rather than the actual manufacturing of the products it sells.
Precept believes most manufacturers either sell directly to the end user or
through independent distributors. Because Precept utilizes in excess of 5,000
manufacturers nationwide that specialize in various products and quantity sizes,
Precept's management believes that it has the ability to be its customers'
single source supplier, and, as such, provides broader manufacturing capability
and enhanced delivery times as compared to direct manufacturers. Precept's
distribution business involves the design, warehousing and distribution of a
broad variety of business products. Through its document management services,
Precept provides a single point of contact for the purchase and warehousing of
all printed products and related items a customer may use. Typically, Precept
will consult with a customer to perform a documents analysis and then, after
determining what documents are required on an ongoing basis, will provide for
the design, production, inventory, management, storage and distribution of the
documents to the customer on an as-needed basis. Precept's sophisticated
management information systems enable it to offer customized services tailored
to the specific customer needs. As a result, customers are provided customized
product usage, stock status, customized billing formats and other custom reports
important to their operation. See Note 12 ("Segment Information"), Notes to
Consolidated Financial Statements of Precept Investors, Inc., for a discussion
of the principal industry segments in which Precept operates.
DISTRIBUTION
Precept believes that the current trend of downsizing and vendor reduction,
combined with customers' desire to maximize efficient commitment of capital in
the inventory of its business products makes distributers the customer's best
source for service and new products. Precept attempts to deliver a complete
solution for its customers' business products, inventory control and document
management needs along with the integration of the customers' accounting
operations to streamline the customer's workflow processes and reduce overall
operating costs. This one-step solution for all the customers' needs allows
Precept to act as the customer's business products outsourcer. As a distributor,
Precept believes it can provide a more effective business products solution
because it has the flexibility to offer the products of many vendors and
suppliers and not be burdened by having to only offer the products that it
manufactures. Furthermore, by foregoing the extensive capital investment
required by machinery and equipment, Precept is well positioned to act
immediately as new technologies present themselves. In addition to multiple
product offerings, Precept is able to leverage its size and scale to achieve
volume purchasing discounts which can be passed on to customers. Finally, acting
as a communications link between its customers and the suppliers allows Precept
to more efficiently inform suppliers what the end users want while
simultaneously making corresponding suggestions for the suppliers in-plant
operations.
Precept markets its various services directly to individual customers by
designing and offering a customized product and service package for that
customer after determining its specific needs. To emphasize its customization
approach, Precept can provide through its electronic forms system a single
customer catalog with increased utility as opposed to one catalog for all or
many customers.
To accomplish the above, Precept has the following capabilities:
DOCUMENTS MANUFACTURING. Precept does not manufacture any business product.
Management believes the vast majority of direct manufacturers are wholesale
producers and do not sell directly to the end user. As a distributor, Precept
has enhanced resources to typically provide its customers their business
products at a lower cost than the major direct manufacturers.
66
<PAGE>
DESIGN. Precept utilizes its experienced, on-site personnel directly
involved with a particular account for design work, rather than a corporate
department, to leverage the knowledge derived from the hands-on involvement with
a particular customer. In addition, Precept expends significant time with its
manufacturing partners with respect to new product developments on behalf of its
customers.
DISTRIBUTION AND WAREHOUSING. Both pick and pack distribution services as
well as full case shipping capabilities are available to Precept's customers. In
addition, Precept provides bulk storage (full case and full pallet), pick and
pack and secure storage. Nationwide warehousing, along with the excess warehouse
capacity offered in conjunction with its manufacturing partners gives Precept
location advantages superior to its competitors.
DOCUMENT MANAGEMENT SERVICE
Precept believes that its innovative management system streamlines business
product ordering and distribution, which simplifies documents monitoring and
storage and encourages "Just-In-Time" business product management. Through
Precept's fully integrated Computerized Forms Management and Inventory Analysis
System its customers are able to monitor, on-line, inventory, track orders, and
release products for distribution. Precept can receive, translate and process
all ANSI (American National Standards Institute) standard EDI (Electronic Data
Interchange) transaction sets (all versions) to give customers a channel to
access information in a seamless manner while providing electronic invoicing and
payments. This document management system allows Precept to maintain absolute
control through electronic forms, intelligent forms and print-on-demand
features. The complete management system allows a customer to have inventory
information, place orders and make payments all through electronic interface.
SALES AND MARKETING
Precept has a broad customer base and believes that no single customer
accounted for more than 6% of total sales during fiscal 1997. Precept relies on
a commission only-based sales force dedicated to all of its products and
services thereby ensuring product and service knowledge among its principal
customers. Precept emphasizes a personal sales and marketing relationship with
the customer by having a single account executive responsible for each customer
account. Precept's sales representatives offer customers customized
merchandising and purchasing programs tailored to each customer's needs. Sales
representatives have frequent contact with their customers and have
responsibility for increasing account penetration and solving customer problems.
For major accounts, Precept utilizes the "Team Concept" where an experienced
team of individuals, including an account executive and customer service
representative, maximize service and enhance long term customer relations.
Precept believes that its presence in 30 locations allows its sales
representatives to service large, national businesses in multiple locations.
Through a continued effort in improving efficiencies and providing customized
systems and enhancements, Precept is committed to a long term partnership with
its customers.
MANAGEMENT INFORMATION SYSTEMS
Precept believes that its management information system features
state-of-the-art hardware and software fully customized for the business
products and document management industry. This customization fully integrates
order entry, receiving, distribution, billing, accounts payable and general
ledger. The system generates reports such as customized summary billing, cost
center analysis, inventory stock status and reorder notices. Connectivity is
accomplished via direct link, dial up, satellite bounce off, VAN (Value Added
Network) systems and personalized Internet access. Precept has designed,
developed and has available an electronic forms package, that can operate on a
single PC, LAN (Local Area Network), Full Host or in an Internet environment and
features electronic cataloging, print-on-demand, intelligent and interactive
form processing and multimedia capabilities (audio and video) for instruction or
training needs.
67
<PAGE>
Ongoing analysis and hands-on involvement with its customers combined with
Precept's knowledge of new technologies allows it to constantly develop and
implement new technological enhancements.
CONSOLIDATION STRATEGY
Precept believes numerous factors exist which create a favorable environment
and significant opportunity for continued consolidation of the business product
distribution and document management industry. Among others, these factors
include: (i) the fragmented nature of the industries, (ii) the lack of operating
and acquisition expertise of target companies, (iii) industry participants
desire for liquidity and/or capital requirements for growth, (iv) industry
participants desire to utilize Precept's existing management information
systems, (v) the pressures of increasing competition, and (vi) creation of
operating efficiencies and synergies resulting in economies of scale.
Precept believes that it possesses substantial competitive advantages over
other industry consolidators. Precept bases this belief on management's track
record in previous growth and consolidation efforts at MTech, (sold to EDS in
1988) and ACS (NYSE:AFA) as well as its experience in acquiring and integrating
businesses at Precept. Precept believes it can leverage the experience and
expertise of the Precept executive management team to become a leading
consolidator of the business products distribution and document management
industries. Furthermore, Precept believes that its ability to attract and
acquire companies as a "consolidator of choice" is due to (i) its existing
operations as a nationwide business products distributor and document management
company and (ii) its corporate infrastructure and management information
systems. Under the Precept business model, acquired companies benefit from the
economies of scale of a larger organization while simultaneously retaining local
operational control thereby enabling them to provide flexible and responsive
service to long-term customers.
Precept seeks to achieve operating efficiencies in acquisitions through the
combination of (i) certain general and administrative functions, (ii)
elimination of redundant facilities, (iii) improved management information
systems and (iv) implementation of Precept's preferred vendor and volume
purchasing arrangements. Precept has, over the years, negotiated certain
arrangements with manufacturers, which it believes will enable it to reduce the
level of inventories in acquired companies thereby allowing more efficient
operations. Integration of acquisitions is often a complex process which may
entail material nonrecurring expenditures, including facility closing costs,
modernization of equipment and computer systems, warehouse assimilation
expenses, asset writedowns and severance payments.
Consideration for acquisitions has typically involved cash and promissory
notes. Future acquisitions may involve cash, promissory notes and in many cases
common stock. Acquisitions are made pursuant to acquisition agreements
containing customary representations, warranties, covenants and indemnification
provisions. Precept typically seeks to obtain noncompete and confidentiality
agreements from selling owners.
PRECEPT TRANSPORTATION SERVICES
Precept is also engaged in the corporate transportation service industry in
the Dallas/Fort Worth metropolitan area. Wingtip Couriers, Inc. ("Wingtip"), a
wholly owned subsidiary of Precept, is an on-demand package delivery service.
Wingtip targets professional organizations, large corporations and financial
institutions as its main business segment. Wingtip also provides bulk and
schedule delivery services along with on-site customer service. Precept conducts
its chauffeured vehicle service through its business, Lonestar Limousine
("Lonestar"). Lonestar's client list includes many of the larger professional
service corporations, financial institutions, hotels and other corporations in
the area. The core business of Lonestar is personal shuttle service to and from
Dallas/Fort Worth airport and other surrounding destinations. See Note 12
("Segment Information"), Notes to Consolidated Financial Statements of Precept
Investors, Inc., for a discussion of the principal industry segments in which
Precept operates.
68
<PAGE>
WINGTIP
Wingtip's core business is unscheduled package delivery within the
Dallas/Fort Worth metropolitan area. On-board computers in its vehicles, along
with automated tracking and dispatching, allow packages to be picked up and
delivered within various time constraints including one-hour deliveries. Wingtip
faces significant competition from several companies in the Dallas/Fort Worth
market. This market is unregulated, price sensitive and constantly evolving
through the development of new services. Wingtip has approximately 10,500
customers, which are supported by 155 full-time employees, and a fleet of 117
vehicles operating seven days a week.
LONESTAR
Lonestar utilizes chauffeured sedans and limousines to provide services for
airport shuttles, conventions, social events, business meetings and leisure
travel. Business customers utilize Lonestar's services primarily to achieve more
efficient use of its employee's time and other resources. Lonestar has
approximately 200 customers, which are supported by 30 full-time employees and a
fleet of 29 vehicles' operating seven days a week.
CONSOLIDATION STRATEGY
Precept believes significant consolidation opportunities exist in the
corporate transportation services industry. Precept management believes the
chauffeured vehicle service business accounted for approximately $3.9 billion in
revenues to roughly 9,000 companies throughout the United States. Precept
believes that no one company currently represents more than 2% of the overall
market.
Precept believes there are significant advantages to consolidating the
chauffeured vehicle service industry. Management believes it can increase
revenues of acquired companies through the implementation of training and
quality assurance programs as well as nationwide marketing of Precept services.
Moreover, Precept believes it can achieve cost savings in acquisitions through
the consolidation of certain administrative functions, increased use of
automation, and the elimination of redundant facilities, equipment and
personnel.
CUSTOMERS
Precept achieves growth in its business products revenues and customer base
through marketing and acquisitions of other business products distribution
companies. Precept has several thousand customers, however the five largest
customers accounted for approximately 23% of Precept's fiscal 1997 revenues. Two
of such customers, one of which is ACS, each represented approximately 6% of
such revenues, and the loss of either of these two customers would likely have a
material adverse affect on Precept.
COMPETITION
Precept believes that its ability to compete successfully in the business
product distribution and document management business is based upon its ability
to offer a complete range of products and services and achieving favorable
pricing by maintaining a significant volume of business with its suppliers.
Precept's principal competitors are direct manufacturers, local and regional
independent distributors and divisions of larger publicly held companies,
including Corporate Express and US Office Products.
FACILITIES
Precept's executive offices are located in a facility of approximately
34,000 square feet in Dallas, Texas. The facility is leased and has a term which
expires July 31, 2001. Precept leases a warehouse facility with approximately
100,000 square feet in Dallas, Texas with a term expiring March 31, 2001.
Precept leases 28 regional and branch locations throughout the U.S. ranging from
approximately 500 square feet to
69
<PAGE>
approximately 15,000 square feet, with varying expiration terms. All properties
leased by Precept are in good repair and in suitable condition for the purposes
for which they are used.
EMPLOYEES
As of November 30, 1997, Precept and its subsidiaries had 367 full-time
equivalent employees. None of Precept's or its subsidiaries' employees is
currently represented by a union, and there have been no work stoppages or
strikes. Management considers its relations with employees to be good.
LEGAL PROCEEDINGS
On January 23, 1996, Precept filed a collection action against John Alden
Life Insurance Co. ("Alden"), currently pending in the United States District
Court for the Southern District of Florida, for approximately $400 thousand in
past due invoice amounts. Alden has denied that it received any products and has
refused to pay Precept on that basis. Alden and its affiliate, John Alden
Systems Corp. ("Alden Systems") have asserted a counterclaim against Precept
alleging that a Precept employee participated with an Alden employee in a plan
to falsify sales to Alden. Alden is seeking approximately $9 million in damages.
In a related action, Alden Systems filed a claim in state circuit court in
Miami, Florida, making similar allegations and seeking similar damages as
contained in its counterclaim described above. Precept has denied the
allegations made by Alden Systems and has moved for a stay pending resolution of
the federal court suit in which Precept is the plaintiff. Precept intends to
pursue the claims asserted in its collection action, believes that it has
meritorious defenses to the above allegations and plans to vigorously defend
against them.
In addition to the foregoing, Precept is subject to certain other legal
proceedings, claims, and disputes which arise in the ordinary course of
business. While Precept has no reason to believe that any pending claims are
material, there can be no assurance that such claims, if adversely determined,
will not have a material adverse effect on the business, financial condition,
results of operations or liquidity of Precept.
70
<PAGE>
PRECEPT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
financial condition and results of operations of Precept should be read in
conjunction the Precept Consolidated Financial Statements and with the related
Notes thereto and other financial information appearing elsewhere in this Proxy
Statement/ Prospectus. Unless otherwise indicated or the context otherwise
requires, each reference to a year is to Precept's fiscal year which ends on
June 30 of such year, and "fiscal 1996" refers to the fiscal year ended June 30,
1996 and "fiscal 1997" refers to the fiscal year ended June 30, 1997.
HISTORY/OVERVIEW
Precept is an independent distributor of custom and stock business products
and provider of document management services ("Business Products") to businesses
in a variety of industries throughout the United States. Precept also operates
various corporate transportation services within the Dallas/Fort Worth
metropolitan area ("Transportation Services"). Precept was founded in 1988 as a
subsidiary of ACS and has grown significantly since then, both internally and
through acquisitions. In June 1994, Precept was spun-off from ACS in a tax-free
stock exchange to ACS shareholders in connection with the initial public
offering of ACS.
Precept was one of the first organizations to begin nationwide consolidation
of operating companies in the Business Products industry. Since 1991, Precept
has acquired 15 companies operating in this industry plus five transportation
entities. Each of these acquisitions was accounted for using the purchase method
of accounting. A substantial majority of the purchase price paid by Precept in
each acquisition represented intangible assets, including customer contracts and
non-compete agreements.
A component of Precept's business strategy is to increase the size of its
operations through strategic acquisitions and internally generated growth.
Precept places substantial emphasis on improving operational and information
system capabilities, while implementing subsequent integration of the Precept
business strategy in acquired operations. Precept's operational focus also
includes continuous upgrading of management systems allowing improved customer
access to financial, inventory and order status information; new product and
service offerings; preferred vendor programs incorporating volume purchasing;
regional and district management oversight; and recruiting experienced sales
individuals. Precept believes these strategies will lead to lower cost of goods
and increased sales of various products and services to existing and new
customers.
As part of the implementation of its business strategy, Precept decided to
focus on its core business by discontinuing certain non-core operations in real
estate construction and real estate related investments. See "Discontinued
Operations" below.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 PERIOD") COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 PERIOD")
Consolidated revenues from continuing operations decreased $877 thousand, or
4.4%, to $18.9 million in the 1997 Period, from $19.8 million for the 1996
Period. The majority of the decrease was from lower sales to Business Products
customers due, in part, to the loss of three customers. Precept has taken steps
to replace the lost revenue through the addition of new customers and the growth
of existing customer relationships. Revenue in the 1997 Period included $985
thousand from two Business Products acquisitions completed in March and July of
1997.
Cost of goods sold includes product, freight and delivery costs. Cost of
goods sold were $11.8 million for the 1997 Period, a decrease of $712 thousand
from $12.5 million in the 1996 Period. Cost of goods sold
71
<PAGE>
as a percentage of Business Products revenues decreased to 68.2% in the 1997
Period from 68.7% in the 1996 Period, due to a shift in revenue mix resulting in
a higher proportion of revenues in higher margin products and services.
Selling, general and administrative expenses include sales commissions,
drivers' wages, lease expense, and corporate overhead. Selling, general and
administrative expenses decreased by $55 thousand to $6.5 million in the 1997
Period from $6.6 million in the 1996 Period. As a percentage of revenues from
continuing operations, selling, general and administrative expenses increased to
34.5% in the 1997 Period from 33.2% in the 1996 Period. The increase as a
percentage of revenues in the 1997 Period is primarily due to an increase in
corporate resources to implement Precept's consolidation strategy.
Depreciation and amortization expense in the 1997 Period and the 1996 Period
were comparable.
Operating income was essentially unchanged at $354 thousand in the 1997
Period.
Interest expense remained flat at $125 thousand in the 1997 Period. While
non-bank debt increased by $520 thousand for acquisitions in the 1997 Period,
and Precept experienced higher outstanding balances under its credit facility,
overall borrowing rates were lower in the 1997 Period.
The effective tax rate in the 1997 Period was comparable to the 1996 Period.
As a result of the foregoing, net income from continuing operations was
essentially unchanged at $135 thousand in the 1997 Period, compared with $134
thousand in the 1996 Period.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Consolidated revenues from continuing operations increased $4.9 million, or
6.8%, to $77.3 million in fiscal 1997, from $72.4 million in fiscal 1996.
Approximately $3.7 million of this increase resulted from Business Products
acquisitions completed by Precept. The remaining revenue increase of $1.2
million, consisting of $726 thousand in Transportation Services increases and
$474 thousand in Business Products increases, resulted primarily from the
addition of new customers and growth among existing customers.
Cost of goods sold were $50.2 million in fiscal 1997, an increase of $5.0
million from $45.2 million in fiscal 1996. Cost of goods sold as a percentage of
revenues for Business Products increased to 70.9% in fiscal 1997 from 67.9% in
fiscal 1996, due to a higher proportion of revenues in lower margin products and
services.
Selling, general and administrative expenses decreased by $1.1 million to
$24.4 million in fiscal 1997 from $25.5 million in fiscal 1996. As a percentage
of revenues from continuing operations selling, general and administrative
expenses decreased from 35.1% to 31.5%, in fiscal 1996 and 1997, respectively.
This decrease is due largely to a reduction in incentive based compensation paid
to executive officers.
Depreciation and amortization expense in fiscal 1997 was comparable to
fiscal 1996.
Operating income increased to $1.3 million in fiscal 1997, compared to $330
thousand in fiscal 1996 due primarily to the factors set forth above.
Interest expense increased to $425 thousand in fiscal 1997 from $317
thousand in fiscal 1996 due to additional borrowings under Precept's credit
facility.
Precept's effective tax rate increased to 41.7% in fiscal 1997 from 31.2% in
fiscal 1996. The effective rate in 1997 exceeded the federal statutory rate of
35.0% due primarily to the amortization of certain acquisition-related costs
that were nondeductible for tax purposes, plus the net effect of state income
taxes.
Net income from continuing operations increased to $532 thousand in fiscal
1997, from a loss of $266 thousand in fiscal 1996 due to the factors discussed
above.
72
<PAGE>
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Consolidated revenues from continuing operations increased $13.3 million, or
22.6%, to $72.4 million in fiscal 1996, from $59.1 million in fiscal 1995.
Approximately $7.5 million of this increase resulted from Business Products
acquisitions completed by Precept. The remaining increase of $5.8 million
resulted primarily from the addition of new Business Products customers and
growth among existing customers.
Cost of goods sold were $45.2 million in fiscal 1996, an increase of $9.6
million from $35.6 million in fiscal 1995. Cost of goods sold as a percentage of
revenues for Business Products increased slightly to 67.9% in fiscal 1996 from
67.1% in fiscal 1995.
Selling, general and administrative expenses increased by $4.5 million to
$25.5 million in fiscal 1996 from $21.0 million in fiscal 1995. As a percentage
of revenues from continuing operations, selling, general and administrative
expenses decreased slightly to 35.1% in fiscal 1996 from 35.5% in fiscal 1995.
Depreciation and amortization expense in fiscal 1996 was comparable to
fiscal 1995.
Operating income decreased to $330 thousand in fiscal 1996, compared to $976
thousand in fiscal 1995, due to the higher costs of goods sold and higher
selling, general and administrative expenses noted above.
Interest expense was $317 thousand in fiscal 1996, an increase of $169
thousand from $148 thousand in fiscal 1995. The increase resulted from
additional borrowings under Precept's credit facility.
Other expense in fiscal 1996 of $400 thousand was attributable to a one time
charge related to interest accrued for sales taxes.
Precept's effective tax rate increased to 31.2% in fiscal 1996 from 25.4% in
fiscal 1995. The low effective tax rate in fiscal 1995, compared to the federal
statutory rate of 35%, is primarily due to a federal income tax refund related
to physical inventory adjustments while Precept was a subsidiary of ACS.
Net loss from continuing operations of $266 thousand in fiscal 1996,
compared to net income of $617 thousand in fiscal 1995 due to the factors
discussed above.
CAPITAL RESOURCES AND LIQUIDITY
Precept's primary sources of funding have been cash flow from operations,
commercial bank credit facilities and notes issued by Precept to sellers of
acquired companies. Precept anticipates that cash flow from operations and
borrowings under credit facilities will continue to be its principal sources of
funding. Precept's principal uses of cash have been, and will continue to be,
the funding of acquisitions, repayment of debt, and capital expenditures for its
information and accounting systems.
Precept had a $10.0 million secured, revolving credit facility with Comerica
Bank ("Old Credit Facility"). Availability under the Old Credit Facility was
subject to a borrowing base calculated based upon accounts receivable. At June
30, 1997, Precept had approximately $6.3 million outstanding under the Old
Credit Facility at an annual interest rate of approximately 8.0%.
A new definitive loan agreement was signed on July 2, 1997, with Wells Fargo
Bank, Texas consisting of a $10.0 million secured revolving credit facility
("New Credit Facility"), which expires June 30, 2000. Borrowings under the New
Credit Facility bear interest at the bank's Prime rate or at LIBOR plus 1.75%,
2.25% or 2.50% dependent upon a financial ratio of Precept calculated at the
beginning of each month. The New Credit Facility is fully secured by
substantially all of the assets of Precept. Availability under the credit
facility is calculated based upon a borrowing base composed of eligible accounts
receivables and inventory. As of January 28, 1998, the amount available under
the New Credit Facility was $8,660,000 and the outstanding balance was
$7,000,000.
Precept incurs capital expenditures primarily for its information and
accounting systems needs. Capital expenditures, from continuing operations, for
the 1997 Period and fiscal years ended June 30, 1997 and 1996, were $63
thousand, $170 thousand and $355 thousand, respectively. The majority of capital
expenditures related to the purchase of software and computer equipment. Planned
capital expenditures
73
<PAGE>
for fiscal 1998 are expected to be approximately $260 thousand to be used for
upgrading and enhancing Precept's information and accounting systems. Actual
capital expenditures for fiscal 1998 may be greater or less than budgeted
amounts.
Precept had cash and cash equivalents totaling $1.7 million at September 30,
1997 compared to $2.5 million at June 30, 1997. The reason for the decrease is
payments for contingent obligations in connection with prior acquisitions and
cash utilized in the acquisition consummated during the 1997 Period. Precept had
cash and cash equivalents of $2.5 million at June 30, 1997, compared to cash and
cash equivalents of $3.5 million at June 30, 1996. Cash and cash equivalents
decreased $1.0 million primarily due to the use of cash to finance contingent
payments in connection with prior acquisitions. Cash and cash equivalents from
discontinued operations of $95 thousand, $0 and $363 thousand as of September
30, 1997, June 30, 1997 and June 30, 1996 have been excluded from the amounts
discussed above.
Working capital for the 1997 Period was $12.0 million compared to $12.3
million at June 30, 1997. The primary reason for the decrease is an increase in
accounts payable. Working capital at June 30, 1997 was $12.3 million as compared
to $14.5 million at June 30, 1996. The decrease in working capital as of June
30, 1997, is primarily a result of a $2.7 million reduction in accruals and
taxes payable, offset by a $1.7 million reduction in accounts receivable, a $1
million reduction in cash and $3.0 million reduction in net assets of
discontinued operations. Precept's capitalization, defined as the sum of
long-term debt and shareholders' equity at September 30, 1997 was approximately
$20.3 million.
In the 1997 Period, 1996 Period and fiscal years 1997 and 1996, cash used
includes discontinued operations. For the 1997 Period, Precept had net cash used
in operating activities of $483 thousand, compared to net cash used of $98
thousand for the 1996 Period. During the fiscal year ended June 30, 1997,
Precept had net cash used in operating activities of $177 thousand, compared to
net cash used of $1.3 million during the fiscal year ended June 30, 1996. The
increase in cash generated from operations during fiscal 1997 is due to the
decrease in receivables.
Cash used in investing activities was $654 thousand in the 1997 Period
compared to cash used in investing activities of $1.1 million in the 1996
Period. Cash was used in the 1997 Period to finance an acquisition and make
contingent payments in connection with prior acquisitions. For the 1996 Period,
contingent payments for prior acquisitions were made along with expenditures for
capitalized software and computer equipment. Cash used in investing activities
for fiscal 1997 was comparable to fiscal 1996.
Cash provided by financing activities was approximately $441 thousand in the
1997 Period compared to cash used in financing activities of $457 thousand in
the 1996 Period. The increase primarily resulted from borrowings under the New
Credit Facility. Cash provided by financing activities in fiscal 1997 was
generated primarily from a $1.7 million increase in borrowings under the Old
Credit Facility.
At September 30, 1997, Precept had working capital of $12.0 million.
Precept's management believes that cash generated from continuing operations and
additional financing available under the New Credit Facility will provide
adequate funds for Precept's anticipated working capital and capital expenditure
needs. However, favorable acquisition or expansion opportunities requiring large
commitments or capital may arise that Precept may be unable to finance
internally. Furthermore, in order to pursue such opportunities, Precept may be
required to incur debt or to issue additional, potentially dilutive, equity
securities. No assurance can be given as to Precept's future acquisition and
expansion opportunities.
INCOME TAXES
At June 30, 1997, Precept had $2.3 million of gross deferred tax assets.
Precept has evaluated its deferred tax assets both individually and in the
aggregate as to the likelihood of realizability of these amounts, and has
concluded that there are no specific realizability issues related to any one
type of temporary difference that gave rise to the deferred tax assets. However,
Precept has concluded that it is more likely than not that some portion of its
deferred tax assets will not be realized. After considering the sources of
taxable income that may be available, Precept estimates that it will not realize
$637 thousand of its deferred tax assets, for which a valuation allowance is
recorded.
74
<PAGE>
DISCONTINUED OPERATIONS
As part of its Precept's business strategy, Precept has decided to focus on
its core businesses and discontinue certain non-core business operations. To
effect this strategy, in February 1997, Precept decided to reduce its investment
in its real estate construction operation, Precept Builders, Inc. ("Builders"),
which performs free-standing construction and finish-out of existing locations,
primarily in the state of Texas, and to sell nearly all of the assets of Precept
Holdings, Inc. ("Holdings"), which owns and operates certain other real
estate-related investments. Builders' revenues for fiscal 1996 and fiscal 1997
were $38.8 million and $82.5 million, respectively. Holdings had minimal
revenues for each fiscal period. See "Certain Relationships and Related
Transactions."
INFLATION
Certain of Precept's business product offerings, particularly paper
products, have been and are expected to continue to be subject to significant
price fluctuations due to inflationary and other market conditions. Precept
generally is able to pass such increased costs on to its customers through price
increases, although it may not be able to adjust its prices immediately.
Significant increases in paper and other costs in the future could materially
affect Precept's profitability if these costs cannot be passed on to customers.
In general, Precept does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that Precept's business will not be affected by inflation in the future.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 EARNINGS PER SHARE ("SFAS 128"), which
specifies a new methodology for calculating earnings per share and is effective
for fiscal years ending after December 15, 1997. This statement will have no
effect on the financial position, results of operations or cash flows of Precept
but will require a restatement of prior period earnings per share. Precept
believes that the earnings per share calculated under SFAS 128 will not be
materially different than the current method used.
In addition, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 REPORTING COMPREHENSIVE INCOME and
Statement of financial Accounting Standards No. 131 DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION which are effective for financial
statement periods beginning after December 15, 1997. As these statements require
only additional disclosures, they will have no effect on Precept's financial
position, results of operations or cash flows.
DESCRIPTION OF PRECEPT SECURITIES
Immediately prior to the Closing, the total authorized capital stock of
Precept will consist of 100,000,000 shares of Precept Class A Common Stock,
10,500,000 shares of Precept Class B Common Stock, par value $.01 per share (the
"Precept Class B Common Stock") and 3,000,000 shares of Preferred Stock, par
value $1.00 per share (the "Precept Preferred Stock"). As of January , 1998,
there were 25,928,559 shares of Precept Class A Common Stock held by 67
shareholders of record, 10,071,441 shares of Precept Class B Common Stock held
by 1 shareholder of record and no shares of Preferred Stock outstanding. The
following descriptions of the capital stock are qualified in all respects by
reference to the Precept Articles of Incorporation, and Precept Bylaws, copies
of which are filed as Exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
As provided in the Precept Articles of Incorporation, no shareholder is
entitled to preemptive rights or cumulative voting rights. The board of
directors of Precept also have the authority to fix or alter the powers,
designations, preferences and relative, participating, optional or other special
rights of all classes of the capital stock of Precept; provided, however, that
the board of directors of Precept may not amend
75
<PAGE>
the terms of Precept Class A Common Stock to provide greater powers, preferences
and rights than provided in the Precept Articles of Incorporation.
PRECEPT CLASS A COMMON STOCK
Each holder of Precept Class A Common Stock is entitled to one vote for each
share held of record on all matters submitted to the shareholders as a single
class with the holders of Precept Class B Common Stock. The Precept Class A
Common Stock does not have any conversion rights and is not subject to
redemption. After dividends have been declared and set aside for payment or paid
on any series of Preferred Stock, each holder of Precept Class A Common Stock
and Precept Class B Common Stock is entitled to receive and to share equally in,
when, as and if declared by the board of directors of Precept, dividends per
share, out of the funds legally available therefore, in such amounts as the
board of directors of Precept may from time to time fix and determine. Upon
liquidation, dissolution or winding up of the affairs of Precept, whether
voluntary of involuntary, after there has been paid or set apart for the holders
of any series of Precept Preferred Stock having a preference over the Precept
Class A Common Stock or Precept Class B Common Stock, the holders of Precept
Class A Common Stock and Precept Class B Common Stock are entitled to receive
and to share equally in all of the assets of Precept available for distribution
to the shareholders. All outstanding shares of Precept Class A Common Stock are
fully paid and nonassessable. The transfer agent and registrar for the Precept
Class A Common Stock is . The shares of Precept Class A Common Stock trade
together with certain stock purchase rights pursuant to that certain Rights
Agreement described more fully below. See "Rights Agreement; Rights to Purchase
Shares of Precept Class A Common Stock," below.
PRECEPT CLASS B COMMON STOCK
Each holder of Precept Class B Common Stock is entitled to ten votes for
each share held of record on all matters submitted to the shareholders as a
single class with the holders of Precept Class A Common Stock. Each share of
Precept Class B Common Stock is convertible at any time at the option of and
without cost to the holder of Precept Class B Common Stock into one fully paid
and nonassessable share of Precept Class A Common Stock by surrendering the
certificate of Precept Class B Common Stock to Precept. In the case of a
consolidation or merger of Precept as a result of which the holders of Precept
Class A Common Stock are entitled to receive cash, stock or other securities or
property with respect to an exchange of the Precept Class A Common Stock, each
holder of Precept Class B Common Stock shall have the right to convert such
share into the kind and amount of cash, shares of stock or other securities or
property receivable by each holder of Precept Class A Common Stock. No holder of
Precept Class B Common Stock may transfer such share whether by sale,
assignment, gift, bequest, appointment or otherwise except to certain permitted
transferees, and upon death of such holder of Precept Class B Common Stock, the
Precept Class B Common Stock shall automatically be converted into Precept Class
A Common Stock. All outstanding shares of Precept Class B Common Stock are fully
paid and nonassessable and are not subject to redemption.
No person or entity holding shares of Precept Class B Common Stock (a "Class
B Holder") may transfer such shares, whether by sale, assignment, gift, bequest,
appointment or otherwise, except to a Permitted Transferee (as hereinafter
defined). In the case of a Class B Holder who is a natural person and the
beneficial owner of shares of Precept Class B Common Stock to be transferred, a
Permitted Transferee consists of (i) such Class B Holder's spouse; provided,
however, that upon divorce any Precept Class B Common Stock held by such spouse
shall automatically be converted into Precept Class A Common Stock, (ii) any
lineal descendant of any great-grandparent of such Class B Holder, including
adopted children, and such descendant's spouse (such descendants and their
spouses, together with such Class B Holder's spouse, are referred to as "family
members"), (iii) the trustee of a trust for the sole benefit of such Class B
Holder or any of such Class B Holder's family members, (iv) any charitable
organization established by such Class B Holder or any of such Class B Holder's
family members and (v) any partnership made up
76
<PAGE>
exclusively of such Class B Holder and any of such Class B Holder's family
members or any corporation wholly-owned by such Class B Holder and any of such
Class B Holder's family members; provided that, if there is any change in the
partners of such partnership or in the shareholders of such corporation that
would cause such partnership or corporation no longer to be a Permitted
Transferee, any Precept Class B Common Stock held by such partnership or
corporation shall automatically be converted into Precept Class A Common Stock.
In the case of a Class B Holder that is a partnership or corporation, a
Permitted Transferee consists of (i) such partnership's partners or such
corporation's stockholders, as the case may be, (ii) any transferor to such
partnership or corporation of shares of Precept Class B Common Stock after the
record date of the initial distribution of Precept Class B Common Stock and
(iii) successors by merger or consolidation. In the case of a Class B Holder
that is an irrevocable trust on the record date of the distribution of Precept
Class B Common Stock, a Permitted Transferee consists of (i) certain successor
trustees of such trust, (ii) any person to whom or for whose benefit principal
or income may be distributed under the terms of such trust or any person to whom
such trust may be obligated to make future transfers, provided such obligation
exists prior to the date such trust becomes a holder of Precept Class B Common
Stock and (iii) any family member of the creator of such trust. In the case of a
Class B Holder that is any trust other than an irrevocable trust on the date of
the distribution of Precept Class B Common Stock, a Permitted Transferee
consists of (i) certain successor trustees of such trust and (ii) the person who
established such trust and such person's Permitted Transferees. Upon the death
or permanent incapacity of any Precept Class B Holder, such holder's Precept
Class B Common Stock shall automatically be converted into Precept Class A
Common Stock. All shares of Precept Class B Common Stock will automatically
convert into shares of Precept Class A Common Stock on the ninetieth day after
the death of Darwin Deason or upon the conversion by the Deason International
Trust (the "Deason Trust") of all Precept Class B Common Stock beneficially
owned by Mr. Deason into shares of Precept Class A Common Stock.
Shares of Precept Class B Common Stock are freely transferable among
Permitted Transferees, but any other transfer of Precept Class B Common Stock
will result in its automatic conversion into Precept Class A Common Stock. The
restriction on transfers of shares of Precept Class B Common Stock to other than
a Permitted Transferee may preclude or delay a change in control of Precept.
PRECEPT PREFERRED STOCK
The Precept Preferred Stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors of
Precept, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion rights, redemption rights and sinking
fund provisions. The issuance of any such Precept Preferred Stock could
adversely effect the rights of the holders of Precept Class A Common Stock and
Precept Class B Common Stock and, therefore, reduce the value of the Precept
Class A Common Stock and Precept Class B Common Stock. The ability of the Board
of Directors of Precept to issue Precept Preferred Stock could discourage, delay
or prevent a takeover of Precept.
PRECEPT CLASS A WARRANTS
Each USTS Class C Common Stock Purchase Warrant outstanding at the Closing
Date will automatically be converted into one Precept Class A Warrant and shall
become exercisable for shares of Precept Class A Common Stock in lieu of the
USTS Common Stock previously purchasable upon exercise. Certificates
representing such Precept Class A Warrants will be distributed promptly after
the Closing Date in exchange for and replacement of current certificates
representing outstanding USTS Class C Warrants. Except for the fact that the
Precept Class A Warrants shall be exercisable for shares of Precept Class A
Common Stock, the Precept Class A Warrants shall have terms and conditions
substantially the same as those of the USTS Class C Warrants. The Precept Class
A Warrants, when issued, will be listed for trading on the Nasdaq. Each Precept
Class A Warrant allows the holder to purchase one share of Precept
77
<PAGE>
Class A Common Stock at a price of $3.82 per share. The Precept Class A Warrants
expire on August 26, 1999. Precept may redeem the Precept Class A Warrants at a
price of $.01 per Precept Class A Warrant if the closing bid price for Precept
Common Stock equals or exceeds $5.157 for at least ten consecutive trading days.
RIGHTS AGREEMENT; RIGHTS TO PURCHASE SHARES OF PRECEPT CLASS A COMMON STOCK
On February , 1998 the Precept Board of Directors declared a dividend of
one common share purchase right (a "Right") for each outstanding share of
Precept Common Stock. The dividend was made on (a "Record Date") to
the shareholders of record at the close of business on that date. Each Right
entitles the registered holder to purchase from Precept one share of Precept
Class A Common Stock, at a price of $150.00 (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated as of February , 1998 (the "Rights Agreement") between Precept
and [ ], as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) ten Business Days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Precept Class A Common Stock (an "Acquiring Person") or (ii)
ten Business Days following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer, the consummation of which would
result in the beneficial ownership by a person or group of 15% or more of such
outstanding Precept Class A Common Stock (the earlier of such dates being the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
certificates for Precept Common Stock outstanding as of the Record Date, by such
certificates for the Precept Common Stock with a copy of a Summary of Rights
attached to the certificate. Additional Rights will be issued in respect of all
shares of Precept Common Stock that are issued after the Record Date but prior
to the earlier of the Distribution Date or the Expiration Date, including the
Shares issued in the Transfer.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Precept Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
certificates issued after the Record Date upon transfer or new issuance of
Precept Common Stock will contain a notation incorporating the Rights Agreement
by reference. Until the Distribution Date (or earlier redemption or expiration
of the Rights), the surrender for transfer of any certificates for Precept
Common Stock outstanding even without such notation or a copy of a Summary of
Rights being attached to such Certificate, will also constitute the transfer of
the Rights associated with the Precept Common Stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the Precept Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on February , 2008, (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed by
Precept, in each case, as described below.
The Purchase Price payable and the number of shares of Precept Class A
Common Stock or other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination, or
reclassification of, the Precept Class A Common Stock, (ii) upon the grant to
holders of the Precept Class A Common Stock of certain rights or warrants to
subscribe for or purchase Precept Class A Common Stock at a price or securities
convertible into Precept Class A Common Stock with a conversion price less than
the then current market price of the Precept Class A Common Stock; (iii) upon
the distribution to holders of the Precept Class A Common Stock of evidences of
indebtedness or assets or of subscription rights or warrants (other than those
referred to above); or (iv) upon any of the foregoing happens with respect to
the Precept Class B Common Stock.
78
<PAGE>
In the event that any person or entity becomes an Acquiring Person (the
beneficial owner of 15% or more of the Precept Class A Common Stock), prevision
will be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will then be void), will have the right to
receive upon exercise that number of shares of Precept Class A Common Stock
having a market value of two times the applicable exercise price of the Right.
The Rights Agreement excludes from the definition of Acquiring Person,
Persons who certify to Precept that they inadvertently acquired in excess of
14.9% of the outstanding Precept Class A Common Stock and thereafter divest such
excess Precept Class A Common Stock or who acquire 15% or more of the Precept
Class A Common Stock in a Permitted Transaction. A "Permitted Transaction" is a
stock acquisition or tender or exchange offer pursuant to a definitive agreement
which would result in a person beneficially owning 15% or more of the Precept
Class A Common Stock and which has been approved by the Board of Directors
(including a majority of the Directors not in association with an Acquiring
Person) prior to the execution of the agreement or the public announcement of
the offer.
In the event that Precept is acquired in a merger or other business
combination transaction, or 50% or more of its consolidated assets or earning
power are sold, proper provisions will be made so that each holder of a Right
will have the right to receive, upon the exercise of the Right at the then
applicable exercise price, that number of shares of common stock of the
acquiring company that at the time of such transaction will have a market value
of two times the applicable exercise price of the Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Precept Class A Common Stock will
be issued and, in lieu of such fractional shares, an adjustment in cash will be
made based on the market price of the Precept Class A Common Stock on the last
trading day prior to the date of exercise.
After a person becomes an Acquiring Person, Precept's Board of Directors may
exchange the Rights, other than those Rights owned by the Acquiring Person, in
whole or in part, at an exchange ratio of one share of Precept Class A Common
Stock per Right, subject to adjustment. However, the Board of Directors cannot
conduct an exchange at any time after any Person, together with its Affiliates
and Associates, becomes the Beneficial Owner of 50% or more of the outstanding
Precept Class A Common Stock.
At any time prior to any Person becoming an Acquiring Person, a Requisite
Majority may redeem the Rights in whole, but not in part, at a price of $0.01
per Right (the "Redemption Price"). In addition, the Precept Board of Directors
may extend or reduce the period during which the Rights are redeemable, so long
as the Rights are redeemable at the time of such extension or reduction.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Precept Board of Directors
without the consent of the holders of the Rights, including an amendment to
extend the Final Expiration Date, except that from and after the Distribution
Date no such amendment may adversely affect the economic interests of the
holders of the Rights.
Until a Right is exercised, the holder of the Right, as such, will have no
rights as a shareholder of Precept, including, without limitation, the right to
vote, or to receive dividends.
79
<PAGE>
OFFICERS AND DIRECTORS OF PRECEPT
The following table sets forth the names and positions of those persons who
are directors and officers of Precept prior to the consummation Transactions.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------------------ -----------------------------------------------------------------
<S> <C>
Darwin Deason............................. Director and Chairman of the Executive Committee of the Board
David L. Neely............................ Chairman of the Board and Chief Executive Officer
Douglas R Deason.......................... President, Chief Operating Officer and Director
Glenn R. Smith............................ Executive Vice President, Chief Administrative Officer and
Director
D. Paul Cabra............................. Executive Vice President of Sales and Operations
Scott B. Walker........................... Senior Vice President, Chief Financial Officer and Director*
Layne A. Deutscher........................ Senior Vice President and General Counsel and Director*
</TABLE>
- ------------------------
*Messrs. Walker and Deutscher will become members of the Board of Directors upon
consummation of the Transactions.
DARWIN DEASON, age 57, has served as a Director of Precept since its
formation in 1988. Mr. Deason is also currently the Chairman of the Board and
Chief Executive Officer of ACS. Prior to the formation of ACS, Mr. Deason spent
20 years with MTech, a data processing subsidiary of MCorp, a bank holding
corporation based in Dallas, Texas ("MCorp"), serving as MTech's Chief Executive
Officer and Chairman of the Board from 1978 until April 1988, and served on the
board of various subsidiaries of MTech and MCorp. Prior to that, Mr. Deason was
employed in the data processing department of Gulf Oil in Tulsa, Oklahoma.
Darwin Deason is the father of Douglas R. Deason.
DAVID L. NEELY, age 52, has served as Chairman of the Board and Chief
Executive Officer of Precept and Precept Business Products, Inc., its business
products distribution company, from formation in October 1988. Prior to the
spinoff of Precept from ACS, Mr. Neely also served as Executive Vice President
of ACS. Prior to founding Precept, Mr. Neely was a senior officer of MTech and
an Executive Vice President of Image Tech, the business products affiliate of
MTech. Mr. Neely has over 20 years of experience in the business products
industry.
DOUGLAS R. DEASON, age 35, has served as President and Chief Operating
Officer of Precept since 1995. Mr. Deason joined Precept in 1991 and from 1993
through 1995 served as Executive Vice President of an operating subsidiary of
Precept. For the seven years immediately prior to joining Precept, Mr. Deason
was a senior commercial real estate broker with the Dallas branch of New York
based Cushman and Wakefield. Douglas R. Deason is the son of Darwin Deason.
GLENN R. SMITH, age 41, has served as Executive Vice President and Chief
Administrative Officer of Precept since December 1989, responsible for corporate
purchasing, distribution operations and all administrative functions of Precept.
Mr. Smith joined Precept as Corporate Purchasing Manager at its formation in
October 1988. Prior to joining Precept, Mr. Smith was Corporate Purchasing
Manager of MTech. He began his employment with MTech as a corporate buyer in
October of 1984. Mr. Smith has over 13 years experience in the business products
industry. Upon consummation of the Transactions, Mr. Smith will resign as a
Director of Precept.
D. PAUL CABRA, age 52, has served as Executive Vice President of Sales and
Operations for Precept since August 1997. Prior thereto, Mr. Cabra served as the
Senior Vice President of Sales for Precept's Central, South and Eastern regions
from 1993 to August 1997, and as Branch Manager from June 1991 to 1993. He was
the Chief Executive Officer and sole shareholder of CABCO Business Forms, Inc.,
a business products distributor, which was acquired by Precept in 1991. Mr.
Cabra has over 18 years experience in the business products industry.
80
<PAGE>
SCOTT B. WALKER, age 42, joined Precept as Senior Vice President and Chief
Financial Officer in August 1996. Prior to joining Precept, Mr. Walker was Chief
Financial Officer of DirectNet Corporation from 1995 until August 1996.
Additionally, Mr. Walker previously served as Vice President in corporate
finance with Lloyds Bank and GE Capital from 1984 to 1991 and Vice President
with First Interstate Bank (now Wells Fargo Bank) from 1992 to 1995. Mr. Walker
holds a Graduate Degree in International Finance from Thunderbird.
LAYNE A. DEUTSCHER, age 38, joined Precept as Senior Vice President and
General Counsel in May 1997. Prior to joining Precept, he was with ACS from
February 1993 until May 1997 serving most recently as Senior Vice President of
Corporate Development responsible for all merger and acquisition activity and
before that as Senior Vice President and Associate General Counsel--Mergers and
Acquisitions. Mr. Deutscher previously was an attorney with the law firm of
Haynes and Boone, L.L.P. from 1987 until February 1993. He was licensed as a
Certified Public Accountant in 1988, and is a graduate of the Wharton School of
the University of Pennsylvania and the University of Texas School of Law.
BOARD COMMITTEES
Precept maintains an Executive Committee, which has broad authority
consistent with the provisions of the TBCA to take action on behalf of the Board
of Directors. The Executive Committee consists of Darwin Deason (Chairman),
David Neely and Doug Deason. Upon consummation of the Transactions, Precept will
establish an Audit Committee and a Compensation Committee.
Following the Closing, Precept has agreed with Michael Margolies, Chairman
of the Board and Chief Executive Officer of USTS, that Mr. Margolies will serve
as Vice Chairman of the Board of Directors of Precept and has agreed with Robert
Blackman, a member of the USTS Board, that Mr. Blackman will serve on the Board
of Directors of Precept. See "The Transactions--Interests of Certain Persons in
the Transactions," and "USTS Directors and Officers."
PRECEPT EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table sets
forth certain information regarding compensation paid for all services rendered
to Precept in all capacities during fiscal year 1997 to Precept's chief
executive officer, the other most highly compensated executive officers of
Precept whose total annual salary and bonus exceeded $100,000, based on salary
and bonuses earned during fiscal year 1997 (collectively, the "Named Precept
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
AWARDS
ANNUAL COMPENSATION --------------------------------
------------------------------------------- RESTRICTED
OTHER ANNUAL STOCK OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) SARS(2)(3)
- ------------------------------------ --------- --------- --------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David Neely ........................ 1997 241,500 279,700 -- -- --
Chairman and Chief Executive 1996 230,000 345,000 -- -- --
Officer 1995 196,236 182,198 -- -- --
Douglas R. Deason .................. 1997 210,000 162,310 -- -- --
President 1996 200,000 200,000 -- -- --
1995 100,000 68,000 -- -- --
Glenn R. Smith ..................... 1997 104,832 25,800 -- -- --
Executive Vice President 1996 97,853 67,500 -- -- --
1995 95,866 39,200 -- -- --
D. Paul Cabra ...................... 1997 96,000 39,100 -- -- --
Executive Vice President 1996 96,000 69,000 -- -- --
1995 84,000 48,000 -- -- --
<CAPTION>
PAYOUTS
---------------
PAYOUTS
LTIP ALL OTHER
NAME AND PRINCIPAL POSITION PAYOUTS(2) COMPENSATION
- ------------------------------------ --------------- -------------------
<S> <C> <C>
David Neely ........................ -- --
Chairman and Chief Executive -- --
Officer -- --
Douglas R. Deason .................. -- --
President -- --
-- --
Glenn R. Smith ..................... -- --
Executive Vice President -- --
-- --
D. Paul Cabra ...................... -- --
Executive Vice President -- --
-- --
</TABLE>
- --------------------------
(1) None of the Named Precept Executive Officers received personal benefits,
securities or property in excess of the lesser of $50,000 or 10% of such
individual's reported salary and bonus.
81
<PAGE>
(2) Precept did not grant any restricted stock awards or SARs or long-term
incentive plan payouts to the Named Precept Executive Officers during fiscal
year 1996.
EXECUTIVE COMPENSATION
The objective of the Precept executive compensation program is to attract
and retain qualified, motivated executives and to closely align their financial
interests with both the short and long-term interests of the Precept
shareholders. The executive compensation program is intended to provide the
executive officers of Precept with overall levels of compensation that are
competitive within the business services industry, as well as within a broader
spectrum of companies of size and complexity.
The three principal components of the Precept executive compensation program
are base salary, annual incentive bonus opportunities, and stock options.
BASE SALARIES. Each executive officer's base salary is reviewed annually
and is subject to adjustment on the basis of individual, corporate, and business
unit performance, as well as competitive and inflationary considerations.
INCENTIVE BONUS. Incentive bonus payments for executive officers other than
the Chief Executive Officer and Chief Operating Officer are made at the end of
each fiscal year based upon the achievement of consolidated financial criteria,
business unit financial criteria, and the attainment of individual goals, all of
which are established informally by the Board of Directors of Precept.
Compensation for the Chief Executive Officer and Chief Operating Officer of
Precept consisted of a base salary and bonus compensation. Bonus compensation
was substantially dependent on the achievement of three targeted financial
measures: consolidated revenues, consolidated earnings before interest, taxes
and depreciation, and consolidated pre-tax earnings. During fiscal year 1997,
Precept achieved 94% of such measures. For fiscal year 1997, executive officers
were eligible to receive maximum bonuses of between 50% and 150% of salary
provided certain financial goals were met.
1996 STOCK OPTION PLAN. Employees of and consultants of Precept have been
eligible to receive grants of options under the Precept 1996 Stock Option Plan
("1996 Plan"). Precept did not grant any SARs to the Named Precept Executive
Officers during fiscal year 1997. The following table provides information
related to options granted and exercised by the Named Precept Executive Officers
during fiscal year 1997 and the number and value of options held at fiscal year
end. Precept does not have any SARs outstanding. Upon the adoption of the 1998
Stock Incentive Plan, the Precept Board determined that Precept would no longer
issue options under the 1996 Plan.
OPTION GRANTS DURING FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL
INDIVIDUAL GRANTS RATES OF
------------------------------------------------------------------------------- STOCK PRICE
NUMBER OF APPRECIATION
SECURITIES % OF TOTAL FOR OPTION
UNDERLYING OPTIONS/SARS GRANTED TERM(1)
OPTIONS/SARS TO EMPLOYEES IN FISCAL EXERCISE OR BASE EXPIRATION -----------
NAME GRANTED(#) YEAR(%) PRICE($) DATE 5%($)
- ------------------------------- ------------------- ------------------------- ------------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
David Neely.................... 211,150 16.3% 0.20 1/02/07 --
Douglas R. Deason.............. 211,150 16.3% 0.20 1/02/07 --
Glenn R. Smith................. 103,000 7.9% 0.20 1/02/07 --
D. Paul Cabra.................. 154,500 11.9% 0.20 1/02/07 --
<CAPTION>
NAME 10%($)
- ------------------------------- -----------
<S> <C>
David Neely.................... --
Douglas R. Deason.............. --
Glenn R. Smith................. --
D. Paul Cabra.................. --
</TABLE>
- ------------------------
(1) All of the options reflected in this table have been exercised. As a result,
potential realizable values over the option term have not been calculated.
82
<PAGE>
AGGREGATE OPTION/SAR EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END 1997
OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED IN-
THE-MONEY
NUMBER OF UNEXERCISED OPTIONS/SARS OPTIONS/SARS AT
NUMBER OF FISCAL
SHARES AT FISCAL YEAR-END YEAR-END(1)
ACQUIRED ON VALUE ---------------------------------- ---------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ----------------------------------------- ----------- --------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
David Neely.............................. 211,150 -- -- -- --
Douglas R. Deason........................ 211,150 -- -- -- --
Glenn R. Smith........................... 103,000 -- -- -- --
Paul Cabra............................... 154,500 -- -- -- --
<CAPTION>
NAME UNEXERCISABLE
- ----------------------------------------- -----------------
<S> <C>
David Neely.............................. --
Douglas R. Deason........................ --
Glenn R. Smith........................... --
Paul Cabra............................... --
</TABLE>
- ------------------------
(1) Value is calculated based on the exercise price ($0.20) and the most recent
sale price of Precept Class A Common Stock prior to and after exercise
($0.20).
1998 STOCK INCENTIVE PLAN. In anticipation of the consummation of the
Transactions and in order to provide greater flexibility for incentive based
compensation, the Board of Directors and shareholders of Precept adopted the
1998 Stock Incentive Plan ("1998 Plan"). In connection with the adoption of the
1998 Plan, the Precept Board determined that Precept would no longer issue
options available under the 1996 Plan but shares available thereunder would be
available for grant under the 1998 Plan.
GENERAL. The 1998 Plan is designed to comply with the requirements of
Section 16b of the Exchange Act. The maximum aggregate number of shares of
Precept Class A Common Stock available for issuance under the 1998 Plan will
initially be 6,000,000, which amount is inclusive of shares of Class A Common
Stock that would have continued to be available for grant pursuant to options
under the 1996 Plan and which amount, when added to the number of shares of
Precept Class A Common Stock covered by options outstanding under the 1996 Plan
(and held by employees or consultants), equals approximately 12.5% of the total
number of shares of Precept Class A Common Stock and Precept Class B Common
Stock which will be outstanding after giving effect to the number of shares to
be issued in connection with the Transactions (such 12.5% being referred to as
the "Approved Amount"). The amount of shares of Precept Class A Common Stock
available for issuance pursuant to options under the 1998 Plan may, at the
discretion of the Precept Board, be increased from time to time as additional
shares of Precept Class A Common Stock are issued from time to time in order to
maintain the number of shares of Precept Class A Common Stock available for
grant, and previously granted and outstanding (and held by Employees and
Consultants), equal to 12.5% of the total number of shares of Precept Class A
Common Stock and Precept Class B Common Stock outstanding from time to time. No
more than 6,000,000 shares of Precept Class A Common Stock will be available for
the granting of incentive stock options within the meaning of Section 422 of the
Code ("Incentive Stock Options").
ADMINISTRATION. Under its terms, the 1998 Plan may be administered by the
Precept Board or one or more committees of the Precept Board, as permitted by
Rule 16b-3 ("Rule 16b-3") promulgated under the Exchange Act. Performance-based
awards to Precept's named executive officers are administered by a committee of
outside directors, as set forth in Section 162(m) of the Code. The Precept Board
or committee administering the 1998 Plan at a particular time (the
"Administrator") determines the individuals eligible to receive awards under the
1998 Plan, the types and number of awards to be granted, the terms and
conditions of such awards (including, for example, with respect to options, the
exercise price, exercise date, any restrictions on exercise), and prescribes the
forms of award agreements. The Administrator is also responsible for, among
other things, determining the advisability and terms of any buyout of options
previously granted and the reductions, if any, in the exercise prices of
previously granted options.
ELIGIBILITY. Employees (including employee directors) ("Employees") of and
consultants ("Consultants") to Precept and any parent or subsidiary of Precept
as well as outside directors of Precept ("Outside Directors") are eligible to
receive awards under the 1998 Plan.
TYPES OF GRANTS. The 1998 permits the grant of nonstatutory stock options
("Nonstatutory Stock Options"), "stock purchase rights" ("Stock Purchase
Rights"), stock appreciation rights ("SARs"),
83
<PAGE>
deferred stock ("Deferred Stock"), dividend equivalents ("Dividend Equivalents")
and awards of restricted stock ("Restricted Stock") to Employees, Consultants
and Outside Directors. The 1998 Plan also permits the grant of Incentive Stock
Options to Employees. The 1998 Plan further permits the Administrator to
designate the grant of Options or SARs to a "covered employee" (as defined in
Section 162(m)(3) of the Code) as a "performance based grant" ("Performance
Based Grant"). Nonstatutory Stock Options and Incentive Stock Options
(collectively, "Options") entitle the holders thereof to purchase Precept Class
A Common Stock.
All awards under the 1998 Plan will be evidenced by a written agreement in
form approved by the Administrator. The Administrator may grant awards under the
1998 Plan alone or in addition to, in tandem with or in substitution for any
other award under the 1998 Plan. Awards granted in addition to or in tandem with
other awards under the 1998 Plan may be granted either at the same time or at
different times. Generally, awards under the 1998 Plan will be granted for no
consideration other than services.
OPTIONS. Each Option will be designated in the written option agreement
evidencing its grant whether the option is an Incentive Stock Option or a
Nonstatutory Stock Option. The exercise price of an Incentive Stock Option shall
be no less than 100% of the fair market value of Precept Class A Common Stock at
the time of the grant (110% of fair market value if the grant is made to an
employee that owns stock representing more than 10% of the voting power of all
classes of stock of Precept or any parent or subsidiary of Precept (a "10%
Holder"). Fair market value is determined by reference to the stock's closing
price on the date of the grant. Incentive Stock Options shall have a term of no
more than 10 years (5 years if granted to a 10% Holder). The exercise price of a
Nonstatutory Stock Option shall be determined by the Administrator.
In the event that an Employee, Consultant or Outside Director is terminated
for cause as set forth in the 1998 Plan, all Options granted to such person
under the 1998 Plan, whether or not vested, are forfeited unless previously
exercised. If an Employee, Consultant or Outside Director's relationship with
Precept terminates other than for cause, a vested Option granted to such person
is exercisable to the extent provided in the agreement granting the Option, but,
in the case of an Incentive Stock Option, shall be exercised within 90 days of
the date of such termination (12 months, if the termination was the result of a
disability) and only to the extent exercisable on the date of such termination.
If there is a change in control of Precept, all Options previously granted,
whether or not vested, shall become fully vested and exercisable, effective the
day immediately prior to the change in control. If the recipient of an Option
dies, the Option may be exercised only to the extent vested at the time of death
and only by the estate of the recipient or a person who acquired the Option by
bequest or inheritance. The 1998 Plan also gives the Administrator the authority
to include a similar change of control provision in other grants under the Plan
(i.e., SAR's, Restricted or Deferred Stock, etc.)
TRANSFERABILITY. Generally, no Option is transferable by a recipient except
by will or the laws of descent and distribution. However, the Administrator
shall, with respect to the holder of a Nonstatutory Option who has a severance
agreement with Precept and may, in its discretion with respect to any other
holder of a Nonstatutory Option, permit the transfer and pledge of such options
under limited circumstances.
FEDERAL INCOME TAX CONSEQUENCES. The grant of an Incentive Stock Option has
no immediate federal income tax consequences to the optionee or Precept. The
exercise of an Incentive Stock Option while the optionee is an Employee or
within three months after termination of employment generally has no immediate
tax consequences to Precept or the optionee. If the optionee is subject to the
alternative minimum tax, however, the exercise of an Incentive Stock Option
would result in an increase in the optionee's alternative minimum taxable income
equal to the excess of the fair market value of the shares of Precept Class A
Common Stock at the time of exercise over the exercise price. If an optionee
holds the shares of Precept Class A Common Stock acquired pursuant to the
exercise of an Incentive Stock Option for the required holding period, the
optionee generally recognizes capital gain or loss upon a subsequent sale of the
shares in the amount of the difference between the amount realized upon the sale
and the
84
<PAGE>
exercise price of the shares. In such a case, Precept is not entitled to a
deduction in connection with the grant or exercise of the Incentive Stock Option
or the sale of shares of Precept Class A Common Stock acquired pursuant to such
exercise. If, however, an optionee exercises an Incentive Stock Option more than
three months after termination of employment or disposes of the shares prior to
the expiration of the required holding period, the optionee generally recognizes
ordinary income equal to the excess of the fair market value of the shares of
Precept Class A Common Stock on the date of exercise over the exercise price.
The required holding period is the longer of two years from the date the option
was granted and one year after the date of issuance of the shares upon the
exercise of the option.
The grant of a Nonstatutory Stock Option has no immediate federal income tax
consequences to the optionee or Precept. Upon the exercise of a Nonstatutory
Stock Option, the optionee recognizes ordinary income (subject to wage
withholding and employment taxes) in an amount equal to the excess of the fair
market value of the shares of Precept Class A Common Stock on the date of the
exercise over the exercise price, and Precept is entitled to a corresponding
deduction if the compensation constitutes an ordinary and necessary business
expense. The optionee's tax basis in the shares of Precept Class A Common Stock
is the exercise price plus the amount of ordinary income recognized by the
optionee, and the optionee's holding period will commence on the date the shares
are received. Upon a subsequent sale of the shares of Precept Class A Common
Stock, an difference between the optionee's tax basis in the shares and the
amount realized on the sale generally is treated as capital gain or loss.
OTHER EMPLOYEE BENEFIT PLAN. Precept has a contributory retirement and
savings plan which covers eligible employees and meets the requirements of
Section 401(k) of the Internal Revenue Code. The plan also allows for a
discretionary contribution by Precept as determined by Precept's Board of
Directors. There have been no contributions made by Precept to date.
EMPLOYMENT AGREEMENTS. Precept has no employment agreements with the Named
Precept Executive Officers. Precept intends to enter into employment agreements
with Michael Margolies and Ron Sorci upon the consummation of the Transactions.
See "The Transactions--Interests of Certain Persons in the Transactions."
Precept will not assume any employment agreements with current USTS officers.
Precept does not anticipate any other contractual compensation arrangements with
any such officers.
DIRECTORS' COMPENSATION. Precept's directors are not paid any compensation
for serving on the Board of Directors of Precept, although Precept may in the
future decide to pay directors' fees. Directors will be reimbursed for their
travel expenses in connection with meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to
consummation of the Transactions, Precept has not had, and will not have, a
Compensation Committee and executive compensation has been informally set by the
Board of Directors.
INDEMNIFICATION AND LIMITATION OF LIABILITY. As authorized by the TBCA, the
Precept Articles of Incorporation provide that, no director of Precept shall be
liable to Precept or its shareholders for monetary damages for an act or
omission in such director's capacity as a director of Precept except that such
provision does not eliminate or limit the liability of a director of Precept
for: (1) a breach of such director's duty of loyalty to Precept or its
shareholders; (2) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law; (3) a transaction from
which such director received an improper benefit, whether or not the benefit
resulted from such an action taken within the scope of such director's office;
(4) an act or omission for which the liability of such director is expressly
provided by statute; or (5) an act related to an unlawful stock repurchase or
payment of a dividend.
The Precept Articles also provide that each person who is or was a director,
officer, employee or agent of Precept, or is or was serving at the request of
Precept as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another corporation, partnership,
joint venture, sole proprietorship, trust or other enterprise or employee
benefit plan (including the heirs, executors, administrators or estate of such
person) shall be indemnified by Precept to the fullest extent that a corporation
is required or permitted to grant indemnification to such person under the TBCA,
as the same exists or may hereafter be amended.
85
<PAGE>
Precept has entered into certain agreements ("Indemnification Agreements")
with each of its directors and executive officers designed to give effect to the
foregoing provisions of the Articles of Incorporation and to provide certain
additional protections against the possibility of liability. Pursuant to the
Indemnification Agreements, Precept will, to the extent permitted under
applicable law, indemnify such persons against all expenses, judgments, fines
and penalties incurred in connection with the defense or settlement of any
actions brought against them by reason of the fact that they are or were
directors or officers of Precept or assumed certain responsibilities at the
direction of Precept. The effect of such provisions of the Articles of
Incorporation and the Indemnification Agreements will be to eliminate the rights
of Precept and its shareholders (through shareholders' derivation suits on
behalf of Precept) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from negligence or
gross negligence).
PRECEPT CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERVICES AGREEMENT
In connection with the spinoff of Precept from its former parent company,
ACS, in 1994, Precept entered into a Reciprocal Services Agreement (the
"Services Agreement") with ACS, effective June 30, 1994, pursuant to which
Precept sells business products and provides package delivery services to ACS.
Prices charged by Precept to ACS under the Services Agreement shall be no less
favorable than could be obtained from an independent third party for comparable
products and services. Precept received approximately $5,400,000 and $712,000
from ACS in fiscal 1997 and during the first three months of fiscal 1998,
respectively. In addition to the foregoing, ACS provides data processing
services to Precept pursuant to the Services Agreement. Precept incurred
expenses of $416,179 and $40,424 to ACS in fiscal 1997 and during the first
three months of fiscal 1998, respectively, for these services. Pricing for ACS
services provided to Precept is no less than ACS' direct costs attributable to
such services. Precept expects to discontinue the purchase of these services
completely by January 31, 1998. The Services Agreement contains the agreements
of ACS and Precept to use reasonable efforts to recommend the services of the
other company to their customers and prospects. The Services Agreement, which
had an initial term of one year, automatically renews for additional consecutive
one-year periods unless earlier terminated by ACS or Precept upon 180 days'
written notice given prior to the expiration of any such one-year period. Mr.
Darwin Deason is Chairman and Chief Executive Officer of ACS.
INDEBTEDNESS OF MANAGEMENT
Precept loaned each of David L. Neely, Chairman and Chief Executive Officer
and Douglas R. Deason, President, Chief Operating Officer and a Director,
$379,988, the proceeds of which were used solely to acquire shares of Precept
Class A Common Stock from shareholders. The loans are evidenced by notes which
become due upon the earlier of (i) June 8, 2005, (ii) upon the sale or transfer
of the shares of Precept Class A Common Stock purchased with the proceeds or
(iii) upon termination of the employment of the maker of the particular note
prior to June 8, 2000. Each of the notes are secured by the shares of Precept
Class A Common Stock purchased with the proceeds of each loan. Interest accrues
at the 90-day U.S. Treasury Bill Rate as stated on June 8 of each year. In lieu
of cash payment, annually on June 8, interest is added to the then outstanding
principal amount of the note. The current balance of each of the notes is
$322,180.19.
On January 2, 1997, in connection with the exercise of options granted on
the same date pursuant to the Precept 1996 Stock Option Plan, Messrs. Neely,
Doug Deason, Smith, Cabra and Walker were made loans by Precept evidenced by
non-interest bearing demand promissory notes payable to Precept as consideration
for such exercise in the amounts of $42,230; $42,230; $20,600; $30,900 and
$20,600, respectively. These notes were repaid in October 1997.
86
<PAGE>
DISCONTINUATION OF BUSINESSES
In an effort to focus on its core business, Precept consummated the
following transactions in connection with the discontinuation of the business,
real estate construction and investments, respectively, of Builders and
Holdings.
BUILDERS. Precept decreased its ownership percentage in Builders through a
private placement of common stock by Builders, which offering was directed
solely to (a) the other shareholder of Builders other than Precept, (b) the
existing shareholders of Precept and (c) any of their affiliates or assignees.
Darwin Deason, a Director and the Chairman of the Executive Committee of
Precept, acquired the full amount of the private placement, the other offerees
having waived their right to purchase their pro rata portion of the shares in
the offering. Precept's percentage ownership in Builders decreased from 90.5% to
1.8% of the total outstanding stock of Builders, and Darwin Deason holds
approximately 98% of the total outstanding stock of Builders. By participating
in the offering by Builders, Darwin Deason also agreed (i) to guarantee, if
required, existing and future performance bonds securing Builders' construction
projects, and (ii) to provide to the companies issuing the performance bonds
letters of credit up to $7 million securing Builders obligations. These
guarantees were previously provided by Precept, Darwin Deason and certain of
Precept's affiliates.
HOLDINGS. A majority of the investment assets of Holdings have been or will
be divested by Precept prior to the Transfer in order to effect its focus on
core operations.
Ranch property located in Bells, Texas (the "Bells Property") owned by
Holdings was recently sold to D3 Holdings, Inc., ("D3 Holdings"), a corporation
controlled by Darwin Deason, a Director and Chairman of Precept's Executive
Committee, Douglas Deason, Precept's President and Chief Operating Officer and
David Neely, Chairman and the Chief Executive Officer of Precept, for $1,200,000
in cash. It is estimated that the purchase price paid to Holdings for the Bells
Property, together with the terms and structure of the purchase was
approximately equal to the estimated fair market value of the Bells Property at
the time of the sale. Precept has subsequently entered into a five year lease
for a more limited use of the Bells Property with variable monthly rental
payments, the amount of which currently is approximately $9,000 per month.
In 1992, Holdings purchased a building in Dallas for development into
condominiums for sale or lease. In April 1994, Darwin Deason leased a one-floor
condominium in the building as his residence under an 18-month lease (which was
subsequently modified). The lease contained an obligation of Mr. Deason to
purchase the condominium for the estimated fair market value of the condominium.
During the lease term, Mr. Deason received a waiver of lease payments, the
benefit of which was approximately $9,400 per month. Precept and Mr. Deason have
subsequently reached an agreement in principal that one full-floor condominium
and one half-floor condominium will be sold to Darwin Deason for approximately
$1,600,000 in cash, which is the estimated fair market value.
Holdings owns a limited partnership interest in Lone Star Jockey Club, Ltd.,
which investment resulted in Holdings becoming the owner of a luxury box at Lone
Star Park, a racing facility in Grand Prairie, Texas. Holdings and D3
Investments, L. P., a Texas limited Partnership ("D3 Investments"), with Darwin
Deason, David Neely and Doug Deason as equal limited partners, have an agreement
in principal that the rights to the luxury box will be sold to D3 Investments
for approximately $92,500, which is the estimated fair market value. After the
sale of the luxury box, the box would be leased to Precept for a term of five
years with monthly rental payments equaling $1,000.
Precept and Darwin Deason have an agreement in principal whereby Mr. Deason
will purchase from Holdings (i) certain real estate located at 72-191 Highway
111, Palm Desert, California (the "Palm Desert Property") for $1,025,125 in cash
and (ii) a 49% interest in CCC&D Corp., (which represents all of Precept's
interest in such entity), a privately held company operating a restaurant on the
Palm Desert Property for $90,000 in cash.
87
<PAGE>
PRECEPT SECURITY OWNERSHIP
The following table sets forth certain information, with respect to the
beneficial ownership of Precept Common Stock, as of February , 1998 (after
giving effect to the 3.15438 to 1 stock split), by (i) all persons who are known
by Precept to be beneficial owners of 5% or more of such stock, (ii) each
director of Precept, (iii) certain executive officers and (iv) all executive
officers and directors of Precept as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares. No effect has been given to shares reserved for issuance under
outstanding stock options except where otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL AMOUNT AND PERCENT OF
AMOUNT AND SHARES OF NATURE OF PERCENT OF TOTAL TOTAL SHARES OF
NATURE OF CLASS A BENEFICIAL SHARES OF CLASS B CLASS A AND PERCENT OF
BENEFICIAL COMMON OWNERSHIP OF COMMON STOCK CLASS B COMMON TOTAL
DIRECTORS AND EXECUTIVE CLASS A COMMON STOCK OWNED CLASS B OWNED STOCK OWNED VOTING
OFFICERS STOCK BENEFICIALLY COMMON STOCK BENEFICIALLY BENEFICIALLY POWER(1)
- ------------------------------- -------------- ----------- ------------ ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Darwin Deason(2)............... 12,737,780 49.19% 10,102,997 100% 63.45% 89.63%
David L. Neely................. 5,150,510 19.89% -- -- -- 4.06%
Douglas R. Deason(3)........... 5,150,507 19.89% -- -- -- 4.06%
Glenn R. Smith................. 876,919 3.39% -- -- -- 0.69%
D. Paul Cabra.................. 1,039,370 4.01% -- -- -- 0.82%
All Executive Officers and
Directors as a Group (7
persons)(2).................. 12,737,780 49.19% 10,102,997 100% 63.45% 89.63%
Beneficial Owners of More than 5% of Precept Common Stock
First Nationwide Bank,
F.S.B........................ 3,286,263 12.69% -- -- -- 2.59%
Charles M. Young, Jr........... 1,928,638 7.45% -- -- -- 1.52%
<CAPTION>
PERCENT OF
TOTAL VOTING
DIRECTORS AND EXECUTIVE POWER AFTER THE
OFFICERS TRANSACTIONS
- ------------------------------- ---------------
<S> <C>
Darwin Deason(2)............... 83.32%
David L. Neely................. 3.77%
Douglas R. Deason(3)........... 3.77%
Glenn R. Smith................. .64%
D. Paul Cabra.................. .76%
All Executive Officers and
Directors as a Group (7
persons)(2).................. 83.32%
Beneficial Owners of More than
First Nationwide Bank,
F.S.B........................ 2.41%
Charles M. Young, Jr........... 1.41%
</TABLE>
- ------------------------------
(1) In calculating the percent of total voting power, the voting power of shares
of Precept Class A Common Stock (one vote per share) and Precept Class B
Common Stock (ten votes per share) is aggregated.
(2) Mr. Darwin Deason holds the sole voting power with respect to 12,737,780 of
the shares of Precept Class A Common Stock through an irrevocable proxy
granted by Messrs. David Neely, Doug Deason, Paul Cabra, Glenn Smith, Dennis
McGlynn, Jeff Neely, Scott Walker, James Wyse, Ms. Jill Deason and the 1997
Deason Children's Trust (the "Trust").
(3) Includes 200,000 shares of Precept Class A Common Stock held by the Trust to
which Mr. Doug Deason disclaims beneficial ownership.
PRECEPT SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Precept Class A Common Stock by shareholders pursuant to
Rule 144 under the Securities Act could have an adverse effect on the market
price of Precept's securities.
As of February , 1998, 25,928,559 shares of Precept Class A Common Stock
and 10,071,441 shares of Precept Class B Common Stock were outstanding. Of the
25,897,003 shares of Precept Class A Common Stock outstanding as of February ,
1998, 22,876,118 shares are restricted securities, as that term is defined in
Rule 144 promulgated under the Securities Act. Absent registration under the
Securities Act, the sale of such restricted shares is subject to Rule 144, as
promulgated under the Securities Act. In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
USTS, who has beneficially owned restricted shares of Precept Common Stock for
at least one year is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of 1% of the total number of
outstanding shares of the same class, or if the Precept Common Stock is quoted
on the Nasdaq, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of USTS for at least
three months immediately preceding the sale and who has beneficially owned the
shares of Precept Common Stock for at least three years is entitled to sell such
shares under Rule 144 without regard to any of the volume limitations described
above. No
88
<PAGE>
assurance can be made as to the effect, if any, that sales of shares of Precept
Common Stock or the availability of such shares for sale will have on the market
prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Precept Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Precept Common Stock and could
impair Precept's ability to raise capital in the future through the sale of
equity securities.
CERTAIN DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS OF USTS
AND SHAREHOLDERS OF PRECEPT
If the Transfer is consummated, all shareholders of USTS immediately prior
to the Closing Date will also become shareholders of Precept. The following is a
summary of the material differences between the respective rights of holders of
the capital stock of USTS and the rights of holders of the capital stock of
Precept. These differences arise from the various provisions of the USTS
Articles of Incorporation, the USTS Bylaws, the Precept Articles and the Precept
Bylaws. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE NGCL, THE
USTS ARTICLES OF INCORPORATION AND USTS BYLAWS, AND THE TBCA, THE PRECEPT
ARTICLES AND PRECEPT BYLAWS.
AUTHORIZED STOCK
The USTS Articles of Incorporation provide that USTS shall have authority to
issue 50,000,000 shares of USTS Common Stock, and 10,000,000 shares of USTS
Preferred Stock. Pursuant to the USTS Articles of Incorporation the board of
directors of USTS may provide for the issuance of USTS Preferred Stock in one or
more series by filing a certificate with the Nevada Secretary of State setting
forth such designation, rights and preferences of such series of preferred
stock.
The Precept Articles of Incorporation provide that Precept shall have the
authority to issue 110,500,000 shares of Common Stock, par value $0.01 per
share, of which 100,000,000 shares have been designated as Class A Common Stock
and 10,500,000 have been designated as Class B Common Stock. Pursuant to the
Precept Articles, as amended, Precept is also authorized to issue up to
3,000,000 shares of Preferred Stock. The board of directors of Precept have the
authority to fix or alter the powers, designations, preferences and relative,
participating, optional or other special rights of such preferred stock by
filing a certificate with the Texas Secretary of State setting forth such
designation, rights and preferences of such series of preferred stock.
VOTING RIGHTS
The USTS Bylaws provide that the holders USTS Common Stock are entitled to
one vote per share. The holders of Series E through Series L Preferred Stock are
not entitled to vote with the holders of USTS Common Stock or as a separate
class unless otherwise entitled by law. The NGCL provides that a corporation's
articles of incorporation may provide for cumulative voting in connection with
the election of directors. The Articles of Incorporation of USTS do not contain
such a provision.
The Precept Articles of Precept provide that each holder of Precept Class A
Common Stock is entitled to one vote per share and that each holder of Precept
Class B Common Stock is entitled to have such number of votes equal to 10 votes
per share. Except as may be provided by law or in a resolution of the board of
directors of Precept, all actions submitted to a vote of the shareholders of
Precept shall be voted on by the holders of the Precept Class A Common Stock and
Precept Class B Common Stock as a single class. The TBCA provides that
shareholders will have the right cumulate votes in connection with the election
of directors unless prohibited by the articles of incorporation. The Precept
Articles of Precept contain such a prohibition.
89
<PAGE>
PREEMPTIVE RIGHTS
Under the NGCL, the shareholders of a corporation organized before October
1, 1991 have a preemptive right to acquire unissued shares, treasury shares or
securities convertible into such shares unless the corporation's articles of
incorporation provide otherwise. The USTS Articles of Incorporation provide that
no shareholder of USTS shall have preemptive rights to acquire any securities
issued or sold by USTS because of his ownership of USTS stock.
Under the TBCA, the shareholders of a corporation have a preemptive right to
acquire unissued shares, treasury shares or securities convertible into such
shares unless the corporation's articles of incorporation provide otherwise. The
Precept Articles of Precept provide that the no shareholder of Precept shall
have a preemptive right to acquire shares of Precept.
INSPECTION RIGHTS
The NGCL provides that any person who has been a shareholder of record of
any corporation and owns or has been authorized by the holders of at least 15%
of all of its outstanding shares, is entitled to inspect and copy the corporate
financial records. Notwithstanding, such shareholder is not entitled to inspect
and copy the corporate financial records if the corporation is listed and traded
on any recognized stock exchange or if the corporation furnishes a detailed,
annual financial statement to its shareholders.
The TBCA provides that a corporation shall keep correct and complete books
and records of account and shall keep minutes of the proceedings of its
shareholders and board of directors. The corporation shall also keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of the shareholders and
the number and the class of the shares held by each. The TBCA further provides
that any person who has been a shareholder for at least six months proceeding
his demand, or shall be the holder of at least 5% of all of the outstanding
shares of a corporation, is entitled to personally, or by agent or attorney, to
examine a corporation's relevant books and records for any proper purpose. The
shareholder must issue a written demand stating the purpose of the inspection,
and may examine the books and records at a reasonable time and make extractions
therefrom.
ACTION BY SHAREHOLDERS WITHOUT MEETING
The NGCL provides that unless otherwise set forth in a corporation's
articles of incorporation or bylaws, any action required or permitted to be
taken at a meeting of the shareholders may be taken without a meeting if the
holders of outstanding stock having at least the minimum number of votes that
would be necessary to authorize or take such action at the meeting, consent to
the action in writing. The USTS Bylaws provide that any action required to be
taken at any annual or special meeting of the shareholders may be taken without
a meeting, without prior notice, if a consent in writing is signed by the
holders of a majority of the holders of outstanding stock provided that prompt
notice is sent to the holders not consenting to the action taken thereto.
Under the TBCA, the shareholders may act without a meeting if a consent in
writing to such action is signed by all shareholders entitled to vote. In
addition, the TBCA permits the articles of incorporation of a Texas corporation
to provide that the shareholders may take action without a meeting if a consent
in writing to such action is signed by the shareholders having a minimum number
of votes that would be necessary to take such action at a meeting. The Amendment
and Restated Articles of Incorporation of Precept contain such a provision.
ANNUAL AND SPECIAL MEETINGS
The NGCL provides that a corporation is entitled to make bylaws pertaining
to the calling and holding of meetings of its shareholders. The USTS Bylaws
provide that the annual meeting of shareholders
90
<PAGE>
for the election of directors and for such other business as may be stated in
the notice of the meeting, shall be held at such place, either within or without
the state of Nevada, and at such time and date as the board of directors, by
resolution, shall determine and as set forth in the notice of the meeting. The
USTS Bylaws further provide that in the event that the board of directors fails
to determine the time, date and place of meeting, the annual meeting of the
shareholders shall be held at the registered office of USTS in Nevada. The USTS
Bylaws provide that special meetings of the shareholders may be called by the
president, secretary or by resolution of the board of directors.
The TBCA provides that the annual meeting of the shareholders shall be held
at such time as may be stated in or fixed in accordance with the bylaws. If the
annual meeting is not held within any 13-month period, any court of competent
jurisdiction in the county in which the principal office of the corporation is
located may, on the application of any shareholder, summarily order a meeting to
be held. Failure to hold the annual meeting at the designated time shall not
work a dissolution of the corporation. The Precept Bylaws provide that an annual
meeting of the shareholders will be held at such date and time as may be
designated from time to time by the Board of Directors of Precept.
The TBCA provides that special meetings of the shareholders may be called by
the (1) president, (2) board of directors (3) persons authorized in the articles
of incorporation or (4) by the holders of at least 10% of the stock entitled to
vote at such meeting unless the articles of incorporation requires a greater
percentage. The TBCA provides that in no event shall the articles of
incorporation require more than 50% of the voting stock to hold a special
meeting of the shareholders. The Precept Articles of Precept provide that
subject to the rights of the holders of Preferred Stock, special meetings of the
shareholders of Precept may be called only by: (1) that chairman of the board of
Precept, (2) the president of Precept, (3) the secretary of Precept, and (4) by
the holders of at least 50% of the voting stock of Precept voting as a single
class. Pursuant to the Precept Articles the affirmative vote of at least 80% of
the voting stock of Precept is required to modify the Precept Articles
pertaining to special meetings of shareholders.
DISTRIBUTION RIGHTS
A Nevada corporation may make distributions as long as after giving effect
to the distribution the corporation is able to pay is debts as they become due
in the usual course of business or, if the articles of incorporation otherwise
permit, the corporation's total assets are greater than the sum of its total
liabilities and the corporation would be able to pay the maximum amount, in any
liquidation, on shares of stock having preferential rights in liquidation. The
USTS Articles of Incorporation do not contain such a provision.
A Texas corporation may make distributions subject to any restrictions in
its articles of incorporation; provided, however, a corporation may not make a
distribution if (i) after giving effect to the distribution, the corporation
would be insolvent or (ii) the distribution exceeds the surplus of the
corporation. Surplus is defined as the excess of net assets of a corporation
over its stated capital.
ELECTION OF DIRECTORS
Under the NGCL, a corporation may provide shareholders with the right to
cumulate their votes in connection with the election of directors. The NGCL
requires that the a corporation have at least one director but provides that a
corporation may provide in its articles of incorporation or in its bylaws for a
fixed number of directors or a variable number of directors within a fixed
minimum or maximum. The USTS Articles of Incorporation do not contain such a
provision. The USTS Bylaws provide for five directors. The USTS Bylaws also
provide that the number of directors may be increased by an amendment to the
bylaws.
The TBCA provides that the board of directors of a corporation shall consist
of one or more members and that the number of directors shall be fixed by, or in
the manner provided in, the articles of incorporation or the bylaws, except to
the number constituting the initial board of directors which shall be
91
<PAGE>
fixed by the articles of incorporation. In the absence of a bylaw or a provision
in the articles of incorporation fixing the number of directors or providing for
the manner in which the number of directors shall be fixed, the number of
directors shall be the same as the number constituting the initial board of
directors as fixed in the articles of incorporation. The Precept Articles
provide that, subject to the rights of the holders of Preferred Stock, if any,
the number of directors shall not be less than three nor more than fifteen and
will be fixed from time to time as set forth in its bylaws. The Precept Bylaws
provide that subject to the rights, if any, of any series of Preferred Stock to
elect additional directors under circumstances specified in the designation of
rights and preferences of such preferred stock, the number of directors of
precept may be determined from time to time by a vote of a majority of the
directors then serving. Currently, the number of directors of Precept is four
(4) and simultaniously with the consummation of the Transaction, it is
anticipated that the number of directors will be increased to nine (9). The
Precept Articles and Bylaws provide that the Directors be divided into three
classes designated as Class I, Class II, and Class III, each class to be as
nearly equal in number as possible. Each Class of directors was initially
elected on [ ], 1998 for the following respective initial terms: Class
I directors were elected for a three-year term: Class II directors were elected
for a two-year term: and Class III directors were elected for a one-year term.
The Precept Articles and Bylaws provide that at each annual shareholders'
meeting, commencing with the 1999 annual shareholders' meeting, each of the
successors to the directors of the Class whose term will expire at such annual
meeting will be elected for a term running until the third annual meeting.
Pursuant to the Precept Articles the affirmative vote of at least 80% of the
voting stock of Precept is required to modify the Precept Articles pertaining to
the election of directors.
REMOVAL OF DIRECTORS
The NGCL provides that any director may be removed from office by the vote
of shareholders representing not less than two-thirds (2/3) of the voting power
of the issued and outstanding stock entitled to vote unless the articles of
incorporation require a larger percentage. The USTS Bylaws provide that any
director may be removed at any time by the affirmative vote of a majority of all
the shares of stock outstanding and entitled to vote at a special meeting of the
shareholders called for that purpose.
The TBCA requires that the directors be removed in accordance with the
provisions of the bylaws or the articles of incorporation. Otherwise, each
director shall hold office for the elected term and until the successor shall
have been elected and qualified. The bylaws or the articles of incorporation may
provide that at any meeting of the shareholders called expressly for the purpose
of director removal, any director or the entire board may be removed, with or
without cause, by a vote of the holders of a specified portion, not less than a
majority, of the shares entitled to vote at an election of directors, subject to
any further restrictions on removal that may be contained in the bylaws. The
Precept Articles of Precept provide that subject to the rights of the holders of
Preferred Stock if any, any director may be removed without cause upon the
affirmative vote of at least 80% of the voting stock. Pursuant to the Precept
Articles the affirmative vote of at least 80% of the voting stock of Precept is
required to modify the Precept Articles pertaining to the removal of directors.
INDEMNIFICATION OF DIRECTORS
The NGCL provides that a corporation may indemnify any person made a party
or threatened to be made a party to any type of proceeding (other than certain
actions by or in right of the corporation) because he is or was a director,
officer, employee or agent of the corporation or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such proceeding if (i) such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, or (ii) in a criminal
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
Expenses incurred by an officer or director (or other employees or agents as
deemed appropriate by the board of directors) in defending civil or criminal
proceedings may
92
<PAGE>
be paid by the corporation in advance of the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it is ultimately determined that such person is not
entitled to be indemnified by the corporation. To indemnify a party, the
corporation must determine that the party met the applicable standards of
conduct. The USTS Articles of Incorporation do not contain any provision
providing for the indemnification of any such director, officer, employee or
agent of the corporation.
Under the NGCL, a corporation, through its articles of incorporation, may
limit or eliminate the personal liability of directors to the corporation and
its shareholders for damages for breach of fiduciary duty. However, this
provision excludes any limitation on liability for (i) acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law or (ii) the
payment of distributions in violation of NGCL Section 78.300. The USTS Articles
of Incorporation contain such a provision.
Under the TBCA, a corporation may set limits on the extent of a director's
liability. The TBCA permits a corporation to indemnify an officer, director,
employee and agent who is the defendant or respondent to a proceeding if such
person (i) acted in good faith, (ii) reasonably believed that his conduct was in
the corporation's best interest if he was acting in his official capacity, and
if he was not acting in his official capacity, that his conduct was not opposed
to the bests interests of the corporation, and (iii) had no reason to believe
his conduct was unlawful in the case of a criminal proceeding. The TBCA provides
that no officer, director, employee, or agent may be indemnified in a proceeding
in which he is found liable on the basis that personal benefit was improperly
received by him or in a proceeding in which he is found liable to the
corporation. Pursuant to the TBCA, expenses incurred by an officer, director,
employee or agent in defending civil or criminal proceedings may be paid by the
corporation in advance of the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
corporation. To indemnify a party, the corporation must determine that the party
met the applicable standards of conduct. Under the TBCA, a provision in the
articles of incorporation, the bylaws, a resolution of shareholders or
directors, or an agreement that makes mandatory the indemnification permitted by
the TBCA is deemed to constitute authorization of indemnification in the manner
provided by the statute. The Precept Articles of Precept provide that each
person who is a director, officer, employee, or agent of Precept, or is serving
at the request of Precept shall be indemnified to the fullest extent permitted
under the TBCA and that reasonable expenses shall be paid or reimbursed in
advance of final disposition to the fullest extent permitted under the TBCA.
AMENDMENT TO ARTICLES
The NGCL requires the approval of the holders of a majority of all
outstanding shares entitled to vote to approve proposed amendments to a
corporation's charter. The holders of the outstanding shares of a particular
class are entitled to vote as a class on a proposed amendment if the amendment
would alter or change the power, preferences or special rights of one or more
series of any class so to affect them adversely.
The TBCA requires the approval of the holders of at least two-thirds (2/3)
of all outstanding shares entitled to vote to approve proposed amendments to a
corporation's articles of incorporation. The holders of the outstanding shares
of a particular class are entitled to vote as a class on a proposed amendment if
the amendment would: (i) increase or decrease the number of authorized shares of
such class or series; (ii) increase or decrease the par value of such class;
(iii) effect an exchange, reclassification or cancellation of all or part of
such class or series; (iv) effect a change or create a right of exchange of all
or part of such class or series; (v) change the designations, preferences,
limitations, or relative rights of the shares of such class or series; (vi)
change the shares of such class or series into the same or a different number of
shares; (vii) create a new class or series having rights equal, prior, or
superior to the shares of such class or series or increase the rights and
preferences of any class or series having rights equal, prior, or superior to
the shares of such class or series; (viii) divide the shares of such class into
series; (ix) limit or deny the existing
93
<PAGE>
preemptive rights of the shares of such class or series; (x) cancel or affect
dividends on the shares of such class or series which had accrued but had not
been declared; or (xi) include or delete from the articles of incorporation any
provisions required or permitted to be included in the articles of incorporation
of a close corporation. The Precept Articles of Precept provide that the
affirmative vote of at least 80% of the voting stock of Precept, voting as a
single class, is required to amend or repeal, or adopt provisions inconsistent
with the article pertaining to the board of director's right to amend the
Precept Bylaws the article pertaining to special meetings of the shareholders or
the article pertaining to the election and removal of directors.
AMENDMENT TO BYLAWS
The NGCL provides that subject to the restrictions set forth in a
corporation's bylaws, the directors may make the bylaws of the corporation. The
USTS Bylaws provide that they may be amended by a majority of the shareholders
or directors.
The TBCA provides that a corporation's board of directors may amend or
repeal the corporation's bylaws or adopt new bylaws unless the articles of
incorporation reserve the power exclusively to the shareholders or the
shareholders expressly provide in amending, adopting or repealing a particular
bylaw that the board of directors may not amend or repeal the bylaw. In
addition, unless the articles of incorporation or a bylaw adopted by the
shareholders provides otherwise as to all or some portion of a corporation's
bylaws, a corporation's shareholders may also amend, adopt or repeal the
corporation's bylaws even though they may also be amended, adopted or repealed
by the board of directors. The Precept Articles of Incorporation provide that
the board of directors may make, amend, and repeal the Precept Bylaws. The
Precept Articles of Incorporation also provide that any bylaw made by the board
of directors may be amended or repealed by the board of directors or by the
shareholders. Notwithstanding the foregoing, the Precept Articles of
Incorporation provide that the Bylaws relating to time and place of shareholder
meetings, order of business thereat, number, election and form of directors,
vacancies and newly created directorships, removal, nomination and election of
directors, indemnification by Precept of officers, directors and others, and
signing of checks may not be amended or repealed by the shareholders, and no
provision inconsistent therewith may be adopted by the shareholders without the
affirmative vote of at least 80% of the voting stock entitled to vote.
MERGERS
Under the NGCL, shareholders have the right, subject to certain exceptions,
to vote on all mergers to which the corporation is a party. In certain
circumstances, different classes of securities may be entitled to vote
separately as a class with respect to mergers. Under the NGCL, unless the
articles of incorporation, the board of directors or the merger statutes require
a greater vote, a plan of merger must be approved by a majority of the voting
power of the shareholders entitled to vote thereon. The USTS Articles of
Incorporation do not contain any such provision.
The approval of the surviving corporation in a merger is not required under
the NGCL if: (i) the articles of incorporation of the surviving domestic
corporation will not differ from its articles before the merger, (ii) each
shareholder holds the same number of shares in the surviving corporation
immediately after the merger as prior thereto, and such shares have identical
designations, preferences, limitations and relative rights, (iii) the number of
voting shares in the surviving corporation immediately after the merger, plus
the voting power of the shares issued in the merger, does not exceed the voting
power of the shares prior to the merger by more than twenty percent (20%), and
(iii) the number of shares entitled to participate without limitations in
distributions immediately after the merger, plus the number of shares entitled
to participate without limitations in distributions shares issued in the merger,
does not exceed the number of shares entitled to participate without limitations
in distributions prior to the merger by more than twenty percent (20%).
94
<PAGE>
Under the TBCA, the shareholders have the right, subject to certain
exceptions, to vote on all mergers to which the corporation is a party. In
certain circumstances, different classes of securities may be entitled to vote
separately with respect to such mergers. The approval of the shareholders of the
surviving corporation in a merger is not required under Texas law if (i) the
corporation is the sole surviving corporation in the merger (ii) there is no
amendment to the surviving corporation's articles of incorporation, (iii) each
shareholder holds the same number of shares in the surviving corporation
immediately after the merger as prior thereto, and such shares have identical
designations, preferences, limitations and relative rights, (iv) the voting
power of the shares in the surviving corporation immediately after the merger,
plus the voting power of the shares issued in the merger, does not exceed the
voting power of the shares outstanding prior to the merger by more than twenty
percent (20%), and (v) the board of directors of the surviving corporation
adopts a resolution approving the plan of merger.
DISSENTERS' RIGHTS OF APPRAISAL
Under the NGCL, dissenting shareholders of a corporation engaged in certain
major corporate transactions are entitled to appraisal rights. Appraisal rights
permit a shareholder to receive cash equal to the fair market value of the
shareholders' shares (as determined by agreement by the parties or by a court),
in lieu of the consideration such shareholder would otherwise receive in any
such transaction.
Under the NGCL, a shareholder is entitled to dissent from, and obtain
payment for the fair value of his shares in the event of consummation of, a plan
of merger or plan of exchange in which the corporation is a party and any
corporate action taken pursuant to a vote of the shareholders to the extent that
the articles of incorporation, bylaws or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares. Notwithstanding, the NGCL provides that
shareholders do NOT have dissenters' rights of appraisal in connection with a
merger or plan of exchange if their shares are securities listed on a national
securities exchange or if they are designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or are securities held by 2,000 stockholders of record,
unless (1) the articles of incorporation provide otherwise or (2) the
shareholders entitled to vote thereon are required to accept anything except (a)
cash or owners' interest in (i) the surviving corporation or (ii) an entity
whose securities were listed n a national securities exchange, included on the
national market system by the National Association of Securities Dealers, Inc,
or held of record by at least 2,000 holders or (b) a combination thereof.
Shareholders of Texas corporations are entitled to exercise certain
dissenters' rights in the event a sale, lease, exchange or other disposition of
all or substantially all of the property and assets of the corporation, and with
certain exceptions, a merger or consolidation. Notwithstanding, no appraisal
rights are available under the TBCA for the holders of any shares of a class or
series of stock of a Texas corporation which is a party to a merger if that
corporation survives the merger and if the merger did not require the vote of
the holders of that class or series of such stock. The TBCA provides that
shareholders do not have appraisal rights in connection with a merger where, on
the record date fixed to determine the shareholders entitled to vote on the
merger or consolidation, the stock of the corporation is listed on a national
securities exchange or is held of record by more than 2,000 shareholders, unless
any of the exceptions discussed below concerning consideration paid to the
shareholder for his shares is met. Under the TBCA, a shareholder will be
entitled to dissent and be paid for his shares if, notwithstanding the above,
the shareholder is required to accept for his shares any consideration other
than (i) shares of stock of a corporation which, immediately after the effective
date of the merger, are listed on a national securities exchange or are held of
record by not less than 2,000 shareholders and (ii) cash in lieu of fractional
shares otherwise entitled to be received.
95
<PAGE>
SECURITIES COVERED BY THIS PROSPECTUS
In addition to the Shares to be issued in the Transfer, the 20,000,000
shares of Precept Class A Common Stock covered by this Proxy
Statement/Prospectus are available for use by Precept in future acquisitions of
assets or securities of companies. The consideration offered by Precept in such
acquisitions in addition to the shares of Precept Class A Common Stock offered
by this Proxy Statement/Prospectus may include such cash, debt or other
securities (which may be convertible into shares of Precept Class A Common Stock
covered by this Proxy Statement/Prospectus), or assumption by Precept of
liabilities of the business being acquired, or a combination thereof. It is
contemplated that the terms of acquisitions will be determined by negotiations
between Precept and the management or the owners of the assets to be acquired or
the owners of the securities (including newly issued securities) to be acquired,
with Precept taking into account the quality of management, the past and
potential earning power and growth of the assets or securities to be acquired,
and other relevant factors. It is anticipated that the shares of Precept Class A
Common Stock issued in acquisitions will be valued at a price reasonably related
to the market value of the Precept Class A Common Stock either at the time the
terms of the acquisition are tentatively agreed upon or at or about the time or
times of delivery of the shares.
None of the 20,000,000 shares of Precept Class A Common Stock covered by
this Proxy Statement/ Prospectus will be subject to restrictions on transfer
under the Securities Act of 1933, as amended (the "Securities Act"), except that
shares of Precept Class A Common Stock to be received by persons who are deemed
to be "affiliates" (as such term is defined in Rule 144 under the Securities
Act) of an acquired company or business may be resold by them only pursuant to
an effective registration statement under the Securities Act covering such
shares, in transactions permitted by the resale provisions of Rule 145(d) under
the Securities Act or Regulation S under the Securities Act (or, in the case of
any such persons who become affiliates of Precept, Rule 144 under the Securities
Act) or as otherwise permitted under the Securities Act. This Proxy
Statement/Prospectus will not be used by such affiliates in connection with any
resale of their shares of Precept Class A Common Stock.
In addition to the Shares to be issued in the Transfer and the shares
issuable in future acquisitions, this Proxy Statement/Prospectus covers the
issuance of up to 1,815,000 Precept Class A Warrants to the holders of record of
the USTS Class C Warrants as of the Closing Date. Each USTS Class C Warrant held
of record as of such date will automatically be converted into one Precept Class
A Warrant at such time and shall become exercisable for shares of Precept Class
A Common Stock in lieu of the USTS Common Stock previously purchasable upon
exercise. Except for the fact that the Precept Class A Warrants shall be
exercisable for shares of Precept Class A Common Stock, the Precept Class A
Warrants shall have terms and conditions substantially the same as those of the
USTS Class C Warrants. See "Description of Precept Securities--Precept Class A
Warrants." Certificates representing such Precept Class A Warrants will be
distributed promptly after the Closing Date in exchange for and replacement of
current certificates representing outstanding USTS Class C Warrants.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Precept Class A
Common Stock to be issued in connection with the Transfer will be passed upon
for Precept by Jackson Walker L.L.P. Certain legal matters with respect to
certain federal income tax consequences of the Transactions will be passed upon
by Bressler, Amery & Ross, P.C.
EXPERTS
The Consolidated Financial Statements of U.S. Transportation, Inc. included
in this Proxy Statement/ Prospectus and elsewhere in the Registration Statement
as of December 31, 1996 and for the year then ended have been audited by Mahoney
Cohen & Company, CPA, P.C., independent auditors as indicated in
96
<PAGE>
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
The Consolidated Financial Statements of Precept Investors, Inc. at June 30,
1996 and 1997, and for each of the three years ended June 30, 1995, 1996 and
1997, appearing in this Proxy Statement/Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
97
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRECEPT INVESTORS, INC.
Consolidated Financial Statements
Report of Independent Auditors........................................................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997.............................................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995, 1996 and 1997................ F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years ended June 30, 1995, 1996 and
1997................................................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1996 and 1997................ F-6
Notes to Consolidated Financial Statements............................................................ F-7
PRECEPT INVESTORS, INC.
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (audited) and September 30, 1997 (unaudited).......... F-19
Consolidated Statements of Operations for the three months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-20
Consolidated Statements of Cash Flows for the three months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-21
Notes to Consolidated Financial Statements (unaudited)................................................ F-22
U.S. TRANSPORTATION SYSTEMS, INC.
Consolidated Financial Statements
Independent Auditor's Report.......................................................................... F-24
Consolidated Balance Sheet as of December 31, 1996.................................................... F-25
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995.................. F-26
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996 and 1995........ F-27
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995.................. F-28
Notes to Consolidated Financial Statements............................................................ F-31
U.S. TRANSPORTATION SYSTEMS, INC.
Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1997 (unaudited)....................................... F-52
Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-53
Consolidated Statements of Operations for the three months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-55
Consolidated Statements of Shareholders' Equity for the year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited).......................................................... F-57
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-59
Notes to Consolidated Financial Statements (unaudited)................................................ F-63
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Precept Investors, Inc.
We have audited the accompanying consolidated balance sheets of Precept
Investors, Inc., as of June 30, 1996 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Precept
Investors, Inc. at June 30, 1996 and 1997, and the consolidated results of its
operations, changes in shareholders' equity, and its cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
Dallas, Texas
September 19, 1997 ERNST & YOUNG L.L.P.
F-2
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 3,516,057 $ 2,496,029
Trade receivables, net of $296,000 and $288,000 allowance for doubtful accounts,
respectively................................................................... 10,012,550 9,229,452
Accounts receivable from affiliates.............................................. 1,353,292 503,571
Other receivables................................................................ 571,057 456,942
Inventory........................................................................ 2,016,226 2,569,498
Other current assets............................................................. 317,621 642,819
Income taxes refundable.......................................................... -- 277,766
Deferred income taxes............................................................ 976,562 1,090,886
Net assets of discontinued operations............................................ 6,562,602 3,560,246
------------- -------------
Total current assets............................................................... 25,325,967 20,827,209
Property and equipment, net of accumulated depreciation............................ 1,316,355 1,857,793
Intangible assets, net of accumulated amortization................................. 4,567,252 4,790,608
Deferred income taxes.............................................................. 568,615 615,019
Other assets....................................................................... 912,959 1,200,379
------------- -------------
Total assets....................................................................... $ 32,691,148 $ 29,291,008
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 454,050 $ 58,160
Current portion of capital lease obligations..................................... -- 185,055
Trade accounts payable........................................................... 4,161,999 4,735,411
Sales taxes payable.............................................................. 2,543,972 1,181,047
Accrued compensation............................................................. 1,865,509 1,132,015
Other accounts payable and accrued expenses...................................... 1,824,013 1,192,475
------------- -------------
Total current liabilities.......................................................... 10,849,543 8,484,163
Long-term debt..................................................................... 5,260,062 6,984,644
Capital lease obligations, less current portion.................................... -- 517,234
Shareholders' equity:
Class A common stock, $.01 par value:
Authorized shares--17,195,742
Issued shares--8,361,647 in 1997; 7,253,845 in 1996............................ 71,668 83,616
Class B common stock, $.01 par value:
Authorized, issued, and outstanding shares--3,202,843.......................... 32,028 32,028
Additional paid-in capital....................................................... 17,449,785 17,676,797
Accumulated deficit.............................................................. (167,691) (3,475,167)
------------- -------------
17,385,790 14,317,274
Class A treasury stock, at cost:
Shares--151,803.................................................................. (191,271) (191,271)
Shareholder notes for stock purchases............................................ (612,976) (821,036)
------------- -------------
Total shareholders' equity......................................................... 16,581,543 13,304,967
------------- -------------
Total liabilities and shareholders' equity......................................... $ 32,691,148 $ 29,291,008
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Business Products................................................. $ 53,069,117 $ 66,592,016 $ 70,778,087
Transportation.................................................... 6,005,512 5,839,916 6,565,838
------------- ------------- -------------
59,074,629 72,431,932 77,343,925
Costs and expenses:
Cost of goods sold................................................ 35,592,200 45,195,583 50,157,418
Selling, general, and administrative.............................. 20,990,027 25,450,236 24,350,230
Depreciation and amortization..................................... 1,516,040 1,455,797 1,498,473
------------- ------------- -------------
58,098,267 72,101,616 76,006,121
------------- ------------- -------------
Operating income.................................................... 976,362 330,316 1,337,804
Interest expense.................................................... 148,336 316,767 425,314
Other expense....................................................... -- 400,000 --
------------- ------------- -------------
Income (loss) from continuing operations before income taxes........ 828,026 (386,451) 912,490
Income tax provision (benefit)...................................... 210,566 (120,676) 380,884
------------- ------------- -------------
Income (loss) from continuing operations............................ 617,460 (265,775) 531,606
Discontinued operations:
Discontinuation of Precept Holdings, Inc.:
Loss from disposal of discontinued operations, net of applicable
income taxes.................................................. -- -- (497,971)
Loss from discontinued operations, net of applicable income
taxes......................................................... (619,295) (339,553) (809,521)
Discontinuation of Precept Builders, Inc.:
(Loss) income from discontinued operations, net of applicable
income taxes.................................................. (434,214) 275,159 (2,531,590)
------------- ------------- -------------
Loss from discontinued operations................................... (1,053,509) (64,394) (3,839,082)
------------- ------------- -------------
Net loss............................................................ $ (436,049) $ (330,169) $ (3,307,476)
------------- ------------- -------------
------------- ------------- -------------
Net loss per common share:
Income (loss) from continuing operations.......................... $ 0.05 $ (0.02) $ 0.05
Loss from discontinued operations................................. (0.09) (0.01) (0.34)
------------- ------------- -------------
Net loss per common share........................................... $ (0.04) $ (0.03) $ (0.29)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding.......................... 11,624,688 11,524,189 11,515,687
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED SHAREHOLDER
CLASS A CLASS B ADDITIONAL EARNINGS CLASS A NOTES FOR TOTAL
COMMON COMMON PAID-IN (ACCUMULATED TREASURY STOCK SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT) STOCK PURCHASES EQUITY
----------- ----------- ---------- ------------ --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1994................ $ 55,654 $ 48,042 $16,834,785 $ 598,527 $ -- $ -- $17,537,008
Net loss............ -- -- -- (436,049) -- -- (436,049)
Purchase of treasury
stock............. -- -- -- -- (68,863) -- (68,863)
----------- ----------- ---------- ------------ --------- -------------- -------------
Balance at June 30,
1995................ 55,654 48,042 16,834,785 162,478 (68,863) -- 17,032,096
Net loss............ -- -- -- (330,169) -- -- (330,169)
Purchase of treasury
stock............. -- -- -- -- (122,408) -- (122,408)
Capital
contribution...... -- -- 615,000 -- -- -- 615,000
Loans made to
shareholders to
purchase stock.... -- -- -- -- -- (612,976) (612,976)
Stock conversion.... 16,014 (16,014) -- -- -- -- --
----------- ----------- ---------- ------------ --------- -------------- -------------
Balance at June 30,
1996................ 71,668 32,028 17,449,785 (167,691) (191,271) (612,976) 16,581,543
Net loss............ -- -- -- (3,307,476) -- -- (3,307,476)
Exercise of stock
options........... 11,948 -- 227,012 -- -- (208,060) 30,900
----------- ----------- ---------- ------------ --------- -------------- -------------
Balance at June 30,
1997................ $ 83,616 $ 32,028 $17,676,797 $(3,475,167) $(191,271) $ (821,036) $13,304,967
----------- ----------- ---------- ------------ --------- -------------- -------------
----------- ----------- ---------- ------------ --------- -------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net loss................................................................. $ (436,049) $ (330,169) $(3,307,476)
Adjustments to reconcile net loss from operations to cash provided by
(used in) operating activities:
Depreciation and amortization.......................................... 1,990,398 1,590,541 1,488,530
Write off of Precept Builders, Inc. property and equipment, net........ -- -- 408,245
Write off of Precept Builders, Inc. intangibles, net................... -- -- 150,477
Precept Holdings, Inc. loss from disposal.............................. -- -- 497,971
Deferred income taxes.................................................. (290,624) (495,102) 106,699
Changes in assets and liabilities, net of effects from acquisitions:
Receivables.......................................................... (4,480,061) (6,948,383) 9,208,773
Receivables from shareholders........................................ -- (612,976) --
Income taxes refundable.............................................. -- -- (277,766)
Inventory............................................................ (500,612) 62,450 (524,043)
Costs in excess of billings on uncompleted contracts, subcontracts
payable, and retainage............................................. 1,151,982 3,385,213 (4,923,077)
Other.................................................................. (262,316) (510,778) (487,695)
Sales taxes payable.................................................... 725,317 1,968,689 (1,527,415)
Accounts payable and other accrued expenses............................ 2,104,427 566,206 (989,922)
----------- ----------- -----------
Net cash (used in) provided by operating activities...................... 2,462 (1,324,309) (176,699)
Investing Activities
Acquisitions, including earnout payments................................. (927,386) (3,536,436) (1,185,575)
Acquisition of property and equipment, net............................... (652,314) (773,773) (1,301,544)
Maturity of restricted certificate of deposit............................ -- 1,732,500 --
----------- ----------- -----------
Net cash used in investing activities.................................... (1,579,700) (2,577,709) (2,487,119)
Financing Activities
Payments on long-term debt............................................... (242,354) (209,371) (454,050)
Issuance of common stock................................................. -- -- 30,900
Capital contribution..................................................... -- 615,000 --
Principal payments on capitalized lease obligations...................... -- -- (82,642)
Borrowings on revolving line of credit................................... -- 8,409,978 9,766,000
Payments on revolving line of credit..................................... -- (3,909,839) (7,979,819)
----------- ----------- -----------
Net cash provided by (used in) financing activities...................... (242,354) 4,905,768 1,280,389
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents..................... (1,819,592) 1,003,750 (1,383,429)
Cash and cash equivalents at beginning of year........................... 4,695,300 2,875,708 3,879,458
----------- ----------- -----------
Cash and cash equivalents at end of year................................. $ 2,875,708 $ 3,879,458 $ 2,496,029
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest expense....................................................... $ 200,243 $ 432,634 $ 575,592
----------- ----------- -----------
----------- ----------- -----------
Income taxes........................................................... $ 140,000 $ 492,000 $ 432,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997, the Company entered into capitalized leases at a recorded
value of $784,931.
In January 1997, 1,040,300 shares of Class A Common Stock were issued in
exchange for shareholder notes
of $208,060.
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1996, AND 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS/BASIS OF PRESENTATION
Precept Investors, Inc., and its subsidiaries, (Precept or the Company)
primarily engage in business forms management and, to a lesser degree, in real
estate construction, courier and chauffeured vehicle services, and investment
activities (collectively, the Precept Businesses). The forms management business
comprises: arranging for the manufacture, storage, and distribution of business
forms, computer supplies, advertising information, and other related business
products for mid- to large-sized corporate customers. The forms management
business is operated out of 28 offices located throughout the United States. The
courier and chauffeured vehicle services business operates primarily in the
Dallas/Fort Worth area.
Effective June 30, 1996, Precept Business Products, Inc., (Old Precept)
formed a new subsidiary, Precept Business Products, Inc. (New Precept) by
contributing all of the assets, liabilities, and operations of the forms
management business to New Precept. Simultaneously, Old Precept assumed the name
of one of its subsidiaries, Precept Investors, Inc. (the Company) and changed
the name of that subsidiary to Precept Holdings, Inc. (Holdings). The Company
retained investments in the related companies and certain other assets and
liabilities that were unrelated to the forms management business.
On June 30, 1994, the Company was party to a transaction (the
Reorganization) whereby, among other things, the Precept Businesses were merged
into Old Precept. Affiliated Computer Services, Inc. (ACS), the Company's former
parent, distributed the capital stock of Old Precept to ACS shareholders on a
pro rata basis. These financial statements reflect the financial position and
results of operations of the combined Precept Businesses on a historical cost
basis. As a result of the Reorganization, the Company and ACS entered into a
Reciprocal Services Agreement, as discussed in Note 7.
The consolidated financial statements comprise the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
In February 1997, the Company decided to reduce its investment in its real
estate construction operation, Precept Builders, Inc. (Builders), which performs
free-standing construction and finish-out of existing locations primarily in the
state of Texas, and to sell the majority of the assets of Holdings, which owns
and operates certain other real estate-related investments. Accordingly, the net
assets and results of operations of these entities have been classified as
discontinued operations in the accompanying financial statements. (See Note 2
for further discussion of the discontinued operations and proposed
transactions.)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments with an initial maturity of
three months or less, primarily overnight investments. Cash and cash equivalents
reflected in the Consolidated Statement of Cash Flows also include amounts
related to discontinued operations of $363,401 and $-0- as of June 30, 1996 and
1997 respectively.
INVENTORY
Inventories, which consist primarily of business forms, are recorded at the
lower of cost as determined using the first-in, first-out (FIFO) method or
market (net realizable value).
F-7
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Amortization of assets recorded under capital leases is included in depreciation
expense.
INTANGIBLES
Intangibles consist primarily of customer contracts acquired in conjunction
with the acquisition of various business forms management companies. Customer
contracts are amortized using the straight-line method primarily over a ten year
period. Accumulated amortization of intangibles totaled $3,652,552 and
$4,475,565 at June 30, 1996 and 1997, respectively.
It is the Company's policy to periodically review the net realizable value
of its intangible assets through an assessment of the estimated future cash
flows related to such assets. Each business unit to which these intangible
assets relate is reviewed to determine whether future cash flows, over the
remaining estimated useful life, provide for recovery of the intangible assets.
In the event that assets are found to be carried at amounts which are in excess
of estimated future gross cash flows, then the intangible assets are adjusted
for impairment to a level commensurate with a discounted cash flow analysis of
the underlying assets.
REVENUE RECOGNITION
For substantially all of the Company's sales, the Company recognizes revenue
when it ships goods to the customer, or for items shipped directly to the
customer from the vendor, the Company recognizes revenue when the Company
receives notification that the vendor has shipped goods to the customer. For
certain customers which represent a minor amount of the Company's sales, the
Company enters into a business products management agreement under which the
customer requests the Company to hold and manage customized products that the
customer has ordered. Under this arrangement, the Company generally recognizes
the revenue at the time the goods are received in its warehouse.
Concentration of credit risk with respect to trade receivables is limited
due to the large number of customers and their geographic dispersion across the
United States. The provision for bad debts was $81,000, $25,000 and $121,000 in
1995, 1996, and 1997, respectively. Account write-offs were $71,000, $-0-, and
$247,000 in 1995, 1996 and 1997, respectively. The allowance for doubtful
accounts increased by $118,000 in 1997 as part of the purchase price allocation
related to the purchase of certain assets of a business forms distributor.
INCOME TAXES
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the
use of an asset and liability approach for financial reporting of income taxes.
SFAS 109 requires provision for deferred taxes for the tax effects (based upon
tax rates currently in effect) arising from basis differences of assets and
liabilities for financial reporting and income tax purposes.
F-8
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXPENSE ALLOCATION TO DISCONTINUED AND CONTINUING OPERATIONS
The Company allocates interest expense on its borrowings to discontinued and
continuing operations proportionately based on net assets of each of the
respective components. Interest expense allocated to discontinued operations was
$51,907, $146,743, and $150,278 in 1995, 1996, and 1997, respectively. General
corporate overhead has not been allocated to discontinued operations.
EARNINGS PER SHARE
Earnings per share computations are based upon the weighted average of
common shares outstanding during the year. Stock options granted during fiscal
1997 have been treated as outstanding for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.
2. DISCONTINUED OPERATIONS
In February, 1997, the Company decided to reduce its investment in Precept
Builders, Inc. (Builders) and to sell the majority of the assets of Precept
Holdings, Inc. (Holdings), the two subsidiaries that performed real estate and
related construction activities.
The Company owned 810 shares of Builders common stock, making it an 81%
shareholder of Builders. Effective March 31, 1997, the Company obtained an
additional 1,000 shares, increasing its ownership to 90.5%, in exchange for a
contribution of capital of approximately $2.3 million. At an unspecified date
within the next year, Builders expects to sell 100,000 shares of its common
stock in a private offering to an officer of the Company, diluting the Company's
ownership percentage to 1.8%. Consequently, the financial position and
operations of Builders would no longer be consolidated in the Company's
financial statements, and the cost method of accounting would be used.
Considering the value of the subsequent interest in Builders would not be
significant, Precept wrote off its entire investment in Builders during June
1997.
The Company also has decided to sell the majority of the assets of Holdings.
The assets to be sold include two condominiums, a ranch, a restaurant, and a
luxury suite at a local racing facility. The assets will be sold to entities
controlled by certain officers and directors of the Company for cash. The
Company has recorded a loss from disposal of these assets of $497,971, which
includes $300,000 that the Company expects to incur for repairs related to the
sale of the assets.
Following is a summary of the net assets and results of operations of the
two entities, which have been reported as discontinued operations for all
periods presented in the Consolidated Balance Sheets and
F-9
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Consolidated Statements of Operations. Note: the net assets of the discontinued
operations as of June 30, 1997, exclude amounts related to Builders, as
described above.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------
1996 1997
------------- ------------
<S> <C> <C>
Receivables and unbilled work.................................... $ 9,584,987 $ 66,055
Other current assets............................................. 432,855 34,907
Real estate, property, and equipment, net........................ 3,663,996 3,988,007
Deferred income taxes............................................ 267,427 --
Other non-current assets......................................... 257,168 --
------------- ------------
Total assets..................................................... 14,206,433 4,088,969
Payables and other accrued expenses.............................. 7,535,180 525,286
Other current liabilities........................................ 108,651 --
Non-current liabilities.......................................... -- 3,437
------------- ------------
Net assets of discontinued operations............................ $ 6,562,602 $ 3,560,246
------------- ------------
------------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales and other income............................ $15,165,647 $39,341,903 $82,661,862
Costs and expenses.................................... 16,673,455 39,443,119 86,002,973
Loss from disposal.................................... -- -- (497,971)
---------- ---------- ----------
Loss before income taxes.............................. (1,507,808) (101,216) (3,839,082)
Income tax benefit.................................... (454,299) (36,822) --
---------- ---------- ----------
Net loss from discontinued operations................. $(1,053,509) $ (64,394) $(3,839,082)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A federal net operating loss (NOL) carryforward of $2,895,036 was generated
by discontinued operations during fiscal 1997. A deferred tax asset of
$1,445,115 attributable to discontinued operations, most of which is applicable
to this NOL, has been reserved for with a valuation allowance due to the
uncertainty of the use of the asset to offset future taxable income of
discontinued operations.
F-10
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment comprises:
<TABLE>
<CAPTION>
JUNE 30
--------------------------
ESTIMATED LIVES 1996 1997
---------------- ------------ ------------
<S> <C> <C> <C>
Buildings...................................... 17 to 20 years $ 772,814 $ 772,814
Vehicles and equipment......................... 3 to 5 years 1,712,146 1,899,715
Leasehold improvements......................... 1 to 10 years 276,143 253,800
Capitalized leases............................. 2 to 5 years -- 784,931
------------ ------------
Accumulated depreciation....................... 2,761,103 3,711,260
1,444,748 1,853,467
------------ ------------
$ 1,316,355 $ 1,857,793
------------ ------------
------------ ------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt at June 30 comprises:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revolving line of credit secured by substantially all of the assets of the Company;
interest accrues at prime plus .25% or LIBOR plus 2.5% (8.75% or 8.22%, respectively
at June 30, 1997) for outstanding borrowings and .25% for unused borrowings
(approximately $3.7 million at June 30, 1997); interest is paid monthly; due July
1998................................................................................ $ 4,500,139 $ 6,275,000
Note payable to Texas Stadium Corporation; secured by stadium box; interest accrues at
9% a year; paid annually............................................................ 531,980 530,617
Other indebtedness.................................................................... 681,993 237,187
------------ ------------
5,714,112 7,042,804
Less current portion.................................................................. 454,050 58,160
------------ ------------
$ 5,260,062 $ 6,984,644
------------ ------------
------------ ------------
</TABLE>
The revolving line of credit contains restrictions as to net worth, interest
coverage, and fixed charge minimum levels as well as limitations on making
certain investments and capital expenditures.
The principal maturities of long-term debt at June 30, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 58,160
1999............................................................ 22,584
2000............................................................ 6,299,616
2001............................................................ 26,832
2002............................................................ 29,246
Thereafter...................................................... 606,366
---------
$7,042,804
---------
---------
</TABLE>
F-11
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes fair value disclosures for financial instruments:
SHAREHOLDER NOTES--The carrying amount of the Company's shareholder notes
(Note 7) approximates their fair value. The carrying amount at June 30,
1997, represents the advances without accrued interest, which management
believes is not impaired.
LONG-TERM DEBT--The carrying amount of the Company's borrowings under its
revolving credit agreement approximates its fair value. The fair value of
other borrowings are not significant to the Company's financial
statements.
6. TAXES
The provision (benefit) for federal and state income taxes attributable to
continuing operations for each of the fiscal years ended June 30 comprises:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current................................................ $ 482,534 $ 408,992 $ 541,612
Deferred............................................... (271,968) (529,668) (160,728)
----------- ----------- -----------
$ 210,566 $ (120,676) $ 380,884
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets consist of the following:
<TABLE>
<CAPTION>
JUNE
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses................................................ $ 844,240 $ 1,318,401
Asset book/tax basis difference................................. 725,600 943,344
Investment basis difference..................................... 438,286 --
Accrued compensation............................................ 174,323 81,432
------------ ------------
Total deferred tax assets......................................... 2,182,449 2,343,177
Valuation allowance............................................... (637,272) (637,272)
------------ ------------
$ 1,545,177 $ 1,705,905
------------ ------------
------------ ------------
</TABLE>
The valuation allowance exists principally due to uncertainty related to the
timing and magnitude of future earnings and taxable transactions. The valuation
allowance as of June 30, 1995 was $637,272.
F-12
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TAXES (CONTINUED)
The provision for income taxes for income from continuing operations before
taxes varies from the statutory U.S. federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Income tax expense at statutory rate.................... $ 281,529 $ (131,393) $ 310,247
State income expense, less federal benefit.............. 11,146 13,945 58,530
Other................................................... (82,109) (3,228) 12,107
---------- ----------- ----------
Income tax provision.................................... $ 210,566 $ (120,676) $ 380,884
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
During fiscal 1996, the Company received a federal income tax refund related
to New Precept physical inventory adjustments that pertain to years when the
Company was a subsidiary of ACS. Under the Company's tax sharing agreement with
ACS, the benefit of $615,000 accrued to the Company. At the time of formation of
the Company on June 30, 1994, the assets and liabilities of the Company were
recorded through recording of a capital contribution equal to the net book value
of the assets and liabilities of the Company. Therefore, this refund has been
credited directly to paid-in capital as it results from periods prior to the
formation of the Company and would have impacted paid-in capital if it were
known at June 30, 1994.
Other expense in fiscal 1996 includes $400,000 primarily related to
estimated interest accrued for sales tax settlements.
7. TRANSACTIONS WITH AFFILIATES AND STOCKHOLDERS
In connection with the Reorganization (Note 1), the Company entered into a
Reciprocal Services Agreement (the Services Agreement) with ACS, effective June
30, 1994. Under the terms of the Services Agreement, the Company will sell
business forms and supplies and provide courier and administrative services at
prices which result in an average gross margin of 20% (subsequent to June 30,
1997, the Services Agreement was amended to an average gross margin of 30%).
Revenues for services provided to ACS under this agreement were $6,044,828,
$6,003,473 and $5,431,109 in 1995, 1996 and 1997, respectively. Amounts due from
ACS were $1,091,254 and $478,915 at June 30, 1996 and 1997, respectively.
In addition, the Company buys certain general and administrative services,
including data processing, from ACS. The Company incurred expenses of $745,574,
$335,613, $416,179, and to ACS in 1995, 1996, and 1997, respectively, for these
services. The Company expects to discontinue the purchase of these services
completely by December 31, 1997.
In connection with the Reorganization (Note 1), shareholders of ACS
receiving shares of the Company agreed to a "linked sales" arrangement for a two
year period commencing June 30, 1994, and ending June 30, 1996. Under the
arrangement, a selling shareholder of ACS stock was required to sell an equal
number of shares of stock in the Company at approximately the same time. To
accommodate the selling shareholders, if a third-party purchaser was not
available, the Company agreed to purchase its shares at $1.26 a share, which
amount was payable at the end of 15 years without interest. Common stock
acquired under these arrangements was classified as treasury stock with the
offsetting obligation reflected in long-term debt. The treasury stock and
related debt are carried at this redemption price in these financial statements.
During 1995 and 1996, the Company repurchased 54,653 and 97,150 shares for
$68,863 and $122,408, respectively, which is classified as a reduction in
shareholders' equity.
F-13
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. TRANSACTIONS WITH AFFILIATES AND STOCKHOLDERS (CONTINUED)
During fiscal year ended June 30, 1996, the Company loaned certain senior
executives $759,976 to be used exclusively to purchase the Company's stock from
selling shareholders. The notes are due in June 2005 or upon the sale or
transfer of the underlying stock and are secured by the underlying stock.
Interest accrues at the 90-day U.S. Treasury Bill rate as stated on June 5 of
each year. In lieu of cash payment, annually on June 5, interest is added to the
then outstanding principal amount of the advance. The shareholder notes have
been paid down to $612,976. As of June 30, 1997, and June 30, 1996, this amount
has been classified as a reduction in shareholders' equity and no interest
income is being accrued by the Company.
In conjunction with the exercise of stock options under the Company's stock
option plan, $208,060 in notes receivable, with recourse, were issued by the
Company for the purchase of the Company's stock by certain executives. As of
June 30, 1997, shareholder notes of $208,060 have been classified as a reduction
in shareholders' equity.
Class B common stock is held exclusively by the major shareholder and is
entitled to vote at 10 votes for each share held. Class A common stock receives
one vote on matters subject to a vote of shareholders. During fiscal 1996, the
remaining Class B shareholder, other than the major shareholder, converted
1,601,415 Class B shares into 1,601,415 Class A shares.
During fiscal 1994, the Company entered into an agreement with its major
shareholder, who also is a director of the Company, for the lease and purchase
of a portion of a condominium building (Condominium) for the Company's original
cost basis. The agreement, as amended, provides for the major shareholder to
receive a waiver of all lease payments, which approximate $9,400 per month,
until said sale. During fiscal 1994, the Company considered the original cost
basis of the Condominium impaired by $100,000 and expensed the amount of this
impairment. In fiscal 1995, the Company identified additional impairment of
approximately $500,000 relating to the Condominium and accordingly expensed this
amount during fiscal 1995. The adjusted cost of the Condominium is recorded as
real estate, property, and equipment in net assets of discontinued operations
and now represents the new purchase price of the Condominium. The Company
currently anticipates completing the sale of the Condominium in conjunction with
the sale of the majority of the assets of Holdings (see Note 2).
8. EMPLOYEE BENEFIT PLAN
New Precept maintains a 401(k) plan (the Plan) which is available to
qualified Company employees meeting certain eligibility requirements.
Participants may contribute up to 15% of their aggregate compensation as defined
in the Plan. On a discretionary basis, the Company may match up to 6% of
participants' aggregate compensation. The Company made no contributions during
fiscal 1995, 1996, and 1997.
F-14
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLAN
In December 1996, the Company adopted a stock option plan. The plan
authorizes the grant of up to 1,300,000 shares of the Company's Class A Common
Stock in the form of non-qualified stock options. Generally, options granted
vest on a pro-rata basis over a five year period, although the vesting period
may be modified at the time of grant by the administrator of the plan. The term
of the options granted is at the discretion of the administrator, but not to
exceed ten years. During January 1997, 1,194,800 options were granted, with
immediate vesting, and exercised for one share each of Common Stock at an
exercise price of $0.20 each. In April 1997, 103,000 options were granted, with
immediate vesting and an exercise price of $0.20. These options remain
outstanding as of June 30, 1997 and are not exercisable until certain provisions
of the grant are met. As of June 30, 1997, 2,200 shares of Class A Common Stock
remain reserved for future issuance under the stock option plan.
10. LEASES
The Company enters into operating and capital lease agreements for
facilities, vehicles, and office equipment in the normal course of business.
Rent expense from operating leases approximated $1,178,788, $1,847,250, and
$2,160,719, for the years ended June 30, 1995, 1996, and 1997, respectively.
Future minimum payments under the capital leases and non-cancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at June 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
---------- ------------
<S> <C> <C>
1998................................................................ $ 243,490 $ 1,791,770
1999................................................................ 226,142 1,660,121
2000................................................................ 160,445 1,291,605
2001................................................................ 168,335 993,862
2002................................................................ 38,145 11,386
Thereafter.......................................................... -- 3,450
---------- ------------
Total minimum lease payments........................................ 836,557 $ 5,752,194
------------
------------
Less amounts representing interest.................................. 134,268
----------
Present value of net minimum lease payments......................... $ 702,289
----------
----------
</TABLE>
11. ACQUISITIONS
During fiscal 1995, the Company acquired the assets, primarily customer
contracts, of a business forms distributor. The transaction was accounted for
using the purchase method of accounting. The acquisition terms included the
payment of $350,000 plus provisions to allow the seller to receive up to an
additional $1,150,000 contingent consideration upon the performance of the
business over a 12 year period. Approximately $531,000 and $265,000 of the
contingent consideration was earned during fiscal years 1995 and 1996,
respectively, and recorded as additional purchase price. As of June 30, 1997, no
additional contingent consideration related to this transaction is required.
During fiscal 1996, the Company acquired the assets, primarily customer
contracts, of Central Ohio Business Forms, Inc., a business forms distributor,
and another business forms distributor, for a total of $3,056,000 plus up to
$3.5 million of contingent consideration based on the subsequent operating
results of the businesses for an agreed upon amount of time. The acquisitions
were accounted for using the purchase
F-15
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS (CONTINUED)
method of accounting. Approximately $143,000 and $252,000 of the contingent
consideration was earned during fiscal years 1996 and 1997, respectively, and
recorded as additional purchase price. As of June 30, 1997, no additional
contingent consideration related to the Central Ohio Business Forms, Inc.
transaction is required since the Company entered into an agreement whereby all
rights to any additional contingent consideration were terminated in exchange
for a lump sum of $200,000 recorded in fiscal year 1997.
During fiscal 1997, the Company completed the purchase of certain assets of
two business forms distributors for a total of $908,000 plus up to $6.3 million
of contingent consideration based on the subsequent operating results of one of
the businesses over a five year period. The acquisitions were accounted for
using the purchase method of accounting with the majority of the purchase price
attributable to customer contracts, accounts receivable, inventory, and fixed
assets. The transactions resulted in the recording of $271,285 in goodwill in
fiscal 1997. Approximately $101,000 of the contingent consideration was earned
during fiscal year 1997 and recorded as additional purchase price.
The above acquisitions resulted in increases of intangible assets of
approximately $881,000, $3,285,000, and $1,075,000 in fiscal years 1995, 1996,
and 1997, respectively.
Results of operations for these acquisitions have been included in the
consolidated results of operations since the date of acquisition. The following
table presents the unaudited pro forma results of operations as if the
acquisitions had occurred at the beginning of each respective period presented.
Pro forma adjustments reflect additional amortization expense based on the fair
value of the assets acquired as if the acquisitions had occurred at the
beginning of the periods presented. Pro forma adjustments also reflect
additional interest expense due to additional borrowings required to fund the
purchase price of each acquisition and income tax effects of the pro forma
adjustments. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had the
acquisitions been made as of those dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
JUNE 30
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Total revenues...................................................... $ 79,961,135 $ 82,431,381 $ 82,317,092
------------- ------------- -------------
------------- ------------- -------------
Income (loss) from continuing operations............................ 1,803,313 (304,247) 490,018
Loss from discontinued operations................................... (1,053,509) (64,394) (3,839,082)
------------- ------------- -------------
Net (loss) income................................................... $ 749,804 $ (368,641) $ (3,349,064)
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per common share:
Income (loss) from continuing operations.......................... $ 0.15 $ (0.02) $ 0.04
Loss from discontinued operations................................... (0.09) (0.01) (0.33)
------------- ------------- -------------
$ 0.06 $ (0.03) $ (0.29)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
12. SEGMENT INFORMATION
The Company operates principally in the business products and transportation
industry segments. Operations in the business products segment involves
arranging for the manufacture, storage, and distribution of business forms,
computer supplies, advertising information, and other related business products
for mid-to large-sized corporate customers. Operations in the transportation
segment primarily
F-16
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
involve courier and chauffeured vehicle services. Total revenue by industry
includes both sales to unaffiliated customers, as reported in the Company's
consolidated income statement, and intersegment sales, which are eliminated in
consolidation of the Company's financial statements. Intersegment sales included
in operating profits below were $31,350, $35,735, and $25,028 for the business
products segment and $155,617, $230,165, and $220,363 for the transportation
segment for the years ended June 30, 1995, 1996, and 1997, respectively.
In computing operating income (loss), none of the following items have been
added or deducted: general corporate expenses (these expenses were included in
the computation of Corporate and Other operating income (loss)), interest
expense, income taxes, and loss from discontinued operations. The following
details depreciation and capital expenditures for each fiscal year by segment.
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each industry. Corporate assets are principally cash and
certain investments.
Segment data as of and for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating income (loss):
Business Products................................................. $ 1,034,768 $ 329,677 $ 1,164,802
Transportation.................................................... (419,637) 88,582 (116,271)
Other and Corporate............................................... 361,231 (87,943) 289,273
------------- ------------- -------------
Total............................................................... $ 976,362 $ 330,316 $ 1,337,804
------------- ------------- -------------
------------- ------------- -------------
Depreciation and amortization:
Business Products................................................. $ 986,658 $ 1,066,228 $ 1,046,948
Transportation.................................................... 452,960 316,611 414,717
Other and Corporate............................................... 76,422 72,958 36,808
------------- ------------- -------------
Total............................................................... $ 1,516,040 $ 1,455,797 $ 1,498,473
------------- ------------- -------------
------------- ------------- -------------
Capital expenditures:
Business Products................................................. $ 113,500 $ 355,491 $ 91,975
Transportation.................................................... 7,250 -- 77,950
Other and corporate............................................... -- -- --
------------- ------------- -------------
Total............................................................... $ 120,750 $ 355,491 $ 169,925
------------- ------------- -------------
------------- ------------- -------------
Identifiable assets:
Business Products................................................. $ 15,134,272 $ 20,084,085 $ 20,179,707
Transportation.................................................... 2,266,758 2,488,849 1,247,953
Other and Corporate............................................... 1,884,332 3,555,612 4,303,102
------------- ------------- -------------
Total............................................................... $ 19,285,362 $ 26,128,546 $ 25,730,762
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
13. TRANSACTION WITH USTS
Effective March 7, 1997, the Company entered into a letter of intent
(Letter) to merge with U.S. Transportation Systems, Inc. (USTS). USTS is engaged
in business areas which relate to transportation, including providing bus,
chauffeured vehicle, motor vehicle, package, and delivery transportation-related
F-17
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTION WITH USTS (CONTINUED)
services. The terms of the Letter have been modified such that upon consummation
of the transaction, the Company will purchase nearly all of the operating assets
and assume certain operating liabilities of USTS. The transaction will be
structured as a tax-free reorganization under Internal Revenue Code Section
368(a)(1)(C) (type C reorganization). In conjunction with the plan of
reorganization, all outstanding shares of the Company shall be split into an
aggregate of 36,000,000 shares. In addition, 9.6 million shares of Class A
common stock will be exchanged as consideration to USTS for the net assets
acquired. As a result, the outstanding shares will total 45,612,500. The Company
will register its common stock with the Securities and Exchange Commission in a
Form S-4 registration statement. USTS is required to liquidate or dissolve as a
corporation and distribute its Precept shares to existing shareholders for the
transaction to qualify with the Internal Revenue Service as a type C
reorganization. The transaction will be accounted for using the purchase method
of accounting with Precept as the purchaser.
14. SUBSEQUENT EVENTS
On July 2, 1997, the Company entered into a new revolving credit agreement
with another financial institution for borrowings not to exceed $10,000,000 (new
line of credit) and terminated the existing outstanding line of credit (old line
of credit). The new line of credit includes restrictions as to the current ratio
and debt service coverage as well as borrowing restrictions based upon accounts
receivable and inventory. The new line of credit is secured by substantially all
of the assets of the continuing operations of the Company. Interest accrues at
prime or LIBOR plus 1.75%, 2.25%, or 2.5% for outstanding borrowings and .25%
for unused borrowings. The additional percentage points added to the LIBOR rate
are dependent upon the Company's Senior Funded Debt to EBITDA ratio at the
beginning of each month the LIBOR based borrowing is renewed. Interest is paid
monthly. The principal balance of the line of credit is due and payable on June
30, 2000.
Subsequent to June 30, 1997, the Company completed acquisitions of certain
assets of two business forms distributors for a total of $955,000, comprised of
$435,000 in cash and $520,000 in notes payable, plus up to $670,000 of
contingent consideration based on the subsequent operating results of the
businesses over a five year period. The acquisitions will be accounted for using
the purchase method of accounting with the majority of the purchase price
attributable to customer contracts.
F-18
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1997
------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 2,496,029 $ 1,704,676
Trade receivables, net of $288,000 and $321,000 allowance for doubtful accounts,
respectively.................................................................... 9,229,452 10,119,761
Accounts receivable from affiliates............................................... 503,571 524,174
Other receivables................................................................. 456,942 520,812
Inventory......................................................................... 2,569,498 2,828,884
Other current assets.............................................................. 642,819 630,042
Income taxes refundable........................................................... 277,766 215,830
Deferred income taxes............................................................. 1,090,886 1,090,886
Net assets of discontinued operations............................................. 3,560,246 3,622,019
------------ -------------
Total current assets................................................................ 20,827,209 21,257,084
Property and equipment, net of accumulated depreciation............................. 1,857,793 1,803,387
Intangible assets, net of accumulated amortization.................................. 4,790,608 5,474,760
Deferred incomes taxes.............................................................. 615,019 615,019
Other assets........................................................................ 1,200,379 1,326,288
------------ -------------
Total assets........................................................................ $ 29,291,008 $30,476,538
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 58,160 $ 45,915
Current portion of capital lease obligations...................................... 185,055 185,055
Trade accounts payable............................................................ 4,735,411 6,351,991
Sales taxes payable............................................................... 1,181,047 995,256
Accrued compensation.............................................................. 1,132,015 786,942
Other accounts payable and accrued expenses....................................... 1,192,475 880,921
------------ -------------
Total current liabilities........................................................... 8,484,163 9,246,080
Long-term debt...................................................................... 6,984,644 7,462,857
Capital lease obligations, less current portion..................................... 517,234 492,503
Shareholders' equity:
Class A common stock, $.01 par value:
Authorized shares--17,195,742
Issued shares--8,361,647........................................................ 83,616 83,616
Class B common stock, $.01 par value:
Authorized, issued and outstanding shares--3,202,843.............................. 32,028 32,028
Additional paid-in capital...................................................... 17,676,797 17,676,797
Accumulated deficit............................................................. (3,475,167) (3,505,036)
------------ -------------
14,317,274 14,287,405
Class A treasury stock, at cost:
Shares--151,803................................................................. (191,271) (191,271)
Shareholder notes for stock purchases........................................... (821,036) (821,036)
------------ -------------
Total shareholders' equity.......................................................... 13,304,967 13,275,098
------------ -------------
Total liabilities and shareholders' equity.......................................... $ 29,291,008 $30,476,538
------------ -------------
------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-19
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Revenues:
Business Products................................................................ $ 18,198,109 $ 17,296,931
Transportation................................................................... $ 1,614,546 1,638,547
------------- -------------
19,812,655 18,935,478
Costs and expenses:
Costs of goods sold.............................................................. 12,510,280 11,797,855
Selling, general, and administrative............................................. 6,593,560 6,538,777
Depreciation and amortization.................................................... 354,384 245,277
------------- -------------
19,458,224 18,581,909
------------- -------------
Operating income................................................................... 354,431 353,569
Interest expense................................................................... 122,570 125,359
------------- -------------
Income from continuing operations before income taxes.............................. 231,861 228,210
Income tax provision............................................................... 97,382 93,102
------------- -------------
Income from continuing operations.................................................. 134,479 135,108
Discontinued operations:
Discontinuation of Precept Holdings, Inc.:
Loss from discontinued operations, net of applicable income taxes.............. (122,046) (164,977)
Discontinuation of Precept Builders, Inc.:
Income from discontinued operations, net of applicable income taxes.......... 207,732 --
------------- -------------
Income (loss) from discontinued operations......................................... 85,686 (164,977)
------------- -------------
Net income (loss).................................................................. $ 220,165 $ (29,869)
------------- -------------
------------- -------------
Net earnings (loss) per common share:
Income from continuing operations................................................ $ 0.01 $ 0.01
Income (loss) from discontinued operations....................................... 0.01 (0.01)
------------- -------------
Net earnings (loss) per common share............................................... $ 0.02 $ 0.00
------------- -------------
------------- -------------
Weighted average common shares outstanding......................................... 11,515,687 11,515,687
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-20
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES.............................................. $ (98,356) $ (483,045)
INVESTING ACTIVITIES
Acquisitions, including earnout payments........................................... (669,342) (496,941)
Acquisition of property and equipment, net......................................... (433,348) (157,184)
------------- -------------
Net cash used in investing activities.............................................. (1,102,690) (654,125)
FINANCING ACTIVITIES
Payments on long-term debt......................................................... (275,843) (12,245)
Principal payments on capitalized lease obligations................................ (20,661) (24,731)
Borrowings on revolving line of credit............................................. 746,552 2,781,018
Payments on revolving line of credit............................................... (907,380) (2,302,805)
------------- -------------
Net cash provided by (used in) financing activities................................ (457,332) 441,237
------------- -------------
Net decrease in cash and cash equivalents.......................................... (1,658,378) (695,933)
Cash and cash equivalents at beginning of period................................... 3,879,458 2,496,029
------------- -------------
Cash and cash equivalents at end of period......................................... $ 2,221,080 $ 1,800,096
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest expense................................................................. $ 146,842 $ 200,813
------------- -------------
------------- -------------
Income taxes..................................................................... $ 123,005 $ 26,586
------------- -------------
------------- -------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended September 30, 1996, the Company entered into
capitalized leases at a
recorded value of $196,233.
During the three months ended September 30, 1997, the Company issued $520,000 in
notes payable for
consideration in two acquisitions.
SEE ACCOMPANYING NOTES.
F-21
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. MANAGEMENT'S REPRESENTATION
In the opinion of management, the accompanying unaudited financial
statements present fairly, in all material respects, the financial position of
Precept Investors, Inc. and the results of their operations and their cash flows
for the three months ended September 30, 1996 and 1997 and, accordingly, all
adjustments (which include only normal recurring adjustments) necessary to
permit fair presentation have been made. Certain information and footnote
disclosures normally required by financial accounting principles have been
condensed or omitted. It is recommended that these statements be read in
conjunction with the financial statements and notes thereto included in the
Company's June 30, 1997 annual report. The results of operations for the period
ended September 30, 1997 are not necessarily indicative of the operating results
for the full year.
2. SELECTED SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents reflected in the Consolidated Statement of Cash
Flows also include amounts related to discontinued operations of $-0- and
$95,420 as of June 30, 1997 and September 30, 1997.
EARNINGS PER SHARE
Earnings per share computations are based upon the weighted average of
common shares outstanding during the year. Stock options granted during fiscal
1997 have been treated as outstanding for all periods presented.
3. ACQUISITIONS
During the three months ended September 30, 1997, the Company completed
acquisitions of certain assets of two business forms distributors for a total of
$955,000, comprised of $435,000 in cash and $520,000 in notes payable, plus up
to $670,000 of contingent consideration based on the subsequent operating
results of the businesses over a five year period. The acquisitions were
accounted for using the purchase method of accounting with the majority of the
purchase price attributable to customer contracts.
4. SUBSEQUENT EVENTS
In February, 1997, the Company decided to reduce its investment in Precept
Builders, Inc. (Builders), a subsidiary of Precept that performed construction
activities. The Company owned 810 shares of Builders common stock, making it an
81% shareholder of Builders. Effective March 31, 1997, the Company obtained an
additional 1,000 shares, increasing its ownership to 90.5%, in exchange for a
contribution of capital of approximately $2.3 million. As of June 30, 1997,
Builders expected to sell 100,000 shares of its common stock in a private
offering to an officer of the Company, diluting the Company's ownership
percentage to 1.8%. Consequently, the financial position and operations of
Builders would no longer be consolidated in the Company's financial statements,
and the cost method of accounting would be used. Considering the value of the
subsequent interest in Builders would not be significant, Precept wrote off its
entire investment in Builders during June 1997. On December 2, 1997, the private
offering was consummated.
F-22
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. SUBSEQUENT EVENTS (CONTINUED)
Subsequent to September 30, 1997, the Company completed acquisitions of
certain assets of two business forms distributors and one chauffeured vehicle
service company for a total of $1,740,000, comprised of $1,240,000 in notes
payable, $146,000 in assumed debt and 250 shares of common stock of a Precept
subsidiary, which can subsequently be exchanged into shares of Precept common
stock equal to a fair value of $354,000 at time of exchange, or for a note equal
to $354,000. The acquisitions will be accounted for using the purchase method of
accounting with the majority of the purchase price attributable to customer
contracts.
F-23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
U.S. Transportation Systems, Inc.
We have audited the accompanying consolidated balance sheet of U.S.
Transportation Systems, Inc. and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
U.S. Transportation Systems, Inc. and subsidiaries as of December 31, 1996, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 26, 1997, except for Note 14
relating to the sale of ASI, as to which
the date is March 28, 1997.
F-24
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................................................... $3,392,629
Cash--restricted................................................................................... 159,747
Accounts receivable, net of allowance for doubtful accounts of $546,000 (Note 3)................... 4,995,999
Notes receivable................................................................................... 930,584
Net investment in sales-type leases (Note 2)....................................................... 840,263
Inventories (Note 1)............................................................................... 594,275
Prepaid and other current assets................................................................... 653,521
----------
TOTAL CURRENT ASSETS............................................................................. 11,567,018
----------
PROPERTY, PLANT AND EQUIPMENT:
Revenue equipment (Notes 3 and 4).................................................................. 7,714,168
Land and buildings................................................................................. 1,020,770
Other.............................................................................................. 1,897,346
----------
Total--at cost................................................................................... 10,632,284
Less: Accumulated depreciation and amortization.................................................... (3,188,342)
----------
PROPERTY, PLANT AND EQUIPMENT-- NET.................................................................. 7,443,942
----------
NET ASSETS HELD FOR SALE (Note 14)................................................................... 4,591,806
----------
OTHER ASSETS:
Net investment in sales-type leases (Note 2)....................................................... 1,520,474
Goodwill, net of accumulated amortization of $496,075 (Note 1)..................................... 1,461,093
Other intangible assets, net of accumulated amortization of $172,026 (Note 1)...................... 986,974
Notes receivable................................................................................... 354,218
Other assets....................................................................................... 402,305
----------
TOTAL OTHER ASSETS................................................................................... 4,725,064
----------
TOTAL ASSETS......................................................................................... $28,327,830
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft..................................................................................... $ 395,156
Notes payable (Note 4)............................................................................. 1,580,269
Line of credit (Note 3)............................................................................ 3,093,044
Accounts payable................................................................................... 998,347
Accrued liabilities................................................................................ 471,409
Due to related party (Note 9)...................................................................... 439,646
----------
TOTAL CURRENT LIABILITIES............................................................................ 6,977,871
----------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES:
Notes payable (Note 4)............................................................................. 3,710,740
Due to related party (Note 9)...................................................................... 665,468
----------
TOTAL LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES............................................... 4,376,208
----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10, 11, 18)
STOCKHOLDERS' EQUITY (Notes 11 and 20):
Preferred stock--par value $.01 per share, redemption value $10.00 per share:
Authorized--10,000,000 shares....................................................................
Issued and outstanding--180,000 shares........................................................... 1,800,000
Common stock--par value $.01 per share:
Authorized--50,000,000 shares....................................................................
Issued and outstanding--6,801,512 shares......................................................... 68,015
Additional paid-in capital......................................................................... 29,204,181
Stock subscription receivable...................................................................... (37,785)
Deferred compensation (Note 11).................................................................... (545,089)
Accumulated deficit................................................................................ (13,515,571)
----------
TOTAL STOCKHOLDERS' EQUITY........................................................................... 16,973,751
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................................... $28,327,830
----------
----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-25
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUES.............................................................................. $ 21,509,751 $ 13,670,321
------------ ------------
EXPENSES:
Cost of goods sold.................................................................. 996,673 2,180,195
Operating expenses for services..................................................... 12,376,818 5,814,900
Selling, general and administrative................................................. 8,253,096 3,149,187
Depreciation expense................................................................ 973,570 607,095
Rent expense........................................................................ 1,300,311 404,147
Amortization of intangible assets................................................... 425,579 124,861
------------ ------------
TOTAL EXPENSES........................................................................ 24,326,047 12,280,385
------------ ------------
(LOSS) INCOME FROM OPERATIONS......................................................... (2,816,296) 1,389,936
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense.................................................................... (617,029) (339,042)
Interest income..................................................................... 387,305 276,054
Gain / (loss) on sales of assets.................................................... 54,680 (419,775)
Loss on Mt. View Settlement......................................................... (215,500) (75,796)
Other expenses...................................................................... (69,395) (34,135)
------------ ------------
Other expenses, net............................................................... (459,939) (592,694)
------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.......................... (3,276,235) 797,242
INCOME TAX EXPENSE (BENEFIT).......................................................... 750,000 (364,000)
------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS.............................................. (4,026,235) 1,161,242
------------ ------------
DISCONTINUED OPERATIONS (Note 14):
Discontinuation of custom equipment manufacturing segment:
(Loss) income from custom equipment manufacturing operations........................ (1,787,859) 94,545
Estimated losses during phase-out period (Note 14).................................. (196,843) --
Discontinuation of entertainment ticket segment:
(Loss) income from entertainment operations......................................... (683,514) 35,330
Adjustment of estimated loss on disposal of charter segment, net of income tax benefit
of $86,000 in 1995 (Note 14)......................................................... -- (167,199)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS..................................................... (2,668,216) (37,324)
------------ ------------
NET (LOSS) INCOME..................................................................... (6,694,451) 1,123,918
LESS: PREFERRED DIVIDEND.............................................................. 169,335 191,700
------------ ------------
NET (LOSS) INCOME APPLICABLE TO COMMON SHAREHOLDERS................................... $ (6,863,786) $ 932,218
------------ ------------
------------ ------------
(LOSS) EARNINGS PER COMMON SHARE:
(Loss) income from continuing operations............................................ $ (1.04) $ .53
(Loss) from discontinued operations................................................. (.66) (.02)
------------ ------------
(LOSS) EARNINGS PER COMMON SHARE...................................................... $ (1.70) $ .51
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................................ 4,036,930 1,823,588
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-26
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK SUB- DEFERRED
--------------------- ----------------------- PAID-IN SCRIPTION COMPEN-
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE SATION
---------- --------- --------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994............... 1,222,198 $ 12,222 180,000 $ 1,800,000 $ 13,570,093 $ -- $ (811,359)
---------- --------- --------- ------------ ------------ ----------- ----------
Preferred stock issuance................. -- -- 170,000 2,040,000 (1,073,524) -- --
Preferred stock conversion............... 425,000 4,250 (170,000) (2,040,000) 2,035,750 -- --
Restricted stock grant issuance.......... -- -- -- -- -- -- 135,667
Stock options issued..................... -- -- -- -- -- -- 17,188
Preferred dividends...................... 9,580 96 -- -- (96) -- --
Common stock issued in connection with
purchase of Armstrong Freight
Express................................ 130,000 1,300 -- -- 564,200 -- --
Common stock issued in connection with
purchase of Trans-Lynx Express......... 19,424 194 -- -- 84,296 -- --
Common stock issued in connection with
purchase of Automated Solutions........ 300,000 3,000 -- -- 1,347,000 -- --
Common stock issued in exchange for
consulting services.................... 55,833 558 -- -- 242,067 -- --
Common stock issued in connection with
contract settlement.................... 8,333 83 -- -- 36,167 (36,250) --
Stock options exercised.................. 61,667 617 -- -- 250,558 (254,035) --
Net income............................... -- -- -- -- -- -- --
---------- --------- --------- ------------ ------------ ----------- ----------
Balance, December 31, 1995............... 2,232,035 $ 22,320 180,000 $ 1,800,000 $ 17,056,511 $(290,285) $ (658,504)
---------- --------- --------- ------------ ------------ ----------- ----------
Net proceeds from exercise of warrants
and options............................ 60,000 600 -- -- 206,900 -- --
Common stock issued in connection with
purchase of Krogel Freight............. 18,333 183 -- -- 54,817 -- --
Preferred stock issuance................. -- -- 300 300,000 (43,272) -- --
Conversion of debentures into common
stock.................................. 753,667 7,537 -- -- 1,768,751 -- --
Preferred stock conversion............... 88,889 889 (300) (300,000) 299,111 -- --
Restricted stock grant issuance.......... -- -- -- -- -- -- 113,415
Preferred stock dividends................ -- -- -- -- -- -- --
Repurchase of common stock............... (47,500) (475) -- -- (89,495) -- --
Common stock issued in connection with
bridge loan............................ 109,957 1,100 -- -- 248,454 -- --
Common stock offering net of offering
costs of $1,500,208.................... 1,705,043 17,050 -- -- 4,996,006 -- --
Common stock issued in connection with
consulting services.................... 314,167 3,142 -- -- 874,733 252,500 --
Common stock issued in connection with
employment contracts................... 16,667 167 -- -- 124,833 -- --
Common stock issued in connection with
purchase of BancPro Transportation and
employment agreement................... 336,000 3,360 -- -- 864,540 -- --
Common stock issued in exchange for
covenant not-to-compete................ 199,444 1,994 -- -- 548,006 -- --
Change in features of preferred stock.... -- -- -- -- 680,000 -- --
Obligation to issue 1,000,000 shares of
common stock in regards to long-term
employment agreement with Company
officer................................ 1,000,000 10,000 -- -- 1,552,500 -- --
Other.................................... 14,810 148 -- -- 61,786 -- --
Net loss................................. -- -- -- -- -- -- --
---------- --------- --------- ------------ ------------ ----------- ----------
Balance, December 31, 1996............... 6,801,512 $ 68,015 180,000 $ 1,800,000 $ 29,204,181 $ (37,785) $ (545,089)
---------- --------- --------- ------------ ------------ ----------- ----------
---------- --------- --------- ------------ ------------ ----------- ----------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
------------- ------------
<S> <C> <C>
Balance, December 31, 1994............... $ (7,555,263) $ 7,015,693
------------- ------------
Preferred stock issuance................. -- 966,476
Preferred stock conversion............... -- --
Restricted stock grant issuance.......... -- 135,667
Stock options issued..................... -- 17,188
Preferred dividends...................... (220,440) (220,440)
Common stock issued in connection with
purchase of Armstrong Freight
Express................................ -- 565,500
Common stock issued in connection with
purchase of Trans-Lynx Express......... -- 84,490
Common stock issued in connection with
purchase of Automated Solutions........ -- 1,350,000
Common stock issued in exchange for
consulting services.................... -- 242,625
Common stock issued in connection with
contract settlement.................... -- --
Stock options exercised.................. -- (2,860)
Net income............................... 1,123,918 1,123,918
------------- ------------
Balance, December 31, 1995............... $ (6,651,785) $ 11,278,257
------------- ------------
Net proceeds from exercise of warrants
and options............................ -- 207,500
Common stock issued in connection with
purchase of Krogel Freight............. -- 55,000
Preferred stock issuance................. -- 256,728
Conversion of debentures into common
stock.................................. -- 1,776,288
Preferred stock conversion............... -- --
Restricted stock grant issuance.......... -- 113,415
Preferred stock dividends................ (169,335) (169,335)
Repurchase of common stock............... -- (89,970)
Common stock issued in connection with
bridge loan............................ -- 249,554
Common stock offering net of offering
costs of $1,500,208.................... -- 5,013,056
Common stock issued in connection with
consulting services.................... -- 1,130,375
Common stock issued in connection with
employment contracts................... -- 125,000
Common stock issued in connection with
purchase of BancPro Transportation and
employment agreement................... -- 867,900
Common stock issued in exchange for
covenant not-to-compete................ -- 550,000
Change in features of preferred stock.... -- 680,000
Obligation to issue 1,000,000 shares of
common stock in regards to long-term
employment agreement with Company
officer................................ -- 1,562,500
Other.................................... -- 61,934
Net loss................................. (6,694,451) (6,694,451)
------------- ------------
Balance, December 31, 1996............... $ (13,515,571) $ 16,973,751
------------- ------------
------------- ------------
</TABLE>
F-27
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income / (Loss) from continuing operations......................................................... $ (4,026,235) $ 1,161,242
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization.................................................................... 1,399,149 731,956
Amortization of deferred compensation............................................................ 113,415 152,855
Deferred tax benefit............................................................................. 750,000 (450,000)
Stock issued in exchange for consulting services................................................. 1,030,410 --
Write off of notes receivable.................................................................... -- 75,796
Loss on Mt. View settlement...................................................................... 215,500 --
Bad debt expense................................................................................. 339,969 --
Changes in features of preferred stock........................................................... 680,000 --
Obligation to issue stock in regards to long-term employment agreement........................... 1,562,500 --
Loss / (gain) on sales of assets................................................................. (54,680) 419,775
Other............................................................................................ 94,605 --
Change in assets and liabilities:
Accounts receivable............................................................................ (1,774,357) (452,231)
Inventories.................................................................................... (381,542) (300,655)
Other receivables.............................................................................. -- (14,980)
Prepaid and other current assets............................................................... 311,361 (279,566)
Other intangibles.............................................................................. (50,000) --
Accounts payable............................................................................... 476,924 (762,358)
Accrued liabilities............................................................................ 31,609 (280,481)
------------- -------------
Net cash provided by continuing operations......................................................... 718,628 1,353
------------- -------------
Loss from discontinued operations.................................................................. (2,668,216) (37,324)
Adjustments to reconcile loss to net cash used in discontinued operations:
Depreciation and amortization.................................................................. 611,031 306,482
Change in net assets and liabilities and losses of discontinued operations..................... (1,504,394) (1,098,916)
------------- -------------
Net cash used in discontinued operations........................................................... (3,561,579) (829,758)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES.............................................................. (2,842,951) (828,405)
------------- -------------
INVESTING ACTIVITIES:
Capital expenditures............................................................................. (854,926) (786,891)
Purchase of intangible assets in Krogel acquisition.............................................. (150,000) --
Purchase of intangible assets in Eagle Air Express acquisition................................... (10,800) --
Proceeds from sales of assets.................................................................... 149,803 1,047,756
Transfers from cash--restricted.................................................................. 6,006 16,726
Advances on notes receivable..................................................................... (952,532) (160,552)
Collection of notes and leases receivable........................................................ 691,714 813,431
Other............................................................................................ 86,587 (246,796)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................................ (1,034,148) 683,674
------------- -------------
FINANCING ACTIVITIES:
Cash overdraft................................................................................... 395,156 (35,570)
Cash received from related parties............................................................... 500,000 295,465
Cash paid to related parties..................................................................... (237,181) (400,946)
Cash obtained through business acquisitions...................................................... -- 75,266
Proceeds from issuance of preferred stock........................................................ 256,728 1,555,933
Proceeds from common stock offering.............................................................. 5,013,056 --
Proceeds from bridge loan........................................................................ 982,000 --
Payment of preferred dividends................................................................... (169,335) (220,439)
Principal payments on debt....................................................................... (10,392,011) (10,949,935)
Borrowings on debt............................................................................... 8,986,026 9,776,459
Proceeds from issuance of convertible debentures................................................. -- 1,776,287
Proceeds from options and warrants exercised..................................................... 207,500 --
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................................................... 5,541,939 1,872,520
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................................................... 1,664,840 1,727,789
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................................... 1,727,789 --
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................................. $ 3,392,629 $ 1,727,789
------------- -------------
------------- -------------
</TABLE>
F-28
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash paid during the year for:
Interest................................................................................ $ 744,200 $ 484,600
---------- ----------
---------- ----------
Taxes................................................................................... $ -0- $ -0-
---------- ----------
---------- ----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
The Company acquired revenue equipment in 1996 and 1995 utilizing long-term
debt of $4,849,137 and $554,907, respectively.
During 1996 and 1995 the Company sold buses in exchange for $154,351 and
$2,151,630 respectively, of sales type financing lease receivables.
During 1996 and 1995, the Company issued 314,167 and 55,833 shares of common
stock in exchange for consulting services.
During 1995, the Company sold various assets, including the discontinued
charter operations, in exchange for notes receivable aggregating to $403,500 and
the assignment of $58,579 of debt held by the Company.
In March 1995, the Company sold a substantial portion of the assets of
Suncoast Transportation for $25,000 cash and a promissory note of $175,000.
In June 1995, the Company issued 130,000 shares of common stock in exchange
for 100% of the outstanding common stock of Avanti Delivery Services, Inc. and
Priority Express, Inc.
In July 1995, the Company issued 19,424 shares of common stock in exchange
for 100% of the outstanding common stock of Trans-Lynx Express, Inc.
In November 1995, the Company issued 300,000 shares of common stock in
exchange for 100% of the outstanding common stock of Automated Solutions, Inc.
In 1996, the Debentures with a book value of $1,776,288 at December 31, 1995
were converted into 753,667 shares of the Company's common stock.
In February 1996, the Company issued 18,333 shares of common stock in
exchange for certain assets of Krogel Air Freight, Inc. and Krogel Freight
Systems of Tampa, Inc.
In 1996, the Company issued 252,111 shares of common stock in regards to
employment contracts and covenants not-to-compete.
In 1996, the Company converted 300 shares of convertible preferred stock
into 88,889 shares of common stock.
In 1996, the Company acquired 47,500 shares of its common stock for $89,970,
which included the cancellation of a note receivable of $68,960.
F-29
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
In September 1996, the Company issued 300,000 shares of common stock in
exchange for 100% of the outstanding common stock of BancPro Transportation,
Inc.
In October 1996, the Company acquired certain intangible assets of Eagle Air
Express in exchange for a note of $32,400 and a cash payment of $10,800.
In November 1996 the Company converted the Preferred Stock Series C to
Preferred Stock Series M, which on the date of conversion had a market value
differential of $680,000.
In November 1996 the Company executed a long term employment contract with
its Chairman which obligated the Company to issue 1,000,000 shares of its Common
Stock which on the date of issuance had a market value of $1,562,500.
F-30
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
U.S. Transportation Systems, Inc. and Subsidiaries (the "Company") are
currently engaged in business areas which relate to transportation. The
transportation services consist of: (i) providing bus, motor vehicle and
packaging and delivery transportation related services; and (ii) manufacturing
of electrical harnesses for transportation equipment. The Company's operations
are conducted in selected cities throughout the United States and
internationally.
In November 1996 the Company made the decision to discontinue Automated
Solutions, Inc. ("ASI"), a segment engaged in custom designing and manufacturing
machinery which folds and tests airbags, and the entertainment divisions
(Downtown Theatre Ticket Agency, Inc., DBA "Advance Entertainment," Advance
Entertainment--Chicago, Inc., Broadway Theatours, Inc. and Premier Box Office,
Inc.), a segment specializing in the retail sale of tickets for theater, sports
and various entertainment events in New York and Chicago (see Note 14).
As more fully discussed in Note 13, during 1996 the Company acquired certain
intangible assets of Krogel Air Freight, Inc. and Krogel Freight Systems of
Tampa, Inc. ("Krogel") which operate a local package pick-up and delivery
service; certain assets of Jackson & Johnson, Inc., which operates a tractor/
trailer delivery service; 100% of the stock of BancPro Transportation, Inc.,
which operates a car rental service; and certain assets of U&M Express and Eagle
Air Express; which operate a pick-up and delivery service.
In October 1996, the Company's harness manufacturing subsidiary, American
Trade-A-Bus, Inc. (ATAB), lost its long term profitable contract with its only
customer Stewart & Stevenson ("S&S"). During the 1996 year, ATAB contributed
approximately $140,000 to continuing operations. Management is attempting to
secure other customers and other profitable work with S&S. If management is
unsuccessful, the Company may be required to liquidate the assets of ATAB.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
USES OF ESTIMATES
The preparation of consolidated financial statements 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 consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed.
F-31
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories were comprised of:
<TABLE>
<S> <C>
Parts............................................................. $ 192,549
Raw materials..................................................... 169,400
Work in Process................................................... 220,088
Sundry............................................................ 12,238
---------
Total............................................................. $ 594,275
---------
---------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company records
depreciation utilizing the straight-line method over estimated useful lives of
10 to 17 years for highway coaches and 3 to 7 years for school buses,
tractor-trailers and other revenue equipment with no residual value. Other
depreciable assets have estimated useful lives of 3 to 30 years, with no assumed
residual value. Overhauls of major highway coach components are capitalized and
written off utilizing the straight-line method over a period of thirty months.
When an asset is sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective accounts, and any
resulting gain or loss is reflected in income.
INVESTMENT TAX CREDIT
The Company accounts for investment and other tax credits (when available)
by the flow-through method.
CASH RESTRICTED
The Company maintains cash balances in certificates of deposit which secure
letters of credit for various insurance policies and bonds. It is the Company's
policy to classify the restricted cash consistent with the liabilities to which
they relate. Therefore, the Company treats restricted cash securing letters of
credit as a current asset.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
GOODWILL
Goodwill and other intangible assets are amortized by the straight-line
method over lives ranging from 5 to 20 years. The Company periodically evaluates
the carrying value and the periods of amortization of goodwill based on the
current and expected future non-discounted income from operations of the
entities giving rise to the goodwill to determine whether events and
circumstances warrant revised estimates of carrying value or useful lives.
Goodwill identifiable to a particular segment or group of assets is charged to
earnings upon disposition of the particular segment or group of assets.
F-32
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
periods presented (see Note 9). Common stock equivalents include shares issuable
upon conversion of the Company's convertible debentures and exercise of certain
of the Company's options and warrants. Such common stock equivalents were
antidilutive in 1996. All share and per share amounts have been retroactively
adjusted for the one-for-six reverse stock split declared on August 27, 1996.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In evaluating the fair value and the future benefits of
long-lived assets, the Company performs an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, of the result of such calculation.
The Company adopted SFAS No. 121 effective January 1, 1996.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation" effective January 1, 1996. SFAS
No. 123 establishes financial accounting and reporting standards for stock-based
employee compensation plans. The Company elected to continue to account for
employee stock-based compensation as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and to provide pro forma disclosures
in the Notes to Financial Statements of the effects of SFAS No. 123 on net
income and earnings per share. There was no effect on the results of operations
as a result of adopting SFAS No. 123.
[2] NET INVESTMENT IN SALES-TYPE LEASES
The Company's leasing activities consist entirely of revenue equipment.
These leases expire at various times through November 2001. There were no
initial or executory costs with respect to these leases.
The following is a summary of the components of the Company's net investment
in these sales-type leases at December 31, 1996:
<TABLE>
<S> <C>
Total Minimum Lease Payments Receivable................................. $3,046,000
Less: Unearned Income................................................... 685,263
---------
Net Investment in Sales Type Leases..................................... $2,360,737
---------
---------
</TABLE>
F-33
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[2] NET INVESTMENT IN SALES-TYPE LEASES (CONTINUED)
Minimum lease payments to be received as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................................ $1,199,000
1998............................................................ 750,000
1999............................................................ 545,000
2000............................................................ 323,000
2001............................................................ 229,000
---------
Total........................................................... $3,046,000
---------
---------
</TABLE>
[3] SECURED LINE OF CREDIT
The Company entered into a line of credit agreement with a Bank in October
1996, which agreement replaced the Company's previous line of credit agreement
with a different institution. The agreement contains an accounts receivable
financing component and an equipment loan component which provide for an
aggregate maximum borrowing balance of $5,000,000. The accounts receivable
component of the line of credit is secured by accounts receivable and sales-type
leases receivable and has a maximum borrowing limit of $3,500,000; the
receivables component borrowing base is computed at 80% of eligible accounts
receivable and 90% of eligible sales-type leases receivable. The equipment loan
component, which has a maximum borrowing limit of $1,500,000, is secured by
equipment, primarily buses, tractors and trailers. All outstanding balances are
due October 8, 1999, the termination date of the agreement. The borrowings are
further secured by property belonging to an officer of the Company. Borrowings
under the finance agreement bear interest at prime plus 1.5 percent (9.75% at
December 31, 1996), which interest is payable monthly. At December 31, 1996, the
amount borrowed and outstanding under the line of credit agreement was
$3,093,044 and is included on the balance sheet in Line of Credit Obligation.
F-34
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[4] NOTES PAYABLE
Notes payable consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Notes payable and capitalized leases, collateralized by equipment,
payable monthly and maturing through December 2001, interest rates
ranging from 8% to 14% (including certain notes with interest based
upon the prime rate, average interest rate approximately 10%)......... $4,056,451
Notes payable, unsecured, resulting from acquisitions, payable monthly
and maturing through Sept. 1998 with interest rates which approximate
10%................................................................... 1,000,398
Mortgage notes payable, collateralized by real property, payable in
monthly installments of $5,310 and $1,879 through August 1998 and
November 2007 respectively. (average interest rate approximately 11%)
Property with a carrying value approximating $675,000 secures the
mortgages............................................................. 234,160
---------
Total Notes Payable..................................................... 5,291,009
Less: Current Maturities................................................ 1,580,269
---------
NON-CURRENT NOTES PAYABLE............................................... $3,710,740
---------
---------
Annual maturities of notes payable, as of December 31, 1996, are as follows:
1997.................................................................... $1,580,269
1998.................................................................... 2,041,170
1999.................................................................... 810,163
2000.................................................................... 548,914
2001.................................................................... 215,294
Thereafter.............................................................. 95,199
---------
TOTAL................................................................... $5,291,009
---------
---------
</TABLE>
In April 1996, the Company completed a Bridge Financing issuing an aggregate
of $1,200,000 principal amount of Bridge Notes. The Company received net
proceeds of $982,000, after deducting the placement agent's discount and expense
allowance and other expenses of the offering. Upon repayment of the Bridge
Notes, the Company recognized a charge to operations of $441,038 based on the
difference between the amount allocated to the note and the principal repaid.
Such charges are included in interest expense.
[5] LONG-TERM LEASES
The Company leases real property under operating leases expiring in 2005.
These leases generally require that the Company pay all costs of maintenance,
insurance and licenses. Future minimum payments,
F-35
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[5] LONG-TERM LEASES (CONTINUED)
on non-cancelable operating leases with initial or remaining terms of one year
or more, are as follows at December 31, 1996:
<TABLE>
<CAPTION>
(NON-
OPERATING LEASES RELATED)
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
1997...................................................................................... $ 444,000
1998...................................................................................... 390,000
1999...................................................................................... 390,000
2000...................................................................................... 368,000
2001...................................................................................... 312,000
------------
Total Minimum Lease Payments.............................................................. $ 1,904,000
------------
------------
</TABLE>
[6] INCOME TAX EXPENSE
The Company accounts for its income taxes under the liability method. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Differences between financial reporting
and tax basis arise most frequently from differences in timing of income and
expense recognition and as a result of business acquisitions.
In 1996, the Company fully reserved its previously recorded net deferred tax
asset of $750,000. The decision to fully reserve the previously recorded
deferred tax asset of $750,000 was based upon management's evaluation that, with
the Company's losses in 1996 and the aspect of losses continuing at least
through June 30, 1997, future profits are not certain enough to presently
substantiate carrying a tax asset on the books. At December 31, 1996, the
Company had available for tax purposes net operating loss ('NOL') carryforwards
of approximately $12,100,000 and general business credits of approximately
$470,000. NOL carryforwards will expire commencing in 2002 and ending in 2011,
as follows: $3,800,000 expiring in 2002; $1,440,000 expiring in 2007; $5,310,000
expiring in 2008; $370,000 expiring in 2009 and the remainder expiring in 2011.
Tax credit carryforwards will expire commencing in 1997 and ending in 2000;
because of the timing of the tax credits, and as ('IRS') rules require the NOL
to be first utilized to offset future earnings, it is less certain to what
extent the Company will realize any benefit from its tax credits.
The Company has reserved $2,838,000 against these expected benefits. This is
due to the relative uncertainty regarding long-term future earnings and the NOL
annual limitations resulting from an 'ownership change' which occurred in
January 1996, within the meaning of section 382 of the IRS Code. Although the
determination of whether an ownership change has occurred is subject to factual
and legal uncertainties, the Company believes that an ownership change occurred
in January 1996 from the issuance of common stock pursuant to the conversion of
convertible debentures. Under an ownership change, the Company will be permitted
to utilize NOL carryforwards (available on the date of such change) in any year
thereafter to reduce its income only to the extent that the amount of such
income does not exceed the product of (the 'Section 382 limit') the fair market
value of the Company's outstanding equity at the time of the ownership change
and long term tax exempt rate published by the IRS; the Company's Section 382
limits on all NOL carryforwards originating before 1996 will be approximately
$605,000 per year, and accordingly, the Company will not, in any case, be able
to utilize its full NOL benefits.
F-36
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[6] INCOME TAX EXPENSE (CONTINUED)
A reconciliation of the total income taxes computed by applying the
statutory federal rate and the effective tax rate follows:
<TABLE>
<CAPTION>
1996
INCOME 1995 INCOME
TAXES % TAXES %
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal Statutory Tax Rate............................................. $ -- -- $ 382,000 34%
Use of NOL to offset tax............................................... -- -- (746,000) (66)
Increase in valuation allowance........................................ 750,000 11% -- --
---------- --- ----------- ---------
Total Federal Income Tax (Benefit)/Expense............................. $ 750,000 11% $ (364,000) (32)%
---------- --- ----------- ---------
---------- --- ----------- ---------
</TABLE>
The components of deferred taxes are as follows as of December 31, 1996:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
------------- ----------
<S> <C> <C>
Accelerated Depreciation............................................................... $ 194,000
Discontinued Operations................................................................ 12,000
Goodwill............................................................................... 145,000
Installment Sales...................................................................... 332,000
Bad Debts.............................................................................. $ 56,000
Tax Credits............................................................................ 470,000
Net Operating Loss..................................................................... 2,995,000
------------- ----------
Total.................................................................................. 3,521,000 683,000
Valuation Allowance.................................................................... (2,838,000)
------------- ----------
Total.................................................................................. $ 683,000 $ 683,000
------------- ----------
------------- ----------
</TABLE>
F-37
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[7] SEGMENT INFORMATION
In 1996 and 1995 the Company's operations are classified into two principal
industry segments: transportation and manufacturing. The following is a summary
of segment information.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Net Sales to Unaffiliated Companies:
Transportation................................................................... $ 18,697,452 $ 9,455,622
Manufacturing.................................................................... 2,812,299 4,214,699
------------- -------------
Totals........................................................................... $ 21,509,751 $ 13,670,321
------------- -------------
------------- -------------
Income (Loss) from Operations:
Transportation................................................................... $ (2,957,159) $ 331,651
Manufacturing.................................................................... 140,863 1,058,285
------------- -------------
Totals........................................................................... (2,816,296) 1,389,936
Other expense, net................................................................. (459,939) (592,694)
------------- -------------
(Loss) Income Before Income Taxes and Discontinued Operations as Reported in the
Accompanying Statement of Operations............................................. $ (3,276,235) $ 797,242
------------- -------------
------------- -------------
Identifiable Assets from Continuing Operations:
Transportation................................................................... $ 20,506,506 $ 10,961,938
Manufacturing.................................................................... 781,451 1,161,709
------------- -------------
Totals........................................................................... $ 21,287,957 $ 12,123,647
------------- -------------
------------- -------------
Depreciation and Amortization:
Transportation................................................................... $ 1,175,799 $ 654,143
Manufacturing.................................................................... 223,350 77,813
------------- -------------
Totals........................................................................... $ 1,399,149 $ 731,956
------------- -------------
------------- -------------
Capital Expenditures:
Transportation................................................................... $ 5,463,707 $ 1,080,292
Manufacturing.................................................................... 240,356 198,084
------------- -------------
Totals........................................................................... $ 5,704,063 $ 1,278,376
------------- -------------
------------- -------------
</TABLE>
[8] MAJOR CUSTOMERS
Revenues from a single transportation contract with Ford Motor Company
approximated 12% and 17% of the Company's revenues from continuing operations in
1996 and 1995, respectively. Revenues received in 1996 and 1995 approximated
$2,520,000 and $2,364,000, and their receivables at December 31, 1996
approximated $407,000.
ATAB, a wholly-owned subsidiary, derives substantially 100% of its revenue
from S&S. Revenues received in 1996 and 1995 approximated $2,812,000 and
$4,112,000, and their receivable at December 31, 1996 approximated $17,000. The
remaining contract work for S&S will be completed in June 1997.
F-38
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[9] RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company owed its Chairman, and or corporations
under his control, and related family entities $1,105,114 which consists of the
following:
<TABLE>
<S> <C>
Balance due at December 31, 1995........................................ $ 602,295
Accrued preferred stock dividends....................................... 169,335
Accrued interest charged to operations.................................. 131,484
Sale of buses to Company................................................ 240,000
Advances--cash.......................................................... 500,000
Repayments.............................................................. (538,000)
---------
Balance due at December 31, 1996........................................ $1,105,114
---------
---------
Annual maturities as of December 31, 1996 are as follows:
1997.................................................................... $ 439,646
1998.................................................................... 203,000
1999.................................................................... 146,700
2000.................................................................... 170,300
2001.................................................................... 145,468
---------
Total................................................................... $1,105,114
---------
---------
</TABLE>
The above loan bears interest at 15% per annum, with weekly payments
including interest of $10,000. $500,000 of the balance due at December 31, 1996
are subordinated to amounts due under a line of credit agreement (See Note 3).
In November 1996, the Company entered into an eleven year employment
agreement, commencing January 1, 1997, with the Chairman. The agreement
provides, among other things for the Chairman to receive a salary of $250,000
per year plus annual CPI adjustments and for a bonus equal to 8% of the
Company's pretax income. In addition, the agreement grants the Chairman the
right to receive 1,000,000 shares of the Company's common stock until March
1997.
The Company recorded compensation expense for $1,562,500 in 1996 for the
market value of the stock on the day the agreement was executed. The stock was
issued to the Chairman in February 1997. The number of shares outstanding and
weighted average number of shares of common stock and common stock equivalents
outstanding during 1996 have been adjusted to reflect the issuance as if it
occurred in November 1996. See Note 18 with respect to the Company's obligation
to repurchase the capital stock owned by Mr. Margolies or members of his family.
In November 1996, the Company entered into an agreement whereby the 180,000
shares of Preferred Stock Series C, all of which is held by the Company's
Chairman and his family, were converted to 180,000 shares of Preferred Stock
Series M. The Preferred Series C had the following features: dividends
cumulative and payable annually at a rate of $1.065 per share; redeemable at the
option of the Issuer after January 1, 2000, at a price of $10.00 per share;
voting rights at the rate of 3.3 common stock voting shares per each preferred
share. The Preferred Series M has the following features: no dividend rights; no
redemption rights; no voting rights; convertible into the Company's common stock
after December 31, 1997 at the rate of 9.5 common shares per each preferred
share. In connection with this conversion, the Company recorded an expense of
$680,000 in 1996. This expense was calculated based on the excess of the market
value of the Company's common stock (on the date of the conversion) over the
value of the
F-39
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Series C Preferred Stock, further reduced by the dividends the Chairman would
have received on the Series C Preferred Stock.
[10] PROFIT-SHARING PLAN
One of the companies adopted a voluntary profit-sharing plan for the benefit
of its employees. Contributions are at the discretion of the company. No
contributions were accrued or paid during the years ended December 31, 1996 and
1995. Another company maintains a non-contributory 401(k) plan.
[11] STOCK OPTIONS:
The Company has the following stock options plans:
- In August 1995, the Company adopted an incentive stock option plan for the
benefit of its key officers, directors and employees. The Company reserved
20,000 shares of its common stock for issuance under the Plan, which
expired on September 1, 1995.
- On April 11, 1995, as part of an agreement with Argent Securities, Inc.
("Argent") Argent gave up its right to first refusal to underwrite future
equity offerings of the Company, and its right to nominate two members to
the Company's Board of Directors; in exchange the Company reserved and
issued to Argent options to purchase 33,333 shares of the Company's common
stock, all of which were exercised except as follows:
8,333 shares at $7.50 per share through April 11, 1997
- In October 1994 the Company issued stock options, pursuant to a consulting
agreement in connection with the acquisition of ATAB, for 18,333 shares of
common stock in 1994 and 50,000 shares of common stock in 1995, of which
59,167 options were exercised in 1995 at $3.00 and $4.50 per share; the
remaining option was canceled pursuant to a superseding consulting
agreement.
- In November 1995, the Company, pursuant to the acquisition of ASI,
reserved and issued options to certain principals and/or employees to
purchase 55,000 shares of common stock as follows:
18,333 shares at $7.50 per share between December 1, 1996 through
December 31, 1998
18,333 shares at $9.00 per share between December 1, 1997 through
December 31, 1998
18,334 shares at $12.00 per share between December 1, 1998 through
December 31, 1998
F-40
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the plans are as follows:
<TABLE>
<CAPTION>
STOCK OPTION INCENTIVE
PLAN FOR NON- STOCK
EMPLOYEE OPTIONS; OTHER
DIRECTORS, SHARES OPTIONS;
CONSULTANTS & EXERCISE UNDER EXERCISE SHARES UNDER EXERCISE
ADVISORS PRICE OPTION PRICE OPTION PRICE
------------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31,
1994............................ -- $ -- 833 $ .36 18,333 $ 3.00
Granted.......................... 33,333 4.50-7.50 -- -- 106,667 4.50-12.00
Exercised........................ -- -- (833) .36 (60,833) 3.00-4.50
Expired.......................... -- -- -- -- -- --
Canceled......................... -- -- -- -- -- --
Outstanding at December 31,
1995............................ 33,333 4.50-7.50 -- -- 64,167 4.50-12.00
------------- ----- -------------
Granted.......................... -- -- -- -- -- --
Exercised........................ (25,000) 4.50 -- -- -- --
Expired.......................... -- -- -- -- -- --
Canceled......................... -- -- -- -- (9,167) 4.50
Outstanding at December 31,
1996............................ 8,333 $ 7.50 -- $ -- 55,000 $ 7.50-12.00
------------- ----------- ----- --- ------------- -------------
------------- ----------- ----- --- ------------- -------------
</TABLE>
STOCK BASED COMPENSATION
The Company has elected to adopt the disclosure-only provisions of SFAS No.
123 (as discussed in Note 1) and will continue to apply APB Opinion No. 25 to
account for stock options. Had compensation expense been determined as provided
in SFAS No. 123 for stock options using the Black-Scholes option pricing model,
the pro forma effect for the years ended December 31, 1996 and 1995 would have
been:
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Net income (loss) applicable to common shares--as reported............................. $ (6,863,786) $ 932,218
Net income (loss) applicable to common shares--pro forma............................... $ (6,989,441) $ 915,722
Net income (loss) per common share--as reported........................................ (1.70) 0.51
Net income (loss) per common share--pro forma.......................................... (1.73) 0.50
</TABLE>
The fair value of each option grant is calculated using the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Expected life (in years)............................................................... 3 3
Interest rate.......................................................................... 5.4% 5.4%
Volatility............................................................................. 75.2% 75.2%
Dividend yield......................................................................... 0.0% 0.0%
</TABLE>
The weighted average fair value of the stock options granted in 1995 was
$3.88.
F-41
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PUBLIC OFFERING OF SECURITIES
In August, 1996 the Company completed a public offering of 1,815,000 Units
of securities. Each "Unit" consisted of one share of Common Stock, $.01 par
value, and one Redeemable Class C Common Stock Purchase Warrant (See "Stock
Warrants" below). The offering was underwritten by a syndicate of
broker-dealers, with First London Securities Corporation acting as
Representative of the underwriters. The Units were offered to the public at a
price of $3.82 per Unit, or a total offering of $6,933,300. The prospectus
prepared by the Company stated that net proceeds of $5,496,805 (after payment of
the expenses of the offering, including payments to the underwriters) were
anticipated. For purposes of this accounting, net proceeds from the offering of
$5,013,056 have been recorded, as additional expenses have been charged to the
offering. The Company expects to use the net proceeds primarily to repay debt,
to finance acquisitions and for working capital.
STOCK GRANT
On January 18, 1994, the Board of Directors of the Company adopted a
Restricted Stock Grant Program (the 'Program') pursuant to which 183,333 shares
of Common Stock were reserved for issuance. The Program provides that if the
Company met certain sales and income goals for the twelve months ended June 30,
1994, the shares would be granted to each of the Company's executive officers
(the 'Grantees') who remain employed by the Company on that date. These 183,333
shares of restricted common stock were issued to the Company's Executive
Officers on August 15, 1994 and may be voted by Grantees. Originally, the
restricted common stock shares issued were subject to forfeiture each year on
May 1 of 1995 through 1998 if total Company sales for the preceding fiscal year
did not meet certain goals, and it was the Company's opinion that attainment of
the specified sales goals was probable. The Plan was amended in April 1995.
Subsequent to the amendment, 20% of the restricted common stock shares issued
shall be subject to forfeiture each year on May 1 of 1995 through 1999 if the
Company does not meet certain sales, profit and income per share goals for the
preceding fiscal year. The amendment divides the grant into three sections; one
third of the grant is based on obtaining a minimum sales goal, one third is
based on a specified amount of income from operations and one third based on
earnings per share. If the second and third goal are not met in any one year,
they can be carried over to the subsequent year. All items were met in 1994,
items one and two were met in 1995 and item one was met in 1996. Additionally,
on August 15, 1998 and August 15 of each successive year through August 15,
2001, restrictions shall lapse on 25% of the restricted common stock shares
issued (and not forfeited due to the Company's failure to meet the specified
goals); however, all shares on which restrictions have not lapsed shall be
forfeited by the grantee upon the grantee's termination of employment with the
Company. The shares were valued at $4.50 per share, the price of the common
stock at time of issuance and a deferred compensation contra equity account,
amortized over the 84 month period restrictions and forfeiture provisions lapse,
was recorded at time of issuance. The balance of the deferred compensation
related to this stock grant at December 31, 1996 was $545,089. Deferred
compensation expense in connection with this grant was $113,415 and $135,667,
respectively, for the years ended December 31, 1996 and 1995, respectively. When
and if the restrictions lapse on the restricted common stock shares, the
Company, under certain conditions, will indemnify the Grantees of the income tax
consequences accruing to the Grantees by virtue of the lapse of restrictions.
STOCK SPLIT
The Company's Board of Directors declared a one-for-six reverse stock split
of its common stock, effective August 27, 1996. The par value of the common
stock remains at $.01 per share. All share data have been adjusted for the
effects of the split.
F-42
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK WARRANTS
On December 1, 1994, Argent and the Company entered into a Letter of
Agreement, pursuant to which Argent Securities, Inc. agreed to provide investor
relations and corporate communications services to the Company for a period of
one year. In consideration of those services, the Company agreed to pay an
annual fee of $20,000 and to issue to Argent warrants to purchase 66,667 shares
of the Company's Common Stock at $2.25 per share. On April 11, 1995 the Company
and Argent entered into a second Letter Agreement. Among the terms of the new
agreement were a reduction to 33,333 of the shares which Argent could purchase
under the warrants issued to it in 1994. These warrants were fully exercised in
1996.
Argent was the underwriter of an offering of securities which the Company
completed on February 28, 1995. Argent received commissions and a
non-accountable expense allowance in compensation for those services. In
connection with that offering, the Company sold to Argent an Underwriter's
Warrant for a nominal price. The Underwriter's Warrant will permit Argent to
purchase 17,000 shares of Series A Preferred Stock between February 21, 1996 and
February 20, 1999.
Effective with the February 28, 1995 offering, the Company issued 170,000
Class A Common Stock Purchase Warrants, each of which allowed the holders to
purchase a share of the Company's common stock and a Class B Common Stock
Purchase Warrant for $8.10. Each Class B Warrant permitted the purchase of a
share of common stock at $9.90. No Class A Warrants were exercised before such
warrants expired on August 20, 1996. Accordingly, there are no Class A Warrants
or Class B Warrants currently outstanding.
Effective with the August 27, 1996 offering, the Company issued 1,815,000
Class C Common Stock Purchase Warrants, each of which allows the holders to
purchase a share of the Company's common stock at $3.82 per share. The Class C
Warrants expire on August 27, 1999. No Class C Warrants have been exercised as
December 31, 1996.
STOCK AUTHORIZATION
On February 21, 1996, the Board of Directors approved an increase in the
authorized common stock shares from 20,000,000 to 50,000,000 shares.
REGISTRATION OF "FORM S-8" STOCK
In September 1996 the Company established the U.S. Transportation Systems,
Inc. Employee Stock and Stock Option Plan.
On October 16, 1996, the Company registered 2,000,000 common shares pursuant
to a Form S-8 filing with the Securities and Exchange Commission. The stock is
reserved for issuance to the Company's Employees, Directors, Officers, or in
consideration for bona fide services provided to the Company by consultants or
advisors. The Company's Board has the sole discretion in determining when to
issue such shares. As of December 31, 1996, the Company had issued 326,000
Common Shares so registered under such Form S-8 filing. The Company had no
commitment at December 31, 1996 to issue any additional shares.
[12] MOUNTAIN VIEW SETTLEMENT
In 1993 the pending litigation between Mountain View Coach Lines, Inc.
(which was in Chapter 7 bankruptcy proceeding) and the State of New York was
settled for $376,000. This settlement, which was approved by the bankruptcy
court on March 28, 1994, insured Mountain View sufficient assets to pay all of
F-43
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[12] MOUNTAIN VIEW SETTLEMENT (CONTINUED)
its administrative expenses and priority claims. The Company's approved priority
claims against Mountain View's assets aggregated $325,000. These claims were not
recorded previous to December 31, 1993 by the Company as this receivable was not
considered realizable until the aforementioned settlement. The bankruptcy estate
could not be concluded until payment of the settlement with the State of New
York cleared administrative procedures, which process took longer than
originally anticipated. In October 1996, after deducting court-approved offsets
of liabilities to the New York Department of Taxation & Finance and the New York
Worker's Compensation Board, the Company received approximately $109,000 in
regards to its claim against Mountain View; the difference between the amount
receivable on the Company's books and the eventual proceeds were expensed in
1996.
[13] ACQUISITIONS
In February 1996, the Company acquired certain personal property, intangible
assets and contract rights from Krogel Air Freight, Inc. and Krogel Freight
Systems of Tampa, Inc. for $150,000 in cash and 18,333 shares of the Company's
common stock. This acquisition was accounted for as a purchase. As a result of
this acquisition the Company recorded goodwill of $205,000 which is being
amortized over eight years.
In June 1996, the Company purchased certain assets from Jackson & Johnson,
Inc. for $160,000 in cash and the assumption of approximately $2,860,000 in
secured debt. No goodwill was recorded as the fair value of the assets acquired
approximated the consideration given by the Company.
In September 1996, the Company acquired 100% of the common stock of BancPro
Transportation, Inc. in exchange for: a $1,150,000 zero interest-bearing note
due September 1998; 300,000 shares of the Company's common stock; and the
following preferred stock (25% of which relates to an employment contract with
the principal officer of BancPro Transportation, Inc.), the balance of the
shares relate to a consulting agreement with CFM:
<TABLE>
<C> <S>
6,667 shares of Preferred Stock
Series E
8,333 shares of Preferred Stock
Series F
10,833 shares of Preferred Stock
Series G
12,500 shares of Preferred Stock
Series H
14,167 shares of Preferred Stock
Series I
15,833 shares of Preferred Stock
Series J
17,500 shares of Preferred Stock
Series K
19,167 shares of Preferred Stock
Series L
</TABLE>
Each share of preferred stock is convertible into a maximum of ten shares of
the Company's common stock upon the attainment by BancPro of certain revenue
goals. Since it is not certain that any such goals will be attained, no amount
was booked for the issuance of these preferred shares. As revenue goals are
reached, the Company will record expense for the respective common shares which
are issued. As part of the agreement the Company received a guarantee from the
Seller in regards to BancPro receivables acquired. This acquisition was
accounted for as a purchase and resulted in recorded goodwill of $455,906, which
is being amortized over eight years.
In June 1995, the Company acquired the capital stock of Avanti Delivery
Services, Inc. and Priority Express Service, Inc. for an aggregate of 130,000
shares of the Company's common stock and, in July 1995,
F-44
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[13] ACQUISITIONS (CONTINUED)
the assets of Falcon Freight, Inc. for $20,000. The acquired companies were all
Florida based corporations which collectively operate a package delivery service
under the name "Armstrong Freight Service" ("Armstrong"). Further, in July 1995,
the Company acquired the capital stock of Trans Lynx Express Inc. ("TLE"),
another Florida based company that provides ground transportation of
containerized air cargo, for 19,424 shares of the Company's common stock. These
acquisitions were accounted for as purchases, which resulted in aggregate
recorded goodwill of $449,483 for the excess of the purchase price over the fair
value of the assets acquired, less liabilities assumed. Goodwill is being
amortized over eight years.
In November 1995, the Company acquired all of the issued and outstanding
capital stock of ASI in exchange for 300,000 shares of the Company's common
stock. ASI is engaged in designing, manufacturing and selling machinery which
folds and tests airbags and assembles airbag modules, for installation in
passenger and utility vehicles. ASI holds several design patents on automatic
bag folding machinery and the process through which these machines operate. This
acquisition was also accounted for as a purchase, which resulted in recorded
goodwill of $3,970,072 for the excess of the purchase price over the fair value
of the assets acquired, less liabilities assumed. Goodwill is being amortized
over eight years. In November 1996, the Company's management made the decision
to discontinue ASI's operations, and it is, thereby, accounted for in the
accompanying financial statements as a discontinued operation (See Note 14).
The purchase price for all acquisitions in 1996 and 1995 was allocated as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Property and equipment............................................. $ 3,029,900 $ 953,800
660,900 4,464,300
Working capital, net............................................... 1,250,000 (3,395,700)
----------- ------------
Total.............................................................. $ 4,940,800 $ 2,022,400
----------- ------------
----------- ------------
</TABLE>
F-45
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[13] ACQUISITIONS (CONTINUED)
The following unaudited pro forma statements do not purport to be indicative
of the results of operations that would have occurred if U.S. Transportation
Systems, Inc. had acquired Armstrong, Krogel, Jackson & Johnson and BancPro at
the beginning of the periods presented.
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------------------------------
ARMSTRONG
FREIGHT TOTAL
U.S. KROGEL, JAY & SERVICE AND BEFORE PRO
TRANSPORTATION JAY AND TRANS LYNX FORMA PRO FORMA
SYSTEMS BANCPRO EXPRESS ADJUSTMENTS ADJUSTMENTS TOTAL
-------------- ------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue................................ $ 12,225,000 $15,610,000 $2,050,000 2$9,885,000 $ -- $29,885,000
Total expenses......................... 10,770,000 15,970,000 2,030,000 28,770,000 30,000 28,800,000
Other expense.......................... 220,000 260,000 15,000 495,000 90,000 585,000
Income tax benefit..................... 364,000 -- -- 364,000 -- 364,000
-------------- ------------- ----------- ----------- ----------- ----------
Income/(loss) from continuing
operations........................... 1,599,000 (620,000) 5,000 984,000 (120,000) 864,000
Loss from discontinued operations...... (37,000) -- -- (37,000) -- (37,000)
-------------- ------------- ----------- ----------- ----------- ----------
Net income/(loss)...................... $ 1,562,000 $ (620,000) $ 5,000 $ 947,000 $(120,000) $ 827,000
-------------- ------------- ----------- ----------- ----------- ----------
-------------- ------------- ----------- ----------- ----------- ----------
Earnings per share:
Income from continuing operations.... $ .37
Loss from discontinued operations.... (.02)
----------
$ .35
----------
----------
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------------------------------
ARMSTRONG
FREIGHT TOTAL
U.S. KROGEL, JAY & SERVICE AND BEFORE PRO
TRANSPORTATION JAY AND TRANS LYNX FORMA PRO FORMA
SYSTEMS BANCPRO EXPRESS ADJUSTMENTS ADJUSTMENTS TOTAL
-------------- ------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenue................................ $ 16,610,000 $10,330,000 $ -- 2$6,940,000 $ -- $26,940,000
Total expenses......................... 18,020,000 11,190,000 -- 29,210,000 110,000 29,320,000
Other expense.......................... 1,110,000 150,000 -- 1,260,000 90,000 1,350,000
Income tax (expense)................... (750,000) -- -- (750,000) -- (750,000)
-------------- ------------- ----------- ----------- ----------- ----------
Loss from continuing operations........ (3,270,000) (1,010,000) -- (4,280,000) (200,000) (4,480,000)
Loss from discontinued operations...... (2,668,000) -- -- (2,668,000) -- (2,668,000)
-------------- ------------- ----------- ----------- ----------- ----------
Net loss............................... $ (5,938,000) $(1,010,000) $ -- ($6,948,000) $(200,000) $(7,148,000)
-------------- ------------- ----------- ----------- ----------- ----------
-------------- ------------- ----------- ----------- ----------- ----------
Earnings per share:
Income from continuing operations.... $ (1.15)
Loss from discontinued operations.... (.66)
----------
($ 1.81)
----------
----------
</TABLE>
F-46
<PAGE>
[13] ACQUISITIONS (CONTINUED)
The proforma adjustments for the years ended December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Amortization of goodwill.............................................. $ 110,000 $ 30,000
Interest expense on note issued....................................... 90,000 90,000
---------- ----------
Total proforma adjustments............................................ $ 200,000 $ 120,000
---------- ----------
---------- ----------
</TABLE>
[14] DISCONTINUED OPERATIONS
AIRBAG EQUIPMENT MANUFACTURER
In November 1996, the Company adopted a formal plan to discontinue its
operation that engages in the design, manufacturing and sales of machinery which
folds and tests airbags and assembles airbag modules for installation in
passenger and utility vehicles. These operations were located in Phoenix,
Arizona. ASI's operations experienced lower gross profit margins than the
Company believed was attainable at the time of acquisition. Further, ASI's
projected capital requirements for 1997 exceeded any amount the Company believed
were warranted by the timing of the anticipated returns. The decision to
discontinue ASI's operations was, thus, precipitated by management's belief that
this segment no longer represented the best utilization of the Company's assets.
On March 28, 1997 the Company sold ASI as a continuing operation for:
$100,000 cash; a 10.5% interest bearing note of approximately $5,200,000 with
monthly payments of approximately $80,000, the unpaid principal fully due on
April 1, 1999; and a non-interest bearing note of $685,000 due April 1, 1999.
These notes are guaranteed personally by the Seller's principal shareholder and
secured by the assets of ASI; additionally, 100% of ASI stock is pledged against
these notes.
During the year ended December 31, 1996, the Company booked $196,843 for the
Company's provision for the estimated operating losses from discontinued
operations during the phase-out period. The operating loss of the Company's
airbag equipment manufacturing segment for the year ended December 31, 1996 was
$1,787,859 (excluding the phase-out period losses) as compared to net income for
the period from November 15, 1995 (the date of acquisition) to December 31, 1995
of $94,545. The results of operations of ASI have been reclassified to
discontinued operations for the years ended December 31, 1996 and 1995. The
segment's net sales were $6,889,758 in 1996 and $905,247 in the aforementioned
period in 1995. Net assets of the discontinued segment held for sale, includes
accounts receivable, inventory (including work in progress), property and
equipment and intangibles.
ENTERTAINMENT DIVISIONS
In November 1996, the Company adopted a formal plan to discontinue its
entertainment divisions which specialize in the retail sale of tickets for
theater, sports and various entertainment events in the New York and Chicago
area. These operations were located in Chicago and New York. The entertainment
divisions experienced lower gross profit margins and increasing losses in recent
years, and the Company believed that the potential for profitability is doubtful
in the near future and was attainable at the time of acquisition. The decision
to discontinue the entertainment divisions was based upon management's belief
that this segment no longer represented a profitable segment.
On January 7, 1997 the Company sold the entertainment divisions as a
continuing operation for 850,000 shares of common stock of Packaging Plus
Services, Inc., a publicly-held company. PKGP was trading at $0.875 per share
and the 850,000 shares represented approximately 28% of PKGP's total issued and
outstanding common stock at the time of the sale.
F-47
<PAGE>
[14] DISCONTINUED OPERATIONS (CONTINUED)
During the year ended December 31, 1996, the Company recorded no provision
for the estimated operating losses from discontinued operations during the
phase-out period (January 1-7, 1997), as the operating activity for such period
was de minimus. The operating loss of the Company's entertainment divisions for
the year ended December 31, 1996 was $683,514, as compared to a net income of
$35,330 for 1995. The results of operations for the entertainment division have
been reclassified to discontinued operations for the years ended December 31,
1996 and 1995. The segment's net sales were $2,331,770 and $2,775,480 in 1996
and 1995, respectively. Net assets of the discontinued segment held for sale of
$189,400 comprised of approximately $80,000 in ticket inventory and the
remainder in computer equipment and furniture and fixtures are included in Net
Assets Held for Sale on the Balance Sheet at December 31, 1996.
CHARTER BUS
On December 31, 1993, the Company adopted a formal plan to discontinue its
charter bus operations. The Company's charter operations were primarily located
in New York, Atlantic City and Toledo. The Company's charter operations had
minimal gross profit margins which continued to decrease over the last few years
and, in fact, were profitable only when used in conjunction with contract
operations. The decision to discontinue the charter segment resulted from
management's belief that charter operations no longer represented a profitable
segment and that the segment's assets could best be utilized elsewhere.
During 1994, the Company disposed of its charter operations in New York and
New Jersey by selling off assets and transferring the assets to other Company
locations. Additionally, in 1995 the Company disposed of its charter bus
operations in Florida (March 1995) and Ohio (October 1995) as continuing
operations. As of December 31, 1996, all assets relating to discontinued charter
operations had been disposed of with the exception of one highway motorcoach
with a carrying value approximating fair market value of $55,953, which amount
is included in Assets Held for Sale. The company generated $97,000 and
$3,091,000 from the sale of assets of the discontinued charter bus segment
during the years ended December 31, 1996 and 1995: $97,000 and $2,123,000 in the
form of sale-type leases in 1996 and 1995, respectively; and $375,000 in two
promissory notes in 1995.
The results of operations for charter bus operations have been reclassified
to discontinued operations for the year ended December 31, 1995. During the year
ended December 31, 1995, the Company increased its reserve for estimated loss on
disposal of discontinued operations by $167,199 (net of income tax benefit of
$86,000) as a result of losses from discontinued operations exceeding the
Company's previous provision for such losses. The operating loss of the
Company's charter bus segment for the year ended December 31, 1995 was $410,431
and net sales were $1,275,182. Net assets of the discontinued segment of
$55,953, relating to one highway motor coach, are included in Net Assets Held
for Sale on the Balance Sheet as of December 31, 1996.
INTEREST EXPENSE ALLOCATION
Interest expense has been allocated to discontinued operations. Interest
expense allocated to discontinued operations totals $577,000 and $129,000 in
1996 and 1995, respectively, and is comprised of: 1) interest directly
attributed to the discontinued operations; and 2) interest not directly
attributed to any operating segment, which amount has been allocated based upon
the ratio of net assets of the discontinued operation to the sum of the
Company's total net assets.
NET ASSETS HELD FOR SALE
In November 1996, the Company announced its intention to dispose of its
airbag equipment manufacturer and entertainment division. In a prior year, the
Company's charter bus operation was
F-48
<PAGE>
[14] DISCONTINUED OPERATIONS (CONTINUED)
discontinued. The consolidated balance sheet relating to the discontinued
operations as of December 31, 1996 has been reclassified to net assets held for
sale as follows:
<TABLE>
<S> <C>
Net Assets Held for Sale:
Current assets........................................ $2,879,257
Property, net......................................... 905,522
Intangibles net....................................... 3,586,800
---------
Total assets........................................ 7,371,579
---------
Bank debt............................................. 766,327
Other liabilities..................................... 2,013,446
---------
Total liabilities................................... 2,779,773
---------
Net assets held for sale.............................. $4,591,806
---------
---------
</TABLE>
[15] FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of trade receivables
and payables, notes receivable and payable, investments in sales-type leases and
related party debt. The book values of trade receivables, payables, notes
payable and related party debt are considered to be representative of their
respective fair values. The calculation of the fair value of financial
instruments requires assumptions which include interest rates for similar
instruments and expected settlement dates.
The estimated fair value of the Company's other financial instruments are as
follows:
<TABLE>
<CAPTION>
ESTIMATED FAIR
CARRYING AMOUNT VALUE
---------------- -------------------
<S> <C> <C>
Notes Receivable................................................. $ 1,284,802 $ 1,261,000
BancPro's receivables............................................ $ 1,776,282 $ 1,692,000
Investments in sales-type leases................................. $ 2,360,737 $ 2,293,000
</TABLE>
[16] CONCENTRATION OF CREDIT RISK
The Companies have cash deposits with various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000.
The Companies maintain cash funds with a brokerage house. These accounts are
insured up to $100,000 by Securities Investor Protection Corporation.
[17] CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED STOCK
In November 1995, the Company sold an aggregate of $3,150,000 principal
amount of 8% convertible debentures for net proceeds of $1,776,288 and, in
February 1996, the Company sold $300,000 of convertible preferred stock for net
proceeds of $256,728. Each of these transactions were made in reliance upon
Regulation S of the Securities Act. The Securities and Exchange Commission (the
'Commission') has taken the position that certain sales of securities pursuant
to Regulation S, effected in a manner similar to the sales made by the Company
(which includes the sale of a substantial number of shares at a significant
discount to the then market price, which shares were resold soon after the 40
day holding period expired), were in fact not made in compliance with such
Regulation. Although management believes that its transactions were in
compliance with the requirements of Regulation S, there can be no assurance that
the Commission will not review such transactions and determine that securities
laws have been violated. If this were to occur, the Company could become subject
to actions by the Commission which could result in an
F-49
<PAGE>
[17] CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED STOCK (CONTINUED)
injunction and/or fines against the Company. Any such actions by the Commission
could have an adverse impact on the Company for which no reserve has been
established. In January 1996, the debentures were converted by the holders into
753,667 shares of common stock. In March 1996, the preferred stock was converted
into 88,889 shares of the Company's common stock.
[18] COMMITMENTS AND CONTINGENCIES
The Company is a party to various matters in litigation. These matters are
subject to many uncertainties and the outcome of all individual matters is not
predictable. Although the amount of liability at December 31, 1996 with respect
to these matters cannot be currently determined, management believes, based upon
the advice of legal counsel, that the outcome of such litigation will not have a
material adverse effect on the consolidated financial position, operations, cash
flow or liquidity of the Company.
The Company is primarily regulated by the Department of Transportation
('DOT') which sets certain safety standards which must be met by the Company's
revenue equipment and sets certain driver requirements. Substantially all of the
Company's transportation segment is subject to these regulations.
At December 31, 1996, the Company has $126,000 of irrevocable standby
letters of credit, $50,000 of which is to cover the Company's liability with
respect to pending accident claims and $76,000 of which is to collateralize
various operational bonds. At December 31, 1996, the Company has recorded a
liability of approximately $55,000 with respect to pending accident claims,
which amount is included in 'Accrued Liabilities', in the accompanying balance
sheet. The Company has recorded all contingent liabilities which it believes are
likely and measurable and does not anticipate actual losses in these matters to
exceed what has been accrued.
The Company maintains a self-insurance program for that portion of health
care costs not covered by insurance. The Company is liable for claims up to
$25,000 per family annually, and aggregate claims up to $500,000 annually. Self
insurance costs are accrued based upon the aggregate of the liability for
reported claims. The Company recorded expense in connection with the insurance
plan of $372,000 and $480,000 for 1996 and 1995, respectively.
On July 10, 1996 the Company entered into an employment agreement with
Ronald P. Sorci to act as the Company's controller for a term of five years. The
agreement was modified on November 22, 1996. Under the agreement as modified,
Mr. Sorci will receive an annual salary of $100,000, an annual non-accountable
expense allowance of $25,000, 2,083 shares of Common Stock each March 31 and
November 30, and other customary benefits. The agreement also contained a
covenant by Mr. Sorci that he would not compete with the Company, for which Mr.
Sorci received 199,444 shares of Common Stock plus a loan in the amount of
$250,000. The loan is due on May 31, 1997 with interest at 9.5%, and is secured
by 70,000 shares of Common Stock. In addition, the Company agreed to indemnify
Mr. Sorci against certain contingent liabilities which may arise from Mr.
Sorci's previous service as Chief Executive Officer of RPS Executive Limousines
Ltd., a limousine service in the New York metropolitan area.
In November 1996, the Company entered into an employment agreement with the
Chairman (See Note 9). The Agreement further provides that in the event of a
change in control of the Company the Company must (i) repurchase all shares of
capital stock owned by Mr. Margolies or members of his family, (ii) pay Mr.
Margolies ten times his last annual salary, (iii) issue to Mr. Margolies 25% of
the Common Stock of the Company, and (iv) repay all loans by the Margolies
family to the Company. Mr. Margolies has agreed to waive these 'change of
control' provisions in connection with the proposed merger with Precept
Investors, Inc.
F-50
<PAGE>
[19] IMPAIRMENT OF ASSET
In October 1996 the Company's harness manufacturing subsidiary, ATAB of
Texas, lost its long term profitable contract with Stewart & Stevenson ('S&S'),
ATAB's only customer. Although ATAB continues to do work for S&S, all subsequent
work has materially lower profit margins to the extent that future profits at
ATAB are uncertain. As such, management determined that certain intangible
assets including goodwill should be written off as the net realizable value of
such assets had been significantly impaired as a result of the significant
change in the profit outlook for ATAB.
[20] SUBSEQUENT EVENTS
On March 7, 1997 the Company signed a letter of intent to enter into a
merger agreement with Precept Investors, Inc. ('Precept'), a Texas corporation,
which is a leading distributor of business forms and product management systems
and which also has a limousine service business and a package delivery business.
Pursuant to the aforementioned agreement, Precept would be merged into the
Company with the Precept shareholders receiving an aggregate of 36,000,000
shares of the Company's common stock. The merger will not be completed, however,
unless a number of conditions precedent are satisfied, including inter alia;
negotiation and execution of a binding merger agreement and other related
agreements, documents and instruments; satisfactory completion of due diligence
reviews by both Precept and the Company, which reviews are presently ongoing;
receipt of a fairness opinion from an investment banker of the Company; the
expiration or termination of any applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and approval
of the merger by the shareholders of the Company and of Precept. Accordingly,
these financial statements have been prepared as if no merger will take place.
On January 30, 1997 the Company formed a wholly-owned subsidiary named U. S.
Trucking, Inc. ('USTI'). Thereafter, the following transactions
contemporaneously took place:
- 100% of the issued and outstanding stock of the Company's wholly-owned
tractor-trailer subsidiaries, Trans Lynx Express, Inc. and Jay & Jay
Transportation, Inc., were merged into USTI as wholly-owned subsidiaries
thereof;
- USTI acquired 100% of the issued and outstanding stock of Mencor, Inc., a
tractor-trailer brokerage company in exchange for $75,000 and 37,500
shares of the Company's common stock;
- USTI acquired 100% of the issued and outstanding stock of Gulf Northern
Transport, Inc. ('GNTI'), a tractor-trailer delivery company for common
shares of USTI which represented 25% of the issued and outstanding stock
of USTI.
In connection with the acquisition of Mencor and GNTI, USTI entered into
employment agreements with Danny Pixler and Michael Menor. The agreement with
Danny Pixler provides that USTI will employ Mr. Pixler through January 30, 2002
as President of USTI and GNTI. Mr. Pixler will receive an annual salary of
$105,000 as well as options to purchase 60,000 shares of the Company's Common
Stock at prices from $1.75 through $3.75. The Agreement with Mr. Menor provides
that he will be employed through January 30, 2000 as President of Mencor. Mr.
Menor will receive an annual salary of $60,000. The Company also issued 18,750
shares of Common Stock to Mr. Menor as consideration for his covenant not to
compete with the Company for two years after termination of his employment.
F-51
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 905,242
Cash--restricted............................................................... 232,879
Accounts receivable, net allowance for doubtful accounts of $946,000........... 8,014,234
Notes receivable (note 3)...................................................... 1,109,063
Net investment in sales-type leases............................................ 937,233
Inventories.................................................................... 393,943
Prepaid and other assets....................................................... 836,795
---------
TOTAL CURRENT ASSETS........................................................... 12,429,389
---------
PROPERTY, PLANT AND EQUIPMENT:
Revenue equipment.............................................................. 12,199,402
Land & building................................................................ 636,119
Other.......................................................................... 1,429,388
---------
Total (at cost).............................................................. 14,264,909
Less: Accumulated depreciation................................................. (4,365,405)
---------
PROPERTY, PLANT AND EQUIPMENT-- NET.............................................. 9,899,504
---------
ASSETS HELD FOR SALE............................................................. 527,810
---------
OTHER ASSETS:
Net investment in sales-type leases............................................ 1,148,985
Goodwill, net of accumulated amortization of $658,502.......................... 1,848,117
Other intangible assets, net of accumulated amortization of $336,265........... 999,611
Notes receivable............................................................... 239,432
Marketable securities.......................................................... 189,400
Other assets................................................................... 429,274
---------
TOTAL OTHER ASSETS............................................................... 4,854,819
---------
TOTAL ASSETS..................................................................... $27,711,522
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft................................................................. $ 13,679
Notes payable.................................................................. 2,218,847
Line of credit................................................................. 5,679,586
Accounts payable............................................................... 1,526,279
Accrued liabilities............................................................ 1,355,408
Due to related party........................................................... 181,257
---------
TOTAL CURRENT LIABILITIES........................................................ 10,975,056
---------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES:
Notes payable.................................................................. 5,223,088
Due to related party........................................................... 817,312
---------
TOTAL LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES........................... 6,040,400
---------
MINORITY INTEREST IN SUBSIDIARY.................................................. 580,125
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--par value $.01 per share, redemption value $10.00 per share:
Authorized--10,000,000 shares
Issued and outstanding--180,000 shares....................................... 1,800,000
Common stock--par value $.01 per share:
Authorized--50,000,000 shares
Issued and outstanding--7,020,679 shares..................................... 70,207
Additional paid-in capital..................................................... 29,964,698
Stock subscription receivable.................................................. (25,785)
Deferred compensation.......................................................... (456,697)
Retained earnings (deficit).................................................... (21,236,482)
---------
TOTAL SHAREHOLDERS' EQUITY....................................................... 10,115,941
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................... $27,711,522
---------
---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-52
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
REVENUES........................................................................... $ 13,065,678 $ 25,417,444
------------- -------------
EXPENSES:
Operating expenses............................................................... 8,651,788 17,328,872
Selling, general and administrative.............................................. 2,162,172 7,856,483
Depreciation expense............................................................. 638,655 1,495,892
Rent expense..................................................................... 693,036 998,345
Amortization of intangible assets................................................ 124,169 403,105
------------- -------------
TOTAL EXPENSES..................................................................... 12,269,820 28,082,697
------------- -------------
INCOME (LOSS) FROM OPERATIONS...................................................... 795,858 (2,665,253)
------------- -------------
OTHER INCOME (EXPENSES):
Interest expense................................................................. (400,501) (894,173)
Interest income.................................................................. 212,465 378,183
Gain/(loss) on sales of assets................................................... 80,285 148,333
Minority interest in subsidiary losses........................................... -- 77,569
Bridge loan expense.............................................................. (441,038) --
Other............................................................................ (10,313) (66,363)
------------- -------------
TOTAL OTHER EXPENSES, net.......................................................... (559,102) (356,451)
------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (CARRIED FORWARD)......................... $ 236,756 $ (3,021,704)
------------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-53
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS (BROUGHT FORWARD)........................... $ 236,756 $ (3,021,704)
------------ -------------
DISCONTINUED OPERATIONS:
(Loss) on operations from entertainment ticketing segment.......................... (375,188) --
(Loss) on operations of custom equipment manufacturing segment..................... (221,931) --
Income (loss) on operations from automobile harness manufacturing segment.......... 1,187,709 (34,932)
Adjustment of reserve for discontinued operations.................................. -- (4,664,275)
------------ -------------
PROFIT (LOSS) FROM DISCONTINUED OPERATIONS........................................... 590,590 (4,699,207)
------------ -------------
NET INCOME (LOSS).................................................................... 827,346 (7,720,911)
LESS: PREFERRED DIVIDENDS............................................................ 143,775 --
------------ -------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS........................................................................ $ 683,571 $ (7,720,911)
------------ -------------
------------ -------------
EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations........................................... $ .03 $ (.44)
Income (loss) from discontinued operations......................................... .18 (.68)
------------ -------------
EARNINGS (LOSS) PER SHARE............................................................ $ 0.21 $ (1.12)
------------ -------------
------------ -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................................... 3,307,110 6,901,253
------------ -------------
------------ -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-54
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
REVENUES............................................................................. $ 5,462,204 $ 8,742,778
------------ -------------
EXPENSES:
Operating expenses................................................................. 3,145,740 6,030,781
Selling, general and administrative................................................ 1,511,142 4,440,741
Depreciation expense............................................................... 187,993 509,392
Rent expense....................................................................... 201,503 267,117
Amortization of intangible assets.................................................. 108,501 145,079
------------ -------------
TOTAL EXPENSES....................................................................... 5,154,879 11,393,110
------------ -------------
INCOME (LOSS) FROM OPERATIONS........................................................ 307,325 (2,650,332)
------------ -------------
OTHER INCOME (EXPENSES):
Interest expense................................................................... (167,888) (340,815)
Interest income.................................................................... 72,333 51,517
Gain on sales of assets............................................................ 44,756 123,676
Bridge loan expense................................................................ (441,038) --
Minority interest in subsidiary loss............................................... -- 48,821
Other.............................................................................. 44,890 --
------------ -------------
Total Other expenses, net.......................................................... (446,947) (116,801)
------------ -------------
LOSS FROM CONTINUING OPERATIONS (CARRIED FORWARD).................................... $ (139,622) $ (2,767,133)
------------ -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-55
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
LOSS FROM CONTINUING OPERATIONS (BROUGHT FORWARD).................................... $ (139,622) $ (2,767,133)
------------ -------------
DISCONTINUED OPERATIONS:
(Loss) on operations from custom equipment manufacturing segment................... (73,857) --
Income (loss) on operations of harness manufacturing segment....................... 523,242 (86,695)
(Loss) on operations of entertainment ticketing segment............................ (316,900) --
Adjustment of reserve for discontinued operations.................................. -- (4,517,330)
------------ -------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS........................................... 132,485 (4,604,025)
------------ -------------
NET LOSS............................................................................. (7,137) (7,371,158)
LESS: PREFERRED DIVIDENDS............................................................ 47,295 --
------------ -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS........................................... $ (54,432) $ (7,371,158)
------------ -------------
------------ -------------
EARNINGS PER COMMON SHARE:
Loss from continuing operations.................................................... $ (.06) $ (.39)
Income (loss) from discontinued operations......................................... .04 (.66)
------------ -------------
EARNINGS (LOSS) PER SHARE............................................................ $ (.02) $ (1.05)
------------ -------------
------------ -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................................... 3,111,746 7,002,343
------------ -------------
------------ -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-56
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
----------------------- ---------------------- PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ----------- --------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,232,035 $ 22,320 180,000 $ 1,800,000 $ 17,056,511 $ (290,285) $ (658,504)
Net proceeds from exercise of
warrants and options......... 60,000 600 -- -- 206,900 -- --
Common stock issued in
connection with purchase of
Krogel Freight............... 18,333 183 -- -- 54,817 -- --
Preferred stock issuance....... -- -- 300 300,000 (43,272) -- --
Conversion of debentures into
common stock................. 753,667 7,537 -- -- 1,768,751 -- --
Preferred stock conversion..... 88,889 889 (300) (300,000) 299,111 -- --
Restricted stock grant
issuance..................... -- -- -- -- -- -- 113,415
Preferred stock dividends...... -- -- -- -- -- -- --
Repurchase of common
stock........................ (47,500) (475) -- -- (89,495) -- --
Common stock issued in
connection with bridge
loan......................... 109,957 1,100 -- -- 248,454 -- --
Common stock offering.......... 1,705,043 17,050 -- -- 4,996,006 -- --
Common stock issued in
connection with consulting
services..................... 314,167 3,142 -- -- 874,733 252,500 --
Common stock issued in
connection with employment
contracts.................... 16,667 167 -- -- 124,833 -- --
Common stock issued in
connection with purchase of
Banc-Pro Transportation...... 336,000 3,360 -- -- 864,540 -- --
Common stock issued in exchange
for covenant not-
to-compete................... 199,444 1,994 -- -- 548,006 -- --
Change in features of preferred
stock........................ -- -- -- -- 680,000 -- --
Obligation to issue 1,000,000
shares of common stock in
regards to long-term
employment agreement with
Company officer.............. 1,000,000 10,000 -- -- 1,552,500 -- --
Other.......................... 14,810 148 -- -- 61,786 -- --
Net loss....................... -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------------ ------------- --------------
Balance, December 31, 1996 6,801,512 $ 68,015 180,000 $ 1,800,000 $ 29,204,181 $ (37,785) $ (545,089)
---------- ----------- --------- ----------- ------------ ------------- --------------
---------- ----------- --------- ----------- ------------ ------------- --------------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
------------- -------------
<S> <C> <C>
Balance, December 31, 1995 $ (6,651,785) $ 11,278,257
Net proceeds from exercise of
warrants and options......... -- 207,500
Common stock issued in
connection with purchase of
Krogel Freight............... -- 55,000
Preferred stock issuance....... -- 256,728
Conversion of debentures into
common stock................. -- 1,776,288
Preferred stock conversion..... -- --
Restricted stock grant
issuance..................... -- 113,415
Preferred stock dividends...... (169,335) (169,335)
Repurchase of common
stock........................ -- (89,970)
Common stock issued in
connection with bridge
loan......................... -- 249,554
Common stock offering.......... -- 5,013,056
Common stock issued in
connection with consulting
services..................... -- 1,130,375
Common stock issued in
connection with employment
contracts.................... -- 125,000
Common stock issued in
connection with purchase of
Banc-Pro Transportation...... -- 867,900
Common stock issued in exchange
for covenant not-
to-compete................... -- 550,000
Change in features of preferred
stock........................ -- 680,000
Obligation to issue 1,000,000
shares of common stock in
regards to long-term
employment agreement with
Company officer.............. -- 1,562,500
Other.......................... -- 61,934
Net loss....................... (6,694,451) (6,694,451)
------------- -------------
Balance, December 31, 1996 $ (13,515,571) $ 16,973,751
------------- -------------
------------- -------------
</TABLE>
F-57
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
----------------------- ---------------------- PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ----------- --------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996
(carried forward)............ 6,801,512 $ 68,015 180,000 $ 1,800,000 $ 29,204,181 $ (37,785) $ (545,089)
---------- ----------- --------- ----------- ------------ ------------- --------------
Restricted stock grant......... -- -- -- -- -- -- 88,392
Common stock issued in
connection with Mencor
acquisition.................. 37,500 375 -- -- 74,625 -- --
Common stock issued in exchange
for consulting services and
board participation.......... 165,000 1,650 -- -- 655,850 -- --
Stock options exercised........ 12,500 125 -- -- 21,750 -- --
Other.......................... 4,167 42 -- -- 8,292 12,000 --
Net loss....................... -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------------ ------------- --------------
Balance, September 30, 1997 7,020,679 $ 70,207 180,000 $ 1,800,000 $ 29,964,698 $ (25,785) $ (456,697)
---------- ----------- --------- ----------- ------------ ------------- --------------
---------- ----------- --------- ----------- ------------ ------------- --------------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
------------- -------------
<S> <C> <C>
Balance, December 31, 1996
(carried forward)............ $ (13,515,571) $ 16,973,751
------------- -------------
Restricted stock grant......... -- 88,392
Common stock issued in
connection with Mencor
acquisition.................. -- 75,000
Common stock issued in exchange
for consulting services and
board participation.......... -- 657,500
Stock options exercised........ -- 21,875
Other.......................... -- 20,334
Net loss....................... (7,720,911) (7,720,911)
------------- -------------
Balance, September 30, 1997 $ (21,236,482) $ 10,115,941
------------- -------------
------------- -------------
</TABLE>
F-58
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations................................................... $ 236,756 $ (3,021,704)
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization..................................................... 762,824 1,856,798
Amortization of deferred compensation............................................. -- 88,392
Minority interest in subsidiary losses............................................ -- 77,569
Stock issuance in exchange for consulting services and board participation...... -- 657,500
Bad debt expense.................................................................. -- 640,217
Gain on sales of assets........................................................... (80,285) 148,333
Change in assets and liabilities:
Accounts receivable............................................................. (2,145,698) (1,891,289)
Inventories..................................................................... (220,862) 336,793
Other receivables............................................................... 42,092 --
Notes receivables............................................................... -- 98,148
Prepaid and other assets........................................................ 35,317 127,627
Accounts payable................................................................ (212,251) 26,871
Accrued liabilities............................................................. (55,557) 637,870
------------- -------------
Net cash used in continuing operations.............................................. (1,637,664) (216,875)
------------- -------------
Income (loss) from discontinued operations: 590,590 (4,699,207)
Adjustments:
Change in net assets and liabilities of discontinued operations................... (1,126,602) 3,299,420
Proceeds from sale of assets held for sale........................................ -- 100,000
Depreciation and amortization..................................................... -- 21,317
------------- -------------
Net cash used in discontinued operations............................................ (536,012) (1,278,470)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (CARRIED FORWARD)............................. $ (2,173,676) $ (1,495,345)
------------- -------------
</TABLE>
F-59
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES (BROUGHT FORWARD)............................. $ (2,173,676) $ (1,495,345)
------------- -------------
INVESTING ACTIVITIES:
Capital expenditures.............................................................. (266,117) (402,420)
Acquisition of intangible assets.................................................. (506,000) (126,016)
Transfers to restricted cash...................................................... (3,063) (73,132)
Advances on notes receivable...................................................... (204,000) (586,750)
Collection of notes receivable.................................................... 90,007 1,023,140
Collection of leases receivable................................................... 210,750 262,420
Proceeds from sale of assets...................................................... 10,500 48,700
Other............................................................................. 2,121 34,869
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................. (665,802) 180,811
------------- -------------
FINANCING ACTIVITIES:
Cash overdraft.................................................................... 484,565 (381,476)
Advances from related party....................................................... 883,430 146,315
Proceeds from issuance of convertible debentures.................................. 256,728 --
Payment of preferred dividends.................................................... (143,775) --
Principal payments to related party............................................... (367,354) (252,860)
Principal payments on debt........................................................ (8,326,909) (4,285,785)
Borrowing on debt................................................................. 5,886,614 3,579,078
Proceeds from common stock offering............................................... 5,117,709 --
Proceeds from options and warrants................................................ 207,500 21,875
Proceeds from bridge loan......................................................... 887,554 --
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................. 4,886,062 (1,172,853)
------------- -------------
NET INCREASED (DECREASED) IN CASH AND CASH EQUIVALENTS.............................. 2,046,584 (2,487,387)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................................ 1,645,031 3,392,629
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................ $ 3,691,615 $ 905,242
------------- -------------
------------- -------------
</TABLE>
F-60
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Cash paid for:
Interest............................................................ $ 454,000 $ 742,000
---------- ----------
---------- ----------
Taxes............................................................... (0) $ 75,000
---------- ----------
---------- ----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
In January 1997, the Company acquired 100% of the common stock of Mencor
Inc. in exchange for $70,000 cash and 37,500 shares of the Company's common
stock. (See Note 2.)
In January 1997, the Company sold the assets of its discontinued
entertainment segment in exchange for 850,000 shares of common stock of
Packaging Plus Services, Inc. (See Note 3.)
In January 1997, the Company acquired 100% of the common stock of Gulf
Northern Transport, Inc. in exchange for $225,000 cash and common shares of its
subsidiary U.S. Trucking, Inc. ("USTI") representing 25% of the issued and
outstanding common stock of USTI. (See Note 2.)
In March 1997, the Company sold the assets of its discontinued custom
equipment manufacturing segment in exchange for $100,000 cash and notes with a
present value of $5,810,868. (See Note 3.)
In 1997, the company issued 165,000 shares of common stock in exchange for
consulting services and board participation.
During the nine months ended September 30, 1996, the Company sold buses in
exchange for $154,000 of sales type financing lease receivables.
During the nine months ended September 30, 1996, the Company acquired
revenue equipment utilizing long term debt of $4,555,205.
During the nine months ended September 30, 1996, holders of $1,776,288 of
convertible debentures converted such debentures into 753,667 shares of the
Company's stock.
During the nine months ended September 30, 1996, the Company converted 300
shares of convertible preferred stock into 88,889 shares of common stock.
During the nine months ended September 30, 1996, the Company acquired 47,500
shares of its common stock for $89,970, which included the cancellation of a
note receivable of $68,960.
During the nine months ended September 30, 1996, the Company declared
$150,660 of preferred dividends.
During the nine months ended September 30, 1996, the Company issued 18,333
shares of common stock valued at $55,000 as part of its acquisition of certain
personal property and contract rights from Krogel Freight Systems of Tampa, Inc.
and Krogel Air Freight, Inc.
During the nine months ended September 30, 1996, the Company issued 136,111
shares of common stock in connection with a covenant not to compete.
F-61
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
During the nine months ended September 30, 1996, the Company issued 104,167
shares of common stock and forgave notes aggregating $252,500 in exchange for
consulting agreement.
During the nine months ended September 30, 1996, the Company acquired
Banc-Pro Transportation, Inc. in exchange for a $1,150,000 zero interest-bearing
note due September 1998; 336,000 shares of the Company's common stock; and
105,000 shares of convertible preferred stock that relate to an employment
contract and a consulting agreement with the sellers.
F-62
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(1) MANAGEMENT'S REPRESENTATION
In the opinion of management, the accompanying unaudited financial
statements present fairly, in all material respects, the financial position of
U.S. Transportation Systems, Inc. and Subsidiaries and the results of their
operations and their cash flows for the nine months ended September 30, 1997 and
1996, and, accordingly, all adjustments (which include only normal recurring
adjustments) necessary to permit a fair presentation have been made. Certain
information and footnote disclosures normally required by financial accounting
principles have been condensed or omitted. It is recommended that these
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1996 Form 10-KSB report. The
results of operations for the period ended September 30, 1997 are not
necessarily indicative of the operating results for the full year.
U.S. Transportation Systems, Inc. has signed a definitive agreement to
transfer substantially all of the assets and certain liabilities to Precept
Investments, Inc. (Precept) in exchange for 9,612,500 shares of Precept Class A
Common Stock which will represent 21% of the outstanding Precept Common Stock
upon completion of the asset sale. The agreement provides that the Precept Class
A Common Stock will be listed on NASDAQ and that they will be distributed to the
shareholders of USTS immediately after completion of the sale, except that some
number of the shares (currently estimated at 600,000) will be used by USTS to
satisfy liabilities which are not being assumed by Precept. USTS is withholding
its rental car brokerage business from the sale.
(2) ACQUISITIONS
On January 30, 1997 the Company formed a wholly-owned subsidiary, U.S.
Trucking, Inc. ("USTI"). Thereafter, the following transactions took place:
- -- 100% of the issued and outstanding stock of the Company's wholly-owned
tractor-trailer subsidiaries, Trans Lynx Express, Inc. and Jay & Jay
Transportation, Inc., were merged into USTI as wholly-owned subsidiaries
thereof;
- -- USTI acquired 100% of the issued and outstanding stock of Mencor, Inc.
("Mencor"), a tractor-trailer brokerage company, in exchange for $70,000 and
37,500 shares of the Company's common stock;
- -- USTI acquired 100% of the issued and outstanding stock of Gulf Northern
Transport, Inc. ("GNTI"), a tractor-trailer delivery company, for $225,000
cash and common shares of USTI which represented 25% of the issued and
outstanding stock of USTI.
The acquisitions of Mencor and GNTI were accounted for as purchases and
resulted in goodwill of $352,396. Additionally, at the time of the acquisition
of GNTI, the Company recorded a liability for the resulting minority interest in
USTI of $645,194.
During the nine months ended September 30, 1996, the Company purchased
certain personal property, intangible assets and contract rights from Krogel Air
Freight, Inc. and Krogel Freight Systems of Tampa, Inc. for $150,000 in cash and
18,333 shares of common stock. The acquisition was accounted for as a purchase.
During the nine months ended September 30, 1996, the Company purchased
certain assets from Jackson & Johnson, Inc. for $160,000 in cash and the
assumption of approximately $2,930,000 in accrued debt. The acquisition was
accounted for as a purchase.
F-63
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(2) ACQUISITIONS (CONTINUED)
During the nine months ended September 30, 1996, the Company purchased 100%
of the outstanding stock of Banc-Pro Transportation, Inc. for 336,000 shares of
common stock. This acquisition was accounted for as a purchase.
(3) DISCONTINUED OPERATIONS
During the third quarter of 1997, the Company closed ATAB of Texas, all
equipment was sold yielding a profit of $1,545, all personnel were terminated
and land and building were transferred to Assets Held for Sale.
On March 28, 1997, the Company sold ASI for: $100,000 cash; a 10.5% interest
bearing note of approximately $5,200,000 with monthly payments of approximately
$80,000, the unpaid principal fully due April 1, 1999; and a non-interest
bearing note of $685,000 also due April 1, 1999. The Company received the first
two payments from the purchaser of ASI. Subsequently, the purchaser of ASI
defaulted on the note. ASI is currently experiencing severe cash flow problems.
Negotiations are underway to modify the note receivable extending payment terms.
ASI is currently attempting to raise additional capital to support its
operations. There is no assurance that ASI will be able to raise this capital
and accordingly, the Company has recorded a reserve of $5,239,086 to adjust the
carrying value of the note receivable to the estimated cash to be received. The
adjustment to the note receivable is included in the reserve for discontinued
operations.
On January 7, 1997, the Company sold the entertainment divisions as a
continuing operation for 850,000 shares of common stock of Packaging Plus
Services, Inc., a publicly-held company (Symbol: "PKGP"). PKGP was trading at
$1.0625 per share at the time of the sale. This transaction resulted in a loss
on disposal of $146,944.
At September 30, 1997, Assets Held for Sale consisted of one motorcoach bus
with a carrying value of $55,953, land and building in Phoenix, Arizona with a
carrying value, net of related debt, of $153,080 and land and building in Sealy,
Texas with a carrying value of $318,777. The carrying values of these assets
approximate estimated realizable value.
(4) CAPITALIZATION
In January 1996, the Company issued $300,000 of convertible preferred stock,
which were converted into 88,889 shares of common stock in March 1996.
During the nine months ended September 30, 1996, the Company increased the
authorized common stock shares from 20,000,000 to 50,000,000 shares.
During the nine months ended September 30, 1996, the Company issued
$1,200,000 of 5% subordinated promissory notes and bridge units. These notes
were paid and the Company recorded expenses related to this issuance of $441,038
during the nine months ended September 30, 1996.
During the nine months ended September 30, 1996, the Company had a
one-for-six reverse split of its common stock, effective August 27, 1996. The
par value remained at $.01 per share, and all share data has been adjusted for
this split.
During the nine months ended September 30, 1996, the Company had a common
stock unit offering whereby 1,705,043 units, each comprising of one share of
common stock and one warrant (exercisable under certain conditions) at $3.82 for
one share of common stock, were issued.
F-64
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(5) SUBSEQUENT EVENTS
On January 30, 1997, USTI, which owns the Company's tractor-trailer
operations, acquired 100% of capital stock of GNTI. On April 16, 1997, United
Acquisition II Corporation ("UACQ"), which is the subject of a bankruptcy
petition, commenced an adversary proceeding in the Bankruptcy Court against the
Company, its Chairman and many other corporate and individual defendants. UACQ
alleges that it acquired beneficial ownership of GNTI prior to the transfer of
GNTI to USTI, and that the defendants conspired to deprive UACQ of its interest
in GNTI. In November 1997, the defendants reached an agreement with UACQ to
settle the litigation. The settlement will be effective only if it is approved
by the Bankruptcy Court. If approved, the settlement would eliminate the claims
by UACQ to ownership of GNTI, in exchange for 25,000 shares of the Company's
common stock and payment of $100,000 plus a promissory note of $100,000 payable
over three years.
F-65
<PAGE>
[ALTERNATE PAGE FOR SHELF PROSPECTUS]
PROSPECTUS
19,887,500 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A COMMON STOCK
---------------
This Prospectus constitutes a prospectus of Precept Business Services, Inc.,
a Texas corporation (the "Company" or "Precept"), with respect to up to
19,887,500 shares of Class A Common Stock, par value $.01 per share (the "Class
A Common Stock"), which may be offered and issued by the Company from time to
time in connection with the future direct and indirect acquisitions of other
businesses, properties or securities in one or more business combination
transactions in accordance with Rule 415(a)(l)(viii) of Regulation C under the
Securities Act of 1933, as amended (the "Securities Act") or as otherwise
permitted under the Securities Act. The consideration for the acquisition of
such assets or securities may consist of cash, the assumption of liabilities and
the shares of Class A Common Stock being registered hereby, or any combination
thereof, as determined pursuant to arms-length negotiations between the Company
and the sellers of the assets or securities to be acquired. It is anticipated
that the shares of the Class A Common Stock issued in any such acquisition will
be valued at a price reasonably related to the then current market value of the
Class A Common Stock.
The number of shares and any other terms in connection with the offering and
issuance of Class A Common Stock in respect of which this Prospectus is being
delivered are set forth in a separate supplement to this Prospectus (a
"Prospectus Supplement"). Any statement contained in this Prospectus will be
deemed to be modified or superseded by any inconsistent statement contained in
any Prospectus Supplement delivered herewith.
The Class A Common Stock has been approved for listing on the Nasdaq
SmallCap Market under the symbol " ."
------------------------
INVESTORS SHOULD CONSIDER THE INFORMATION UNDER "RISK FACTORS" IN EVALUATING
AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus, under a different cover page, is also being used in
connection with the issuance on March , 1998 of 9,612,500 shares of the
Company's Class A Common Stock in connection with the acquisition by a
subsidiary of the Company of substantially all of the assets and business as a
going concern of U.S. Transportation Systems, Inc. (the "USTS Acquisition").
Therefore, certain information contained in this Prospectus is not directly
related to the issuance of shares by the Company hereunder.
<PAGE>
This Prospectus may not be used to consummate issuance and sales of Class A
Common Stock unless accompanied by a Prospectus Supplement.
------------------------
March , 1998
<PAGE>
[ALTERNATE PAGE FOR SHELF PROSPECTUS]
AVAILABLE INFORMATION
Precept will be subject to the informational requirements of the Exchange
Act and in accordance therewith will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York,
New York 10048. Copies of these materials can also be obtained from the
Commission at prescribed rates by writing to the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission and that is located at http://www.sec.gov. The Company intends to
furnish to its shareholders annual reports containing financial statements
audited by independent certified public accountants following the end of each
fiscal year.
Precept has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities to be issued pursuant to the USTS Acquisition. This Prospectus does
not contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus or in any document
incorporated by reference in this Prospectus as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
The Registration Statement, including exhibits filed as part thereof, are
available for inspection and copying at the Commission's offices as described
above.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PRECEPT
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL OR TO OR FROM ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
<PAGE>
[ALTERNATE PAGE FOR SHELF PROSPECTUS]
THE OFFERING
<TABLE>
<S> <C>
Number of shares of Class A Common Stock offered See applicable Prospectus
hereby.................................................. Supplement
Class A Common Stock to be outstanding after the See applicable Prospectus
Offering................................................ Supplement
Total Common Stock to be outstanding after the See applicable Prospectus
Offering................................................ Supplement
See applicable Prospectus
Nasdaq SmallCap Market Symbol........................... Supplement
</TABLE>
<PAGE>
[ALTERNATE PAGE FOR SHELF PROSPECTUS]
PLAN OF DISTRIBUTION
THE OFFERING
The Company may issue the Class A Common Stock in connection with the future
direct and indirect acquisitions of other businesses, properties or securities
in one or more business combination transactions in accordance with Rule
415(a)(l)(viii) of Regulation C under the Securities Act, or as otherwise
permitted under the Securities Act. The Company expects that the terms upon
which it may issue the shares will be determined through negotiations with the
securityholders or principal owners of the businesses whose securities or assets
are acquired. It is expected that the shares that are issued will be valued at
prices reasonably related to market prices for the Class A Common Stock
prevailing either at the time an acquisition agreement is executed or at the
time an acquisition is consummated.
GENERAL
All expenses of this Offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of shares
by the Company in business combination transactions, although finder's fees may
be paid with respect to specific acquisitions. Any person receiving a finder's
fee may be deemed to be an Underwriter within the meaning of the Securities Act.
The shares of the Company's Class A Common Stock offered hereunder will be
listed for trading on the Nasdaq SmallCap Market.
VALIDITY OF SHARES
Unless otherwise indicated in an applicable Prospectus Supplement, the
validity of the Class A Common Stock will be passed upon for the Company by
Jackson Walker L.L.P., Dallas, Texas.
<PAGE>
[ALTERNATE PAGE FOR SHELF PROPSECTUS]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF CLASS A COMMON STOCK
OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF CLASS A COMMON STOCK BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................
The Company...............................................................
Risk Factors..............................................................
Recent Developments.......................................................
Plan of Distribution......................................................
Validity of Shares........................................................
Experts...................................................................
Available Information.....................................................
</TABLE>
19,887,500 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MARCH , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, dated as of November 16, 1997 is
made by and between U.S. Transportation Systems, Inc., a Nevada corporation
("USTS"), Precept Investors, Inc., a Texas corporation ("Precept") and Precept
Acquisition Company, L.L.C., a Nevada limited liability company and wholly owned
subsidiary of Precept ("Acquisition").
RECITALS:
WHEREAS, USTS wishes to transfer its business and substantially all of its
assets to Acquisition solely in exchange for voting shares of Precept and the
assumption by Acquisition of certain liabilities of USTS (the "Transfer"); and
WHEREAS, the Transfer is intended to qualify as a reorganization with the
meaning of Section 368(a) of the Code; and
WHEREAS, after the Closing of the Transfer USTS will, as an integral part of
the transaction, distribute most of the shares of Precept to USTS's shareholders
in complete liquidation of USTS and USTS will dissolve; and
WHEREAS, Precept has formed Acquisition to acquire the Business and
substantially all of the assets of USTS on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, and for
other good, valid and binding consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. The following terms have the following meanings when used
herein:
"Acquisition Proposal" means any proposal or offer, for a tender or exchange
offer, a merger, consolidation or other business combination involving USTS or
any USTS Subsidiary thereof or any proposal to acquire in any manner a
substantial equity interest in, or substantially all of the assets of, USTS or
any USTS Subsidiary.
"Affiliate" means with respect to any Person, any other Person directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, such Person.
"Affiliate of USTS" has the meaning set forth in SECTION 8.12.
"Agreement" means this Agreement and Plan of Reorganization, including all
Schedules and Exhibits hereto, as it may be amended from time to time in
accordance with its terms.
"Assets" has the meaning set forth in SECTION 2.1.
"Assumed Contracts" has the meaning set forth in SECTION 2.1(H).
"Assignment and Assumption Agreement" means the Assignment and Assumption
Agreement and Bill of Sale in the form attached hereto as EXHIBIT B.
"Assumed Liabilities" has the meaning set forth in SECTION 2.3.
A-1
<PAGE>
"Balance Sheet" has the meaning set forth in SECTION 5.6.
"Balance Sheet Date" has the meaning set forth in SECTION 5.6.
"Business" means the business presently conducted by USTS, including, but
not limited to, providing ground transportation of passengers and cargo and
ground transportation related services, both directly and through its
subsidiaries.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. SectionSection 9601 ET SEQ.
"Closing" means the closing of the transactions contemplated by this
Agreement.
"Closing Date" means January 31, 1998 assuming the satisfaction of all
conditions set forth in Article 9, or, if such conditions are not satisfied on
such date, on such date three business days after satisfaction thereof or such
other date as mutually agreed in writing by the parties hereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"December USTS Financials" has the meaning set forth in SECTION 5.6.
"E&Y" means Ernst & Young, L.L.P., independent auditors.
"Environmental Laws" means all federal, state and local laws, rules and
regulations applicable to USTS and its properties relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws and regulations relating to Releases or
threatened Releases of Hazardous Materials, or otherwise relating to the
manufacture, processing, distribution, use treatment, storage, disposal,
transport or handling of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any business or entity which is a member of the same
"controlled group of corporations," is under "common control" or is a member of
an "affiliated service group" with an entity within the meanings of Sections
414(b), (c) or (m) of the Code, or required to be aggregated with the entity
under Section 414(o) of the Code, or is under "common control" with the entity,
within the meaning of Section 4001(a)(14) of ERISA, or any regulations
promulgated or proposed under any of the foregoing Sections.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Assets" has the meaning set forth in SECTION 2.2.
"Excluded Liabilities" has the meaning set forth in SECTION 2.4.
"Facilities" shall mean the land and related facilities owned or leased by
USTS and used in the Business, as set forth on SCHEDULE 2.1(D).
"Final Closing Balance Sheet" means a balance sheet of USTS as of the
Closing Date, prepared in accordance with GAAP and delivered to Acquisition
pursuant to Section 11.4.
"Ford Contract" means that certain Purchase Order, last amendment dated July
12, 1996, by and between Shortway River Rouge, Inc. and Ford Motor Company.
"FTC" means the Federal Trade Commission.
"GAAP" means generally accepted accounting principles consistently applied.
A-2
<PAGE>
"Hazardous Materials" means chemicals, materials or substances which are
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "toxic pollutants," "pollutants," "contaminants," or words of similar
import under any Environmental Law; or other chemical, material, substance or
waste, exposure to which is prohibited, limited or regulated under any
Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"IDB" has the meaning set forth in SECTION 11.7.
"IDB Loan Agreement" means that certain Loan and Security Agreement, dated
October 7, 1996, as amended, by and between USTS and IDB.
"Independent Accounting Firm" shall mean a "Big Six" accounting firm, other
than E&Y or such other nationally recognized firm of independent public
accountants as Precept and USTS may agree upon.
"Intellectual Property Rights" has the meaning set forth in SECTION 5.15.
"Inventory" has the meaning set forth in SECTION 2.1(C).
"IRS" means the Internal Revenue Service.
"June 30 Balance Sheet" has the meaning set forth in SECTION 6.6.
"Liquidating Trust" has the meaning set forth in SECTION 12.1.
"Margolies" means Michael Margolies.
"Margolies Term Note" means that certain promissory note, dated July 7, 1997
made by USTS and payable to Margolies in the original principal amount of
$1,039,794.37.
"Material Adverse Effect" means, with respect to any entity, a material
adverse effect on the financial condition, properties, business, results of
operations or prospects of such entity and its subsidiaries taken as a whole, or
on the ability of such entity to perform its obligations hereunder or to
consummate the transactions contemplated hereby, whether or not caused by
management of such entity.
"Permitted Encumbrances" means:
(a) Liens for real estate taxes, assessments or governmental charges or
construction lien claims not delinquent or being contested in good faith by
appropriate proceedings;
(b) Liens or deposits in connection with worker's compensation or other
insurance or to secure the performance of bids, trade contracts, leases, public
or statutory obligations, surety or appeal bonds or other obligations of like
nature incurred in the ordinary course of business not yet due and payable;
(c) Easements, restrictions, minor title irregularities and similar matters
which have no Material Adverse Effect as a practical matter upon the ownership
or use of property;
(d) Liens of mechanics, materialmen, carriers, warehousemen or other like
statutory or common law liens securing obligations incurred in good faith in the
ordinary course of business that are not yet due and payable;
(e) Liens identified on EXHIBIT A attached hereto;
(f) Liens for rentals not yet due and payable pursuant to capitalized
leases; and
(g) Specific customer work-in process liens.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, trust or unincorporated organization or government or
any agency or political subdivision thereof.
"Plan of Liquidation and Dissolution" means the plan whereby USTS will
liquidate and dissolve USTS in accordance with Section 11.2 of this Agreement,
which plan is attached hereto as EXHIBIT C.
A-3
<PAGE>
"Precept Benefit Plans" has the meaning set forth in SECTION 6.18.
"Precept Common Stock" shall mean the Class A Common Stock of Precept, par
value $0.01 per share.
"Precept Disclosure Schedules" has the meaning set forth in SECTION 6.2.
"Precept Financial Statements" has the meaning set forth in SECTION 6.6.
"Precept Leases" has the meaning set forth in SECTION 6.9(B).
"Precept Material Agreements" has the meaning set forth in SECTION 6.12(A).
"Precept Personal Property" has the meaning set forth in SECTION 6.11(A).
"Precept Real Property" has the meaning set forth in SECTION 6.9(A).
"Precept Shareholder Information" has the meaning set forth in SECTION 6.21.
"Precept Subsidiary" has the meaning set forth in SECTION 6.3.
"Preliminary Closing Balance Sheet" has the meaning set forth in SECTION
9.2(K).
"Purchase Price" has the meaning set forth in SECTION 3.1.
"RCRA" means the Resource Conservation and Recovery Act, as amended, 42
U.S.C. SectionSection 6901 ET SEQ.
"Receivables" has the meaning set forth in SECTION 2.1(B).
"Registration Rights Agreement" means a Registration Rights Agreement to be
entered into by and between Margolies and Precept in the form attached as
EXHIBIT D.
"Releases" means any release, spill, emission, leaking, injection, deposit,
disposal, discharge, dispersal, leaching or migration into the atmosphere, soil
surface water, groundwater or property in violation of Environmental Law.
"Representatives" has the meaning set forth in SECTION 8.8.
"SEC" means the Securities Exchange Commission.
"Shares" has the meaning set forth in Section 3.1.
"Subsequent USTS Financials" has the meaning set forth in SECTION 5.6.
"Taxes" means all taxes, fees, assessments, levies, duties and similar
charges imposed by any federal, state, local or foreign governmental authority,
together with all interest, penalties, fines and other additions imposed in
respect thereof; including, without limitation, all income, gains, real property
gains, profits, gross receipts, payroll, employment, social security (and
similar), disability, health, hospitalization, unemployment compensation,
worker's compensation, Pension Benefit Guaranty Corporation, severance, windfall
profits, environmental, license, occupation, customs, imposts, capital stock,
franchise, ad valorem, excise, sales, use, transfer, registration, value added,
alternative minimum, add-on minimum, successor, withholding and estimated taxes
or other charges.
"Tax Returns" means all original and amended returns, declarations,
certifications, statements, notices, elections, estimates, reports, claims for
refund and information returns relating to or required to be filed or maintained
in connection with any Tax, together with all schedules and attachments thereto.
"Transfer" has the meaning set forth in the recitals hereto.
"USTS" has the meaning set forth in the recitals hereto.
"USTS Affiliate Letter" has the meaning set forth in SECTION 8.12.
A-4
<PAGE>
"USTS Benefit Plan" has the meaning set forth in SECTION 5.18.
"USTS Common Stock" has the meaning set forth in SECTION 5.2.
"USTS Disclosure Schedules" has the meaning set forth in SECTION 5.2.
"USTS Financial Statements" has the meaning set forth in SECTION 5.6.
"USTS Leases" has the meaning set forth in SECTION 5.9(B).
"USTS Material Agreement" has the meaning set forth in SECTION 5.12(A).
"USTS Preferred Stock" has the meaning set forth in SECTION 5.2.
"USTS Real Property" has the meaning set forth in SECTION 5.9(A).
"USTS Reports" has the meaning set forth in SECTION 5.6.
"USTS Stockholder Information" has the meaning set forth in SECTION 5.19.
"USTS Subsidiary" has the meaning set forth in SECTION 5.3.
ARTICLE 2
EXCHANGE OF ASSETS
2.1 THE ASSETS. Subject to the terms and conditions and upon the basis of
the agreements, representations and warranties contained herein, at the Closing
USTS shall transfer, convey, assign and deliver to Acquisition, and Acquisition
shall accept from USTS, all right, title, and interest of USTS in (a) the
Business as a going concern and (b) all of the assets of USTS (excluding the
Excluded Assets) free and clear of all liens, mortgages, pledges, security
interests, conditional sales agreements, charges, encumbrances and other adverse
claims or interests of any nature (except for Permitted Encumbrances), including
without limitation the following (collectively, the "Assets"):
(a) All assets reflected in the Closing Balance Sheet;
(b) All accounts, notes and other receivables and prepaid expenses and
credits of USTS ("Receivables");
(c) All inventory, stock in trade, finished products, work-in-process,
and raw materials, including supplies inventory ("Inventory");
(d) The Facilities including but not limited to all real property,
buildings, structures and improvements thereon and all fixtures and fittings
attached thereto and contained therein set forth on SCHEDULE 2.1(D);
(e) All machinery equipment, business machines, furniture, tools, dies,
molds, parts and other tangible property;
(f) All sales order files, engineering order files, purchase order
files, manufacturing records, product quality qualifications, customer lists
and business files of USTS;
(g) The Intellectual Property Rights of USTS and all licenses and other
rights related thereto;
(h) All rights and interest of USTS to or in all agreements, options,
contracts, distributor agreements, leases, instruments, purchase orders and
all sales orders and bids including all USTS Material Agreements listed on
SCHEDULE 5.12 (the "Assumed Contracts");
(i) All licenses, approvals, certificates, permits, franchises, or other
evidence of authority issued by a Federal, state, local or foreign
governmental agency or authority to the extent assignable;
A-5
<PAGE>
(j) All computer programs, hardware and software (including
documentation and related object and source codes) and like property, and
all records thereof, used in the wherever located to the extent assignable;
(k) All interests in and to the name U.S. Transportation Systems, Inc.
and all variations thereof and all rights to the use of such name and
variations thereto as trademarks; all listings pertaining to USTS in all
telephone books and directories; and stationery, forms, labels, shipping
materials, catalogs, brochures, art work, photographs and advertising and
promotional materials;
(l) All cars, trucks, tractors, trailers, vans, other motorized vehicles
and car phones owned or leased including those set forth on SCHEDULE 2.1(L)
and any and all assignable warranties covering such motor vehicles and car
phones;
(m) Subject to SECTION 2.2(C), all cash and cash equivalents, cash
deposits and escrows, bank accounts, money market accounts, other accounts,
certificates of deposit and other investments of USTS;
(n) To the extent assignable by USTS, all warranties (express or
implied) and rights and claims related to the Assets or the operation of the
Business including all rights to causes of action, lawsuits, judgments,
claims and demands being pursued or pursuable by USTS;
(o) All guarantees, warranties, indemnities and other similar rights in
favor of USTS and all rights to proceeds under insurance policies;
(p) All operating manuals, policies, procedure manuals, training
manuals, personnel records of USTS's employees hired by Acquisition and
other books and records used by corporate USTS in connection with the Assets
and the Business, including customer, policy and financial information and
records;
(q) All going concern value and goodwill of USTS, its trade name(s) or
personnel;
(r) All ownership interests in USTS Subsidiaries; and
(s) All other assets, including computers and computer data stored on
magnetic or other media of USTS (excluding the Excluded Assets).
2.2 EXCLUDED ASSETS. USTS shall not transfer, convey or assign, and
Acquisition shall not acquire, the following assets (such assets being
collectively referred to hereinafter as the "Excluded Assets"):
(a) All rights of USTS arising under this Agreement and the consummation
of the transactions contemplated hereby;
(b) All corporate minute books and stock records of USTS and such other
similar corporate books and records of USTS as may exist on the Closing
Date; PROVIDED, however, that Acquisition shall be entitled to obtain copies
of such other records of USTS relating to the Assets as Acquisition may
reasonably require in connection with the operation of the Business or use
of the Assets subsequent to the Closing;
(c) An amount of cash equal to $175,000.00 to permit USTS to pay its
liabilities for the expenses and costs incurred by it in connection with
this Agreement and the transactions contemplated herein, including the Plan
of Liquidation and Dissolution; and
(d) All of the capital stock of Bancpro Transportation, Inc. and other
assets all as set forth on SCHEDULE 2.2(D).
2.3 ASSUMED LIABILITIES. On the Closing Date, subject to the provisions of
SECTION 2.4 hereof, Acquisition shall assume the following liabilities of USTS
relating to the Business (collectively, the "Assumed Liabilities"):
A-6
<PAGE>
(a) All the obligations of USTS under the Assumed Contracts and any
other agreements, contracts, instruments, purchase orders, sales orders, and
commitments of USTS relating to the operation of the Business after the
Closing Date;
(b) The obligations of USTS under the warrants, stock options and other
obligations specifically set forth in SCHEDULE 2.3(B) by issuance of
warrants, options and commitments which shall afford the holder thereof the
rights to purchase the number of shares at the purchase price on SCHEDULE
2.3(B) together with such other terms in such instruments as Precept shall
reasonably determine; and
(c) The liabilities set forth on the Closing Balance Sheet.
2.4 EXCLUDED LIABILITIES. It is expressly agreed and understood by the
parties to this Agreement that Acquisition does not assume and will not become
liable or responsible for any of the following liabilities and obligations of
USTS (collectively, the "Excluded Liabilities"):
(a) Any intercompany payable balances owed by USTS, or any USTS
Subsidiaries, to any Affiliate of USTS (other than the Margolies Term Note
which shall be an Assumed Liability);
(b) Any liability related to the matters set forth on SCHEDULE 5.13;
(c) Any liability or obligation arising out of or relating to the
Excluded Assets;
(d) Any liability or obligation arising out of or relating to the breach
of, default under, or failure to perform with respect to, the Assumed
Contracts prior to and including the Closing Date; provided, however, that
Precept shall agree to assume up to $20,000 of liabilities or obligations,
in the aggregate, arising out of or relating to the breach of, default
under, or failure to perform with respect to, the Assumed Contracts prior to
and including the Closing Date, which liabilities shall be Assumed
Liabilities;
(e) Any contingent liabilities and liabilities that are not set forth in
the Closing Balance Sheet;
(f) Any liabilities arising out of the violation of or in connection
with Environmental Laws, Releases or Releases of Hazardous Materials;
(g) Any and all liabilities arising out of claims for injury (including
death) or claims for damages, direct or consequential, resulting from or
connected with finished products or services of the Business or USTS
(whenever manufactured) and shipped on or before the Closing Date;
(h) Any liability of USTS for unpaid Taxes for periods before the
Closing Date other than those liabilities reflected on Final Closing Balance
Sheet;
(i) Any liability of USTS for Taxes (including, without limitation,
income and transfer Taxes) resulting from the consummation of the
transactions contemplated by this Agreement other than those liabilities
reflected on Final Closing Balance Sheet;
(j) Any liability of USTS for the unpaid Taxes of any Person other than
USTS under Treasury Regulation Section 1.1502-6 (or any similar provision of
sate, local or foreign law), as transferee or successor, by contract, or
otherwise;
(k) Any liability or obligation arising out of or incurred in connection
with the administration of any USTS Benefit Plan other than those
liabilities reflected on Final Closing Balance Sheet;
(l) Any liability or obligation of USTS under or with respect to the
Series E, F, G, H, I, J, K or L USTS Preferred Stock;
(m) Any liability or obligation of USTS under that certain promissory
note dated September 6, 1997, issued by USTS payable to Consolidated
Financial Management, Inc.; and
(n) All other liabilities of USTS (other than Assumed Liabilities).
A-7
<PAGE>
ARTICLE 3
CONSIDERATION
3.1 CONSIDERATION. The consideration for the Assets shall be (a) the
delivery by Precept to USTS of 9,500,000 shares of Precept Common Stock plus one
additional share of Precept Common Stock for each share of USTS Common Stock
issued between the date hereof and the Closing Date upon the exercise of stock
options or warrants set forth on SCHEDULE 2.3(B) (the "Shares"), together with
(b) the assumption by Acquisition of the Assumed Liabilities (collectively, the
"Purchase Price").
ARTICLE 4
CLOSING
4.1 CLOSING DATE. The Closing hereunder shall take place at the offices of
Jackson Walker L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202, at
10:00 a.m. Dallas time, on the Closing Date, assuming the satisfaction of all
conditions set forth in ARTICLE 9, or at such other place, time or date as USTS
and Precept may agree.
4.2 TRANSACTIONS AT CLOSING. At the Closing, and on the basis of the
representations, warranties, covenants and agreements made herein and in the
exhibits, certificates and other instruments delivered pursuant hereto, and
subject to the terms and conditions hereof:
(a) TRANSFER OF ASSETS. USTS shall transfer and convey or cause to be
transferred and conveyed to Acquisition all of the Assets, shall deliver to
Acquisition the Assignment and Assumption Agreement, the conveyance
documents relating to the Intellectual Property Rights, the warranty deeds
referred to in SECTION 9.2(H), the certificates of title of the motor
vehicles and such other good and sufficient instruments of transfer and
conveyance as shall be necessary to vest in Acquisition good and valid title
to all of the Assets.
(b) PAYMENT OF CONSIDERATION AND ASSUMPTION OF ASSUMED LIABILITIES. In
consideration for the transfer of the Assets (i) Precept shall cause
Acquisition to deliver to USTS a certificate representing the Shares and
(ii) Acquisition shall deliver to USTS the Assignment and Assumption
Agreement, whereby Acquisition shall assume the Assumed Liabilities.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF USTS
USTS represents and warrants to Acquisition and Precept as follows:
5.1 ORGANIZATION, GOOD STANDING, POWER, ETC.
(a) USTS is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Nevada, and has the requisite
corporate power and authority to carry on its business as now conducted.
USTS is duly qualified as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified would not have a
Material Adverse Effect on USTS.
A-8
<PAGE>
(b) USTS has the requisite corporate power and authority to enter into
this Agreement and, subject to obtaining stockholder approval of this
Agreement, the Transfer and the Plan of Liquidation and Dissolution, to
perform its obligations hereunder. The execution and delivery of this
Agreement by USTS and the consummation by USTS of the transactions
contemplated hereby have been duly authorized by the Board of Directors of
USTS and no other corporate proceedings on the part of USTS are necessary
for the execution and delivery of this Agreement by USTS, and, subject to
obtaining stockholder approval of this Agreement, the Transfer and the Plan
of Liquidation and Dissolution, the consummation by USTS of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
USTS and, subject to obtaining stockholder approval of this Agreement, the
Transfer and the Plan of Liquidation and Dissolution and assuming that it
has been duly executed and delivered by Precept, constitutes a legal, valid
and binding obligation of USTS, enforceable against USTS in accordance with
its terms except as enforcement thereof may be limited by liquidation,
conservatorship, bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally from
time to time in effect and except that equitable remedies are subject to
judicial discretion.
5.2 AUTHORIZED CAPITALIZATION OF USTS. The authorized capital stock of
USTS consists of 50,000,000 shares of USTS common stock, par value $0.01 per
share (the "USTS Common Stock"), and 10,000,000 shares of preferred stock, par
value $0.01 per share (the "USTS Preferred Stock"). As of October 10, 1997,
there were 7,186,141 shares of USTS Common Stock and 285,000 shares of USTS
Preferred Stock issued and outstanding. USTS has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the stockholders of USTS on any matter. All issued and
outstanding shares of USTS Common Stock are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. Except as disclosed in
SCHEDULE 5.2 of the disclosure schedules delivered herewith by USTS (the "USTS
Disclosure Schedules"), (i) there are no outstanding or authorized
subscriptions, options, warrants, calls, rights (including any preemptive
rights), commitments, or other agreements of any character whatsoever which
obligate or may obligate USTS to issue or sell any additional shares of its
capital stock or any securities convertible into or evidencing the right to
subscribe for any shares of its capital stock or securities convertible into or
exchangeable for such shares, (ii) there are no outstanding or authorized stock
appreciation, phantom stock, profit participation or similar plans or contracts
or rights with respect to USTS or USTS Subsidiaries which are effective as of
the date hereof or which have been executed or agreed to as of the date hereof
with an effective date after the date hereof, and (iii) there are no
stockholders' agreements, voting trusts, proxies or other agreements or
understandings with respect to the voting of the capital stock of USTS or any
USTS Subsidiaries to which USTS or any USTS Subsidiary is or are a party which
are presently effective or have been executed or agreed to as of the date hereof
and provide for an effective date after the date hereof or to which any officer
or director of USTS or any stockholder owned or controlled by such officer or
director is or will be a party in accordance with the terms hereof.
5.3 SUBSIDIARIES. USTS owns, directly or indirectly, the equity and debt
interests of each corporation, partnership, joint venture, limited liability
company or other legal entity (each a "USTS Subsidiary"), in the amounts and the
identities of which are disclosed in the USTS Reports and in SCHEDULE 5.3 of the
USTS Disclosure Schedules. For each USTS Subsidiary that is a corporation, each
of the outstanding shares of capital stock of each of the USTS Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable, and all such
outstanding shares or other ownership interests are owned, directly or
indirectly, by USTS free and clear of all liens, pledges, security interests,
claims or other encumbrances other than liens imposed by local law which are not
material.
5.4 OTHER INTERESTS. Except for interests in USTS Subsidiaries and as set
forth in SCHEDULE 5.4 of the USTS Disclosure Schedules, neither USTS nor any
USTS Subsidiary owns, directly or indirectly, any
A-9
<PAGE>
interest or investment (whether equity or debt) in any corporation, partnership,
joint venture, business, trust or entity other than investments in short term
investment securities.
5.5 EFFECT OF AGREEMENT. The execution, delivery and performance of this
Agreement by USTS and the consummation by USTS of the transactions contemplated
hereby will not require any notice to, filing with, or the consent, approval or
authorization of any person or governmental authority, except for filings
required under the HSR Act, the Securities Act, the Exchange Act and state "Blue
Sky" filings. Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in the
acceleration or termination of, or the creation in any party of the right to
accelerate, terminate, modify or cancel, any material indenture, contract,
lease, sublease, loan agreement, note or other obligation or liability to which
USTS is a party or is bound or to which any of its assets are subject which
would have a Material Adverse Effect on USTS, (ii) conflict with, violate or
result in a breach of any provision of the charter documents or bylaws of USTS,
(iii) conflict with or violate any law, rule, regulation, ordinance, order,
writ, injunction or decree applicable to USTS or by which any of its properties
or assets is bound or affected which conflict or violation would result in a
Material Adverse Effect on USTS or (iv) conflict with or result in any breach of
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or result in the creation of any lien, charge or
encumbrance on any of the properties or assets of USTS pursuant to any of the
terms, conditions or provisions of any indenture, contract, lease, sublease,
loan agreement, note, permit, license, franchise, agreement or other instrument,
obligation or liability to which USTS is a party or by which USTS or any of its
assets is bound or affected which would have a Material Adverse Effect on USTS.
5.6 SEC DOCUMENTS. USTS has filed each report, proxy statement or
information statement (as defined in Regulation 14C under the Exchange Act)
required of it since January 1, 1990 (including exhibits and any amendments
thereto) with the SEC (collectively, the "USTS Reports"). Except as set forth in
SCHEDULE 5.6 of the USTS Disclosure Schedules, as of their respective dates, (i)
the USTS Reports complied as to form in all material respects with the
applicable requirements of the Securities Act, the Exchange Act, and the rules
and regulations thereunder, and (ii) the USTS Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. Each of the
consolidated balance sheets of USTS included in the USTS Reports (including the
related notes and schedules) has been prepared in accordance with GAAP, or, if
unaudited, in accordance with applicable published accounting requirements of
the SEC, and fairly presents the consolidated financial position of USTS and the
USTS Subsidiaries as of its date, and each of the consolidated statements of
income, changes in stockholders' equity and cash flows of USTS included in the
USTS Reports (including any related notes and schedules, and together with the
consolidated balance sheets of USTS, the "USTS Financial Statements") has been
prepared in accordance with GAAP, or, if unaudited, in accordance with
applicable published accounting requirements of the SEC, and fairly presents the
results of operations, changes in stockholders' equity or cash flows, as the
case may be, of USTS and USTS Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end audit
adjustments which would not cause a Material Adverse Effect on USTS). Neither
USTS nor any of the USTS Subsidiaries has any material liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
that would be required to be reflected on, or reserved against in, a balance
sheet of USTS or in the notes thereto, prepared in accordance with GAAP, except
liabilities reflected on the balance sheet contained in the USTS December
Financials and liabilities arising in the ordinary course of business since
December 31, 1996 (the "Balance Sheet Date"). The balance sheet of USTS for
December 31, 1996 (the "Balance Sheet") and the related consolidated statements
of income for the period ended December 31, 1996 are hereafter referred to as
the "December USTS Financials". All material agreements, contracts and other
documents required to be filed as exhibits to any of the USTS Reports have been
so filed. USTS has filed all reports and other filings required to be filed with
the SEC under the rules and regulations of the SEC. Any financial statements
prepared for filing with the SEC by USTS subsequent to the date of the December
USTS Financials or the
A-10
<PAGE>
date hereof, including but not limited to its year ended December 31, 1996
audited financial statements (but only to the extent the same are required to be
filed with the SEC prior to the Closing date) (the "Subsequent USTS
Financials"), have been, or if not yet filed, will be, prepared in accordance
with GAAP (in the case of audited statements) and in accordance with applicable
published accounting requirements of the SEC (in the case of unaudited
statements), consistently applied, will fairly represent the financial
condition, and will accurately set forth in all material respects the results of
the combined operations, of USTS and the USTS Subsidiaries for the periods
covered thereby.
5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the USTS
Reports and SCHEDULE 5.7 of the USTS Disclosure Schedules, and except for
changes arising from the public announcement of the transactions contemplated by
this Agreement, since December 31, 1996, USTS has conducted its Business only in
the ordinary course of business and there has not been (i) any material change
in USTS or any development or combination of developments which has resulted or
is reasonably likely to result in a Material Adverse Effect on USTS; (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to its capital stock; (iii) any material change in its accounting
principles, practices or methods; (iv) any termination by USTS of the employment
of any department head or officer of USTS, or has USTS entered into (A) any
written employment agreement or (B) any oral employment agreement not terminable
without penalty by any party thereto upon 60 days notice; (v) any material
increase in the rate of compensation or bonus payments payable or to become
payable to any of USTS's officers or directors (including, without limitation,
any payment of or promise to pay any bonus or special compensation); (vi) any
purchase, redemption, issuance, sale or other acquisition or disposition of any
of its shares of capital stock or other equity securities, or agreement to do
so, or any grant of any options, warrants or other rights to purchase or convert
any obligation into any shares of USTS's capital stock or any evidence of
indebtedness or other securities; (vii) any transaction between USTS and any
Affiliate (as defined in Rule 12b-2 under the Exchange Act) of USTS; and (viii)
any agreement entered into by USTS to do any of the things set out in (i)-(vii)
above.
5.8 TAXES. Except as set forth in SCHEDULE 5.8 of the USTS Disclosure
Schedules:
(a) All Tax Returns required to have been filed by USTS and the USTS
Subsidiaries have been timely filed (taking into account duly granted
extensions) and are true, correct and complete in all respects. Except as
disclosed in SCHEDULE 5.8(a) to the USTS Disclosure Schedules, (i) USTS is
not currently the beneficiary of any extension of time within which to file
any Tax Return, and (ii) no claim has ever been made by any governmental
authority in a jurisdiction where USTS does not file Tax Returns that USTS
or any USTS Subsidiary is or may be subject to taxation by that
jurisdiction. All persons characterized as independent contractors, and not
as employees, were properly characterized for all purposes under applicable
laws (including, without limitation, their characterization as independent
contractors for income and employment tax withholdings and payments.
(b) All Taxes of USTS which have become due (without regard to any
extension of the time for payment and whether or not shown on any Tax
Return) have been paid. USTS has withheld and paid over all Taxes required
to have been withheld and paid over and has complied with all information
reporting and back-up withholding requirements relating to Taxes. There are
no liens with respect to Taxes on any of the assets of USTS, other than
liens for Taxes not yet due and payable or for Taxes disclosed in SCHEDULE
5.8(b) to the USTS Disclosure Schedules that are being contested in good
faith through appropriate proceedings and for which adequate reserves have
been established in the USTS Financial Statements.
(c) The unpaid Taxes of USTS for all periods ending on or before the
Balance Sheet Date did not exceed the amount of the current liability
accruals for Taxes (exclusive of reserves for deferred Taxes established to
reflect timing differences) reflected on the face of the Balance Sheet, and
the unpaid Taxes of USTS for all periods ending on or before the Closing
Date will not exceed the amount of such current liability accruals reflected
on the Closing Balance Sheet as adjusted for USTS operations
A-11
<PAGE>
in the ordinary course of business through the Closing Date in accordance
with GAAP and, to the extent consistent therewith, the most recent custom
and practices of USTS.
(d) No deficiencies exist or have been asserted or are expected to be
asserted (verbally or in writing) with respect to Taxes of USTS and USTS has
not received notice nor does it expect to receive notice (verbally or in
writing) that it has not filed a Tax Return or paid any Taxes required to be
filed or paid by it. No audit, examination, investigation, action, suit,
claim or proceeding relating to the determination, assessment or collection
of any Tax of USTS is currently in process, pending or threatened (verbally
or in writing). Except as disclosed in SCHEDULE 5.8(d) of the USTS
Disclosure Schedules, no waiver or extension of any statute of limitations
relating to the assessment or collection of any Tax of USTS is in effect.
There are no outstanding requests for rulings with any Tax authority
relating to Taxes of USTS.
(e) Except as disclosed in SCHEDULE 5.8(e) of the USTS Disclosure
Schedules, USTS is not and has never been a party to any tax sharing
agreement or arrangement (formal or informal, verbal or in writing).
(f) USTS has delivered to Precept true and complete copies of all
federal, state, local and foreign income Tax Returns filed by USTS for its
five (5) most recently ended taxable years, together with all related
examination reports, statements of deficiencies and closing and other
agreements. SCHEDULE 5.8(f) of the USTS Disclosure Schedules indicates
which, if any, of such returns have been, or currently are, the subject of
any audit, examination or other Tax proceeding.
(g) USTS (i) has not filed a consent under Code Section 341(f)
concerning collapsible corporations; (ii) has not made any payments,
obligated itself to make any payments or become a party to any agreement
that under any circumstance could obligate it or any successor or assignee
of it to make any payments that are not or will not be deductible under Code
Section 280G, or that would be subject to excise Tax under Code Section
4999; (iii) is not a "foreign person" as defined in Code Section 1445(f)(3);
(iv) is not and has not been a United States real property holding
corporation within the meaning of Code Section 897(c)(2) during the
applicable period specified in Code Section 897(c)(1)(A)(ii); (v) does not
own and has not owned any interest in any "controlled foreign corporation"
as defined in Code Section 957 or "passive foreign investment company" as
defined in Code Section 1296; (vi) is not and has not been a party to any
agreement or arrangement for which partnership Tax Returns are required to
be filed; (vii) does not own any asset that is subject to a "safe harbor
lease" within the meaning of Code Section 168(f)(8), as in effect prior to
amendment by the Tax Equity and Fiscal Responsibility Act of 1982; (viii)
does not own any "tax-exempt use property" within the meaning of Code
Section 168(h) or "tax exempt bond financed property" within the meaning of
Code Section 168(g)(5); and (ix) has not agreed to and is not required to
make any adjustment under Code Section 481(a) by reason of a change in
accounting method or otherwise.
5.9 REAL PROPERTY.
(a) SCHEDULE 5.9(a) of the USTS Disclosure Schedules contain a complete
and accurate list of all real property owned or, to the extent material,
leased by USTS (the "USTS Real Property"). Except as otherwise disclosed in
SCHEDULE 5.9(a) of the USTS Disclosure Schedules and except for liens for
taxes not yet due and payable, the USTS Real Property owned by USTS is free
and clear of all liens, mortgages, pledges, security interests, conditional
sales agreements, charges, encumbrances (except to the extent that the
existence of such encumbrance would not materially affect the use of such
property by Acquisition) and other adverse claims or interests of any nature
whatsoever. All improvements on the USTS Real Property are in good condition
and repair, reasonable wear and tear excepted.
(b) Except as disclosed in SCHEDULE 5.9(b) of the USTS Disclosure
Schedules, there are no material existing leases, subleases, tenancies,
licenses, contracts or other agreements ("USTS Leases") relating to the USTS
Real Property to which USTS is a party.
A-12
<PAGE>
(c) Except as disclosed in SCHEDULE 5.9(c) of the USTS Disclosure
Schedules, (i) each of the USTS Leases to USTS of the USTS Real Property is
valid, and neither USTS nor, to the knowledge of USTS, any other party
thereto is in default or non-compliance thereunder, nor is there any event
which with notice or lapse of time, or both, would constitute a default
thereunder by USTS or, to the knowledge of USTS, any other party thereto
except where such default would not result in a Material Adverse Effect on
USTS and (ii) USTS has not received notice that any party to any Lease
intends to cancel, terminate or refuse to renew the same or to exercise or
decline to exercise any option or other right thereunder.
5.10 ENVIRONMENTAL. Except for those matters that (i) would not have a
Material Adverse Effect on USTS, (ii) are in compliance with applicable law, or
(iii) are disclosed in SCHEDULE 5.10 of the USTS Disclosure Schedules:
(a) USTS has not used, stored, treated, transported, manufactured,
handled, produced or disposed of any Hazardous Materials on, under, at, or
from, any of the owned, leased or operated properties or assets described in
the USTS Disclosure Schedules, or otherwise, in any manner which violated
any applicable Environmental Law and to USTS's knowledge no prior owner or
operator of such property or asset of any tenant, subtenant, prior tenant or
prior subtenant thereof has used Hazardous Materials on, from or affecting
such property or asset, or otherwise, in any manner which violated any
applicable Environmental Law.
(b) To the knowledge of USTS, there have been no Releases of any
Hazardous Material on, under, at, or from any of the owned, leased or
operated properties or assets described in the USTS Disclosure Schedules or
otherwise.
(c) USTS does not have any liabilities assessed, no written claims have
been received by USTS and no currently outstanding citations or notices of
violation have been received by USTS, which in the case of any of the
foregoing have been or are imposed by reason of or based upon any alleged
violation of any applicable Environmental Laws, including, but not limited
to, any such liabilities relating to or arising out of or attributable, in
whole or in part, to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, presence or handling of any
Hazardous Materials by USTS at any of the USTS Real Property or otherwise.
(d) There are no actions by any governmental authority or third party
pending under any Environmental Laws to which USTS is a party alleging a
violation of Environmental Law, nor are there any decrees, or orders, or
other administrative or judicial requirements, outstanding under any
Environmental Law with respect to USTS.
(e) The real property currently used, owned or leased by USTS contains
no regulated underground storage tanks, or regulated underground piping
associated with underground storage tanks, used currently or in the past as
such tanks are defined in RCRA or comparable state law.
(f) To the knowledge of USTS, USTS has obtained and is in compliance
with all permits and licenses that are required under Environmental Laws,
and is in compliance with all terms and conditions of such permits and
licenses.
5.11 PERSONAL PROPERTY.
(a) Except as otherwise described in SCHEDULE 5.11(a) of the USTS
Disclosure Schedules, all of USTS's personal property (the "USTS Personal
Property") is (i) free and clear of all liens, other than liens for taxes
not yet due and payable, mortgages, pledges, security interests, conditional
sales agreements, charges, encumbrances and other adverse claims or
interests of any nature whatsoever, and (ii) is in good operating condition
and repair, reasonable wear and tear excepted. The USTS Personal Property,
taken as a whole, is reasonably fit and usable for the purposes for which it
is being used, reasonably sufficient for all current operations and business
of USTS and conforms with all
A-13
<PAGE>
applicable ordinances, regulations and laws except where the failure to
conform would not have a Material Adverse Effect on USTS.
(b) The inventory of USTS as reflected by the December USTS Financials
and the inventory as the same shall exist on the date hereof, other than the
reserve established for the inventory reflected in the December USTS
Financials, consisted and will consist of items which were and will be of
the usual quality and quantity necessary for the normal conduct of the
business of USTS and is reasonably expected to be usable or saleable within
a reasonable period of time in the ordinary course of the business of USTS.
With respect to inventory in the hands of suppliers for which USTS is
committed as of the Closing date, such inventory is reasonably expected to
be usable in the ordinary course of the business of USTS as presently being
conducted.
5.12 MATERIAL AGREEMENTS.
(a) SCHEDULE 5.12 of the USTS Disclosure Schedules lists each agreement
and arrangement (whether written or oral and including all amendments
thereto) to which USTS is a party or a beneficiary or by which USTS or any
of its Assets is bound and that is material to USTS (collectively, the "USTS
Material Agreements"), including without limitation (i) any real estate
leases; (ii) any contracts for the provision of goods or services by USTS;
(iii) any agreement evidencing, securing or otherwise relating to any
indebtedness for which USTS is liable; (iv) any capital or operating leases,
value-added reseller, reseller, or conditional sales agreements relating to
vehicles, equipment or other assets of USTS or agreements pursuant to which
USTS is entitled or obligated to acquire any assets from a third party; (v)
any insurance policies; (vi) any employment, consulting, noncompetition,
separation, collective bargaining, union or labor agreements or
arrangements; (vii) any agreement with any stockholder, director, officer or
employee of USTS, or any affiliate or family member thereof; (viii) any
joint marketing or similar agreement or arrangement; and (ix) any other
agreement or arrangement pursuant to which, based on historical or projected
volume, USTS will be required to make or entitled to receive aggregate
payments in excess of $50,000 during any calendar year.
(b) USTS has performed all obligations required to be performed by it in
connection with the agreements and arrangements required to be disclosed
pursuant to this SECTION 5.12 and is not in receipt of any claim of default
under any agreement or arrangement required to be disclosed by this SECTION
5.12; USTS has no present expectation or intention of not fully performing
any material obligation pursuant to any agreement or arrangement required to
be disclosed in the USTS Disclosure Schedules pursuant to this SECTION 5.12
and except as set forth in SCHEDULE 5.12(b) of the USTS Disclosure
Schedules, USTS has no knowledge of any breach or anticipated breach by any
other party to any agreement or arrangement required to be disclosed in the
USTS Disclosure Schedules pursuant to this SECTION 5.12.
(c) USTS has delivered to Acquisition a copy of the agreements and
arrangements required to be disclosed in the USTS Disclosure Schedules
pursuant to this Section 5.12.
(d) Except as disclosed in USTS Reports or SCHEDULE 5.12(d) of the USTS
Disclosure Schedules, all the USTS Material Agreements to which USTS is a
party are valid and enforceable, USTS has performed all obligations imposed
upon them thereunder, and USTS nor, to the knowledge of USTS, any other
party thereto is in default thereunder, nor is there any event which with
notice or lapse of time, or both, would constitute a default or
non-compliance thereunder by USTS or, to the knowledge of USTS, any other
party thereto.
A-14
<PAGE>
5.13 LEGAL PROCEEDINGS. Except as set forth in SCHEDULE 5.13 of the USTS
Disclosure Schedules, there are no claims, actions, suits, arbitrations,
grievances, proceedings or investigations pending or, to the best knowledge of
USTS, threatened against USTS, at law, in equity, or before any federal, state,
municipal or other governmental or nongovernmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, and there are no
outstanding or unsatisfied judgments, orders, decrees or stipulations to which
USTS is a party, which involve the transactions contemplated herein or which
would have a Material Adverse Effect upon USTS. USTS is not currently engaged in
or contemplating any legal action to recover moneys due to them or damages
sustained by them. USTS is not in violation of or in default with respect to any
applicable judgment, order, writ, injunction or decree, which would have a
Material Adverse Effect upon USTS.
5.14 LABOR MATTERS. Except as disclosed in SCHEDULE 5.14 of the USTS
Disclosure Schedules, neither USTS nor any of the USTS Subsidiaries is a party
to, or is bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. To the
knowledge of USTS, there is no unfair labor practice or labor arbitration
proceeding pending. Except as disclosed in SCHEDULE 5.14 of the USTS Disclosure
Schedules, to the knowledge of USTS, there are no organizational efforts with
respect to the formation of a collective bargaining unit presently being made or
threatened involving employees of USTS or any of the USTS Subsidiaries.
5.15 PATENTS, TRADEMARKS, FRANCHISES, ETC. Except as set forth in SCHEDULE
5.15 of the USTS Disclosure Schedules, all agreements and applications related
to any patents, trademarks, copyrights, trade names, trade secrets, service
marks, other intellectual property rights (including, without limitation, rights
with respect to computer software), franchises and other similar rights (the
"Intellectual Property Rights") which are listed in SCHEDULE 5.15 of the USTS
Disclosure Schedules are valid and enforceable, USTS has performed all
obligations imposed upon it thereunder, and USTS is not in default thereunder,
nor is there any event which with notice or lapse of time, or both, would
constitute a default thereunder by USTS or, to the knowledge of USTS, any other
party thereto. Except as set forth in SCHEDULE 5.15 of the USTS Disclosure
Schedules, USTS has not received notice that any party to any such agreement
intends to cancel, terminate or refuse to renew the same or to exercise or
decline to exercise any option or other right thereunder. Each of USTS and the
USTS Subsidiaries has all right, title and interest in, or has a valid and
enforceable license to use, the Intellectual Property Rights presently being
used in the business, and the current use of the Intellectual Property Rights by
USTS and the USTS Subsidiaries does not infringe upon the rights of any third
person.
5.16 INSURANCE. SCHEDULE 5.16 of the USTS Disclosure Schedules contains a
list of all policies of insurance maintained as of the date of this Agreement by
USTS, or maintained by any USTS Subsidiary, in respect of the Business and
Assets of USTS and the USTS Subsidiaries, including without limitation insurance
providing benefits for employees. The insurance policies set forth in SCHEDULE
5.16 of the USTS Disclosure Schedules provide adequate coverage against the
risks involved in the Business and operation of USTS. Neither USTS nor any USTS
Subsidiary has received notice from any insurance carrier of the intention of
such carrier to discontinue any insurance policy set forth in SCHEDULE 5.16 of
the USTS Disclosure Schedules, or any coverage currently provided by any such
policy. Since January 1, 1997, neither USTS nor any of the USTS Subsidiaries has
been denied coverage by any insurance carrier or has failed or currently fails
to maintain any insurance coverage which may be required by the laws of the
states in which USTS or USTS Subsidiaries do business. The premiums due on the
insurance which covers calendar year 1996 have been paid in full (or are not
delinquent) and the premiums due for the period from January 1, 1997 to the
Closing Date have been or will be paid in full as and when due. All such
insurance complies in all material respects with the terms of each of its leases
and each of the mortgages, deeds of trust, service agreements with third parties
and/or loan agreements to which USTS or any of the USTS Subsidiaries is a party.
5.17 EMPLOYEES. Except as disclosed in SCHEDULE 5.17 of the USTS
Disclosure Schedules and as reflected in USTS Financial Statements, USTS is not
a party to any:
A-15
<PAGE>
(i) management, employment or other contract providing for the
employment or rendition of executive services;
(ii) contract for the employment of any employee which is not
terminable by USTS on 30 days notice;
(iii) bonus, incentive, deferred compensation, severance pay,
pension, profit-sharing, retirement, stock purchase, stock option,
employee benefit or similar plan, agreement or arrangement (including
without limitation Christmas bonuses and similar year end bonuses); or
(iv) any other employment contract or other compensation agreement or
arrangement affecting or relating to current or former employees of USTS.
5.18 EMPLOYEE BENEFIT PLANS. All material employee benefit plans, as
defined in Section 3(3) of ERISA, all arrangements providing compensation,
severance or other benefits (excluding any employment agreement or arrangement
which may be terminated with no more than 30 days prior written notice and which
provides no severance or termination benefits greater than those described in
USTS's employee manuals) to any employee or director or former employee or
director of USTS, the USTS Subsidiaries or ERISA Affiliate (as defined below) of
USTS (the "USTS Benefit Plans") are set forth in SCHEDULE 5.18 of the USTS
Disclosure Schedules. Unless otherwise disclosed in SCHEDULE 5.18 of the USTS
Disclosure Schedules, to the extent applicable, the USTS Benefit Plans comply,
in all material respects, with the requirements of ERISA and the Code, and any
USTS Benefit Plan intended to be qualified under Section 401(a) of the Code has
been determined by the IRS to be so qualified or USTS has submitted or is in the
process of submitting a timely determination letter request to the IRS with
respect to any such USTS Benefit Plan. Neither USTS nor any ERISA Affiliate of
USTS (during the period of its affiliated status and prior thereto, to its
knowledge) maintains, contributes to or has in the past maintained or
contributed to any benefit plan which is covered by Title IV of ERISA or Section
412 of the Code. Neither any USTS Benefit Plan nor USTS has incurred any
liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA.
Each USTS Benefit Plan has been maintained and administered in all material
respects in compliance with its terms and with ERISA and the Code to the extent
applicable thereto. There are no pending or anticipated claims against or
otherwise involving any of USTS Benefit Plans and no suit, action or other
liability (excluding claims for benefits incurred in the ordinary course of USTS
Benefit Plan activities) has been brought against or with respect to any such
USTS Benefit Plan, except for any of the foregoing which would not have a
Material Adverse Effect on USTS. All contributions required to be made as of the
date hereof to USTS Benefit Plans have been made or provided for. All required
contributions to USTS Benefit Plans have been timely made. Neither USTS nor any
ERISA Affiliate of USTS has contributed to, or been required to contribute to,
any "multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA).
Except for benefits as may be required to be provided under applicable
provisions of federal or state law, there are no plans or arrangements which
provides or has any liability to provide life insurance or medical or other
employee welfare benefits to any employee or former employee upon his retirement
or termination of employment. The execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event under any
USTS Benefit Plan that will or may result in any payment (whether of severance
pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any employee. The only severance agreements or severance policies applicable
to USTS or any of the USTS Subsidiaries are the agreements and policies
specifically referred to in the USTS Disclosure Schedules (and, in the case of
such agreements, the form of which is attached to the USTS Disclosure
Schedules).
5.19 STOCKHOLDER INFORMATION. None of the information to be distributed to
stockholders of USTS in connection with the Transfer nor any amendments or
supplements of or to any of the foregoing which is provided by USTS
(collectively, the "USTS Stockholder Information"), will between the date the
USTS Stockholder Information is first mailed to stockholders and the Closing
Date, contain any statement which,
A-16
<PAGE>
at such time and in light of the circumstances under which it is made, will be
false or misleading with respect to any fact, or will omit to state any fact
necessary in order to make the statements therein not false or misleading.
5.20 FULL DISCLOSURE. No information furnished, or to be furnished, by
USTS or its representatives pursuant to this Agreement (including, but not
limited to, the USTS Reports and all information in the USTS Disclosure
Schedules) is, or will be, false or misleading and such information includes all
facts required to be stated therein or necessary to make the statements therein
not misleading. No representation or warranty by or on behalf of USTS or the
USTS Subsidiaries contained in this Agreement, and no statement contained in any
certificate, list, exhibit, or other instrument furnished or to be furnished by
USTS pursuant hereto (including the USTS Disclosure Schedules) contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material facts which are necessary in order to make the statement contained
herein or therein, in light of the circumstances under which they are made, not
misleading.
5.21 TRANSACTIONS WITH RELATED PARTIES. Except for transactions disclosed
in SCHEDULE 5.21 of the USTS Disclosure Schedules, there have been no loans or
other transactions between USTS and any officer, director or stockholder, or any
affiliate thereof, of USTS. Except as disclosed in SCHEDULE 5.21 of the USTS
Disclosure Schedules, neither USTS, any officer or director of USTS nor any
spouse or child of any such person owns or has any interest in, directly or
indirectly, any real or personal property owned by or leased to USTS or any
Intellectual Property Rights licensed by USTS.
5.22 LAWS. Except for Environmental Laws, which are covered in SECTION
5.10 hereof, and as specifically set forth in SCHEDULE 5.22 of the USTS
Disclosure Schedules, USTS has complied in all material respects with all laws,
rules, regulations, ordinances, codes, licenses, clearances, permits,
franchises, grants, authorizations, easements, consents, certificates and orders
relating to any of its properties or applicable to its business, including, but
not limited to, labor, equal employment opportunity, occupational safety and
health, consumer protection, environmental, securities and antitrust laws and
regulations except where the failure to be in compliance would not have a
Material Adverse Effect on USTS. USTS has all contractors licenses required for
it to conduct its business except where the failure to be in compliance would
not have a Material Adverse Effect on USTS. USTS is not in material violation of
any applicable zoning, building or environmental regulation, ordinance or other
law, order, regulation, restriction or requirement relating to its operations or
properties, whether such properties are owned or leased, and no governmental
body or other person has claimed that any such violation exists, or called
attention to the need for any work, repairs, construction, alterations or
installation on or in connection with the properties of USTS, except for such
violations that would not have a Material Adverse Effect on USTS. As of the date
hereof, the Board of Directors of USTS has approved the Transfer pursuant to the
relevant provisions of Nevada law.
5.23 BROKERAGE. Except as set forth in SECTION 5.23 of the USTS Disclosure
Schedules, USTS has not retained any broker or finder in connection with the
transactions contemplated by this Agreement.
5.24 PRODUCT WARRANTIES. Except as set forth in SECTION 5.24 of the USTS
Disclosure Schedules, there is no claim against or liability of USTS or any USTS
Subsidiary on account of product warranties or with respect to the manufacture,
sale or rental of defective products and there is no basis for any such claim on
account of defective products heretofore manufactured, sold or rented that is
not fully covered by insurance.
5.25 FORD CONTRACT. USTS is not aware, so far as USTS can reasonably
foresee, of any reason why the Ford Contract would not be renewed by Ford Motor
Company on substantially the same terms and conditions for a period of at least
one year beyond the current June 30, 1998 expiration date.
A-17
<PAGE>
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PRECEPT AND ACQUISITION
Acquisition and Precept represent and warrant to USTS, at the time of
execution hereof and at the Closing Date, the following:
6.1 ORGANIZATION, GOOD STANDING, POWER, ETC.
(a) (i) Precept is a corporation duly organized, validly existing and
in good standing under the laws of the State of Texas, and has the requisite
corporate power and authority to carry on its business as now conducted.
Precept is duly qualified as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary except where the failure to be so qualified would not have a
Material Adverse Effect on Precept. Copies of the Articles of Incorporation
and Bylaws of Precept heretofore delivered to USTS or its representatives
are true and complete as of the date hereof. Such Articles of Incorporation
and Bylaws are in full-force and effect, and Precept is not in violation or
breach of any provisions of its Articles of Incorporation or Bylaws.
(ii) Acquisition is a newly formed limited liability company duly
organized, validly existing and in good standing under the laws of the
State of Nevada, and has the requisite limited liability company power
and authority to carry on its business as now conducted.
(b) Each of Acquisition and Precept have the requisite power and
authority to enter into this Agreement and, to perform their respective
obligations hereunder. The execution and delivery of this Agreement by
Acquisition and Precept and the consummation by Acquisition and Precept of
the transactions contemplated hereby have been duly authorized by the Board
of Directors of Precept and the sole member of Acquisition and except for
shareholder approval of the amendment to the Articles of Incorporation of
Precept to increase the number of shares of Precept Common Stock to an
amount not in excess of 100,000,000 shares and the split of the Precept
Class A Common Stock, and the Precept Class B Common Stock, no other
corporate proceedings on the part of Acquisition and Precept are necessary
for the execution and delivery of this Agreement by Acquisition and Precept,
and the consummation by Acquisition and Precept of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Acquisition and Precept and assuming that it has been duly executed and
delivered by USTS, constitutes a legal, valid and binding obligation of each
of Acquisition and Precept, enforceable against Acquisition and Precept in
accordance with its terms except as enforcement thereof may be limited by
liquidation, conservatorship, bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditor's rights
generally from time to time in effect and except that equitable remedies are
subject to judicial discretion.
6.2 AUTHORIZED CAPITALIZATION OF PRECEPT. The authorized capital stock of
Precept consists of 17,195,742 authorized shares of Class A Common Stock,
8,361,647 of which were issued and outstanding as of June 30, 1997, and
3,202,843 authorized shares of Class B Common Stock, 3,202,843 of which were
issued and outstanding as of June 30, 1997. Precept has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the shareholders of Precept on any matter. All issued and
outstanding shares of Common Stock are duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights. Except as disclosed in
SCHEDULE 6.2 of the disclosure schedules delivered herewith by Precept (the
"Precept Disclosure Schedules"), (i) there are no outstanding or authorized
subscriptions, options, warrants, calls, rights (including any preemptive
rights), commitments, or other agreements of any character whatsoever which
obligate or may obligate Precept to issue or sell any additional shares of its
capital stock or any securities convertible into or evidencing the right to
subscribe for any shares of its capital stock or securities convertible into or
exchangeable for such shares, (ii) there are no outstanding or authorized stock
appreciation, phantom stock, profit participation or similar plans or contracts
or rights
A-18
<PAGE>
with respect to Precept or any of its subsidiaries which are effective as of the
date hereof or which have been executed or agreed to as of the date hereof with
an effective date after the date hereof, and (iii) there are no shareholders'
agreements, voting trusts, proxies or other agreements or understandings with
respect to the voting of the capital stock of Precept or any of its subsidiaries
to which Precept or any of its subsidiaries is or are a party which are
presently effective or have been executed or agreed to as of the date hereof and
provide for an effective date after the date hereof or to which any officer or
director of Precept or any shareholder owned or controlled by such officer or
director is or will be a party in accordance with the terms hereof. Set forth in
the Precept Disclosure Schedules is a list of all such options, warrants or
other convertible securities, identifying the holder thereof, the number of
shares of Precept Common Stock into which the security is convertible, and the
purchase price payable upon exercise or the conversion ratio, as applicable.
6.3 SUBSIDIARIES. Except as set forth in SCHEDULE 6.3 of the Precept
Disclosure Schedules, Precept owns directly or indirectly each of the
outstanding shares of capital stock of each of Precept's direct or indirect
subsidiaries (each a "Precept Subsidiary"), the identities of which are set
forth in the Precept Disclosure Schedules. Each of the outstanding shares of
capital stock of each Precept Subsidiary (that are corporations) is duly
authorized, validly issued, fully paid and nonassessable, and all such
outstanding shares or other ownership interests are owned, directly or
indirectly, by Precept free and clear of all liens, pledges, security interests,
claims or other encumbrances other than liens imposed by local law which are not
material. Acquisition does not own directly or indirectly any Subsidiaries.
6.4 OTHER INTERESTS. Except as set forth in SCHEDULE 6.3 of the Precept
Disclosure Schedules with respect to Precept's interests in the Precept
Subsidiaries, neither Precept nor any Subsidiary owns, directly or indirectly,
any material interest or investment (whether equity or debt) in any corporation
(including but not limited to USTS), partnership, joint venture, business, trust
or entity other than investments in short term investment securities.
6.5 EFFECT OF AGREEMENT. The execution, delivery and performance of this
Agreement by Acquisition and Precept and the consummation by Acquisition and
Precept of the transactions contemplated hereby will not require any notice to,
filing with, or the consent, approval or authorization of any person or
governmental authority, except for filings required under (a) the Securities
Act, (b) the HSR Act, (c) the Exchange Act and (d) state "Blue Sky" laws.
Neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) except as set forth in the Precept
Disclosure Schedules, result in the acceleration or termination of, or the
creation in any party of the right to accelerate, terminate, modify or cancel,
any indenture, contract, lease, sublease, loan agreement, note or other
obligation or liability to which Acquisition or Precept is a party or is bound
or to which any of their respective assets are subject which event would have a
Material Adverse Effect on Precept, (ii) conflict with, violate or result in a
breach of any provision of the charter or organization documents or bylaws (or
similar document) of Acquisition or Precept, (iii) conflict with or violate any
law, rule, regulation, ordinance, order, writ, injunction or decree applicable
to Acquisition or Precept or to any other Precept Subsidiary by which any of
their respective properties or assets is bound or affected which conflict or
violation would result in a Material Adverse Effect on Precept or (iv) conflict
with or result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or result in the
creation of any lien, charge or encumbrance on any of the properties or assets
of Acquisition or Precept pursuant to any of the terms, conditions or provisions
of any indenture, contract, lease, sublease, loan agreement, note, permit,
license, franchise, agreement or other instrument, obligation or liability to
which Acquisition or Precept is a party or by which Acquisition or Precept, a
Precept Subsidiary or any of their respective assets is bound or affected which
would have a Material Adverse Effect on Acquisition or Precept.
6.6 FINANCIAL INFORMATION. Precept has delivered to USTS the audited
balance sheet of Precept as of June 30, 1997 (the "June 30 Balance Sheet") and
the related audited statements of operations, of shareholders' equity and of
cash flows for the one-year period ended June 30, 1997 (together with related
A-19
<PAGE>
notes and schedules), which financial statements contain a report of E&Y,
reporting thereon (the "Precept Financial Statements").
The Precept Financial Statements have been prepared in accordance with GAAP,
and fairly present the results of operations, changes in shareholders' equity
and of cash flows for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end adjustments which would not cause a
Material Adverse Effect on Precept). Neither Precept nor any Precept Subsidiary
has any material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected on, or
reserved against in, a balance sheet of Precept or in the notes thereto,
prepared in accordance with GAAP, except liabilities reflected on the June 30
Balance Sheet and liabilities arising in the ordinary course of business since
June 30, 1997.
6.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Precept Financial Statements or SCHEDULE 6.7 of the Precept Disclosure
Schedules, and except for changes arising from the public announcement of the
transactions contemplated by this Agreement, since July 1, 1997, Precept has
conducted its business only in the ordinary course of business and there has not
been (i) any material change in Precept or any development or combination of
developments which has resulted or is reasonably likely to result in a Material
Adverse Effect on Precept or the prospects of Precept; (ii) any declaration,
setting aside or payment of any dividend or other distribution with respect to
its capital stock; (iii) any material change in its accounting principles,
practices or methods; (iv) any termination by Precept of the employment of any
department head or officer of Precept or entered into (A) any written employment
agreement or (B) any oral employment agreement not terminable without penalty by
any party thereto upon 60 days notice; (v) any material increase in the rate of
compensation or bonus payments payable or to become payable to any of Precept's
officers or directors (including, without limitation, any payment of or promise
to pay any bonus or special compensation); (vi) any purchase, redemption,
issuance, sale or other acquisition or disposition of any of its shares of
capital stock or other equity securities, or agreement to do so, or any grant of
any options, warrants or other rights to purchase or convert any obligation into
any shares of Precept's capital stock or any evidence of indebtedness or other
securities; (vii) any transaction between Precept and any Affiliate (as defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of Precept;
and (viii) any agreement entered into by Precept to do any of the things set out
in (i)-(vii) above.
6.8 TAXES.
(a) All Tax Returns required to have been filed by Precept have been
timely filed (taking into account duly granted extensions) and are true,
correct and complete in all respects. Except as disclosed in SCHEDULE 6.8(a)
of the Precept Disclosure Schedules (i) Precept is not currently the
beneficiary of any extension of time within which to file any Tax Return,
and (ii) no claim has ever been made by any governmental authority in a
jurisdiction where Precept does not file Tax Returns that Precept is or may
be subject to taxation by that jurisdiction.
(b) All Taxes of Precept which have become due (without regard to any
extension of the time for payment and whether or not shown on any Tax
Return) have been paid. Precept has withheld and paid over all Taxes
required to have been withheld and paid over and has complied with all
information reporting and back-up withholding requirements relating to
Taxes. There are no liens with respect to Taxes on any of the assets of
Precept, other than liens for Taxes not yet due and payable or for Taxes
disclosed in SCHEDULE 6.8(b) of the Precept Disclosure Schedules that are
being contested in good faith through appropriate proceedings and for which
adequate reserves have been established in the Precept Financial Statements.
(c) No deficiencies exist or have been asserted or are expected to be
asserted (verbally or in writing) with respect to Taxes of Precept and
Precept has not received notice nor does it expect to receive notice
(verbally or in writing) that it has not filed a Tax Return or paid any
Taxes required to be filed or paid by it. No audit, examination,
investigation, action, suit, claim or proceeding relating to
A-20
<PAGE>
the determination, assessment or collection of any Tax of Precept is
currently in process, pending or threatened (verbally or in writing). Except
as disclosed in SCHEDULE 6.8(c) to the Precept Disclosure Schedules, no
waiver or extension of any statute of limitations relating to the assessment
or collection of any Tax of Precept is in effect. There are no outstanding
requests for rulings with any Tax authority relating to Taxes of Precept.
6.9 REAL PROPERTY.
(a) SCHEDULE 6.9(a) of the Precept Disclosure Schedules contains a
complete and accurate list of all real property owned or, to the extent
material, leased by Precept (the "Precept Real Property"). Except as
otherwise disclosed in SCHEDULE 6.9(a) of the Precept Disclosure Schedules
and except for liens for taxes not yet due and payable, the Precept Property
owned by Precept is free and clear of all liens, mortgages, pledges,
security interests, conditional sales agreements, charges, encumbrances
(except to the extent that the existence of such encumbrance would not
materially affect Precept's use of such property) and other adverse claims
or interests of any nature whatsoever. All improvements on the Precept Real
Property are in good condition and repair, reasonable wear and tear
excepted.
(b) Except as disclosed in SCHEDULE 6.9(b) of the Precept Disclosure
Schedules, there are no material existing leases, subleases, tenancies,
licenses, contracts or other agreements ("Precept Leases") relating to the
Precept Real Property to which Precept is a party.
(c) Except as disclosed in SCHEDULE 6.9(c) of the Precept Disclosure
Schedules, (i) each of the Leases to Precept of the Precept Real Property is
valid, and neither Precept nor, to the knowledge of Precept, any other party
thereto is in default thereunder, nor is there any event which with notice
or lapse of time, or both, would constitute a default thereunder by Precept
or, to the knowledge of Precept, any other party thereto except where such
default would not result in a Material Adverse Effect on Precept and (ii)
Precept has not received notice that any party to any Lease intends to
cancel, terminate or refuse to renew the same or to exercise or decline to
exercise any option or other right thereunder.
6.10 ENVIRONMENTAL. Except for those matters that (i) would not have a
Material Adverse Effect on Precept, (ii) are in compliance with applicable law
or (iii) are disclosed in SCHEDULE 6.10 of the Precept Disclosure Schedules:
(a) Precept has not used, stored, treated, transported, manufactured,
handled, produced or disposed of any Hazardous Materials on, under, at, or
from, any of the owned, leased or operated properties or assets described in
the Precept Disclosure Schedules, or otherwise, in any manner which violated
any applicable Environmental Law and to Precept's knowledge no prior owner
or operator of such property or asset of any tenant, subtenant, prior tenant
or prior subtenant thereof has used Hazardous Materials on, from or
affecting such property or asset, or otherwise, in any manner which violated
any applicable Environmental Law.
(b) To Precept's knowledge, there have been no Releases of any Hazardous
Material on, under, at, or from any of the owned, leased or operated
properties or assets described in the Precept Disclosure Schedules or
otherwise.
(c) Precept has no liabilities assessed, no written claims have been
received by Precept and no currently outstanding citations or notices of
violation have been received by Precept, which in the case of any of the
foregoing have been or are imposed by reason of or based upon any alleged
violation of any applicable Environmental Laws, including, but not limited
to, any such liabilities relating to or arising out of or attributable, in
whole or in part, to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, presence or handling of any
Hazardous Materials by Precept at any of the Precept Real Property or
otherwise.
A-21
<PAGE>
(d) There are no actions by any governmental authority or third party
pending under any Environmental Laws to which Precept is a party alleging a
violation of Environmental Law, nor are there any decrees, or orders, or
other administrative or judicial requirements, outstanding under any
Environmental Law with respect to Precept.
(e) The real property currently used, owned or leased by Precept
contains no regulated underground storage tanks, or regulated underground
piping associated with underground storage tanks, used currently or in the
past as such tanks are defined in RCRA or comparable state law.
(f) To the knowledge of Precept, Precept has obtained and is in
compliance with all material permits and licenses that are required under
Environmental Laws, and is in material compliance with all terms and
conditions of such permits and licenses.
6.11 PERSONAL PROPERTY.
(a) Except as otherwise described in SCHEDULE 6.11(a) of the Precept
Disclosure Schedules, all of Precept's personal property (the "Precept
Personal Property") is (i) free and clear of all liens, other than liens for
taxes not yet due and payable, mortgages, pledges, security interests,
conditional sales agreements, charges, encumbrances and other adverse claims
or interests of any nature whatsoever, and (ii) is in good operating
condition and repair, reasonable wear and tear excepted. The Precept
Personal Property, taken as a whole, is reasonably fit and usable for the
purposes for which it is being used, reasonably sufficient for all current
operations and business of Precept and conforms with all applicable
ordinances, regulations and laws except where the failure to conform would
not have a Material Adverse Effect on Precept.
(b) The inventory of Precept as reflected by the June 30, 1997 Precept
Financials and the inventory as the same shall exist on the date hereof,
other than the reserve established for the inventory reflected in the June
30, 1997 Precept Financials, consisted and will consist of items which were
and will be of the usual quality and quantity necessary for the normal
conduct of the business of Precept and is reasonably expected to be usable
or saleable within a reasonable period of time in the ordinary course of the
business of Precept. With respect to inventory in the hands of suppliers for
which Precept is committed as of the date hereof, such inventory is
reasonably expected to be usable in the ordinary course of the business of
Precept as presently being conducted.
6.12 MATERIAL AGREEMENTS.
(a) SCHEDULE 6.12 of the Precept Disclosure Schedules lists each
agreement and arrangement (whether written or oral and including all
amendments thereto) to which Precept is a party or a beneficiary or by which
Precept or any of its assets is bound and that is material to Precept
(collectively, the "Precept Material Agreements"), including without
limitation (i) any real estate leases; (ii) any contracts for the provision
of goods or services by Precept; (iii) any agreement evidencing, securing or
otherwise relating to any indebtedness for which Precept is liable; (iv) any
capital or operating leases, value-added reseller, reseller, or conditional
sales agreements relating to vehicles, equipment or other assets of Precept
or agreements pursuant to which Precept is entitled or obligated to acquire
any assets from a third party; (v) any insurance policies; (vi) any
employment, consulting, noncompetition, separation, collective bargaining,
union or labor agreements or arrangements; (vii) any agreement with any
stockholder, director, officer or employee of Precept, or any affiliate or
family member thereof; (viii) any joint marketing or similar agreement or
arrangement; and (ix) any other agreement or arrangement pursuant to which,
based on historical or projected volume, Precept will be required to make or
entitled to receive aggregate payments in excess of $50,000 during any
calendar year.
(b) Precept has performed all obligations required to be performed by it
in connection with the agreements and arrangements required to be disclosed
pursuant to this Section 6.12 and is not in receipt of any claim of default
under any agreement or arrangement required to be disclosed by this
A-22
<PAGE>
Section 6.12; Precept has no present expectation or intention of not fully
performing any material obligation pursuant to any agreement or arrangement
required to be disclosed in the Precept Disclosure Schedules pursuant to
this Section 6.12 and Precept has no knowledge of any breach or anticipated
breach by any other party to any agreement or arrangement required to be
disclosed in the Precept Disclosure Schedules pursuant to this Section 6.12.
(c) Precept has delivered to USTS a copy of the agreements and
arrangements required to be disclosed in the Precept Disclosure Schedules
pursuant to this Section 6.12.
(d) Except as disclosed in the Precept Disclosure Schedules, all the
Precept Material Agreements referred to in the Precept Disclosure Schedules
are valid and enforceable, Precept has performed all obligations imposed
upon them thereunder, and Precept nor, to the knowledge of Precept, any
other party thereto is in default thereunder, nor is there any event which
with notice or lapse of time, or both, would constitute a default thereunder
by Precept or, to the knowledge of Precept, any other party thereto.
6.13 LEGAL PROCEEDINGS. Except as set forth in the Precept Disclosure
Schedules, there are no claims, actions, suits, arbitrations, grievances,
proceedings or investigations pending or, to the best knowledge of Precept,
threatened against Precept, at law, in equity, or before any federal, state,
municipal or other governmental or nongovernmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, and there are no
outstanding or unsatisfied judgments, orders, decrees or stipulations to which
Precept is a party, which involve the transactions contemplated herein or which
would have a Material Adverse Effect upon Precept. Except as set forth in
SCHEDULE 6.13 of the Precept Disclosure Schedules, Precept is not presently
engaged in or contemplating any legal action to recover moneys due to them or
damages sustained by them. Precept is not in violation of or in default with
respect to any applicable judgment, order, writ, injunction or decree, which
would have a Material Adverse Effect upon Precept.
6.14 LABOR MATTERS. Except as set forth in SCHEDULE 6.14 of the Precept
Disclosure Schedules, neither Precept nor any of Precept Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. To the
knowledge of Precept, there is no unfair labor practice or labor arbitration
proceeding pending. To the knowledge of Precept and except as set forth in
SCHEDULE 6.14 of the Precept Disclosure Schedules, there are no organizational
efforts with respect to the formation of a collective bargaining unit presently
being made or threatened involving employees of Precept or any of Precept
Subsidiaries.
6.15 PATENTS, TRADEMARKS, FRANCHISES, ETC. All patents and trademarks
owned by Precept and registered in the U.S. Patent and Trademark Office have
been duly issued or registered therein, all such registrations have been validly
issued and all are in full force and effect. Precept in its operations does not
infringe any valid patent, trademark, trade name, service mark or copyright of
any other person or entity. All agreements related to Intellectual Property
Rights listed in SCHEDULE 6.15 of the Precept Disclosure Schedules are valid and
enforceable, Precept has performed all obligations imposed upon it thereunder,
and Precept is not in default thereunder, nor is there any event which with
notice or lapse of time, or both, would constitute a default thereunder by
Precept or, to the knowledge of Precept, any other party thereto. Except as set
forth in SCHEDULE 6.15 of the Precept Disclosure Schedules, Precept has not
received notice that any party to any such agreement intends to cancel,
terminate or refuse to renew the same or to exercise or decline to exercise any
option or other right thereunder.
6.16 INSURANCE. SCHEDULE 6.16 of the Precept Disclosure Schedules contains
a list of all policies of insurance maintained as of the date of this Agreement
by Precept, or maintained by any Precept Subsidiary, in respect of the business
and assets of Precept and the Precept Subsidiaries, including without limitation
insurance providing benefits for employees. The insurance policies set forth in
SCHEDULE 6.16 of the Precept Disclosure Schedules provide adequate coverage
against the risks involved in the business and operation of Precept. Neither
Precept nor any Precept Subsidiary has received notice from any insurance
A-23
<PAGE>
carrier of the intention of such carrier to discontinue any insurance policy set
forth in SCHEDULE 6.16 of the Precept Disclosure Schedules, or any coverage
currently provided by any such policy. Since January 1, 1997, neither Precept
nor any of the Precept Subsidiary has been denied coverage by any insurance
carrier or has failed or currently fails to maintain any insurance coverage
which may be required by the laws of the states in which Precept or Precept
Subsidiaries do business. The premiums due on the insurance which covers
calendar year 1996 have been paid in full (or are not delinquent) and the
premiums due for the period from January 1, 1997 to the Closing Date have been
or will be paid in full as and when due. All such insurance complies in all
material respects with the terms of each of its leases and each of the
mortgages, deeds of trust, service agreements with third parties and/or loan
agreements to which Precept or any of the Precept Subsidiaries is a party.
6.17 EMPLOYEES. Except as disclosed in SCHEDULE 6.17 of the Precept
Disclosure Schedules and as reflected in Precept Financial Statements, Precept
is not a party to any:
(i) management, employment or other contract providing for the
employment or rendition of executive services;
(ii) contract for the employment of any employee which is not terminable
by Precept on 30 days' notice;
(iii) bonus, incentive, deferred compensation, severance pay, pension,
profit-sharing, retirement, stock purchase, stock option, employee benefit
or similar plan, agreement or arrangement (including without limitation
Christmas bonuses and similar year end bonuses); or
(iv) any other employment contract or other compensation agreement or
arrangement affecting or relating to current or former employees of Precept.
6.18 EMPLOYEE BENEFIT PLANS. All material employee benefit plans, as
defined in Section 3(3) of ERISA, all arrangements providing compensation,
severance or other benefits (excluding any employment agreement or arrangement
which may be terminated with no more than 30 days' prior written notice and
which provides no severance or termination benefits greater than those described
in Precept's employee manuals) to any employee or director or former employee or
director of Precept, the Precept Subsidiaries or ERISA Affiliate of Precept (the
"Precept Benefit Plans") are listed in SCHEDULE 6.18 of the Precept Disclosure
Schedules. Unless otherwise disclosed in the Precept Disclosure Schedules, to
the extent applicable, Precept Benefit Plans comply, in all material respects,
with the requirements of ERISA and the Code, and any Precept Benefit Plan
intended to be qualified under Section 401(a) of the Code has been determined by
the IRS to be so qualified or Precept has submitted or is in the process of
submitting a timely determination letter request to the IRS with respect to any
such Precept Benefit Plan. Except as set forth in the Precept Disclosure
Schedules, neither Precept nor any ERISA Affiliate of Precept (during the period
of its affiliated status and prior thereto, to its knowledge) maintains,
contributes to or has in the past maintained or contributed to any benefit plan
which is covered by Title IV of ERISA or Section 412 of the Code. Neither any
Precept Benefit Plan nor Precept has incurred any liability or penalty under
Section 4975 of the Code or Section 502(i) of ERISA. Each Precept Benefit Plan
has been maintained and administered in all material respects in compliance with
its terms and with ERISA and the Code to the extent applicable thereto. There
are no pending or anticipated claims against or otherwise involving any of
Precept Benefit Plans and no suit, action or other liability (excluding claims
for benefits incurred in the ordinary course of Precept Benefit Plan activities)
has been brought against or with respect to any such Precept Benefit Plan,
except for any of the foregoing which would not have a Material Adverse Effect
on Precept. All contributions required to be made as of the date hereof to
Precept Benefit Plans have been made or provided for. All required contributions
to Precept Benefit Plans have been timely made. Neither Precept nor any ERISA
Affiliate of Precept has contributed to, or been required to contribute to, any
"multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA).
Except for benefits as may be required to be provided under applicable
provisions of federal or state law and except as set forth in Schedule 6.18 of
the Precept Disclosure Schedules, there are no plans or arrangements which
provides or
A-24
<PAGE>
has any liability to provide life insurance or medical or other employee welfare
benefits to any employee or former employee upon his retirement or termination
of employment. The execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence of
any additional or subsequent events) constitute an event under any Precept
Benefit Plan that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
employee. The only severance agreements or severance policies applicable to
Precept or any of the Precept Subsidiaries are the agreements and policies
specifically referred to in the Precept Disclosure Schedules.
6.19 TRANSACTIONS WITH RELATED PARTIES. Except for transactions disclosed
in SCHEDULE 6.19 of the Precept Disclosure Schedules there have been no loans or
other transactions between Precept and any officer, director or shareholder, or
any affiliate thereof, of Precept. Except as disclosed in SCHEDULE 6.19 of the
Precept Disclosure Schedules, neither Precept, any officer or director of
Precept nor any spouse or child of any such person owns or has any interest in,
directly or indirectly, any real or personal property owned by or leased to
Precept or any copyrights, patents, trademarks, service marks, trade names or
trade secrets licensed by Precept.
6.20 BROKERAGE. Except as set forth in SCHEDULE 6.20 of the Precept
Disclosure Schedules, Acquisition and Precept have not retained any broker,
investment banking firm or finder in connection with the transactions
contemplated by this Agreement.
6.21 SHAREHOLDER INFORMATION. None of the information to be distributed to
stockholders of USTS in connection with the Transfer nor any amendments or
supplements of or to any of the foregoing which is provided by Acquisition and
Precept (collectively, the "Precept Shareholder Information"), will between the
date the Precept Shareholder Information is first mailed to USTS shareholders
and the Closing Date, contain any statement which, at such time and in light of
the circumstances under which it is made, will be false or misleading with
respect to any fact, or will omit to state any fact necessary in order to make
the statements therein not false or misleading.
6.22 LAWS. Except for environmental laws, which are covered in Section
6.10 hereof, and as specifically set forth in the Precept Disclosure Schedules,
Precept has complied in all material respects with all laws, rules, regulations,
ordinances, codes, licenses, clearances, permits, franchises, grants,
authorizations, easements, consents, certificates and orders relating to any of
its properties or applicable to its business, including, but not limited to,
labor, equal employment opportunity, occupational safety and health, consumer
protection, environmental, securities and antitrust laws and regulations except
where the failure to be in compliance would not have a Material Adverse Effect
on Precept. Precept has all contractors licenses required for it to conduct its
business except where the failure to be in compliance would not have a Material
Adverse Effect on Precept. Precept is not in material violation of any
applicable zoning, building or environmental regulation, ordinance or other law,
order, regulation, restriction or requirement relating to its operations or
properties, whether such properties are owned or leased, and no governmental
body or other person has claimed that any such violation exists, or called
attention to the need for any work, repairs, construction, alterations or
installation on or in connection with the properties of Precept, except for such
violations that would not have a Material Adverse Effect on Precept. As of the
date hereof, the Board of Directors of Precept has approved the Transfer
pursuant to the relevant provisions of applicable law.
6.23 FULL DISCLOSURE. No information furnished, or to be furnished, by
Acquisition, Precept or any of Precept's shareholders to USTS or its
representatives pursuant to this Agreement (including, but not limited to, the
Precept Disclosure Schedules and all information in this Agreement and the
Exhibits and Schedules hereto) is, or will be, false or misleading and such
information includes all facts required to be stated therein or necessary to
make the statements therein not misleading. No representation or warranty by or
on behalf of Acquisition, Precept or the Precept Subsidiaries contained in this
Agreement, and no statement contained in any certificate, list, exhibit, or
other instrument furnished or to be furnished by
A-25
<PAGE>
Precept pursuant hereto contains or will contain any untrue statement of a
material fact, or omits or will omit to state any material facts which are
necessary in order to make the statement contained herein or therein, in light
of the circumstances under which they are made, not misleading.
6.24 PRODUCT WARRANTIES. Except as set forth in SCHEDULE 6.24 of the
Precept Disclosure Schedules, there is no claim against or liability of Precept
or any Precept Acquisition on account of product warranties or with respect to
the manufacture, sale or rental of defective products and there is no basis for
any such claim on account of defective products heretofore manufactured, sold or
rented that is not fully covered by insurance.
ARTICLE 7
CONDUCT OF BUSINESS PENDING THE TRANSFER
7.1 CONDUCT OF BUSINESS BY ACQUISITION AND PRECEPT PENDING THE
TRANSFER. Acquisition and Precept covenant and agree that, prior to the Closing
Date, unless USTS shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement:
(a) To the extent reasonably practicable and taking into account any
operational matters that may arise that are attributable to the pendency of
the Transfer, the business of Precept shall be conducted only in, and
Precept shall not take any action except in, the ordinary course of business
and consistent with past practices, and Precept shall use its commercially
reasonable efforts to maintain and preserve its business organization,
assets, prospects, employees and advantageous business relationships.
(b) Precept will, and will cause the Precept Subsidiaries to, conduct
its and their business in the ordinary course, consistent with past
practice, between the date of this Agreement and the Closing. Precept agrees
that the following actions are outside the ordinary course of business and
will not, and will not permit the Precept Subsidiaries, without the prior
written consent of USTS to (a) declare, pay or make any dividends or
distributions on its capital stock; (b) enter into any agreement (oral or
written) with its directors, officers, or salaried employees (except for
employees in the ordinary course of business); (c) increase the compensation
of its directors, officers, or employees (except for employees in the
ordinary course of business); (d) make capital expenditures (or enter into
commitments to make capital expenditures) in excess of $100,000 (either
individually or in the aggregate); (e) issue any capital stock or any
securities or other instruments convertible, exercisable or exchangeable for
shares of its capital stock; (f) incur indebtedness or other liabilities
other than in the ordinary course of business and consistent with past
practice; (g) redeem any capital stock or pay any principal of any
indebtedness to any director, executive officer or shareholder; (h) enter
into any agreement or arrangement to sell any assets or any of its capital
stock or merge with any entity, except for sales of assets in the ordinary
course of business; or (i) enter into any agreement or arrangement to
purchase any securities or assets of any entity or to merge or otherwise
combine with any entity.
7.2 INTERIM OPERATIONS OF USTS. USTS covenants and agrees as to itself and
the USTS Subsidiaries that, from and after the date hereof and until the Closing
Date (except as Acquisition and Precept shall otherwise agree in writing or
except as otherwise contemplated by this Agreement):
(a) To the extent reasonably practicable and taking into account any
operational matters that may arise that are attributable to the pendency of
the Transfer, the business of USTS shall be conducted only in, and USTS
shall not take any action except in, the ordinary course of business and
consistent with past practices, and USTS shall use its commercially
reasonable efforts to maintain and preserve its business organization,
assets, prospects, employees and advantageous business relationships.
A-26
<PAGE>
(b) USTS will, and will cause the USTS Subsidiaries to, conduct its and
their business in the ordinary course, consistent with past practice,
between the date of this Agreement and the Closing. USTS agrees that the
following actions are outside the ordinary course of business and will not,
and will not permit the USTS Subsidiaries, without the prior written consent
of Acquisition, to (a) declare, pay or make any dividends or distributions
on its capital stock; (b) enter into any agreement (oral or written) with
its directors, officers, or salaried employees (except for employees in the
ordinary course of business); (c) increase the compensation of its
directors, officers, or employees (except for employees in the ordinary
course of business); (d) make capital expenditures (or enter into
commitments to make capital expenditures) in excess of $100,000 (either
individually or in the aggregate); (e) issue any capital stock or any
securities or other instruments convertible, exercisable or exchangeable for
shares of its capital stock; (f) incur indebtedness or other liabilities
other than in the ordinary course of business and consistent with past
practice; (g) redeem any capital stock or pay any principal of any
indebtedness to any director, executive officer or stockholder; (h) enter
into any agreement or arrangement to sell any assets or any of its capital
stock or merge with any entity, except for sales of assets in the ordinary
course of business or (i) enter into any agreement or arrangement to
purchase any securities or assets of any entity or to merge or otherwise
combine with any entity.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 REGISTRATION STATEMENT AND PROXIES.
(a) USTS and Precept shall cooperate and promptly prepare and Precept
shall file with the SEC as soon as practicable a Joint Proxy and
Registration Statement on Form S-4 (the "Form S-4") under the Securities
Act, with respect to the Precept Common Stock issuable in the Transfer, a
portion of which Joint Proxy and Registration Statement shall serve as the
proxy statement with respect to the meeting of the stockholders of USTS in
connection with the approval of the Agreement, the Transfer and the Plan of
Liquidation and Dissolution (the "Joint Proxy Statement/Prospectus"). The
respective parties will cause the Proxy Statement/Prospectus and the Form
S-4 to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and
regulations thereunder. Precept shall use all reasonable efforts, and USTS
will cooperate with Precept, to have the Form S-4 declared effective by the
SEC as promptly as practicable. Precept shall use its best efforts to
obtain, prior to the effective date of the Form S-4, all necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses
incident thereto.
(b) Precept agrees that the Joint Proxy Statement/Prospectus and each
amendment or supplement thereto at the time of mailing thereof and at the
time of the meeting of stockholders of USTS, or, in the case of the Form S-4
and each amendment or supplement thereto, at the time it is filed or becomes
effective, will not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing shall not apply
to the extent that any such untrue statement of a material fact or omission
to state a material fact was made by Precept in reliance upon and in
conformity with written information concerning USTS furnished to Precept by
USTS specifically for use in the Joint Proxy Statement/ Prospectus.
(c) USTS agrees that the written information concerning USTS provided by
it for inclusion in the Joint Proxy Statement/Prospectus and each amendment
or supplement thereto, at the time of mailing thereof and at the time of the
meeting of the stockholders of USTS, or, in the case of written information
concerning USTS provided by USTS for inclusion in the Form S-4 or any
amendment or supplement thereto, at the time it is filed or becomes
effective, will not include an untrue statement of
A-27
<PAGE>
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. No amendment or
supplement to the Joint Proxy Statement/Prospectus or the Form S-4 nor any
request for acceleration thereof will be made by USTS or Precept without the
approval of the other party, except as required by law. Precept will advise
USTS, promptly after its receives notice, of the time when the Form S-4 or
any post effective supplement or amendment thereto has become effective the
issuance of any stop order, the suspension of the qualification of the
Precept Common Stock issuable in connection with the Transfer for offering
or sale in any jurisdiction, any request by the SEC for amendment of the
Joint Proxy Statement/Prospectus or the Form S-4 or requests by the SEC for
additional information and will promptly provide USTS with copies of any
responses filed by Precept to SEC comments on the Form S-4.
(d) Precept agrees to prepare and file a Notification Form for the
Listing of Shares with the NASDAQ Small Cap Market to list the Shares.
8.2 LETTER OF PRECEPT'S ACCOUNTANTS. Precept shall cause to be delivered
to USTS a letter of Ernst & Young, L.L.P., Precept's independent public
accountants, dated a date within two business days before the date on which the
Form S-4 shall become effective and addressed to USTS and Precept, in form and
substance reasonably satisfactory to USTS and customary in scope and substance
of letters delivered by independent public accountants in connection with
registration statements similar to the Form S-4.
8.3 LETTER OF USTS'S ACCOUNTANTS. USTS shall cause to be delivered to
Precept a letter of Mahoney Cohen Rashba & Pokart, CPA, USTS's independent
public accountants, dated a date within two business days before the date on
which the Form S-4 shall become effective and addressed to USTS and Precept, in
form and substance reasonably satisfactory to Precept and customary in scope and
substance of letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
8.4 USTS STOCKHOLDER MEETING; USTS BOARD RECOMMENDATION. USTS shall call a
special meeting of its stockholders to be held as soon as practicable after the
effective date of the Form S-4 for the purpose of voting to approve this
Agreement and the transactions contemplated hereby and the Plan of Liquidation
and Dissolution. Subject to Section 8.10 hereof, the Joint Proxy
Statement/Prospectus and the USTS Stockholder Information shall contain, among
other things, the recommendation of the Board of Directors of USTS in favor of
the Agreement, Transfer, and the adoption of the Agreement and the adoption of
the Plan of Liquidation and Dissolution, it being understood that the failure of
the Board of Directors of USTS to make such recommendations shall not be deemed
a breach of this Agreement if the Board of Directors of USTS determines, after
consultation with and advice from counsel, that it cannot, consistent with its
fiduciary duties, make such recommendations.
8.5 CONSENT OF STOCKHOLDERS OF USTS. Subject to Section 8.9 hereof, USTS
shall transmit the Joint Proxy Statement/Prospectus to its stockholders and
shall use its best efforts to take all action necessary to obtain its
stockholders' approval of the Agreement, the Transfer and the Plan of
Liquidation and Dissolution.
8.6 EXPENSES. All expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party incurring such
expenses whether or not the Transfer is consummated.
8.7 ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees (i) to use all reasonable efforts to
take, or cause to be taken, all actions and (ii) to use all reasonable efforts
to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement and to cooperate with each other in connection
with the foregoing, (iii) to use all reasonable efforts to obtain all necessary
waivers, consents and approvals from other parties to material loan agreements,
leases and other
A-28
<PAGE>
contracts and to notify each of the other parties hereto of any request for
prepayment with respect thereto; provided however, all reasonable efforts with
respect to obtaining waivers, consents and approvals under loan agreements does
not obligate the parties hereto to make any prepayment on any such loan, (iv) to
use all reasonable efforts to obtain all necessary consents, approvals and
authorizations as are required to be obtained under any federal, state, local or
foreign law or regulations, (v) to defend all lawsuits or other legal
proceedings challenging this Agreement or the consummation of the transactions
contemplated hereby, (vi) to use all reasonable efforts to lift or rescind any
injunction or restraining order or other order adversely affecting the ability
of the parties to consummate the transactions contemplated hereby and (vii) to
use all reasonable efforts to effect all necessary registrations and filings and
submissions of information required or requested by governmental authorities.
8.8 NO SOLICITATION. From and after the date hereof, USTS agrees that it
will not, and will not permit any of its officers, directors, employees, agents
and other representatives or those of any of its Subsidiaries (collectively, the
"Representatives") to, directly or indirectly, solicit or initiate any
prospective buyer or the making of any proposal that constitutes, or may
reasonably be expected to lead to, an Acquisition Proposal from any person;
provided, however, that, notwithstanding any other provision of this Agreement,
(i) USTS may engage in discussions or negotiations with any third party who
(without any solicitation or initiation, directly or indirectly, by or with USTS
or any Representative thereof after the date of this Agreement) seeks to
initiate such discussions or negotiations and may furnish such third party
information concerning USTS and its Business, properties and assets, (ii) USTS's
Board of Directors may take and disclose to its stockholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act and (iii)
following receipt of an Acquisition Proposal that is financially superior to the
Transfer and reasonably capable of being financed (as determined in each case in
good faith by USTS's Board of Directors after consultation with USTS's financial
advisors), the Board of Directors of USTS may withdraw, modify or not make its
recommendation referred to in Section 8.4 or 8.5 (as the case may be) or
terminate this Agreement in accordance with Section 10.1(d), but in each case
referred to in the foregoing clauses (i) through (iii) only to the extent that
the Board of Directors of USTS shall conclude in good faith based upon written
advice from legal counsel that such action is necessary in order for the Board
of Directors of USTS to act in a manner that is consistent with its fiduciary
obligations under applicable law. USTS shall immediately cease and cause to be
terminated any existing solicitation, initiation, encouragement, activity,
discussion or negotiation with any parties conducted heretofore by USTS or its
Representatives with respect to any Acquisition Proposal existing on the date
hereof. USTS will promptly notify the other of any inquiries or developments
related to any of the above or any such requests for such information or the
receipt of any Acquisition Proposal, including the identity of the person or
group engaging in such discussions or negotiations, requesting such information
or making such Acquisition Proposal, and (unless the Board of Directors of USTS
conclude such disclosure is inconsistent with its fiduciary obligations under
applicable law based upon written advice from legal counsel) the material terms
and conditions of any Acquisition Proposal.
8.9 NOTIFICATION OF CERTAIN MATTERS. Each party will promptly give written
notice to the other parties upon becoming aware of the occurrence or failure to
occur, or impending or threatened occurrence or failure to occur, of any event
that would cause or constitute, or would be likely to cause or constitute, a
breach of any of its representations, warranties or covenants contained in this
Agreement and will use all reasonable efforts to prevent or promptly remedy the
occurrence or failure. No such notification shall limit or affect the
representations, warranties, covenants or conditions or remedies of the parties
hereunder.
8.10 ACCESS TO INFORMATION. Acquisition, Precept and USTS and their
respective officers, directors, employees and agents shall afford the officers,
employees and agents of the other parties hereto complete access at all
reasonable times to their respective officers, employees, agents, properties,
facilities, books, records and contracts and those of their respective
subsidiaries and shall furnish the other parties hereto all financial, operating
and other data and information as the other parties hereto through their
officers, employees or agents, may reasonably request. For a period of 24 months
from the date of this Agreement,
A-29
<PAGE>
each party hereto shall hold and will cause their respective representatives to
hold in strict confidence all documents and information concerning the other
parties hereto furnished to other parties hereto in connection with the
transactions contemplated by this Agreement (except to the extent that such
information can be shown to have been (i) previously known by the party to whom
the information was disclosed (or their respective Affiliates) prior to its
disclosure to the party to whom the information was disclosed, (ii) in the
public domain through no fault of the party to whom the information was
disclosed or (iii) later lawfully acquired by the party to whom the information
was disclosed (or their respective affiliates) from other sources, and will not
release or disclose such information to any other person, except in connection
with this Agreement to (a) their respective auditors, attorneys, financial
advisors and other consultants or advisors or (b) responsible financial
institutions, partnerships and individuals after the disclosing party, has made
reasonable efforts to cause such financial institutions, partnerships and
individuals to agree to be bound by the provisions of this Section 8.10 as if
the reference to the disclosing party herein were to them (it being understood
that such persons shall be informed by the disclosing party of the confidential
nature of such information and shall be directed by the disclosing party to
treat such information confidentially); provided that the disclosing party and
their respective representatives may provide such documents and information in
response to judicial or administrative process or applicable governmental laws,
rules, regulations, orders or ordinances, but only that portion of the documents
or information which, on the advice of counsel, is legally required to be
furnished, and provided that the disclosing party notifies the non-disclosing
party of its obligation to provide such information prior to such disclosure and
fully cooperates with the non-disclosing party to protect the confidentiality of
such documents and information under applicable law. If the transactions
contemplated by this Agreement are not consummated, the parties shall return to
each other all copies of written information furnished to them by the other
parties hereto or their respective affiliates, agents, representatives or
advisers.
8.11 INFORMATION FOR OTHER FILINGS. The parties represent to each other
that the information provided and to be provided by USTS, Acquisition and
Precept, respectively, for use in any document to be filed with any other
governmental agency or authority in connection with the transactions
contemplated hereby shall, at the respective times such documents are filed with
the governmental agency or authority and on the Closing Date be true and correct
in all material respects and shall not omit to state any material fact required
to be stated therein or necessary in order to make such information not false or
misleading, and Acquisition, Precept, and USTS each agree to so correct any such
information provided by it for use in such documents that shall have become
false or misleading.
8.12 AFFILIATE LETTERS. Prior to the Closing Date, USTS shall deliver to
Precept a list (the "USTS Affiliate List") of names and addresses of those
persons who, as of the date of this Agreement, were in the reasonable judgment
of USTS, "affiliates" (each such person, an "Affiliate of USTS") of USTS within
the meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act and under the SEC guidelines. The USTS Affiliate List will be
updated as appropriate from time to time, up to and including the Closing Date.
USTS shall provide Precept such information and documents as Precept shall
reasonably request for purposes of reviewing such list. USTS shall deliver or
cause to be delivered to Precept, concurrently with the execution of this
Agreement and when necessary from time to time between the date hereof and the
Closing Date, from each Affiliate of USTS identified in the USTS Affiliate List,
an Affiliate Letter in the form attached hereto as EXHIBIT F (the "USTS
Affiliate Letter"). USTS shall be entitled to place legends as specified in such
Affiliate Letters on the certificates evidencing any Precept Common Stock to be
received by each Affiliate of USTS, pursuant to the terms of this Agreement, and
to issue appropriate stop transfer instructions to the transfer agent for the
Precept Common Stock, consistent with the terms of such USTS Affiliate Letters.
8.13 PUBLIC ANNOUNCEMENTS. USTS, on the one hand, and Precept, on the
other hand, will consult with each other before issuing any press release or
otherwise making any public statements with respect to the transactions
contemplated by this Agreement, and shall not issue any such press release or
make any such public statement without the prior written consent of the other,
except as may be required by
A-30
<PAGE>
applicable law or by obligations pursuant to any listing agreement with any
national securities exchange or transaction reporting system. USTS and Precept
agree to issue a joint press release upon execution of this Agreement, which
press release shall be mutually acceptable to both parties.
8.14 HART-SCOTT-RODINO FILING. USTS and Precept shall cooperate in the
preparation and filing of any required notification and documentation under
Title II of the HSR Act and the rules of the FTC promulgated thereunder. USTS
shall pay to the FTC the appropriate filing fee in the full amount required to
be paid under the HSR Act and the rules of the FTC.
ARTICLE 9
CONDITIONS
9.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE TRANSFER. The
obligations of each party to effect the Transfer shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) The Agreement and the Plan of Reorganization shall have been
approved and adopted by the requisite consent of the stockholders of USTS
required by applicable law or by the applicable regulations of any stock
exchange;
(b) USTS shall have received an opinion from Bressler, Amery & Ross,
P.C., addressed to USTS, and Precept, stating that the Transfer will be
treated as a tax free reorganization within the meaning of Section 368(a) of
the Code;
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Transfer under the HSR Act shall have expired or been
terminated;
(d) No preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority shall be in effect that would make the acquisition or holding
directly or indirectly by USTS of the Shares illegal or otherwise prevent
the consummation of the Transfer. In the event any such order or injunction
shall have been issued, each party agrees to use its reasonable efforts to
have any such injunction lifted or order reversed;
(e) The Form S-4 shall have been declared effective under the Securities
Act and the Exchange Act and shall be effective at the Closing Date, and no
stop order suspending effectiveness of the Form S-4 shall have been issued
under the Securities Act or under the proxy rules of the SEC pursuant to the
Exchange Act, and all state securities laws shall have been complied with in
connection with the issuance of the Shares, and no stop order suspending the
effectiveness of any qualification or registration of such Shares under such
state securities laws shall have been issued;
(f) The Shares to be issued pursuant to the Transfer shall have been
approved for listing on the NASDAQ Small Cap Market, subject only to
official notice of issuance by Precept;
(g) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board or other regulatory
body required in connection with the execution, delivery and performance of
this Agreement shall have been obtained or made, except for filings in
connection with the Transfer and any other documents required to be filed
after the Closing Date and except where the failure to have obtained or made
any such consent, authorization, order, approval, filing or registration
would not have a Material Adverse Effect on Precept;
(h) M. H. Meyerson & Co., Inc. shall have advised USTS in writing that
the Transfer is fair from a financial point of view; and
A-31
<PAGE>
(i) No action shall be pending which has been filed by any state or
federal authority or any other party seeking to enjoin consummation of the
transactions contemplated by this Agreement, including, but not limited to,
the Transfer and no injunction shall have been issued and shall be effective
or enforceable or under appeal if the effectiveness or enforceability
thereof has been lifted or stayed by a court or other authority of competent
jurisdiction, preventing the Transfer, or imposing conditions on, the
Transfer which are materially adverse to USTS, Precept or any of their
respective stockholders or shareholders, as the case may be.
9.2 ADDITIONAL CONDITIONS TO THE OBLIGATION OF ACQUISITION AND
PRECEPT. The obligation of Acquisition and Precept to effect the Transfer is
also subject to the fulfillment at or prior to the Closing Date of the following
conditions (unless waived):
(a) USTS shall in all material respects have performed each obligation
and agreement and complied with each covenant to be performed and complied
with by it hereunder on or prior to the Closing Date;
(b) The representations and warranties of USTS in this Agreement shall
be true and correct in all material respects when made and at the Closing
Date with the same force and effect as though made at such time, except as
affected by the transactions contemplated hereby;
(c) USTS shall have furnished to Acquisition a certificate, dated the
Closing Date, signed by a responsible officer of USTS, to the effect that
all conditions set forth in Section 9.2(a) and (b) have been satisfied;
(d) There shall have been no material adverse change in the condition
(financial or otherwise), operations, assets, liabilities or prospects of
USTS since June 30, 1997;
(e) Acquisition shall have received a copy of the resolutions of the
Board of Directors of USTS authorizing the execution, delivery and
performance of the Agreement and the consummation of the transactions
contemplated hereby and a copy of the resolutions or other consent of the
stockholders of USTS approving the Agreement and the Plan of Liquidation and
Dissolution, all certified by the Secretary of USTS on the Closing Date.
Such certificates shall state that the resolutions set forth therein have
not been amended, modified, revoked or rescinded as of the date of such
certificates;
(f) Acquisition shall have received a certificate of the Secretary of
USTS dated the Closing Date, as to the incumbency and signature of the
officers of USTS executing this Agreement and any certificate, agreement or
other documents to be delivered pursuant hereto, together with evidence of
the incumbency of such Secretary;
(g) The Series M USTS Preferred Stock shall have been exchanged and
converted into 1,710,000 shares of USTS Common Stock;
(h) USTS shall have delivered to Acquisition special warranty deeds
conveying USTS's interests in the Facilities together with the standard form
owner's title insurance policy for each item of real property insuring
Acquisition that good, valid and indefeasible title to such item of real
property is vested in Acquisition, subject only to standard form exclusions
and other exclusions set forth in such policies;
(i) An assignment of the leases with respect to the Facilities to
Precept;
(j) USTS shall have delivered to Acquisition and Precept all necessary
consents, waivers, authorizations and approvals, so that neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in the acceleration or
termination of, or the creation in any party of the right to accelerate,
terminate, modify or cancel, any indenture, contract, lease, sublease, loan
agreement, note or other obligation or liability to which USTS is a party or
is bound or to which any of their assets are subject, (ii) conflict with,
violate or
A-32
<PAGE>
result in a breach of any provision of the Articles of Incorporation or
Bylaws of USTS or any stockholder thereof, (iii) conflict with or violate
any law, rule, regulation, ordinance, order, writ, injunction or decree
applicable to USTS or by which any of its properties or assets is bound or
affected or (iv) conflict with or result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become
a default) under, or result in the creation of any lien, charge or
encumbrance on any of the properties or assets of USTS pursuant to any of
the terms, conditions or provisions of any indenture, contract, lease,
sublease, loan agreement, note, permit, license, franchise, agreement or
other instrument, obligation or liability to which USTS is a party or by
which USTS or any of its Assets is bound or affected;
(k) USTS shall have furnished to Acquisition at least three (3) business
days prior to Closing a preliminary balance sheet of USTS as of the Closing
Date, prepared in accordance with GAAP (the "Preliminary Closing Balance
Sheet"); and
(l) The adversary proceeding (the "Litigation") filed in the United
States Bankruptcy Court for the Southern District of New York (White Plains
Division) (the "Court") and styled UNITED ACQUISITION II CORPORATION V. MID
AMERICA TRANSPORTERS GROUP, INC., ET. AL., and naming USTS as a defendant,
must be settled by the parties thereto and the settlement thereof must: (i)
either (A) be not materially more disadvantageous to U.S. Trucking, Inc.
than the draft settlement previously delivered to Precept (as determined by
Precept in its reasonable discretion) or (B) be on terms reasonably
satisfactory to Precept and Acquisition; (ii) provide that UACQ has no
interest in the capital stock of each of Gulf Northern Transport, Inc. and
Mencor, Inc. (the "Disputed Shares"); (iii) release USTS, Mid America
Transporters Group, Inc., and the other defendants named in the Lawsuit from
any and all claims to the Disputed Shares and any and all claims and
liabilities described in the Lawsuit or arising out of the transactions and
matters described in the Lawsuit; and (iv) be approved by the Court in
connection with the bankruptcy case styled IN RE UNITED ACQUISITION II
CORP., Case No. 97-B-20503 ASH, Chapter 11, relating to United Acquisition
II Corporation. In addition, USTS shall deliver estoppel certificates
addressed to Precept and Acquisition from each of the signatories to the
settlement agreement other than UACQ and stating that each such signatory
has no interest in the Disputed Shares.
9.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF USTS. The obligations of
USTS to effect the Transfer are also subject to the fulfillment at or prior to
the Closing Date of the following conditions (unless waived):
(a) Acquisition and Precept shall in all material respects have
performed each obligation and agreement and complied with each covenant to
be performed and complied with by it hereunder on or prior to the Closing
Date;
(b) The representations and warranties of Acquisition and Precept in
this Agreement shall be true and correct in all material respects when made
and at the Closing Date with the same force and effect as though made at
such time, except as affected by the transactions contemplated hereby;
(c) Acquisition and Precept shall have furnished to USTS a certificate,
dated the Closing Date, signed by a responsible officer of Acquisition and
Precept, respectively, to the effect that all conditions set forth in
Section 9.3(a) and (b) have been satisfied;
(d) There shall have been no material adverse change in the condition
(financial or otherwise), operations, assets, liabilities or prospects of
Precept since June 30, 1997;
(e) USTS shall have received a copy of the resolutions of the Boards of
Directors of each of Acquisition and Precept authorizing the execution,
delivery and performance of the Agreement and the consummation of the
transactions contemplated hereby, certified by the Secretary of Precept on
the Closing Date. Such certificates shall state that the resolutions set
forth therein have not been amended, modified, revoked or rescinded as of
the date of such certificates;
A-33
<PAGE>
(f) USTS shall have received a certificate of the Secretary of each of
Acquisition and Precept dated the Closing Date, as to the incumbency and
signature of the officers of Acquisition and Precept, respectively,
executing this Agreement and any certificate, agreement or other documents
to be delivered pursuant hereto, together with evidence of the incumbency of
each such Secretary;
(g) Precept shall have entered into the Registration Rights Agreement
with Margolies in the form attached hereto as Exhibit D;
(h) Acquisition shall have entered into Employment Agreements with
Margolies and Ron Sorci in the form attached hereto as EXHIBIT E-1 and E-2;
(i) The total outstanding shares of Precept Common Stock shall not
exceed 36,000,000 shares and the outstanding warrants, options or other
derivative securities representing the right to purchase shares of Precept
Common Stock set forth on SCHEDULE 6.2 to the Precept Disclosure Schedules;
and
(j) Precept shall either pay IDB all of the outstanding obligations
under the IDB Loan Agreement or provide IDB with irrevocable standby letter
of credit from a financial institution reasonably satisfactory to IDB for
the full amount of the obligations plus ninety (90) days interest on the
principal amount of the loan.
ARTICLE 10
TERMINATION, AMENDMENT AND WAIVER
10.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date whether before or after approval of the Agreement and Plan of
Liquidation and Dissolution by the stockholders:
(a) by mutual written consent of the Boards of Directors of USTS and
Precept;
(b) at any time prior to the Closing Date by Acquisition or Precept if
any representation or warranty of USTS contained in this Agreement or any
certificate or other document executed and delivered by USTS pursuant to
this Agreement is or becomes untrue or breached in any material respect or
if USTS fails to comply in any material respect with any covenant contained
herein, and the cumulative effect of all thereof results in a Material
Adverse Effect on USTS, and any such misrepresentation, noncompliance or
breach is not cured (if curable), waived or eliminated within five business
days after receipt by USTS of written notice thereof;
(c) at any time prior to the Closing Date by USTS if any representation
or warranty of Acquisition or Precept contained in this Agreement or any
certificate or other document executed and delivered by Acquisition or
Precept pursuant to this Agreement is or becomes untrue or breached in any
material respect or if Acquisition or Precept fails to comply in any
material respect with any covenant contained herein, and the cumulative
effect of all thereof results in a Material Adverse Effect on Acquisition or
Precept, and any such misrepresentation, noncompliance or breach is not
cured (if curable), waived or eliminated within five business days after
receipt by Acquisition or Precept of written notice thereof;
(d) by any of the Boards of Directors of USTS, Acquisition or Precept if
the Closing Date shall not have occurred on or before January 31, 1998;
provided, however, that the right to terminate under this Section 10.1(d)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of
the Closing Date to occur on or before such date;
(e) if a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued an order, decree or
ruling or taken any other action (which order, decree or ruling the parties
hereto shall use all reasonable efforts to lift), in each case permanently
A-34
<PAGE>
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable;
(f) by the Board of Directors of USTS, upon delivery of written notice
to Precept from USTS that USTS has received an Acquisition Proposal and
intends either to (i) withdraw, modify or not make a recommendation referred
to in Section 8.4 or 8.5, as applicable, or (ii) terminate this Agreement,
subject in each case to the provisions of Sections 8.10 and 10.3; or
(g) by either Precept or USTS upon delivery of written notice to USTS if
the closing sale price of USTS Common Stock falls below $1.65 for more than
ten consecutive trading days at any time prior to the Closing.
The date on which this Agreement is terminated pursuant to any of the
foregoing subsections of this Section 10.1 is herein referred to as the
"Termination Date."
10.2 EFFECT OF TERMINATION. In the event this Agreement is terminated such
that the provisions of Section 10.3 do not apply, USTS, Acquisition and Precept
shall each be entitled to pursue, exercise and enforce any and all remedies,
rights, powers and privileges available at law or in equity. In the event of a
termination of this Agreement such that the provisions of Section 10.3 do not
apply, a party not then in material breach of this Agreement shall stand fully
released and discharged of any and all obligations under this Agreement.
10.3 FEES AND EXPENSES.
(a) Except as otherwise provided in this Section, all costs and expenses
incurred in connection with this Agreement shall be paid by the party
incurring such costs or expenses.
(b) USTS agrees to pay Precept a fee in immediately available funds
equal to $1 million promptly, but in no event later than sixty (60) business
days, after the termination of this Agreement as a result of the occurrence
of any of the events set forth below:
(i) USTS shall have entered into, or shall have publicly announced
its intention to enter into, an agreement or an agreement in principle
with respect to any Acquisition Proposal which the Board of Directors has
determined is more favorable to USTSs' stockholders than the transactions
contemplated by this Agreement, or the Board of Directors of USTS shall
have withdrawn or materially modified in any manner adverse to Precept
the Board's approval or recommendation of the Transfer;
(ii) any person or group (as defined in Section 13(d)(3) of the
Exchange Act) (other than Acquisition or Precept or any affiliate
thereof) shall have become the beneficial owner (as defined in Rule 13d-3
promulgated under the Exchange Act) of a majority of the outstanding USTS
Common Stock; or
(iii) the failure to consummate the Transfer by January 31, 1998 as a
result of USTS's breach or failure to perform in any material respect any
of its covenants or agreements under this Agreement other than a breach
or failure to perform resulting from strikes, fire or other casualties,
acts of God or other similar causes beyond the control of USTS.
(c) Precept agrees to pay USTS a fee in immediately available funds
equal to $1 million promptly, but in no event later than sixty (60) business
days, after the termination of this Agreement as a result of the occurrence
of any of the events set forth below:
(i) any person or group (as defined in Section 13(d)(3) of the
Exchange Act) (other than USTS or any affiliate thereof) other than any
existing shareholders of Acquisition or Precept shall have become the
beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange
Act) of a majority of the outstanding Precept Common Stock; or
A-35
<PAGE>
(ii) the failure to consummate the Transfer by January 31, 1998 as a
result of Acquisition's breach or failure to perform in any material
respect any of its covenants or agreements under this Agreement.
10.4 AMENDMENT. This Agreement may be amended by the parties hereto, at
any time before or after approval of the Agreement, the Transfer and the Plan of
Liquidation and Dissolution by the shareholders of USTS, but, after any such
approval, no amendment shall be made that changes the form or reduces the amount
of consideration to be paid to USTS or that in any other way materially
adversely affects the rights of such shareholders (other than a termination of
this Agreement in accordance with the provisions hereof) without the further
approval of such shareholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
10.5 WAIVER. At any time prior to the Closing Date, any term, provision or
condition of this Agreement may be waived in writing (or the time for
performance of any of the obligations or other acts of the parties hereto may be
extended) by the party that is entitled to the benefits thereof.
ARTICLE 11
POST CLOSING OBLIGATIONS
11.1 CHANGE OF NAME. On or immediately after the Closing Date USTS will
amend its Articles of Incorporation so as to change its corporate name to a name
significantly different from "U.S. Transportation Systems, Inc." and will
thereafter take such action as may reasonably be requested by Precept or
Acquisition to make the present corporate name of USTS available to them.
11.2 DISSOLUTION. From and after the Closing Date, USTS will not engage in
any business, will promptly, liquidate and dissolve as a corporation in
accordance with the Plan of Liquidation and Dissolution.
11.3 USTS'S CORPORATE RECORDS. USTS will make available to inspection and
copying all books and records retained by it pursuant to Section 2.2(b) hereof
to Acquisition or Precept upon reasonable request for access thereto, and if at
any time USTS proposes to discard to destroy such books and records, it will
first offer to transfer them without charge to Precept or Acquisition.
11.4 PREPARATION AND DELIVERY OF CLOSING BALANCE SHEET.
(a) As promptly as practicable after the Closing Date, but in no event
later than 45 days after the Closing Date, USTS shall prepare and deliver to
Acquisition the Final Closing Balance Sheet which shall update the
Preliminary Closing Balance Sheet. Acquisition shall have the opportunity to
observe and consult with USTS during the preparation of the Final Closing
Balance Sheet.
(b) To the extent that Acquisition disputes any items or amounts
reflected on the Final Closing Balance Sheet which, in the aggregate, exceed
$900,000, Acquisition shall notify USTS in writing (specifying each disputed
item and, if applicable, specifying the amount thereof in dispute, and
setting forth, in reasonable detail, the basis for such dispute) within 15
days after Acquisition receives the Final Closing Balance Sheet. In the
event of such a dispute, Acquisition and USTS shall attempt in good faith to
reconcile their differences with respect to the differences which are in
excess of $900,000, and any resolution by them as to any disputed amounts
shall be final, binding and conclusive on the parties. If Acquisition and
USTS are unable to reach a resolution of such dispute within 15 days after
the receipt by USTS of Acquisition's written notice of dispute, Acquisition
and USTS shall submit the items remaining in dispute for resolution to the
Independent Accounting Firm, which shall act as arbitrator and shall
promptly as practicable after submission, determine and report to the
parties upon such remaining disputed items with respect to the differences
which are in excess of $900,000, and such report shall be final, binding and
conclusive on the parties. Acquisition and USTS
A-36
<PAGE>
shall provide the Independent Accounting Firm with such information, and
shall afford such accountants such access to Acquisition's and USTS's books
and records, as such accountants may reasonably request in connection with
their determination of the disputed item or amount. The fees of the
Independent Accounting Firm in connection with such determination shall be
shared equally by Acquisition and USTS.
11.5 MARGOLIES NOTE. Within ten (10) business days after the Closing Date,
Precept shall cause Acquisition to repay all principal and accrued and unpaid
interest due on the Margolies Note unless, prior to such date, Margolies and
Acquisition have restructured the Margolies Note on terms and conditions
acceptable to each of Margolies and Precept.
11.6 SETTLEMENT OF CLAIMS. Neither Precept nor Acquisition will settle any
cause of action, lawsuit, claim or demand acquired hereunder and involving USTS
without the approval of USTS which shall not be unreasonably withheld. If such
approval is withheld USTS shall indemnify and hold Precept and Acquisition
harmless with respect to such proposed settlement from the shares of Precept
Common Stock held by USTS for contingent claims pursuant to the Plan of
Liquidation and Dissolution, and, upon USTS fulfilling such indemnification
obligation, Precept and Acquisition shall assign such cause of action, lawsuit,
claim or demand to USTS.
11.7 ISRAEL DISCOUNT BANK. Precept shall, within 120 days of the Closing
Date use commercially reasonable efforts to cause Israel Discount Bank ("IDB")
to release guarantees delivered by Margolies in favor of IDB with respect to the
indebtedness owed to IDB by USTS and reflected in the USTS Financial Statements.
ARTICLE 12
INDEMNIFICATION
12.1 INDEMNIFICATION BY USTS. USTS (or the Liquidating Trust established
pursuant to the Plan of Liquidation and Dissolution (the "Liquidating Trust"))
agrees to indemnify and hold Precept, Acquisition, and their respective
officers, directors, shareholders, Affiliates, employees and agents ("Precept
Indemnitees") harmless from any and all damages, losses (which shall include any
diminution in value), shortages, liabilities (joint or several), payments,
obligations, penalties, claims, response costs, litigation, demands, defenses,
judgments, suits, proceedings, costs, disbursements or expenses (including,
without limitation, fees, disbursements and expenses of attorneys, accountants
and other professional advisors and of expert witnesses and costs of
investigation and preparation) of any kind or nature whatsoever (collectively,
"Damages"), directly or indirectly resulting from, relating to or arising out
of:
(a) any breach of or inaccuracy in any representation or warranty of
USTS contained in this Agreement (including, without limitation, those
representations and warranties contained in Article 5) or in any other
agreement, instrument, certificate or other document executed by or on
behalf of USTS at or in contemplation of the Closing pursuant to or in
connection with this Agreement (an "Operative Document"); provided, however,
that (i) the Preliminary Closing Balance Sheet is not an Operative Document,
and (ii) no Damages shall be deemed to have arisen by reason of the
uncollectability of accounts receivable included in the Assets except to the
extent that the amount of uncollected receivables exceeds $2,000,000 (for
purposes of indemnification, accounts receivable shall be deemed
uncollectible if such receivables have not been collected, using
commercially reasonable efforts, within one year of the Closing Date);
provided, however, that at the time of payment in full with respect to any
claim by Precept Indemnitees for indemnification by reason of the
uncollectability of accounts receivable, Acquisition shall assign to USTS
(or the Liquidating Trust) those accounts receivable acquired hereunder,
which Acquisition identifies as uncollectible and with respect to which it
has received payment from USTS (or the Liquidating Trust);
A-37
<PAGE>
(b) any breach or non-performance, partial or total, by USTS of any
covenant or agreement of USTS (or any Affiliate thereof or any USTS
Subsidiary) contained in this Agreement or in any Operative Document,
including, without limitation, the covenants and obligations of USTS under
Section 7.2;
(c) any violation of or non-compliance with or remedial obligation
arising under, any Environmental Laws arising from any event, condition,
circumstances, activity, practice, incident, action or plan existing or
occurring prior to the Closing relating in any way to the Assets or the
Business (including, without limitation, the ownership, operation or use of
the Assets and the conduct of the Business of USTS prior to the Closing, the
presence of any underground storage tanks or any Hazardous Materials on, in,
under or affecting all or any portion of USTS's properties or any
surrounding areas, and any Releases or threatened Releases with respect to
such underground storage tanks or Hazardous Materials; and the storage,
disposal or treatment, or transportation for storage, disposal or treatment,
of Hazardous Materials; but excluding any violation of or non-compliance
with, or remedial obligation arising under, any Environmental Laws that is
attributable solely to a change by USTS or Acquisition in the structure, use
or condition of any of the Assets after the Closing);
(d) all contracts, agreements, obligations, commitment and liabilities
of USTS of every kind and character relating in any way to the assets or the
business of USTS other than the Assumed Liabilities;
(e) any and all Damages incurred by the Precept Indemnitees, U.S.
Trucking, Inc., or any of other USTS Subsidiaries acquired by Acquisition
under this Agreement in connection with or arising out of the litigation
styled WILLIAM ORR V. U.S. TRANSPORTATION SYSTEMS, INC., JAY AND JAY
TRANSPORTATION, INC. AND MICHAEL MARGOLIES, Index No. 604365197 filed on
August 20, 1997;
(f) all of the Excluded Liabilities.
12.2 INDEMNIFICATION IF NEGLIGENCE OF PRECEPT INDEMNITEE. THE
INDEMNIFICATION PROVIDED IN THIS ARTICLE 12 SHALL BE APPLICABLE WHETHER OR NOT
NEGLIGENCE OF ANY PRECEPT INDEMNITEE IS ALLEGED OR PROVEN.
12.3 OFFSET. A Precept Indemnitee shall have the right to offset any
amounts for which it is entitled to indemnification under this Article 12
against any amounts payable by the Precept Indemnitee to USTS pursuant to any
Operative Document or otherwise. The rights of offset set forth in this Section
12.3 are not subject to the limitation set forth in Section 12.7 or elsewhere in
this Article 12.
12.4 INDEMNIFICATION BY PRECEPT AND ACQUISITION. Precept and Acquisition,
jointly and severally, agree to indemnify and hold USTS and the Liquidating
Trust and their respective officers, directors, shareholders, trustees,
Affiliates, employees and agents ("USTS Indemnitees") harmless from and against
any and all Damages, directly or indirectly resulting from, relating to or
arising out of any breach of or inaccuracy in any representation or warranty of
Precept contained in this Agreement.
12.5 NO THIRD PARTY BENEFICIARIES. The indemnification provided in
Sections 12.1 and 12.4 is given solely for the purpose of protecting the Precept
Indemnitees and the USTS Indemnities, respectively, and shall not be deemed
extended to, or interpreted in a manner to confer any benefit, right or cause of
action upon, any other Person.
12.6 CONDITIONS OF INDEMNIFICATION. The respective obligations and
liabilities of each of USTS, Precept and Acquisition (the "indemnitor") to the
other (the "indemnitee") under Sections 12.1 and 12.4 with respect to claims
resulting from the assertion of liability by third parties shall be subject to
the following terms and conditions.
A-38
<PAGE>
(a) In the event that a legal proceeding or action is commenced against
an indemnitee with respect to any indemnified matter, that indemnitee will
provide written notice thereof to the indemnitor, together with a copy of
any claim, process or other legal pleading, within twenty (20) days (or such
earlier date as is necessary to avoid prejudice to the indemnitor) after
receipt of notice. Failure to provide notice within such time frame shall
not excuse the performance of the indemnitor unless such failure materially
adversely prejudices the ability of the indemnitor to defend the claim. The
indemnitor will undertake the defense thereof, at its expense, by counsel of
its own choosing and reasonably acceptable to the indemnitee; provided that
the indemnitee may participate in all aspects of the defense with, or
without, counsel of its own choice. In the event that the indemnitee elects
to retain additional counsel of its own choice, the fees and expenses of
said counsel shall be the exclusive responsibility of the indemnitee unless
(i) the indemnitor has agreed to pay such fees and expenses, (ii) the
indemnitor has failed to undertake the defense of such action by promptly
retaining counsel reasonably acceptable to indemnitee to represent the
interests of indemnitee, or (iii) the nature of any such action presents a
conflict between the interests of the indemnitor and the indemnitee, or the
indemnitee has been advised by counsel that there may be one or more legal
defenses available to it that are different from or additional to those
available to the indemnitee (in which case, if the indemnitee informs the
indemnitor in writing that it elects to employ separate counsel at the
expense of indemnitor, the indemnitor shall have no further right to
participate in or undertake the defense of such action on behalf of the
indemnitor except with respect to payment of legal fees, costs, expenses and
full indemnification for any Damages), it being understood, however that the
indemnitor shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys at
any time for the indemnitee, which firm shall be designated in writing by
the indemnitee.
(b) In the event that the indemnitor, on or before the 30th day after
receipt of notice of any such action, or, if applicable and earlier, on or
before the tenth day preceding the day on which an answer, appearance or
other pleading must be served in order to prevent judgment by default in
favor of the person asserting such claim or other prejudice to the
indemnitee, fails to undertake the defense of such action, the indemnitee
will have the right to retain counsel of its own choosing and undertake the
defense, compromise or settlement of such claim for the account and risk of
the indemnitor without waiving the indemnitee's right to full
indemnification from the indemnitor and at the indemnitor's expense, subject
to the right of the indemnitor to assume the defense of such claims at any
time prior to settlement, compromise or final determination thereof with
counsel reasonably acceptable to the indemnitee.
(c) Notwithstanding the foregoing, the indemnitor shall not settle any
claim asserted against the indemnitee without the prior written consent of
the indemnitee unless such settlement involves only the payment of money and
the claimant provides the indemnitee with a release from all liability in
respect of such claim. If the settlement of any claim involves more than the
payment of money, the indemnitor shall not settle the claim without the
prior written consent of the indemnitee, which consent shall not be
unreasonably withheld. In the event the indemnitor has not undertaken the
defense, as described above, with respect to any claim resulting from the
assertion of liability by third parties, the indemnitee may settle any claim
without prior notice to and consent of the indemnifying party, and
indemnitee agrees to promptly, and in any event withing thirty days after
receipt of written demand, reimburse indemnitee of all Damages, including
without limitation all amounts paid or incurred in connection with such
settlement, together with attorneys' fees, costs, and expenses and other
costs incurred in connection with defense of the claim.
(d) The indemnitee and indemnitor will each cooperate with all
reasonable requests of the other.
A-39
<PAGE>
12.7 INDEMNIFICATION LIMITATIONS. Notwithstanding the provisions of
Section 12.1, (i) USTS (or the Liquidating Trust) shall only be required to
indemnify the Precept Indemnitees out of and to the extent of shares of Precept
Common Stock held in the Contingency Reserve (as defined in Article 5 of the
Plan of Liquidation and Dissolution), (ii) notwithstanding the timing of a claim
for indemnification by a Precept Indemnitee, USTS (or the Liquidating Trust)
shall only be required to satisfy claims of Precept Indemnities no earlier than
the date (a) of the one year anniversary of the Closing Date and (b) after all
other pending claims against USTS (or the Liquidating Trust) have been disposed
of, (iii) USTS (or the Liquidating Trust) shall only be required to indemnify
the Precept Indemnities for claims made on or before the two year anniversary of
the Closing Date, and (iv) notwithstanding any of the foregoing, subsection (ii)
of this Section 12.7 shall not apply to any claims by any Precept Indemnities,
U.S. Trucking, Inc., or any USTS Subsidiaries acquired by Acquisition under this
Agreement pursuant to Section 12.1(e).
12.8 USTS DISTRIBUTIONS TO USTS SHAREHOLDERS. Neither USTS nor the
Liquidating Trust shall make any distribution (other than the initial
distribution) to any shareholders of USTS while there is pending any claim of
Precept or Acquisition for Damages pursuant to this Article 12.
ARTICLE 13
GENERAL PROVISIONS
13.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Transfer and with respect to
representations and warranties of USTS shall survive the Transfer for a period
of two (2) years and with respect to representations and warranties of Precept
and Acquisition shall survive the Transfer for a period of one (1) year. Each
party covenants with the other not to make any claim with respect to any such
matter after the date on which such survival period has terminated.
13.2 NOTICES. All notices and other communications hereunder shall be in
writing and, except where notice is specifically required to be given by
telecopier or facsimile shall be deemed to have been duly given if delivered
personally, mailed by certified mail (return receipt requested) or sent by
cable, telegram, telecopier or telex to the parties at the following addresses
or at such other addresses as shall be specified by the parties by like notice:
(a) if to USTS to:
U.S. Transportation Systems, Inc.
33 West Main Street
Elmsford, New York 10523
Fax No. (914) 347-8102
Attn: Chairman
with a copy to:
Bressler, Amery & Ross, P.C.
17 State Street
New York, New York 10004
Fax No. (212) 425-9337
Attn: Robert Brantl
(b) if to Acquisition or Precept to:
Precept Investors, Inc.
1909 Woodall Rodgers Frwy., Suite 500
Dallas, Texas 75201
A-40
<PAGE>
Fax No. (214) 220-1082
Attn: General Counsel
with a copy to:
Jackson Walker, LLP
901 Main Street, Suite 6000
Dallas, Texas 75202
Fax No. (214) 953-5822
Attn: Richard F. Dahlson
Notice so given shall (in the case of notice so given by mail) be deemed to
be given and received in the fourth calendar day after posting and (in the case
of notice so given by cable, telegram, telecopier, telex or personal delivery)
on the date of actual transmission or (as the case may be) personal delivery.
13.3 MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein): (i) constitutes the entire agreement and
supersedes all other prior agreements and undertakings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof;
(ii) shall not be assignable by any party hereto without the prior written
consent of the other parties hereto; and (iii) shall be governed in all
respects, including validity, interpretation and effect, by the internal laws of
the State of Texas without giving effect, to the principles of conflict of laws
thereof. This Agreement may be executed in one or more counterparts which
together shall constitute a single agreement. If any provision of this Agreement
shall be held to be illegal, invalid or unenforceable under any applicable law,
then such contravention or invalidity shall not invalidate the entire Agreement.
Such provision shall be deemed to be modified to the extent necessary to render
it legal, valid and enforceable, and if no such modification shall render it
legal, valid and enforceable, then this Agreement shall be construed as if not
containing the provision held to be invalid, and the rights and obligations of
the parties shall be construed and enforced accordingly.
A-41
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
<TABLE>
<S> <C> <C>
U. S. TRANSPORTATION SYSTEMS, INC.
By: /s/ MICHAEL MARGOLIES
-----------------------------------------
Michael Margolies,
CHIEF EXECUTIVE OFFICER
PRECEPT ACQUISITION COMPANY, L.L.C.
By: /s/ DAVID L. NEELY
-----------------------------------------
PRECEPT INVESTORS, INC.
By: /s/ DAVID L. NEELY
-----------------------------------------
David L. Neely,
CHIEF EXECUTIVE OFFICER
</TABLE>
A-42
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A Permitted Encumbrances
Exhibit B Assignment and Assumption Agreement
Exhibit C Plan of Liquidation and Dissolution
Exhibit D Registration Rights Agreement
Exhibit
E-1 Employment Agreement--Michael Margolies
Exhibit
E-2 Employment Agreement--Ron Sorci
Exhibit F Affiliate Letter Form
</TABLE>
A-43
<PAGE>
ANNEX B
U.S. TRANSPORTATION SYSTEMS, INC.
PLAN OF LIQUIDATION AND DISSOLUTION
This Plan of Liquidation and Dissolution (the "PLAN") is for the purpose of
effecting the dissolution and liquidation of U.S. Transportation Systems, Inc.,
a Nevada corporation (the "COMPANY"), in accordance with and pursuant to the
provisions of the Nevada General Corporation Law and Section 368(a) of the
Internal Revenue Code of 1986, as amended, in substantially the following
manner:
1. EFFECTIVE. The Plan shall be effective on the date (the "EFFECTIVE
DATE") on which it is adopted by the affirmative vote of the holders of a
majority of the outstanding shares of the Common Stock of the Company at a
special meeting (the "SPECIAL MEETING") of the Company's shareholders called for
such purpose pursuant to a Notice and Joint Proxy/Registration Statement on Form
S-4 filed with the Securities and Exchange Commission, subject to consummation
of the transfer by the Company to Precept Acquisition Corp. ("ACQUISITION
CORP.") of substantially all of the Company's assets pursuant to the Agreement
and Plan of Reorganization dated as of November 16, 1997 by and among the
Company, Precept Investors, Inc. ("PRECEPT") and Acquisition Corp. (the "PRECEPT
AGREEMENT").
2. CESSATION OF BUSINESS. After the Effective Date, the Company shall not
engage in any business activities except for the purposes of (i) prosecuting or
defending lawsuits by or against the Company, (ii) disposing of and conveying
its remaining properties, discharging its liabilities and winding up its
business affairs and (iii) making the Liquidating Distribution (as hereinafter
defined) and distributing its remaining assets, if any, in accordance with the
Plan. The Board of Directors of the Company (the "BOARD") and, at their
pleasure, the officers, shall continue in office solely for these purposes.
After the Certificate of Dissolution is filed with the Nevada Department of
State, the Company will not plan to hold any further meetings of its
Shareholders.
3. DISSOLUTION. As promptly as practicable after the Effective Date, and
in any event no later than one year after the Effective Date, the Company shall
file a Certificate of Dissolution with the Nevada Secretary of State, after
which the Secretary of State shall issue a certificate that the Company is
dissolved pursuant to Subchapter 580 of Chapter 78 of the Nevada General
Corporation Law ("SUBCHAPTER 580").
4. SALE OF ASSETS. As part of the overall Plan, the Company has entered
into the Precept Agreement providing for the transfer of substantially all of
the assets of the Company in exchange for shares of Precept Common Stock (the
"PRECEPT SHARES") and the assumption by Acquisition Corp. of certain liabilities
of the Company (including the substitution of certain warrants and options to
purchase Precept Common Stock for certain warrants and options to purchase
securities of the Company (the "PRECEPT ACQUISITION"). After the Effective Date,
the Company shall have continuing authority to sell, lease, exchange or
otherwise convert all or any part of its assets as contemplated by the terms and
provisions of the Plan, including, if the requisite approval of the Shareholders
is received, the consummation of the Precept Acquisition pursuant to the Precept
Agreement.
5. PAYMENT OF DEBTS. The Company shall pay or make proper provision for
the payment of all known or ascertainable liabilities of the Company, including
all amounts estimated by the Board to be necessary, appropriate or desirable, in
its absolute discretion, for the payment of estimated expenses, taxes and
contingent liabilities (including expenses of dissolution, liquidation and
termination of existence) (the "CONTINGENCY RESERVE"), all as provided in
Chapter 78 of the Nevada General Corporation Law. The Contingency Reserve will
consist of a portion of the Precept Shares (but initially not less than 500,000
Precept Shares), cash or other property, if any. The Company may, if deemed
necessary, sell Precept Shares and apply the proceeds of the sale to the payment
of liabilities.
6. SHAREHOLDERS. For purposes hereof, the term "Shareholders" shall mean
the holders of the Company's outstanding Common Shares and the holders of the
Company's outstanding Preferred Shares. The rights of the holders of Preferred
Shares shall be PARI PASSU with the rights of holders of Common Shares on a per
share basis.
B-1
<PAGE>
7. LIQUIDATING DISTRIBUTION. As promptly as practicable after the
Effective Date, and in any event no later than one year after the Effective
Date, the Company shall distribute pro rata to the Shareholders that portion of
the Precept Shares and any other assets of the Company remaining after making
provision for the Contingency Reserve (the "LIQUIDATING DISTRIBUTION"). The
Liquidating Distribution may be made in a series of distributions and is
intended to be made in Precept Shares but may be in cash or kind, in such manner
and, subject to the preceding sentence, at such time or times as the Board, in
its absolute discretion, may determine; provided, however, that in no event
shall cash be distributed if such distribution would affect the tax-free nature
of the Precept Acquisition. If the Company is legally precluded from making all
or part of the Liquidating Distribution within one year after the Effective Date
or the Board otherwise determines that it is impractical or inadvisable to make
all or part of the Liquidating Distribution within such time, such Liquidating
Distribution or part thereof shall be made instead to the Liquidating Trust
(defined in Section 12).
8. CANCELLATION OF OUTSTANDING STOCK. The Liquidating Distribution shall
be in complete redemption and cancellation of all of the outstanding Common
Stock and Preferred Stock of the Company. The Board may direct that the
Company's stock transfer books be closed at the close of business on the record
date fixed by the Board for the first or any subsequent installment of any
Liquidating Distribution as the Board, in its absolute discretion, may determine
(the "RECORD DATE") and thereafter certificates representing Common Stock or
Preferred Stock shall not be assignable or transferable on the books of the
Company except by will, intestate succession or operation of law.
9. MISSING SHAREHOLDERS. If any Liquidating Distribution to a Shareholder
cannot be made, whether because the Shareholder cannot be located or for any
other reason, then the distribution to which such Shareholder is entitled shall
(unless transferred to the trust established pursuant to Section 12 hereof) be
transferred to and deposited in an account maintained by a bank, brokerage firm,
law firm, or similar fiduciary, which account shall be designated for the
benefit of such shareholders. The proceeds of such distribution shall thereafter
be held solely for the benefit of and for ultimate distribution to such
Shareholder as the sole equitable owner thereof and shall escheat to the State
of Nevada or be treated as abandoned property in accordance with the laws of the
State of Nevada. In no event shall the proceeds of any such distribution revert
to or become the property of the Company.
10. AMENDMENTS. Notwithstanding the adoption of the Plan by the Company's
Shareholders, the Board may modify or amend the Plan and, prior to the filing of
the Certificate of Dissolution with the Secretary of State of the State of
Nevada, may abandon the Plan, without further action by the Shareholders to the
extent permitted by Nevada law.
11. INDEMNIFICATION. The Company shall continue to indemnify its officers,
directors, employees and agents in accordance with applicable law, its articles
and bylaws and any contractual arrangements for actions taken in connection with
the Plan and the winding up of the affairs of the Company and shall indemnify
any liquidating trustees and their agents on similar terms. The Company's
obligation to indemnify such persons may be satisfied out of the assets of the
Liquidating Trust (as defined below). The Board and the trustees, in their
absolute discretion, are authorized to obtain and maintain insurance for the
benefit of such officers, directors, employees, agents and trustees to the
extent permitted by law.
12. LIQUIDATING TRUST. At such time as it shall choose (but in any event
no later than one year after the Effective Date), the Board shall transfer to a
liquidating trust (the "LIQUIDATING TRUST") under a Liquidating Trust Agreement
substantially in the form attached hereto as Appendix 1, any remaining assets of
the Company, including the Contingency Reserve and any portion of the
Liquidating Distribution withheld by the Board of Directors pursuant to Section
7 hereof. The Liquidating Trust will succeed to all of the then remaining assets
of the Company, including the Contingency Reserve, and any liabilities of the
Company. The sole purpose of the Liquidating Trust will be to liquidate on terms
satisfactory to the liquidating trustee(s) and to distribute to the Shareholders
the assets formerly owned by the Company, if any, after paying any remaining
liabilities of the Company. Michael Margolies is hereby selected by the Board
and the Shareholders to act as Trustee of the Liquidating Trust for the benefit
of the Company's
B-2
<PAGE>
shareholders, and Robert Brantl, Esq. is hereby selected as successor Trustee in
the event that Mr. Margolies becomes unable to serve as Trustee.
13. POWER OF BOARD OF DIRECTORS. The Board and, if authorized by the
Board, the officers, shall have authority to do or authorize any and all acts
and things as provided for in the Plan and any and all such further acts and
things as they may consider desirable to carry out the purposes of the Plan,
including the execution and filing of a Form 966 with the Internal Revenue
Service within 30 days from the Effective Date and all such other certificates,
documents, information returns, tax returns, and other documents which may be
necessary or appropriate to implement the Plan. The Board may authorize such
variations from or amendments to the provisions of the Plan as may be necessary
or appropriate to effectuate the complete liquidation and dissolution of the
Company and the distribution of its assets to its Shareholders in accordance
with the Nevada General Corporation Law. The death, resignation, or other
disability of any director or officer of the Company shall not impair the
authority of the surviving or remaining director(s) or officer(s) to exercise
any of the powers provided for in the Plan. Upon such death, resignation or
other disability, the surviving or remaining director(s), or, if there be none,
to the extent permitted by law the surviving or remaining officer(s) shall have
authority to fill the vacancy or vacancies so created, but the failure to fill
such vacancy or vacancies shall not impair the authority of the surviving or
remaining director(s) or officer(s) to exercise any of the powers provided for
in the Plan. In connection with and for the purpose of implementing and assuring
completion of the Plan, the Company may, in the absolute discretion of the
Board, pay to the Company's officers, directors and employees, or any of them,
compensation or additional compensation above their regular compensation, in
money or property, in recognition of the extraordinary efforts they, or any of
them, will be required to undertake or actually undertake, in successful
implementation of the Plan. Adoption of the Plan by the Shareholders shall
constitute the approval of the Shareholders of the payment of any such
compensation.
APPENDIX 1
LIQUIDATING TRUST AGREEMENT
This AGREEMENT AND DECLARATION OF TRUST is made by and between U.S.
TRANSPORTATION SYSTEMS, INC., a Nevada corporation (the "COMPANY"), and MICHAEL
MARGOLIES (the "TRUSTEE").
WHEREAS, the Company is in the process of liquidation and dissolution
pursuant to a Plan of Liquidation and Dissolution (the "PLAN") adopted by the
Company's shareholders on , 1997;
WHEREAS, pursuant to the aforesaid Plan, the Company is to complete its
liquidation by , 1998;
WHEREAS, pursuant to the terms of the Agreement and Plan of Reorganization
dated as of November 16, 1997 (the "PRECEPT AGREEMENT") by and among the
Company, Precept Investors, Inc. ("PRECEPT") and Precept Acquisition Corp.
("ACQUISITION CORP."), the Company has transferred substantially all of its
assets to Acquisition Corp. on , 1998 in exchange for shares of
Precept Common Stock and the assumption of certain liabilities as provided in
the Precept Agreement;
WHEREAS, the transfer of the assets contemplated by the Precept Agreement,
in conjunction with the Liquidation, is intended to qualify as a reorganization
pursuant to Sections 368(a)(1)(C) and 368(a)(2)(G) of the Internal Revenue Code
of 1986, as amended (the "CODE");
WHEREAS, the Company has distributed a portion of the shares of Precept
Common Stock received by the Company pursuant to the Precept Agreement to its
shareholders and has retained the balance as a contingency reserve to satisfy
any remaining liabilities of the Company;
WHEREAS, the common shareholders of the Company have approved this Agreement
and have authorized the Company to make distributions, on behalf of all of the
shareholders, to the Trustee, as trustee of this Trust;
B-3
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company hereby grants, releases, assigns, transfers, conveys and delivers to the
Trustee all of the Company's right, title and interest in and to all assets it
currently owns, holds or in which it otherwise possesses any interest, subject
to the assumption by the Trustee of all of the Company's liabilities and
obligations, whether ascertained, unascertained or contingent, IN TRUST for the
uses and purposes stated herein and subject to the terms and provisions set out
below, and the Trustee hereby accepts such assets and such Trust and hereby
assumes such liabilities and obligations of the Company subject to the terms and
provisions set out below.
ARTICLE 1
NAMES AND DEFINITIONS
1.1 NAME. This Trust shall be known as the USTS Liquidating Trust (the
"TRUST").
1.2 DEFINITIONS.
(a) "Agreement" or "Agreement of Trust" shall mean this instrument as
originally executed or as it may from time to time hereafter be amended
pursuant to the terms hereof.
(b) "Shareholders" shall mean the holders of the Company's Common Shares
and the Company's Preferred Shares.
(c) "Beneficiaries" shall mean the Shareholders of the Company as they
appear in the records of the Trust on the Record Date (as defined in the
Plan).
(d) "Trust Corpus" shall mean the property held from time to time by the
Trustee, subject to all of the liabilities and obligations assumed by the
Trustee, under this Trust.
(e) "Trustee" shall mean Michael Margolies. Upon the termination,
resignation or total disability or death of the Trustee, Robert Brantl, Esq.
shall act as successor Trustee, or his successor, appointed in accordance
with Section 10.3 hereof.
ARTICLE 2
NATURE OF TRANSFER
2.1 NATURE AND PURPOSE OF TRUST. The Trust exists solely for the purposes
of holding, liquidating and disposing of any assets received by it and paying or
settling the ascertained, unascertained and contingent liabilities and
obligations of the Company and thereafter distributing the remaining Trust
Corpus to the Beneficiaries. In connection with such purpose, it is intended
that the Trust serve as a vehicle for the preservation and maintenance of the
Trust Corpus, with a view to its liquidation and not the conduct of a continuing
business. This Agreement is intended to create a trust, and to be governed and
construed in all respects as a trust. The Trust is not intended to be, shall not
be deemed to be and shall not be treated as a general partnership, limited
partnership, joint venture, corporation, joint stock company or association, nor
shall the Trustee or the Beneficiaries, or any of them, for any purpose be, or
be deemed to be or treated in any way whatsoever to be, liable or responsible
hereunder as partners or joint venturers. The relationship of the Beneficiaries
to the Trustee shall be solely that of beneficiaries of a trust, and their
rights shall be limited to those conferred upon them by this Agreement. In no
event shall any part of the Trust Corpus revert or be distributed to the
Company. Notwithstanding any other provision hereof, the Trustee is authorized
and empowered to take only such action as is necessary or advisable to preserve
the Trust Corpus pending its distribution to the Beneficiaries, and the Trustee
shall have no power or authority to enter into or engage in the conduct of any
trade or business in respect of the Trust Corpus.
2.2 INSTRUMENTS OF FURTHER ASSURANCE. The Company and such persons as
shall have the right and power after the dissolution of the Company will, upon
request of the Trustee, execute, acknowledge, and deliver such further
instruments and do such further acts as may be necessary or proper to
effectively carry out the purposes of this Agreement, to confirm the transfer to
the Trustee of any property covered or
B-4
<PAGE>
intended to be covered hereby and the assumption of all liabilities pertaining
thereto, and to vest in the Trustee, his successors and assigns, the estate,
powers, instruments or funds in trust hereunder.
2.3 UNKNOWN PROPERTY AND LIABILITIES. The Trustee shall be responsible for
only the property delivered to him or registered in his names and shall have no
duty to make, nor incur any liability for failing to make, any search for
unknown property. The Trustee shall be responsible for only those liabilities
and obligations of which he is informed and shall have no duty to make, nor any
liability for failing to make, any search for unknown liabilities.
2.4 TRANSFEREE LIABILITY. In the event that any liability of the Company
is asserted against the Trustee as a successor to the Company, the Trustee may
use such part of the Trust Corpus as may be reasonable for contesting any such
liability and in payment thereof, including reasonable attorneys' fees incurred
in connection therewith.
2.5 LIMITATION OF LIABILITY. No personal liability shall attach to the
Trustee or the Beneficiaries with respect to any liabilities or obligations
arising under this Agreement, and all persons dealing with the Trust must look
solely to the Trust Corpus for the enforcement of any claims against the Trust.
2.6 ASSIGNMENT FOR BENEFIT OF BENEFICIARIES. The Trustee hereby assigns to
the Beneficiaries the beneficial interest in all the Trust Corpus, and retains
only such incidents of ownership therein as are necessary to undertake the
actions and transactions authorized herein.
ARTICLE 3
BENEFICIARIES
3.1 BENEFICIAL INTERESTS. The beneficial interests of the Beneficiaries
shall be recorded by the Trustee or his agent on the books of the Trust. The
beneficial interests of the Beneficiaries will be evidenced only by the Trust's
records and there will be no certificates or other tangible evidence of such
interests. The beneficial interests of the Beneficiaries will not be
transferable except pursuant to the laws of descent and distribution or by
operation of law.
If any conflicting claims or demands are made or asserted with respect to
beneficial interests herein, or if there should be any disagreement among the
transferees, assignees, heirs, representatives or legatees succeeding to all or
a part of the interest of any Beneficiary resulting in adverse claims or demands
being made in connection with such interest, then, in any of such events, the
Trustee shall be entitled, at his sole election, to refuse to comply with any
such conflicting claims or demands. In so refusing, the Trustee may elect to
make no payment or distribution in respect of the beneficial interest involved,
or any part thereof, and in so doing the Trustee shall not be or become liable
to any of such parties for his failure or refusal to comply with any of such
conflicting claims or demands, nor shall the Trustee be liable for interest on
any funds which he may so withhold. The Trustee shall be entitled to refrain and
refuse to act until (i) the rights of the adverse claimants have been
adjudicated by a final judgment of a court of competent jurisdiction from which
there is no appeal pending and the applicable appeal period shall have expired,
(ii) all differences have been adjusted by valid written agreement between all
of such parties, and the Trustee shall have been furnished with an executed
counterpart of such agreement, or (iii) there is furnished to the Trustee a
surety bond or other security satisfactory to the Trustee, as he shall deem
appropriate, to fully indemnify him as between all conflicting claims or
demands.
3.2 RIGHTS OF BENEFICIARIES. The Beneficiaries shall take and hold their
beneficial interests subject to all the terms and provisions of this Agreement
of Trust. The interest of the Beneficiaries is hereby declared to, and shall be
in all respects, personal property. The Beneficiaries shall have no title to,
possession of, management of, or control of, the Trust Corpus except as herein
expressly provided. The whole title to all the Trust Corpus shall be vested in
the Trustee and the sole interest of the Beneficiaries shall be the rights and
benefits given to them under this Agreement of Trust.
B-5
<PAGE>
3.3 APPLICABLE LAW. As to matters affecting the title, ownership,
transferability, or attachment of the interest of the Beneficiaries in the
Trust, the laws from time to time in force in the State of Nevada shall govern
except as otherwise herein specifically provided.
ARTICLE 4
DURATION AND TERMINATION OF TRUST
4.1 DURATION. The existence of this Trust shall terminate three years from
the date of the transfer of the Company's assets to the Trust, unless earlier
terminated by the distribution of all of the Trust Corpus; provided, however,
that if the Trust holds installment obligations that are payable over a period
that ends more than two years after the date of transfer of the Company's assets
to the Trust, the term of the Trust with respect to those obligations only shall
extend for such longer period as is reasonably necessary to collect and
distribute all payments made on such obligations; and, further provided that the
Trustee will not unduly prolong the duration of the Trust.
4.2 CONTINUANCE OF TRUST FOR WINDING UP. After the termination of the
Trust and for the purpose of liquidating and winding up the affairs of the
Trust, the Trustee shall continue to act as such until his duties have been
fully performed. Upon distribution of all of the Trust Corpus, the Trustee shall
retain the books, records, shareholder lists, Beneficiary lists, and
certificates and other documents and files which shall have been delivered to or
created by the Trustee. At the Trustee's discretion, all of such records and
documents may, but need not, be destroyed at any time after six years from the
completion and winding up of the affairs of the Trust. Except as otherwise
specifically provided herein, upon the discharge of all liabilities of the Trust
and final distribution of all of the Trust Corpus, the Trustee shall have no
further duties or obligations hereunder except to account as provided in Section
5.4 hereof.
4.3 PERPETUITIES RULE. If the provisions of this Trust shall be violative
of the rule against perpetuities, then such Trust shall terminate, if it has not
previously terminated, twenty-one (21) years after the death of the survivor of
all of the Shareholders.
ARTICLE 5
ADMINISTRATION OF TRUST ESTATE
5.1 PAYMENT OF CLAIMS, EXPENSES AND LIABILITIES. The Trustee shall pay
from the Trust Corpus all claims, expenses, charges, liabilities, and
obligations of the Trust and all liabilities and obligations which the Trustee
specifically assumes and agrees to pay pursuant to this Agreement and such
transferee liabilities as the Trustee may be obligated to pay as transferee of
the assets comprising the Trust Corpus, and the costs, charges, and expenses
connected with or growing out of the execution or administration of the Trust
and such other payments and disbursements as are provided in this Agreement or
as may be determined to be a proper charge against the Trust Corpus by the
Trustee.
5.2 INTERIM DISTRIBUTIONS. The Trust shall distribute at least annually to
the Beneficiaries its net income plus all net proceeds from the sale of assets,
except that the Trust may retain an amount of net income or net proceeds
reasonably necessary to maintain the value of the Trust Corpus or to meet claims
and contingent liabilities.
5.3 FINAL DISTRIBUTION. If the Trustee determines that all claims, debts,
liabilities, and obligations of the Trust have been paid or discharged and that
the remaining assets of the Trust may be conveniently distributed in kind, or if
the existence of the Trust shall terminate pursuant to Section 4.1 hereof, the
Trustee shall, as expeditiously as is consistent with the conservation and
protection of the Trust Corpus, distribute the Trust Corpus to the Beneficiaries
of record on the close of business on such record date as the Trustee may
determine.
B-6
<PAGE>
5.4 REPORTS TO BENEFICIARIES. As soon as practicable after the end of each
fiscal year of the Trust and after termination of the Trust, the Trustee shall
submit a written report to the Beneficiaries (which report shall constitute the
accounting of the Trust for such period) showing (i) the assets and liabilities
of the Trust at the end of such fiscal year or upon termination and the receipts
and disbursements of the Trustee for such fiscal year or period, (ii) any
changes in the Trust Corpus which he have not previously reported, and (iii) any
action taken by the Trustee in the performance of his duties under this
Agreement of Trust which he has not previously reported and which, in his
opinion, materially affects the Trust Corpus. The fiscal year of the Trust shall
end on December 31 of each year unless the Trustee deems it advisable to
establish some other date as the date on which the fiscal year of the Trust
shall end.
5.5 FEDERAL INCOME TAX INFORMATION. As soon as practicable after the close
of each fiscal year, the Trustee shall mail to the Beneficiaries a statement
showing the dates and amounts of all distributions made by the Trustee, if any,
and such other information as is reasonably available to the Trustee which may
be helpful in determining the amount and character of items of income,
deductions and credits of the Trust that the Beneficiaries should include in
their federal income tax returns for the preceding year.
ARTICLE 6
POWERS OF AND LIMITATIONS UPON THE TRUSTEE
6.1 TRUSTEE. The Shareholders appoint Michael Margolies as Trustee under
this Agreement of Trust. In doing so, the Shareholders acknowledge that Michael
Margolies is a shareholder, officer and director of the Company. The
Shareholders recognize that Michael Margolies is not "independent" for the
reason that he owns a beneficial interest in the Trust. However, the
Shareholders have determined that it is essential to the orderly liquidation of
the Company that he serve, given Mr. Margolies' knowledge of the business and
affairs of the Company. This selection in no way indicates a desire to continue
the business of the Company.
6.2 GENERAL POWERS OF AND LIMITATIONS UPON TRUSTEE. The Trustee, subject
only to the specific limitations contained in this Agreement, shall have,
without further or other authorization, and free from any power or control on
the part of the Beneficiaries, full, absolute and exclusive power, control and
authority over the Trust Corpus and over the affairs of the Trust to the same
extent as if the Trustee were the sole owner thereof in his own right, provided,
however, that such power, control and authority shall only be exercised to do
such acts and things as in his sole judgment and discretion are necessary or
incidental to, or desirable for, the carrying out of any of the purposes of the
Trust. Any determination made in good faith by the Trustee of the purposes of
the Trust or the existence of any power or authority hereunder shall be
conclusive and binding upon the Beneficiaries. In construing the provisions of
this Agreement, a presumption shall exist in favor of the grant of powers and
authority to the Trustee, except insofar as the existence or exercise of any
such power or authority would jeopardize the status of the Trust as a grantor
trust for federal income tax purposes. The enumeration of any specific power or
authority herein shall not be construed as limiting the general powers or
authority or any other specified power or authority conferred herein upon the
Trustee. As set forth in Section 2.1 hereof, the Trustee shall not at any time,
on behalf of the Trust or the Beneficiaries, enter into or engage in any trade
or business, and no part of the Trust Corpus shall be used or disposed of by the
Trustee in furtherance of any trade or business. This limitation shall apply
irrespective of whether the conduct of any such business activities is deemed by
the Trustee to be necessary or proper for the conservation and protection of the
Trust Corpus.
The Trustee shall invest the funds of the Trust Corpus in demand and time
deposits in banks or savings institutions, or temporary investments such as
short-term certificates of deposit or Treasury bills. The sole purpose of the
Trust shall be to liquidate the Trust Corpus and discharge the liabilities
transferred to it with no objective to continue or engage in the conduct of any
trade or business. In no event shall the Trustee receive any property, make any
distribution, satisfy or discharge any obligation, claim, liability, or expense
or otherwise take any action which is inconsistent with a complete liquidation
of the Company as that term
B-7
<PAGE>
is used and interpreted by Sections 368(a)(1)(C) and 368(a)(2)(G) of the Code,
the Treasury Regulations promulgated thereunder, and rulings, decisions and
determinations of the Internal Revenue Service or any court of competent
jurisdiction, or take any action that would jeopardize the status of the Trust
as a "LIQUIDATING TRUST" for federal income tax purposes within the meaning of
Treasury Regulation Section 301.7701-4(d). The Trust does not, and will not,
receive or retain cash in excess of a reasonable amount to meet claims and
contingent liabilities. In addition, the Trust does not, and will not, receive
transfers of any unlisted stock of a single issuer that represents 80 percent or
more of the stock of such issuer, and the Trust does not, and will not, receive
transfers of any general or limited partnership interests.
6.3 SPECIFIC POWERS OF TRUSTEE. Subject to the provisions of Section 6.2
hereof, the Trustee shall have the following specific powers in addition to any
powers conferred upon him by any other Section or provision of this Agreement of
Trust or by virtue of any present or future statute or rule of law, in all
instances without any action or consent required by the Beneficiaries; provided,
however, that the enumeration of the following powers shall not be considered in
any way to limit or control the power of the Trustee to act as specifically
authorized by any other Section or provision of this Agreement and to act in
such a manner as the Trustee may deem necessary or appropriate, in his sole
discretion, to conserve, protect, and administer the Trust Corpus or otherwise
to confer upon the Beneficiaries the benefits intended to be conferred upon him
by this Agreement.
(a) To retain and set aside such funds out of the Trust Corpus as the
Trustee shall deem necessary or expedient to pay, or provide for the payment
of, (i) unpaid claims, liabilities, debts or obligations of the Trust, (ii)
contingencies, and (iii) the expenses of administering the Trust Corpus;
(b) To do and perform any acts or things necessary or appropriate for
the conservation and protection of the Trust Corpus, and in connection
therewith to employ any agents or representatives as the Trustee deem
expedient and to pay reasonable compensation therefor;
(c) To sell, transfer, assign, borrow against, pledge, hypothecate or
deal in any other manner with any of the Trust Corpus, including the shares
of Precept Common Stock, in such manner as the Trustee may deem advisable
for any Trust purpose;
(d) To engage in, intervene in, prosecute, join, defend, compound,
settle, compromise, abandon or adjust by arbitration or otherwise, any
actions, suits, proceedings, disputes, claims, controversies, demands or
other litigation to enforce any instruments, contracts, agreements, claims
or causes of action relating to the Trust, the Trust Corpus or the Trust's
affairs, to enter into agreements relating to the foregoing, whether or not
any suit is commenced or claim accrued or asserted and, in advance of any
controversy, to enter into agreements regarding arbitration, adjudication or
settlement thereof, all in the name of the Trust or of the Company if
otherwise required;
(e) To file any and all documents and take any and all such other action
as the Trustee, in his sole judgment, may deem necessary in order that the
Trust may lawfully carry out its purposes in any jurisdiction;
(f) To change the name of the Trust;
(g) To prepare and file, or assist in the preparation and filing of,
federal and state tax returns and reports required to be filed on behalf of
the Trust or the Trustee.
ARTICLE 7
LIABILITY OF TRUSTEE AND BENEFICIARIES AND OTHER MATTERS
7.1 GENERALLY. The Trustee shall not be liable to the Trust or to any
Beneficiary for any act or omission of any other Trustee, Beneficiary, or agent
of the Trust, or be held to any personal liability whatsoever in tort, contract,
or otherwise in connection with the affairs of the Trust, except only that
B-8
<PAGE>
arising from his own bad faith, wilful misfeasance, gross negligence, or
reckless disregard of duty. The Trustee shall not be liable except for the
performance of such duties and obligations as are specifically set forth in this
Agreement, and no implied covenants or obligations shall be read into this
agreement against the Trustee. The Trustee shall not be liable with respect to
any action taken or omitted to be taken by him in good faith, in accordance with
the direction of Beneficiaries having an aggregate beneficial interest of more
than 50% of the total beneficial interests in the Trust. In addition to, and not
in limitation of, the foregoing, no successor Trustee shall be in any way liable
for the acts or omissions of any Trustee or agent of the Trust occurring prior
to the date on which he or she became Trustee.
7.2 RELIANCE BY TRUSTEE. The Trustee may consult with counsel, auditors or
other experts, and the advice or opinion of such counsel, auditors, or other
experts shall be full and complete personal protection to the Trustee in respect
of any action taken or suffered by him in good faith and in reliance upon or in
accordance with such advice or opinion. In discharging his duties, the Trustee
may rely upon financial statements of the Trust represented to him to be correct
by the person having charge of its books of account. The Trustee may rely, and
shall be personally protected in acting, upon any instrument or other document
of any sort whatsoever reasonably believed by him to be genuine.
7.3 LIMITATION OF LIABILITY OF TRUSTEE AND BENEFICIARIES. The Trustee, in
incurring any debts, liabilities, or obligations, or in taking or omitting any
other actions for or in connection with the Trust, is, and shall be deemed to
be, acting as Trustee of the Trust and not in his own individual capacity.
Except to the extent provided in Section 7.1 hereof, no Trustee shall, nor shall
any Beneficiary, be liable for any debt, claim, demand, judgment, decree,
liability, or obligation of any kind of, against, or with respect to the Trust,
arising out of any action taken or omitted for or on behalf of the Trust, and
the Trust shall be solely liable therefor, and resort shall be had solely to the
Trust Corpus for the payment or performance thereof. A Beneficiary shall be
entitled to pro rata indemnity from the Trust Corpus, if, contrary to the
provisions hereof, the Beneficiary shall be held to any such personal liability.
7.4 EXPRESS EXCULPATORY CLAUSES IN INSTRUMENTS. As far as practicable, the
Trustee shall cause any written instrument creating an obligation of the Trust
to include a reference to this Agreement and to provide that neither the
Beneficiaries nor the Trustee shall be liable thereunder and that the other
parties to such instrument shall look solely to the Trust Corpus for the payment
of any claim thereunder or the performance thereof; provided, however, that the
omission of such provision from any such instrument shall not render the
Beneficiaries or the Trustee liable nor shall the Trustee be liable to anyone
for such omission.
7.5 INDEMNIFICATION OF TRUSTEE.
(a) The Trustee shall be indemnified from the Trust Corpus against any
loss, liability, expense (including attorney's fees and costs), or damage
which such Trustee may incur or sustain by reason of being or having been a
Trustee of the Trust or for performing any functions incidental to such
service; provided, however, that the foregoing shall not relieve such person
of liability for breach of such duties of care and good faith as are imposed
upon trustees by the laws of the State of Nevada.
(b) Indemnification under paragraph (a) of this Section 7.5 shall be
made by the Trust as authorized in the specific case unless a determination
has been made that indemnification of the Trustee is improper in the
circumstances because he has not met the applicable standards of conduct.
Such determination shall be made by independent legal counsel (who may be
counsel to the Trust) in a written opinion.
(c) Expenses incurred in connection with a civil, criminal,
administrative, or investigative action, suit, or proceeding, or threat
thereof, may be paid by the Trust in advance of the final disposition of
such action, suit, or proceeding upon receipt of an undertaking by or on
behalf of the Trustee to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the Trust as
authorized herein.
B-9
<PAGE>
(d) The indemnification provided in this Section 7.5 shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under any other agreement or otherwise, both as to action as Trustee and as
to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a Trustee and shall inure to the benefit
of the heirs, executors, and administrators of such person.
(e) The Trust shall have the power to purchase and maintain at the
expense of the Trust insurance on behalf and for the benefit of any person
who is or was a Trustee of the Trust against claims or liabilities arising
from the service of such person as Trustee, whether or not the Trust would
have the power to indemnify such person against such liability under the
provisions of this Section 7.5.
ARTICLE 8
PROTECTION OF PERSONS DEALING WITH THE TRUSTEE
8.1 RELIANCE UPON ACTS OF TRUSTEE. Any act of a Trustee purporting to be
done in his capacity as such shall, as to any persons dealing with such Trustee,
be conclusively deemed to be within the purpose of this Trust and within the
powers of the Trustee. As to any matter requiring or involving action by the
Beneficiaries, any person dealing with a Trustee shall be fully protected in
relying upon the Trustee's certificate setting forth the facts concerning the
calling of any meeting of the Beneficiaries, the giving of notice thereof, and
the action taken at such meeting, including the aggregate beneficial interests
of the
Beneficiaries taking such action.
ARTICLE 9
COMPENSATION OF TRUSTEE
9.1 AMOUNT OF COMPENSATION. The Trustee shall be entitled to receive as
compensation for his services as Trustee a fee during each calendar year equal
to three percent of the market value of the Trust Corpus on January 1 of that
year (or, in the year of formation, the date of formation of the Trust). During
any partial year in which the Trustee serves, the fee shall be apportioned
appropriately. The fee may be paid from time to time at the discretion of the
Trustee.
9.2 EXPENSES. The Trustee shall be reimbursed from the Trust Corpus for
all expenses reasonably incurred in accordance with this Agreement.
ARTICLE 10
CONCERNING THE TRUSTEE
10.1 NUMBER AND QUALIFICATION. Subject to the provisions of Section 10.3
hereof relating to the period pending the appointment of a successor Trustee,
there shall be at least one Trustee of the Trust.
10.2 RESIGNATION AND REMOVAL. Any Trustee may resign and be discharged
from the Trust hereby created by giving written notice thereof to the
Beneficiaries. Such resignation shall become effective on the day specified in
such notice (which shall be no less than 30 days after the date of the notice)
or upon the appointment of such Trustee's successor and such successor's
acceptance of such appointment, whichever is earlier, without need for prior
accounting. Any Trustee may be removed at any time, with or without cause, by
vote of Beneficiaries holding more than 50% of the total beneficial interests in
the Trust.
10.3 APPOINTMENT OF SUCCESSOR. Should at any time a Trustee resign or be
removed, or die or become incapable of action, or be adjudged a bankruptcy or
insolvent, a vacancy shall be deemed to exist. If no successor Trustee is named
in this Agreement of Trust, the Beneficiaries may, pursuant to Article 12
hereof, appoint a successor Trustee. If the Beneficiaries have not filled all
vacancies to be filled by them
B-10
<PAGE>
within 60 days after they have the authority to do so pursuant to this Section
10.3, a Beneficiary may apply to a court of competent jurisdiction in accordance
with Nevada law to fill such vacancies.
10.4 ACCEPTANCE OF APPOINTMENTS BY SUCCESSOR TRUSTEE. Any successor
Trustee appointed hereunder shall execute an instrument accepting such
appointment hereunder and shall, in case of a resignation, deliver one copy
thereof to the retiring Trustee.
Thereupon such successor Trustee shall, without any further act, become
vested with all the estates, properties, rights, powers, trusts, and duties of
his or her predecessor in the Trust hereunder with like effect as if originally
named herein.
10.5 BONDS. Unless a bond is required by law, no bond shall be required of
the original Trustee hereunder or of any successor Trustee hereunder. If a bond
is required by law, no surety or security with respect to such bond shall be
required unless required by law.
ARTICLE 11
CONCERNING THE BENEFICIARIES
11.1 EVIDENCE OF ACTION BY BENEFICIARIES. Whenever in this Agreement it is
provided that a Beneficiary may take any action (including the making of any
demand or request, the giving of any notice, consent, or waiver, the removal of
a Trustee, the appointment of a successor Trustee, or the taking of any other
action), the fact of at the time of taking any such action such Beneficiary
having joined therein may be evidenced (i) by any instrument or any number of
instruments of similar tenor executed by a Beneficiary in person or by agent or
attorney appointed in writing, or (ii) by the record of the Beneficiary voting
in favor thereof at any meeting of Beneficiaries duly called and held in
accordance with the provisions of Article 12 hereof.
11.2 LIMITATION UPON SUITS BY BENEFICIARIES. No Beneficiary shall have any
right by virtue of any provision of this Agreement to institute any action or
proceeding at law or in equity against any party other than the Trustee upon or
under or with respect to the Trust Corpus or the assets relating to or forming
part of the Trust Corpus and the Beneficiaries do hereby waive any such right,
unless Beneficiaries having an aggregate beneficial interest of more than 50% of
the total beneficial interests in the Trust shall have made written request upon
the Trustee to institute such action or proceeding in his own name as Trustee
hereunder and shall have offered to the Trustee reasonable indemnity against the
costs and expenses to be incurred therein or thereby, and the Trustee for 30
days after his receipt of such notice, request, and offer of indemnity shall
have failed to institute any such action or proceeding.
11.3 REQUIREMENT OF UNDERTAKING. The Trustee may request any court to
require, and any court may in its discretion require, in any suit for the
enforcement of any right or remedy under this Agreement, or in any suit against
the Trustee for any action taken or omitted by him as Trustee, the filing by any
party litigant in such suit of an undertaking to pay the costs of such suit, and
such court may in its discretion assess reasonable costs, including reasonable
attorney's fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
provided, that the provisions of this Section 11.3 shall not apply to any suit
by the Trustee and such undertaking shall not be requested by the Trustee or
otherwise required in any suit by any Beneficiary or group of Beneficiaries
having an aggregate beneficial interest of more than 25% of the total beneficial
interests of the Trust.
B-11
<PAGE>
ARTICLE 12
MEETING OF BENEFICIARIES
12.1 PURPOSE OF MEETINGS. A meeting of the Beneficiaries may be called at
any time and from time to time pursuant to the provisions of this Article 12 for
the purpose of taking any action which the terms of this Agreement permit
Beneficiaries having a specified aggregate beneficial interest to take either
acting alone or with the Trustee or with any other Beneficiary or Beneficiaries.
12.2 MEETING CALLED BY TRUSTEE. The Trustee may at any time call a meeting
of the Beneficiaries to be held at such time and at such place within the State
of Nevada (or elsewhere if so determined by the Trustee) as the Trustee shall
determine. Written notice of every meeting of the Beneficiaries shall be given
by the Trustee (except as provided in Section 12.3 hereof), which written notice
shall set forth the time and place of such meeting and in general terms the
action proposed to be taken at such meeting, and shall be mailed not more than
60 nor less than ten days before such meeting is to be held to all of the
Beneficiaries of record not more than 60 days before the date of such meeting,
such record date to be fixed by the Trustee. The notice shall be directed to the
Beneficiaries at their respective addresses as they appear in the records of the
Trust.
12.3 MEETING CALLED UPON REQUEST OF BENEFICIARY. Except as hereinafter
provided in this Section 12.3, within 30 days after written request to the
Trustee by Beneficiaries having an aggregate beneficial interest of more than
50% of the total beneficial interests in the Trust to call a meeting of all the
Beneficiaries, which written request shall specify in reasonable detail the
action proposed to be taken, the Trustee shall proceed under the provisions of
Section 12.2 hereof to call a meeting of the Beneficiaries, and if the Trustee
fails to call such a meeting within such 30 day period then such meeting may be
called by Beneficiaries having an aggregate beneficial interest of more than 50%
of the total beneficial interests in the Trust or by his designated
representative or representatives. If the purpose of the meeting is to fill a
vacancy in accordance with Section 10.3 hereof, any Beneficiary may call such a
meeting. If the purpose of the meeting is other than to fill a vacancy and if
there is no Trustee, Beneficiaries having an aggregate beneficial interest of
more than 50% of the total beneficial interests in the Trust, or his designated
representative or representatives, may call such meeting without first applying
to the Trustee or waiting the 30-day period provided for in the first sentence
of this Section 12.3. Any meeting called by one or more Beneficiaries shall be
subject to the same notice requirements as are set forth in Section 12.2 hereof,
and the Beneficiary or Beneficiaries calling the meeting shall fix the record
date therefor.
12.4 PERSONS ENTITLED TO VOTE AT MEETING OF BENEFICIARIES. Each
Beneficiary on the record date shall be entitled to vote at a meeting of the
Beneficiaries either in person or by proxy duly authorized in writing and shall
have one vote for each share of Common Stock of the Company previously
registered on the books of the Trust in the name of such Beneficiary. The
signature of the Beneficiary on such written authorization need not be witnessed
or notarized.
12.5 QUORUM. At any meeting of Beneficiaries, the presence of
Beneficiaries having an aggregate beneficial interest sufficient to take action
on any matter for which such meeting was called shall be necessary to constitute
a quorum.
12.6 CONDUCT OF MEETINGS. The Trustee shall appoint the Chairman and the
Secretary of the meeting. The vote upon any resolution submitted to any meeting
of Beneficiaries shall be by written ballot.
12.7 RECORD OF MEETING. A record of the proceedings of each meeting of
Beneficiaries shall be prepared by the Secretary of the meeting. The record
shall be signed and verified by the Secretary of the meeting and shall be
delivered to the Trustee to be preserved by him. Any record so signed and
verified shall be conclusive evidence of all the matters therein stated.
B-12
<PAGE>
ARTICLE 13
AMENDMENTS
13.1 WITH CONSENT OF BENEFICIARIES. At the direction or with the consent
(evidenced in the manner provided in Section 11.1 hereof) of Beneficiaries
having an aggregate beneficial interest of more than 50% of the total beneficial
interests in the Trust, the Trustee shall promptly make and execute a
declaration amending this Agreement for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this Agreement
or amendments hereto; provided, however, that no such amendment shall permit the
Trustee hereunder to engage in any activity prohibited by Section 2.1 or 6.2
hereof, or adversely affect the Beneficiaries' right to receive their pro rata
shares of the Trust Corpus at the time of distribution.
13.2 WITHOUT CONSENT OF BENEFICIARIES. The Trustee may from time to time
and at any time make or execute a declaration amending this Agreement without
the consent of the Beneficiaries pursuant to Section 13.1 hereof for the purpose
of (a) curing any ambiguity or correcting or supplementing any provision
contained herein or in any amendment to this Agreement which may be defective or
inconsistent with any other provision contained herein or in any amendment to
this Agreement, (b) making such other provisions or modifications in regard to
matters or questions relating to this Agreement or any amendment hereto,
provided the same shall not adversely affect the interests of the Beneficiaries,
or (c) having the Trust continue to qualify as a "LIQUIDATING TRUST" for federal
income tax purposes.
13.3 NOTICE AND EFFECT OF AMENDMENT. Promptly after the execution by the
Trustee of any such declaration of amendment, the Trustee shall send a summary
or copy of the amendment to each Beneficiary. Upon the execution of any such
declaration of amendment by the Trustee, this Agreement shall be deemed to be
modified and amended in accordance therewith.
ARTICLE 14
MISCELLANEOUS PROVISIONS
14.1 FILING DOCUMENTS. This Agreement shall be filed in such governmental
office or offices, if any, and in such other office or offices as the Trustee
may determine to be necessary or desirable. A copy of this Agreement and all
amendments thereof shall be filed in the office of the Trustee and shall be
available during regular business hours upon reasonable notice for inspection by
any Beneficiary or his or her duly authorized representative. The Trustee shall
file or record any amendment of this Agreement in the same places where the
original Agreement is filed or recorded. The Trustee shall file or record any
instrument which relates to any change in the office of Trustee in the same
places where the original Agreement is filed or recorded.
14.2 LAWS AS TO CONSTRUCTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada.
14.3 SEPARABILITY. In the event any provision of this Agreement or the
application thereof to any person or circumstances shall be finally determined
by a court of competent jurisdiction to be invalid or unenforceable to any
extent, the remainder of this Agreement, or the application of such provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each provision of this
Agreement shall be valid and enforced to the fullest extent permitted by law.
14.4 NOTICES. Any notice or other communication by the Trustee to any
Beneficiary shall be deemed to have been sufficiently given, for all purposes,
if given by being deposited, postage prepaid, in a post office or letter box and
being addressed to such Beneficiary at its address as shown in the records of
the Trust.
B-13
<PAGE>
14.5 NO COURT SUPERVISION. The Trust shall not be administered under the
direction or jurisdiction of any court except as provided in Section 10.3
hereof, nor shall there be any duty of the Trustee to account to any court with
respect to his administration of the Trust or the Trust Corpus.
14.6 IRREVOCABLE TRUST. This Trust is irrevocable except to the extent
contemplated by Article 13 hereof.
IN WITNESS WHEREOF, U.S. Transportation Systems, Inc. has caused this
Agreement to be signed by its Chairman or President and the Trustee has signed
this Agreement, effective this day of , 1997.
U.S. TRANSPORTATION SYSTEMS, INC.
By: -----------------------------------------
Michael Margolies,
TRUSTEE
B-14
<PAGE>
ANNEX C
M.H. MEYERSON & CO., INC.
FOUNDED 1960
BROKERS & DEALERS IN SECURITIES
UNDERWRITERS
NEWPORT OFFICE TOWER
525 WASHINGTON BLVD. - P.O. BOX 260 - JERSEY CITY, NJ 07303-0260
201-459-9500 - 800-888-8118 - FAX 201-459-9521 - www.mhmeyerson.com
October 16, 1997
Board of Directors
U.S. Transportation Systems, Inc.
33 West Main Street
Elmsford, New York 10523
Dear Sirs:
We understand that Precept Investors, Inc. has agreed in principle for U.S.
Transportation Systems, Inc. (USTS) to transfer its business and substantially
all of its assets to Precept in exchange for an aggregate of 9,500,000 shares of
Precept's Class A Common Stock, (500,000 shares of which will be held back to
satisfy certain contingent liabilities of USTS). Precept's Class A Common Stock
will be listed on and trade on the Nasdaq SmallCap Market.
You have asked us to render an opinion as to the fairness of the
transaction, from a financial point of view to the common shareholders of USTS.
In the course of our review of the transaction, we have:
1. Reviewed the draft Agreement and Plan of Reorganization between Precept and
USTS.
2. Reviewed the unaudited financial statements for USTS for the six months
ended June 30, 1997 and the three months ended March 31, 1997.
3. Reviewed the audited financial statements for USTS for the year ended
December 30, 1996.
4. Reviewed financial information, including publicly available disclosure
information, projections, relating to the business, operations and prospects
of USTS, furnished by USTS.
5. Met with certain members of USTS management to discuss historical and
current operations, financial condition, and future prospects of USTS and
Precept as well as the benefits to result from the Transfer of USTS and
Precept and future growth strategies for the combined companies, post
Transfer.
6. Reviewed the potential pro forma financial results of the companies after
the Transfer.
7. Analyzed the relative financial contribution of each of the companies to the
combined company after the Transfer.
8. Reviewed the draft financial statements of Precept for the years ended June
30, 1997, and June 30, 1996.
9. Reviewed certain non-public operating and financial information, including
projections, relating to the business, operations and the draft S-4
Registration Statement of Precept, furnished by Precept.
10. Met with certain members of Precept's management to discuss historical and
current operations, financial condition, and future prospects of Precept and
USTS as well as the benefits resulting from the Transfer of Precept and
USTS.
11. Compared historical financial results of Precept with those of other
publicly traded companies which we believed to be relevant.
12. Conducted such other studies, analyses, inquiries and investigations as we
deemed appropriate.
In the course of our review, we have relied upon and assumed, without
independent verification of the accuracy of the information supplied by
Precept's and USTS' management. We have also relied upon the assurances of the
management of Precept and USTS that they are not aware of any facts that would
make such information incomplete or misleading.
Based on the foregoing, it is our opinion that the transactions are fair,
from a financial point of view, to the common shareholders of USTS.
Respectfully yours,
<TABLE>
<S> <C>
/s/ ERIC RAINER BASHFORD
- ------------------------------
Eric Rainer Bashford, C.F.A.
M.H. MEYERSON & CO., INC.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Texas Business Corporation Act (the "TBCA"), a Texas corporation
may in general indemnify a director or officer who was, is or is threatened to
be made a named defendant or respondent in a proceeding by virtue of his
position in the corporation if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, in the case of criminal proceedings, had no reasonable cause to
believe his conduct was unlawful. Further, a Texas corporation may indemnify a
director or officer in an action brought by or in the right of the corporation
only if such director or officer was not found liable to the corporation, unless
or only to the extent that a court finds him to be fairly and reasonably
entitled to indemnity for such expenses as the court deems proper, within
statutory limits.
The Registrant's Restated Articles of Incorporation, as amended, provide
that each person who (i) is or was a director, officer, employee or agent of
Registrant or (ii) is or was serving at the request of Registrant as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, or other enterprise or employee benefit plan (including
the heirs, executors, administrators or estate of such person) shall be
indemnified by the Registrant to the fullest extent that a corporation is
required or permitted to grant indemnification to such person under the TBCA.
Reasonable expenses incurred by a director, officer, employee or agent of the
Registrant, who was, is or is threatened to be made a named defendant or
respondent in a proceeding shall be paid or reimbursed by the Registrant, in
advance of the final disposition of the proceeding, to the maximum extent
permitted under the TBCA.
Additionally, Registrant's Restated Articles of Incorporation, as amended,
eliminate in certain circumstances the monetary liability of directors of
Registrant for an act or omission in the director's capacity as a director. This
provision does not eliminate or limit the liability for (i) a breach of a
director's duty of loyalty to Registrant or its shareholders; (ii) an act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of the law; (iii) a transaction from which the director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; (iv) an act or omission for which the
liability of the director is expressly provided for by statute; or (v) an act
related to an unlawful stock repurchase or payment of a dividend.
The above discussion of the Registrant's Restated Articles of Incorporation,
as amended, and Bylaws and of the TBCA is not intended to be exhaustive and is
qualified in its entirety by the Restated Articles of Incorporation, as amended,
and Bylaws and the TBCA.
Registrant carries directors' and officers' liability insurance which
insures Registrant's directors and officers against liability for any "wrongful
act" arising out of their position, and which is not reimbursable under the
Registrant's Bylaws or which, if reimbursable, Registrant has not paid or is
unable to pay. These provisions of the policy pertaining to officers and
directors are also subject to several exclusions, including losses covered under
other forms of insurance, losses occasioned by violations of governmental
regulations and ordinances, losses for which insurance would be against public
policy and others recited therein.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of November 16, 1997 by and among U.S.
Transportation Systems, Inc., Precept Investors, Inc. and Precept Acquisition Company, L.L.C.
(2)
2.2 Plan of Liquidation and Dissolution (2)
3.1 Amended and Restated Articles of Incorporation (3)
3.2 Bylaws (3)
4.1 Warrant Agent Agreement (3)
4.2 Form of Precept Class A Warrant Certificate (3)
4.3 Form of Precept Class A Common Stock Certificate (3)
4.4 Form of Rights Agreement between Precept and . (3)
4.5 Form of Irrevocable Proxy granted to Darwin Deason by various Precept shareholders (3)
5 Opinion of Jackson Walker L.L.P. (3)
8.1 Opinion of Bressler, Amery & Ross re: Tax Matters (4)
10.1 Form of Registration Rights Agreement by and among Precept Investors, Inc., Michael Margolies and
The Margolies Family Trust (4)
10.2 Form of Employment Agreement by and between Precept Investors, Inc. and Michael Margolies (4)
10.3 Form of Employment Agreement by and between Precept Investors, Inc. and Ron Sorci (4)
10.4 Reciprocal Services Agreement, dated June 30, 1994, between Precept and ACS (1)
10.5 Form of Directors Indemnification Agreement (1)
10.6 Precept 1996 Stock Option Plan (3)
10.7 Precept 1998 Stock Incentive Plan (3)
10.8 Credit Agreement and Line of Credit Note, dated as of July 1, 1997, between Precept and Wells
Fargo Bank (Texas), National Association (1)
11.1 Statement re Computation of U.S. Transportation Systems, Inc. Per Share Earnings (4)
21 Subsidiaries (3)
23.1 Consent of Ernst & Young LLP (1)
23.2 Consent of Mahoney Cohen & Company, CPA, P.C. (1)
23.3 Consent of Bressler, Amery & Ross (to be included in its opinion filed as Exhibit 8.1) (4)
23.4 Consent of Jackson Walker L.L.P. (to be included in its opinion filed as Exhibit 5) (3)
23.5 Consent of M.H. Meyerson & Co., Inc. (4)
24 Power of Attorney (contained on signature page of this Registration Statement)
27.1 Financial Data Schedule (4)
99.1 Form of Proxy (2)
99.2 Consent of Michael Margolies (1)
99.3 Consent of Robert Blackman (1)
99.4 Consent of Scott B. Walker (1)
99.5 Consent of Layne A. Deutscher (1)
</TABLE>
- ------------------------
(1) Filed herewith
(2) Previously filed as an Annex to the Proxy Statement/Prospectus included in
the Registration Statement
(3) To be filed by Amendment
(4) Previously filed
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant
to Section 13 or 15(d) of the Exchange Act that are incorporated by
reference in this registration statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 29th day of January, 1998.
<TABLE>
<S> <C> <C>
PRECEPT BUSINESS SERVICES, INC.
By: /s/ DAVID L. NEELY
-----------------------------------------
David L. Neely,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following directors and officers
of Precept Business Services, Inc., in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
* Director and Chairman of
- ------------------------------ the Executive Committee January 29, 1998
Darwin Deason of the Board
/s/ DAVID L. NEELY Chairman and Chief
- ------------------------------ Executive Officer and January 29, 1998
David L. Neely Director
* President & Chief
- ------------------------------ Operating Officer and January 29, 1998
Douglas R. Deason Director
* Executive Vice President,
- ------------------------------ Chief Administrative January 29, 1998
Glenn R. Smith Officer and Director
Senior Vice President and
* Chief Financial Officer
- ------------------------------ (Principal Accounting January 29, 1998
Scott B. Walker Officer)
*By: /s/ DAVID L. NEELY
-------------------------
David L. Neely
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of November 16, 1997 by and among U.S.
Transportation Systems, Inc., Precept Investors, Inc. and Precept Acquisition Company, L.L.C.
(2)
2.2 Plan of Liquidation and Dissolution (2)
3.1 Amended and Restated Articles of Incorporation (3)
3.2 Bylaws (3)
4.1 Warrant Agent Agreement (3)
4.2 Form of Precept Class A Warrant Certificate (3)
4.3 Form of Precept Class A Common Stock Certificate (3)
4.4 Form of Rights Agreement between Precept and . (3)
4.5 Form of Irrevocable Proxy granted to Darwin Deason by various Precept shareholders (3)
5 Opinion of Jackson Walker L.L.P. (3)
8.1 Opinion of Bressler, Amery & Ross re: Tax Matters (4)
10.1 Form of Registration Rights Agreement by and among Precept Investors, Inc., Michael Margolies
and The Margolies Family Trust (4)
10.2 Form of Employment Agreement by and between Precept Investors, Inc. and Michael Margolies (4)
10.3 Form of Employment Agreement by and between Precept Investors, Inc. and Ron Sorci (4)
10.4 Reciprocal Services Agreement, dated June 30, 1994, between Precept and ACS (1)
10.5 Form of Directors Indemnification Agreement (1)
10.6 Precept 1996 Stock Option Plan (3)
10.7 Precept 1998 Stock Incentive Plan (3)
10.8 Credit Agreement and Line of Credit Note, dated as of July 1, 1997, between Precept and Wells
Fargo Bank (Texas), National Association (1)
11.1 Statement re Computation of U.S. Transportation Systems, Inc. Per Share Earnings (4)
21 Subsidiaries (3)
23.1 Consent of Ernst & Young LLP (1)
23.2 Consent of Mahoney Cohen & Company, CPA, P.C. (1)
23.3 Consent of Bressler, Amery & Ross (to be included in its opinion filed as Exhibit 8.1) (4)
23.4 Consent of Jackson Walker L.L.P. (to be included in its opinion filed as Exhibit 5) (3)
23.5 Consent of M.H. Meyerson & Co., Inc. (4)
24 Power of Attorney (contained on signature page of this Registration Statement)
27.1 Financial Data Schedule (4)
99.1 Form of Proxy (2)
99.2 Consent of Michael Margolies (1)
99.3 Consent of Robert Blackman (1)
99.4 Consent of Scott B. Walker (1)
99.5 Consent of Layne A. Deutscher (1)
</TABLE>
- ------------------------
(1) Filed herewith
(2) Previously filed as an Annex to the Proxy Statement/Prospectus included in
the Registration Statement
(3) To be filed by Amendment
(4) Previously filed
<PAGE>
RECIPROCAL SERVICES AGREEMENT
THIS RECIPROCAL SERVICES AGREEMENT ("Agreement") is made and entered
into this 30th day of June, 1994, between ACS Investors, Inc., a Delaware
corporation (the name of which will be changed to Affiliated Computer
Services, Inc. on July 5, 1994) ("ACS"), and Precept Business Products, Inc.,
a Texas corporation ("Precept"), as follows:
1. SERVICES PROVIDED BY PRECEPT TO ACS
During the term of this Agreement Precept shall be ACS' exclusive
provider of the services described in the following schedules attached
hereto:
Schedule A - Forms, Products and Printing Services
Schedule B - Courier and Transportation Services
Schedule C - Administrative Consulting Services
Schedule D - Benefits Administration
2. SERVICES PROVIDED BY ACS TO PRECEPT
During the term of this Agreement ACS shall be Precept's exclusive
provider of the services described in the following schedules attached
hereto:
Schedule E - Human Resources Services
Schedule F - Sublease (2828 N. Haskell)
3. TERM OF AGREEMENT
The term of this Agreement shall begin effective June 30, 1994, and
shall continue until the first anniversary thereof. The terms shall
automatically renew for successive annual periods on each anniversary
date unless either party notifies the other party, at least six (6)
months prior to any such anniversary date, that it will not renew the
Agreement term at the end of the then-current annual term.
4. PRICING
Prices charged for services shall be as set forth in each Schedule.
All prices shall be subject to review annually by a committee of the
Board of Directors of ACS prior to each
1
<PAGE>
annual term renewal. Prices charged by Precept to ACS shall be no less
favorable than ACS could obtain from an independent third party for
comparable services. Pricing for ACS services provided to Precept shall
be at no less than ACS' direct costs attributable to such services.
Monthly invoices shall be provided for services rendered the prior
month, unless otherwise agreed by the parties, and are payable within
thirty (30) days of date of invoice. Amounts not timely paid shall be
subject to late charges of 1.5% per month applied subject to applicable
law.
In addition to the services described in Sections 1 and 2 hereof,
Precept or ACS may provide other miscellaneous services to the other
party upon request and, in such event, the prices charged for such
services shall be as agreed upon by ACS and Precept and may include
reimbursement of direct costs attributable to the services provided;
however, in no event shall the pricing for such requested services
exceed pricing that could be obtained on an arms'-length basis from a
third party.
5. LIABILITY LIMITATIONS
If either party shall breach its obligations under this Agreement, such
party's liability to the other party shall not exceed the charges for
the related services for the month in which the breach occurred. Neither
party shall be liable to the other for special or consequential damages
nor shall either party have any liability as a result of any delay or
breach caused by acts or events beyond the reasonable control of such
party.
6. TERMINATION
Either party may terminate its obligation to obtain specific services
under this Agreement from the other party in the event such other party
is in material breach of this Agreement with respect to such specific
services and fails to cure such breach within thirty (30) days of
receipt of notice specifying the basis for the breach.
7. REFERRAL OF PROSPECTS
Both parties shall use their best reasonable efforts to refer prospects
to the other party for services offered by the other party.
8. CONFIDENTIALITY
Each party agrees to maintain the confidentiality of all proprietary
non-public information
2
<PAGE>
related to the other party which may be provided to each party in
connection with services rendered under this Agreement.
ENTERED INTO AS OF THE DATE FIRST WRITTEN ABOVE.
ACS INVESTORS, INC.
BY: /s/ JEFFREY A. RICH
--------------------
TITLE: EVP
-----------------
PRECEPT BUSINESS PRODUCTS, INC.
BY: /s/ DAVID L. NEELY
--------------------
TITLE: CEO
-----------------
3
<PAGE>
SCHEDULE A
FORMS, PRODUCTS AND PRINTING SERVICES
SERVICES:
- - Provide and manage all forms and printing requirements
- - Management of vendors and ordering/supply process
- - Provide all office and data processing supplies
- - Provide all advertising specialty products
CHARGES:
Prices will be at or below standard prices offered to all Precept customers,
giving consideration to factors such as order quantity, availability and
product specifications.
4
<PAGE>
SCHEDULE B
COURIER AND TRANSPORTATION SERVICES
SERVICES:
- - On-call courier services in locations serviced by Wingtip Couriers, Inc.
- - Executive transportation in Dallas, Texas area
- - Limousine service by Lone Star Limousine
CHARGES:
- - Standard Wingtip charges for courier services less a 10% discount
- - Standard rates for limousine services less a 10% discount
- - Cost plus 10% profit margin for executive transportation services
5
<PAGE>
SCHEDULE C
ADMINISTRATIVE CONSULTING SERVICES
(BUILDING MANAGEMENT, HUMAN RESOURCES, INSURANCE, REAL ESTATE)
SERVICES:
- - Consulting services as requested by ACS related to (i) ACS' human
resources functions; (ii) ACS' risk management and insurance functions;
and (iii) ACS' real estate leasing requirements.
- - Management of certain ACS facilities services at 2828 N. Haskell Avenue,
Dallas, Texas, including management of internal facilities services and
management of third party facilities vendors (services covered are
building maintenance, telephone, mail service, security and construction).
CHARGES:
- - $10,000 per month, plus Precept's direct costs attributable to such
facilities services as of the date of this Agreement, subject to an annual
cost-of-living adjustment based on any increase in the consumer price index.
6
<PAGE>
SCHEDULE D
BENEFITS ADMINISTRATION
SERVICES
- - Third party benefits administration services for ACS' Medical, Dental
and Workers' Compensation Benefit Plans, including periodic coverage
review, recommendation of changes, processing and payment of claims, and
administration of ACS' self insurance fund
CHARGES:
- - $9.25 per employee / per month for TPA services
$1.25 per employee / per month for Non-Subscriber self insurance
administration
7
<PAGE>
SCHEDULE E
HUMAN RESOURCES SERVICES
SERVICES:
- - Assistance on state and Federal regulatory compliance
- - Unemployment claims and compensation
- - Safety Compliance
- - Employee relations
- - Compensation, wage and salary administration
- - Payroll processing
CHARGES:
- - $83.00 per employee / per month for local HR services
$25.00 per employee / per month for remote HR services
$12.00 per employee / per month for Wingtip drivers (excludes payroll
processing)
8
<PAGE>
SCHEDULE F
SUBLEASE
SUBLEASE:
Precept -- 11,000 square feet on 9th floor of 2828 N. Haskell facility
Wolf Benefits -- 2,400 square feet in 3960 N. Central Expressway facility
Wingtip Couriers -- 24,836 square feet in 2700 N. Haskell facility --
Notwithstanding any term of this Reciprocal Services Agreement to the
contrary, Precept and Wingtip agree to sublease this space for the remainder
of the primary lease term (December 31, 1998)
RENT:
- - Allocated on the same basis as all other entities occupying space in
such facilities; as to the space at 2700 N. Haskell, pass through to
Precept of all rent and tenant obligations
9
<PAGE>
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into effective as of __________, 1998, by and between Precept Business
Services, Inc., a Texas corporation (the "Company"), and _________________
________________, a [director][officer] of the Company (the "Indemnitee").
W I T N E S S T H:
WHEREAS, the Indemnitee is presently serving as a [director][officer]
of the Company, and the Company desires the Indemnitee to continue in such
capacity; and
WHEREAS, the Indemnitee is willing, subject to certain conditions,
including without limitation, the execution and performance of this Agreement
by the Company, to continue in that capacity;
NOW, THEREFORE, in order to induce the Indemnitee to continue to serve
in his present capacity, the Company and Indemnitee hereby agree as follows:
1. CONTINUED SERVICE: The Indemnitee will continue to serve as a
[director][officer] of the Company so long as he is duly elected and
qualified in accordance with the bylaws of the Company (the "Bylaws") or
until he resigns in writing in accordance with applicable law.
2. INITIAL INDEMNITY. (a) The Company shall indemnify the Indemnitee
when he was or is a party or is threatened to be made a party to any pending,
threatened or completed action, suit or proceeding, whether civil,
administrative, investigative or criminal (other than an action by or in the
name of the Company), by reason of the fact that he is or was or had agreed
to become a [director][officer] of the Company, or is or was serving or had
agreed to serve at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against any and all costs, charges and expenses,
including without limitation, attorneys' and others' fees and expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by the Indemnitee in connection therewith and any appeal therefrom
if the Indemnitee acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendre or its equivalent shall not, of itself, create a presumption that
the Indemnitee did not satisfy the foregoing standard of conduct to the
extent applicable thereto.
Page 1
<PAGE>
(b) The Company shall indemnify the Indemnitee when he was or is a
party or is threatened to made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the Company to
procure a judgment in its favor by reason of the fact that he is or was or
had agreed to become a [director][officer] of the Company, or is or was
serving or had agreed to serve at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against costs, charges and expenses
(including attorneys and others' fees and expenses) actually and reasonably
incurred by him in connection with the defense or settlement thereof or any
appeal therefrom if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company and
except that no indemnification shall be made in respect of any claim, issue
or matter as to which the Indemnitee shall have been adjudged to be liable to
the Company unless and only to the extent that the Court of Chancery or the
court in which such action, suit or proceeding was brought shall determine
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, the Indemnitee is fairly and reasonably
entitled for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that the Indemnitee has been successful on the merits
or otherwise, including without limitation the dismissal of an action with
prejudice, in defense of any action, suit or proceeding referred to in
Sections 2(a) or 2(b) hereof or in defense of any claim, issue or matter
therein, he shall be indemnified against costs, charges and expenses
(including attorneys' and others' fees and expenses) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under Sections 2(a) and 2(b) (unless ordered by
a court) shall be made by the Company only as authorized in the specific case
upon a determination in accordance with Section 4 hereof or any applicable
provision of the articles of incorporation of the Company (the
"Certificate"), Bylaws, other agreement, resolution or otherwise. Such
determination shall be made (i) by the Board of Directors of the Company (the
"Board"), by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (ii) if such a quorum of
disinterested directors is not available or so directs, by independent legal
counsel (designated in the manner provided below in this Section 2(d) in a
written opinion, or (iii) by the stockholders of the Company (the
"Stockholders"). Independent legal counsel shall be designated by vote of a
majority of the disinterested directors, provided, however, that if the Board
is unable or fails to so designate, such designation shall be made by the
Indemnitee subject to the approval of the Company (which approval shall not
be unreasonably withheld). Independent legal counsel shall not be any person
or firm who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the
Company or the Indemnitee in an action to determine the Indemnitee's rights
under this Agreement. The Company agrees to pay the reasonable fees and
expenses of such independent legal counsel and to indemnify fully such
counsel against costs, charges and expenses (including attorneys' and others'
fees and other expenses) actually and reasonably incurred by such counsel in
connection with this Agreement or the opinion of such counsel pursuant hereto.
Page 2
<PAGE>
(e) All expenses (including attorneys' and others' fees and expenses)
incurred by the Indemnitee in his capacity as a director or officer of the
Company in defending a civil or criminal action, suit or proceeding shall be
paid by the Company in advance of the final disposition of such action, suit
or proceeding in the manner prescribed by Section 4(b) hereof.
(f) The Company shall not adopt any amendment to the Certificate or
Bylaws the effect of which would be to deny, diminish or encumber the
Indemnitee's rights to indemnity pursuant to the Certificate. Bylaws, the
Texas Business Corporation Act, as amended (the "TBCA") or any other
applicable law as applied to any act or failure to act occurring in whole or
in part prior to the date (the "Effective Date") upon which the amendment was
approved by the Board or the Stockholders, as the case may be. In the event
that the Company shall adopt any amendment to the Certificate or Bylaws the
effect of which is to so deny, diminish or encumber the Indemnitee's rights
to indemnity, such amendment shall apply only to acts or failures to act
occurring entirely after the Effective Date thereof unless the Indemnitee
shall have voted in favor of such adoption as a director or holder of record
of the Company's voting stock, as the case may be.
3. ADDITIONAL INDEMNIFICATION. (a) Pursuant to Article 2.02-1 of the
TBCA, without limiting any right which the Indemnitee may have pursuant to
Section 2 hereof, the Certificate, the Bylaws, the TBCA, any policy of
insurance or otherwise, but subject to the limitations on the maximum
permissible indemnity which may exist under applicable law at the time of any
request for indemnity hereunder determined as contemplated by Section 3(a)
hereof, the Company shall indemnify the Indemnitee against any amount which
he is or becomes legally obligated to pay relating to or arising out of any
claim made against him because of any act, failure to act or neglect or
breach of duty, including any actual or alleged error, misstatement or
misleading statement, which he commits, suffers, permits or acquiesces in
while acting in his capacity as a [director] [officer] of the Company, or, at
the request of the Company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
The payments which the Company's is obligated to make pursuant to this
Section 3 shall include without limitation damages, judgments, settlements
and charges, costs, expenses, expenses of investigation and expenses of
defense of legal actions, suits, proceedings or claims and appeals therefrom,
and expenses of appeal, attachment or similar bonds; provided, however, that
the Company shall not be obligated under this Section 3(a) to make any
payment in connection with any claim against the Indemnitee to the extent (i)
of any fine or similar governmental imposition which the Company is
prohibited by applicable law from paying which results in a final,
nonappealable order or (ii) based upon or attributable to the Indemnitee
gaining in fact a personal profit to which he was not legally entitled,
including without limitation profits made from the purchase and sale by the
Indemnitee of equity securities of the Company which are recoverable by the
Company pursuant to Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and profits arising from transactions in
publicly traded securities of the Company which were effected by the
Indemnitee in violation of Section 10(b) of the Exchange Act, including Rule
10b-5 promulgated thereunder. The determination of whether the
Page 3
<PAGE>
Indemnitee shall be entitled to indemnification under this Section 3(a) may
be, but shall not be required to be, made in accordance with Section 4(a)
hereof. If that determination is so made, it shall be binding upon the
Company and the Indemnitee for all purposes.
(b) Expenses (including without limitation attorneys' and others' fees
and expenses) incurred by Indemnitee in defending any actual or threatened
civil or criminal action, suit, proceeding or claim shall be paid by the
Company in advance of the final disposition thereof as authorized in
accordance with Section 4(b) hereof.
4. CERTAIN PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES. (a) Except as otherwise permitted or required by the TBCA, for
purposes of pursuing his rights to indemnification under Sections 2(a), 2(b)
or 3(a) hereof, as the case may be, the Indemnitee may, but shall not be
required to, (i) submit to the Board a sworn statement of request for
indemnification substantially in the form of EXHIBIT 1 attached hereto and
made a part hereof (the "Indemnification Statement") averring that he is
entitled to indemnification hereunder, and (ii) present to the Company
reasonable evidence of all expenses for which payment is requested.
Submission of an Indemnification Statement to the Board shall create a
presumption that the Indemnitee is entitled to indemnification under Sections
2(a), 2(b) or 3(a) hereof, as the case may be, and the Board shall be deemed
to have determined the Indemnitee is entitled to such indemnification unless
within 30 calendar days after submission of the Indemnification Statement the
Board shall determine by vote of a majority of the directors at a meeting at
which a quorum is present, based upon clear and convincing evidence
(sufficient to rebut the foregoing presumption) and the Indemnitee shall have
received notice within such period in writing of such determination that the
Indemnitee is not so entitled to indemnification, which notice shall disclose
with particularity the evidence in support of the Board's determination. The
foregoing notice shall be sworn to by all persons who participated in the
determination and voted to deny indemnification. The provisions of this
Section 4(a) are intended to be procedural only and shall not affect the
right of the Indemnitee to indemnification under this Agreement and any
determination by the Board that the Indemnitee is not entitled to
indemnification and any failure to make the payments requested in the
Indemnification Statement shall be subject to judicial review as provided in
Section 7 hereof.
(b) For purposes of determining whether to authorize advancement of
expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit to the
Board a sworn statement of request for advancement of expenses substantially
in the form of EXHIBIT 2 attached hereto and made a part hereof (the
"Undertaking"), averring that the (i) has reasonably incurred or will
reasonably incur actual expenses in defending an actual civil or criminal
action, suit, proceeding or claim, and (ii) undertakes to repay such amount
if it shall ultimately be determined that he is not entitled to be
indemnified by the Company under this Agreement or otherwise. For purposes of
requesting advancement of expenses pursuant to Section 3(b) hereof, the
Indemnitee may, but shall not be required to submit an Undertaking or Expense
Request, as the case may be, the Board shall within 10 calendar days
authorize immediate payment of the expenses stated in the
Page 4
<PAGE>
Undertaking or Expense Request, as the case may be, whereupon such payments
shall immediately be made by the Company. No security shall be required in
connection with any Undertaking or Expense Request and any Undertaking or
Expense Request shall be accepted without reference to the Indemnitee's
ability to make repayment.
5. SUBROGATION; DUPLICATION OF PAYMENT. (a) In the event of payment
under this Agreement, the Company shall be subrogated to the extent such
payment to all of the rights of recovery of the Indemnitee, who shall execute
all papers required and shall do everything that may be necessary to secure
such rights, including the execution of such documents necessary to enable
the Company effectively to bring suit to enforce such rights.
(b) The Company shall be liable under this Agreement to make any
payment in connection with any claim made against the Indemnitee to the
extent the Indemnitee has actually received payment (under any insurance
policy, the Certificate, the Bylaws or otherwise) of the amounts otherwise
payable hereunder.
6. STOCKHOLDER RATIFICATION. The Company may, at its option, propose at
any future meeting of the Stockholders that this Agreement be ratified by the
Stockholders; provided, however, that the Indemnitee's rights hereunder shall
be fully enforceable in accordance with the terms hereof whether or not such
ratification is sought or obtained; and provided further, however, that if
such ratification is sought and not obtained, the Company, in the direction
of and upon action by the Board, may rescind this Agreement.
7. ENFORCEMENT. (a) If a claim for indemnification is made to the
Company pursuant to Section 4 hereof is not paid in full by the Company
within 30 calendar days after a written claim has been received by the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim.
(b) In any action brought under Section 7(a) hereof, it shall be a
defense to a claim for indemnification pursuant to Sections 2(a) or 2(b)
hereof (other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where the
Undertaking, if any is required, has been tendered to the Company) that the
Indemnitee has not met the standards of conduct which make it permissible
under the TBCA for the Company to indemnify the Indemnitee for the amount
claimed, but the burden of proving such defense shall be on the Company.
Neither the failure of the Company (including the Board, independent legal
counsel or the Stockholders) to have made a determination prior to
commencement of such action that indemnification of the Indemnitee is proper
in the circumstances because he has met the applicable standard of conduct
set forth in the TBCA, nor an actual determination by the Company (including
the Board, independent legal counsel or the Stockholders) that the Indemnitee
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the Indemnitee has not met the applicable
standard of conduct.
Page 5
<PAGE>
(c) It is the intent of the Company that the Indemnitee not be required
to incur the expenses associated with the enforcement of his rights under
this Agreement by litigation or other legal action because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Indemnitee hereunder. Accordingly, if it should appear to the
Indemnitee that the Company has failed to comply with any of its obligations
under the Agreement or in the event that the Company or any other person
takes any action to declare the Agreement void or unenforceable, or
institutes any action, suit or proceeding designed (or having the effect of
being, designed) to deny, or to recover from, the Indemnitee the benefits
intended to be provided to the Indemnitee hereunder, the Company irrevocably
authorizes the Indemnitee from time to time to retain counsel of his choice,
at the expense of the Company as hereafter provided, to represent the
Indemnitee in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director,
officer, Stockholder or other person affiliated with the Company, in any
jurisdiction. Regardless of the outcome thereof, the Company shall pay and be
solely responsible for any and all costs, charges and expenses, including
without limitation attorneys' and others' fees and expenses, reasonably
incurred by the Indemnitee as a result of (i) the Company's failure to
perform this Agreement or any provision thereof, or (ii) the Company or any
person contesting the validity or enforceability of this Agreement or any
provision thereof as aforesaid.
8. MERGER OR CONSOLIDATION. In the event that the Company shall be a
constituent corporation in a consolidation, merger or other reorganization,
the Company, if it shall not be the surviving, resulting or other corporation
therein, shall require as a condition thereto the surviving, resulting or
acquiring corporation to agree to indemnify the Indemnitee to the full extent
provided in Section 3 hereof. Whether or not the Company is the resulting,
surviving or acquiring corporation in any such transaction, the Indemnitee
shall also stand in the same position under this Agreement with respect to
the resulting, surviving or acquiring corporation as he would have with
respect to the Company if its separate existence had continued.
9. NONEXCLUSIVITY AND SEVERABILITY. (a) The right to indemnification
provided by this Agreement shall not be exclusive of any other rights to
which the Indemnitee may be entitled under the Certificate, Bylaws, the TBCA,
any other statute, insurance policy, agreement, vote of Stockholders or of
directors or otherwise, both as to actions in his official capacity and as to
actions in another capacity while holding such office, and shall continue
after the Indemnitee has ceased to be a director, officer, employee or agent
and shall inure to the benefit of his heirs, executors and administrators.
(a) If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid,
unenforceable or other illegal, the remainder of this Agreement and the
application of such provision to other persons or circumstances shall not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal shall be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid and legal.
Page 6
<PAGE>
10. TERMINATION. This Agreement shall be terminable at any time by the
Company upon notice delivered to the Indemnitee; provided, however, that
any termination of this Agreement shall not affect the rights or obligations
of the parties hereto arising prior to such termination.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without giving effect to the
principles of conflict of laws thereof.
12. MODIFICATION SURVIVAL. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof. This Agreement may be
modified only by an instrument in writing signed by both parties hereto. The
provisions of the Agreement shall survive the death, disability or incapacity
of the Indemnitee, the resignation of the Indemnitee as a [director] [officer]
of the Company or the termination of the Indemnitee's service as a
[directors] [officer] of the Company and shall inure to the benefit of the
Indemnitee's heirs, executors and administrators.
13. CERTAIN TERMS. For purposes of this Agreement, references to "other
enterprises" shall include employer benefit plans; references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to any
employer benefit plan; and references to "serving at the request of the
Company" shall include any service as a director, officer, employee or agent
of the Company which imposes duties on, or involves services by, the
Indemnitee with respect to an employee benefit plan, its participants or
beneficiaries, references to the masculine shall include the feminine;
references to the singular shall include the plural and vice versa; and if
the Indemnitee acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee
benefit plan he shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to herein.
IN WITNESS WHEREOF, the Company and the Indemnity have executed this
Agreement as of the date set forth in the introductory paragraph hereof.
PRECEPT BUSINESS SERVICES, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
----------------------------------
[Indemnitee]
Page 7
<PAGE>
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF _______________)
)SS
COUNTY OF ______________)
I, ________________________ being first duly sworn, do depose and say as
follows:
1. This Indemnification Statement is submitted pursuant to the
Indemnification Agreement, dated as of ________________, between Precept
Business Services, Inc., a Texas corporation (the "Company") and the
undersigned.
2. I am requesting indemnification against charges, costs, expenses
(including attorneys' and others' fees and expenses), judgments, fines and
amounts paid in settlement, all of which (collectively, "Liabilities") have
been or will be incurred by me in connection with an actual or threatened
action, suit, proceeding or claim to which I am a party or am threatened to
be made a party.
3. With respect to all matters related to any such action, suit,
proceeding or claim, I am entitled to be indemnified as herein contemplated
pursuant to the aforesaid Indemnification Agreement.
4. Without limiting any other rights which I have or may have, I am
requesting indemnifications against Liabilities which have or may arise out
of __________________________________________________.
----------------------------------------
Name
Subscribed and sworn to before me, a Notary Public in and for said County
and State, this _______ day of ___________, 19___.
----------------------------------------
----------------------------------------
Name
[Notarial Seal]
My commission expires the ___ day of _______________, 19____.
Page 8
<PAGE>
EXHIBIT 2
UNDERTAKING
STATE OF ____________)
)SS
COUNTY OF____________)
I, _________________________ being first duly sworn, do depose and say
as follows:
1. This Undertaking is submitted pursuant to the Indemnification
Agreement, dated as of ________________________, between Precept Business
Services, Inc., (the "Company"), a Texas corporation and the undersigned.
2. I am requesting advancement of certain costs, charges and expenses
which I have incurred or will incur in defending an actual or pending civil
or criminal action, suit, proceeding or claim.
3. I hereby undertake to repay this advancement of expenses if it shall
ultimately be determined that I am not entitled to be indemnified by the
Company under the aforesaid Indemnification Agreement or otherwise.
4. The costs, charges and expenses for which advancement is requested
are, in general, all expenses related to ______________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________
Name
Subscribed and sworn to before, me, a Notary Public in and for said
County and State, this ______day of ________, 19___.
________________________________________
________________________________________
Name
[Notarial Seal]
My commission expires the __ day of ____________, 19___.
Page 9
<PAGE>
EXHIBIT 10.8
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of July 1, 1997, by and between
Precept Investors, Inc., a Texas corporation ("Investors"), Precept Business
Products, Inc., a Delaware corporation ("BPI"), Wingtip Couriers, Inc., a
Texas corporation ("Wingtip") and LSL Acquisition Corporation, a Texas
corporation ("LSL") (Investors, BPI, Wingtip and LSL are individually
hereinafter referred to as a "Borrower" and collectively as the "Borrowers"),
and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrowers have requested from Bank the credit accommodations described
below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed
to provide the Credits to Borrowers on the terms and conditions contained
herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and each Borrower hereby agree as
follows:
ARTICLE I
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrowers from time to time
up to and including June 30, 2000, not to exceed at any time the aggregate
principal amount of Ten Million Dollars ($10,000,000.00) LESS the original
principal amount of the Term Loan ("Line of Credit"), the proceeds of which
shall be used for working capital and acquisitions. Borrower's obligation to
repay advances under the Line of Credit shall be evidenced by a promissory
note substantially in the form of Exhibit A attached hereto ("Line of Credit
Note"), all terms of which are incorporated herein by this reference;
provided, that in the event the Term Loan is made by Bank to Borrowers
pursuant to the terms of this Agreement, the maximum aggregate principal
amount of the Line of Credit shall automatically be reduced to $10,000,000
less the original principal amount of the Term Loan.
(b) LIMITATION ON BORROWINGS. Outstanding borrowings under the Line
of Credit, to a maximum of the principal amount set forth above, shall not at
any time exceed an aggregate of eighty percent (80%) of the aggregate amount
of eligible accounts receivable of BPI, Wingtip, Relay Couriers Inc., and
LSL, plus thirty percent (30%) of the value of BPI's eligible inventory,
<PAGE>
(exclusive of work in process and inventory which is obsolete, unsaleable or
damaged), with value defined as fair market value; provided however, that
outstanding borrowings against BPI's inventory shall not at any time exceed
an aggregate of One Million Dollars ($1,000,000.00). All of the foregoing
shall be determined by Bank upon receipt and review of all collateral reports
required hereunder and such other documents and collateral information as
Bank may from time to time require. Borrower acknowledges that said borrowing
base was established by Bank with the assumption that, among other items, the
aggregate of all returns, rebates, discounts, credits and allowances for the
three (3) months immediately preceding any date of determination shall at all
times be less than five percent (5%) of Borrower's gross sales for said
period. If such dilution of Borrower's accounts for the immediately
preceding three (3) months at any time exceeds five percent (5%) of
Borrower's gross sales for said period, Bank, in its sole discretion, may
reduce the foregoing advance rate against eligible accounts receivable to a
percentage appropriate to reflect such additional dilution and/or establish
additional reserves against Borrower's eligible accounts receivable;
provided, however, that the Bank shall make no such reduction in excess of
twenty-five percent (25%) of the then existing advance rate during any 90-day
period.
As used herein, "eligible accounts receivable" shall consist solely of
trade accounts created in the ordinary course of Borrower's business, upon
which Borrower's right to receive payment is absolute and not contingent upon
the fulfillment of any condition whatsoever, and in which Bank has a
perfected security interest of first priority, and shall not include:
(i) any account which is more than sixty (60) days past due
(ii) that portion of any account for which there exists any right of
setoff, defense or discount (except regular discounts allowed in the
ordinary course of business to promote prompt payment) or for which any
defense or counterclaim has been asserted;
(iii) any account which represents an obligation of any state or
municipal government or of the United States government or any political
subdivision thereof (except accounts which represent obligations of the
United States government and for which Bank's forms N-138 and N-139 have
been duly executed and acknowledged);
(iv) any account which represents an obligation of an account debtor
located in a foreign country;
(v) any account which arises from the sale or lease to or performance
of services for, or represents an obligation
-2-
<PAGE>
of, an employee, affiliate, partner, member, parent or subsidiary of
Borrower;
(vi) that portion of any account which represents interim or progress
billings or retention rights on the part of the account debtor;
(vii) any account which represents an obligation of any account debtor
when twenty percent (20%) or more of Borrower's accounts from such account
debtor are not eligible pursuant to (i) above;
(viii) that portion of any account from an account debtor which
represents the amount by which Borrower's total accounts from said account
debtor exceeds twenty-five percent (25%) of Borrower's total accounts;
(ix) any account deemed ineligible by Bank when Bank, in its sole
discretion, deems the creditworthiness or financial condition of the
account debtor, or the industry in which the account debtor is engaged,
to be unsatisfactory.
(c) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at
any time exceed the maximum principal amount available thereunder, as set
forth above.
SECTION 1.2. TERM LOAN.
(a) TERM LOAN. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make a loan to Borrower in the aggregate
principal amount not to exceed Four Million Dollars ($4,000,000.00) ("Term
Loan"), the proceeds of which shall be used to refinance a portion of the
Line Of Credit. Borrower's obligation to repay the Term Loan shall be
evidenced by a promissory note substantially in the form of Exhibit B
attached hereto ("Term Note" and together with the Line of Credit Note, the
"Notes"), all terms of which are incorporated herein by this reference.
Bank's commitment to grant the Term Loan shall terminate on June 15, 2000.
The right of the Borrower to convert a portion of the Line of Credit to
the Term Loan may be exercised only once and is subject to the conditions of
Section 3.3 of this Agreement.
-3-
<PAGE>
Upon the conversion of a portion of the Line of Credit to a Term
Loan, Bank shall surrender to Borrowers the Line of Credit Note in exchange
for a replacement Line of Credit Note substantially in the form of the
promissory note attached hereto as Exhibit A, except that the stated
principal amount shall be $10,000,000 less the original principal amount of
the Term Loan.
(b) REPAYMENT. The principal amount of the Term Loan shall be repaid
in accordance with the provisions of the Term Note. In completing the blanks
in the Term Note on its issuance, the principal amount of the Term Note shall
be amortized over five (5) years, and principal shall be payable in equal
successive installments over said amortization term.
(c) PREPAYMENT. Borrower may prepay principal on the Term Loan solely
in accordance with the provisions of the Term Note.
SECTION 1.3. INTEREST/FEES.
(a) INTEREST. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note.
(b) COMMITMENT FEE. Borrower shall pay to Bank a non-refundable
commitment fee for the Line of Credit equal to $25,000 which fee shall be due
and payable in full on the original execution of the Loan Documents.
(c) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to
one fourth percent (0.25%) per annum (computed on the basis of a 360-day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit, which fee shall be calculated on a quarterly basis by Bank and shall
be due and payable by Borrower in arrears within ten (10) days after each
quarterly billing is sent by Bank. From and after the date that the Term Loan
is made pursuant to the terms of this Agreement, the unused commitment fee
shall be calculated on the basis that the maximum amount of the Line of
Credit is $10,000,000 less the original principal amount of the Term Loan.
SECTION 1.4. COLLECTION OF PAYMENTS. Borrowers authorize Bank to
collect all interest and fees due under each Credit by charging Borrower's
demand deposit account number 4439-824194 with Bank for the full amount
thereof. Should there be insufficient funds in any such demand deposit
account to pay all such sums when due, the full amount of such deficiency
shall be immediately due and payable by Borrower.
SECTION 1.5. COLLATERAL.
As security for all indebtedness of Borrowers to Bank subject hereto,
Investors, BPI, LSL and Wingtip each hereby
-4-
<PAGE>
grants to Bank security interests of first priority in all of their
respective accounts receivable, general intangibles and other rights to
payment. In addition, BPI hereby grants to Bank a security interest of first
priority in all of its inventory and equipment. In addition, Borrowers will
cause Relay Couriers, Inc. to grant security interests of first priority in
all of its accounts receivable, general intangibles and other rights to
payment as security for all indebtedness of Borrowers to bank.
All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand
for all costs and expenses incurred by Bank in connection with any of the
foregoing security, including without limitation, filing and recording fees
and costs of appraisals, audits and title insurance.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Each Borrower makes the following representations and warranties to
Bank, which representations and warranties shall survive the execution of
this Agreement and shall continue in full force and effect until the full and
final payment, and satisfaction and discharge, of all obligations of all
Borrowers to Bank subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Each Borrower is a corporation duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation. Each Borrower is qualified or licensed to do
business (and is in good standing as a foreign corporation, if applicable) in
all jurisdictions in which such qualification or licensing is required or in
which the failure to so qualify or to be so licensed could have a material
adverse effect on such Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes,
and each other document, contract and instrument required hereby or at any
time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal,
valid and binding agreements and obligations of each Borrower or the party
which executes the same, enforceable in accordance with their respective
terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrowers of each of the Loan Documents do not violate any provision of any
law or regulation, or contravene any
-5-
<PAGE>
provision of the Articles of Incorporation or By-Laws of any Borrower, or
result in any breach of or default under any material contract, obligation,
indenture or other instrument to which Borrower is a party or by which any
Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of any
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of any Borrower other than those disclosed
by Borrowers to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. Each of (a) the
audited financial statement of Investors dated June 30, 1996, (b) the audited
financial statement of BPI dated June 30, 1996 and (c) the interim unaudited
consolidated financial statement of Investors dated April 30, 1997 (i) is
complete and correct and presents fairly the financial condition of
Borrowers, (ii) discloses all liabilities of Borrowers that are required to
be reflected or reserved against under generally accepted accounting
principles, whether liquidated or unliquidated, fixed or contingent, and
(iii) has been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied (it being understood that all
interim statements are subject to year end audit adjustments and are not
required to have footnote disclosures). A true copy of each such statement
has been delivered to Bank prior to the date hereof. Since the date of such
financial statement there has been no material adverse change in the
financial condition of any Borrower, except as has been previously disclosed
to Bank in writing relating to the losses incurred by Precept Builders, Inc.,
nor has any Borrower mortgaged, pledged, granted a security interest in or
otherwise encumbered any of its assets or properties except in favor of Bank
or as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. No Borrower has any knowledge of any
pending assessments or adjustments of its respective income tax payable with
respect to any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which any Borrower is a party or by which any
Borrower may be bound that requires the subordination in right of payment of
any of Borrower's obligations subject to this Agreement to any other
obligation of such Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Each Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any,
-6-
<PAGE>
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
SECTION 2.9. ERISA. Each Borrower is in compliance in all material
respects with all applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended or recodified from time to time ("ERISA");
no Borrower has violated any provision of any defined employee pension
benefit plan (as defined in ERISA) maintained or contributed to by any such
Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has
occurred and is continuing with respect to any Plan initiated by any
Borrower; each Borrower has met its minimum funding requirements under ERISA
with respect to each Plan; and each Plan will be able to fulfill its benefit
obligations as they come due in accordance with the Plan documents and under
generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. No Borrower is in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrowers
to Bank in writing prior to the date hereof, each Borrower is in compliance
in all material respects with all applicable federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of such Borrower's
operations and/or properties, including without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Resource Conservation
and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as
any of the same may be amended, modified or supplemented from time to time.
None of the operations of any Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment. No Borrower has a material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to grant any of the Credits is subject to the fulfillment to Bank's
satisfaction of all of the following conditions:
-7-
<PAGE>
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
granting of each of the Credits shall be satisfactory to Bank's counsel.
(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes;
(ii) Corporate Borrowing Resolution and Certificate of
Incumbency for Precept Investors, Inc.;
(iii) Corporate Borrowing Resolution and Certificate of
Incumbency for Precept Business Products, Inc.;
(iv) Corporate Borrowing Resolution and Certificate of
Incumbency for Wingtip Couriers, Inc.;
(v) Corporate Borrowing Resolution and Certificate of
Incumbency for LSL Acquisition Corporation;
(vi) Corporate Resolution: Pledge of Assets and Certificate
of Incumbency for Relay Couriers, Inc.;
(vii) Security Agreement: Rights to Payment for Precept
Investors, Inc.;
(viii) Security Agreement: Rights to Payment/Inventory for
Precept Business Products, Inc.;
(ix) Security Agreement: Equipment for Precept Business
Products, Inc.;
(x) Security Agreement: Rights to Payment for
Wingtip Couriers, Inc.;
(xi) Security Agreement: Rights to Payment for LSL Acquisition Corporation;
(xii) Security Agreement: Rights to Payment for Relay Couriers, Inc.;
(xii) UCC Financing Statements; and
(xiii) Such other documents as Bank may require under any other Section of
this Agreement.
(c) FINANCIAL CONDITION. Except as has been previously disclosed to
Bank in writing relating to the losses incurred by Precept Builders, Inc.,
there shall have been no material adverse change, as determined by Bank, in
the financial condition or business of any Borrower, nor any material
decline, as determined by Bank, in the market value of any collateral
required hereunder or a substantial or material portion of the assets of any
Borrower.
(d) INSURANCE. Each Borrower shall have delivered to Bank evidence of
insurance coverage on all such Borrower's property, in form, substance,
amounts, covering risks and issued by companies satisfactory to Bank, and
where required by Bank, with loss payable endorsements in favor of Bank.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The
obligation of Bank to make each extension of credit requested
-8-
<PAGE>
by any Borrower hereunder shall be subject to the fulfillment to Bank's
satisfaction of each of the following conditions:
(a) COMPLIANCE. The representations and warranties contained herein
and in each of the other Loan Documents shall be true on and as of the date
of the signing of this Agreement and on the date of each extension of credit
by Bank pursuant hereto, with the same effect as though such representations
and warranties had been made on and as of each such date, and on each such
date, no Event of Default as defined herein, and no condition, event or act
which with the giving of notice or the passage of time or both would
constitute such an Event of Default, shall have occurred and be continuing or
shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
Section 3.3. ADDITIONAL CONDITIONS TO MAKING OF THE TERM LOAN. The
obligation of Bank to make the Term Loan shall be subject to the fulfillment
to Bank's satisfaction of each of the following conditions:
(a) The consolidated EBITDA of Investors must be equal to or greater
than $4,000,000 for the twelve (12) month period ending on the last day of
the calendar month immediately preceding the date Borrower's request the Bank
to make the Term Loan. "EBITDA" is defined as (a) net income, after income
taxes, determined in conformity with GAAP; plus (b) income taxes deducted in
determining net income; plus (c) interest expense deducted in determining net
income; plus (d) amortization and depreciation expenses deducted in
determining net income; plus (e) other non-cash charges (excluding accruals
in the normal course of business), deducted in determining net income.
(b) Borrower must request Bank in writing to make the Term Loans no
later than June 15, 2000.
(c) Borrower must execute and deliver the Term Note in the form of
Exhibit "B" attached hereto, with all blanks appropriately completed.
ARTICLE IV
AFFIRMATIVE COVENANTS
Each Borrower covenants that so long as Bank remains committed to extend
credit to any Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of any Borrower to Bank under any of
the Loan Documents remain outstanding, and until payment in full of all
-9-
<PAGE>
obligations of all Borrowers subject hereto, each Borrower shall, unless Bank
otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at
the times and place and in the manner specified therein, and immediately upon
demand by Bank, the amount by which the outstanding principal balance of any
of the Credits at any time exceeds any limitation on borrowings applicable
thereto.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records
in accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the
same, and to inspect the properties of any Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) and not later than 120 days after and as of the end of each fiscal
year, an audited, consolidated financial statement of Investors and all
subsidiaries, prepared by a certified public accountant acceptable to Bank,
to include balance sheet, income statement and statement of cash flow;
(b) not later than 30 days after and as of the end of each month, a
consolidating financial statement of Investors, all subsidiaries, prepared by
Investors, to include balance sheet, income statement and consolidated
statement of cash flow;
(c) contemporaneously with each monthly financial statement of Borrower
required hereby, a borrowing base certificate, a summary inventory collateral
report, and a reconciliation of accounts;
(d) contemporaneously with each monthly financial statement of Borrower
required hereby, a certificate of the chief executive officer or chief
financial officer of Borrower that said financial statements are accurate and
that there exists no Event of Default nor any condition, act or event which
with the giving of notice or the passage of time or both would constitute an
Event of Default;
(e) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which such
-10-
<PAGE>
Borrower is organized and/or which govern such Borrower's continued existence
and with the requirements of all laws, rules, regulations and orders of any
governmental authority applicable to such Borrower and/or its business other
than those laws, rules or regulations the noncompliance with which would not
have a material adverse effect on Borrowers, taken as a whole.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that
of such Borrower, including but not limited to fire, extended coverage,
public liability, flood, property damage and workers' compensation, with all
such insurance carried with companies and in amounts satisfactory to Bank,
and deliver to Bank from time to time at Bank's request schedules setting
forth all insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
such Borrower's business in good repair and condition, and from time to time
make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and
state and local property taxes and assessments, except such (a) as such
Borrower may in good faith contest or as to which a bona fide dispute may
arise, and (b) for which such Borrower has made provision, to Bank's
satisfaction, for eventual payment thereof in the event Borrower is obligated
to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of
any material litigation to Borrower's knowledge pending or threatened against
any Borrower.
SECTION 4.9. FINANCIAL CONDITION. Maintain such Investors financial
condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to
the extent modified by the definitions herein), with compliance determined
commencing with Investors' financial statements for the period ending March
31, 1997:
(a) Current Ratio not at any time less than 1.20 to 1.0 as of the end
of each fiscal quarter, with "Current Ratio" defined as total current assets
divided by total current liabilities.
(b) Debt Service Coverage Ratio not less than 1.5 to 1.0 as of the end
of each fiscal quarter with "Debt Service Coverage Ratio" defined as EBITDA
for the twelve (12) month period ending on the last day of the immediately
preceding fiscal quarter
-11-
<PAGE>
divided by the sum of the following (without duplication) (a) total interest
expense deducted in determining net income for the twelve (12) month period
ending on the last day of the immediately preceding fiscal quarter; plus (b)
all current maturities of principal with respect to all unsubordinated
long-term indebtedness, excluding any amount outstanding under the Line of
Credit, of Borrowers as of the last day of the immediately preceding fiscal
quarter.
(c) Prior to the making of the Term Loan, Senior Funded Debt to EBITDA
Ratio not greater than 5.0 to 1.0 as of the end of each fiscal quarter, with
"Senior Funded Debt" defined as total funded unsubordinated indebtedness,
according to GAAP and including capital leases, of Borrowers and with "Senior
Funded Debt to EBITDA Ratio" defined as Senior Funded Debt divided by EBITDA
for the twelve (12) month period ending on the last day of the immediately
preceeding fiscal quarter.
(d) From and after the making of the Term Loan, Senior Funded Debt to
EBITDA Ratio not greater than 3.5 to 1.0 as of the end of each fiscal quarter.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than ten
(10) business days after the occurrence of each such event or matter) give
written notice to Bank in reasonable detail of: (a) the occurrence of any
Event of Default, or any condition, event or act which with the giving of
notice or the passage of time or both would constitute an Event of Default;
(b) any change in the name or the organizational structure of Borrower; (c)
the occurrence and nature of any Reportable Event or Prohibited Transaction,
each as defined in ERISA, or any funding deficiency with respect to any Plan;
or (d) any termination or cancellation of any insurance policy which any
Borrower is required to maintain, or any uninsured or partially uninsured
loss through liability or property damage, or through fire, theft or any
other cause affecting any Borrower's property.
SECTION 4.11. PRECEPT BUILDERS, INC. Promptly, but in no event later
than the earlier of (a) one hundred eighty (180) days after the execution of
this Agreement and (b) the merger of Borrower and U.S Transportation Systems,
Inc., divest at least a ninety-five percent (95%) ownership interest in
Precept Builders, Inc.
ARTICLE V
NEGATIVE COVENANTS
Each Borrower further covenants that so long as Bank remains committed
to extend credit to any Borrower pursuant hereto, or any liabilities (whether
direct or contingent, liquidated or unliquidated) of any Borrower to Bank
under any of the Loan Documents remain outstanding, and until payment in full
of all
-12-
<PAGE>
obligations of all Borrowers subject hereto, no Borrower will, without Bank's
prior written consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits
except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make additional fixed asset
acquisitions, other than in connection with a merger or acquisition, in any
fiscal year in excess of an aggregate of $500,000.
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to
Bank, (b) any other liabilities of Borrower existing as of, and disclosed to
Bank prior to, the date hereof, (c) inter-company indebtedness among
Borrowers, and (d) indebtedness in addition to the indebtedness permitted by
clauses (a) through (c) of this subsection 5.3, not to exceed $2,000,000.00
in the aggregate at any one time outstanding.
SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature
of Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity in excess of one million
dollars ($1,000,000); nor sell, lease, transfer or otherwise dispose of all
or a substantial or material portion of Borrower's assets except in the
ordinary course of its business.
SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for
deposit or collection in the ordinary course of business), accommodation
endorser or otherwise for, nor pledge or hypothecate any assets of Borrower
as security for, any liabilities or obligations of any other person or
entity, except (a) any of the foregoing in favor of Bank; (b) guaranties
existing on the date hereof and set forth on Schedule 5.5 and all such
replacements, renewal, extensions, or amendments thereof so long as the
amount of such guaranties after such replacement, renewal, extension or
amendment shall not exceed the amount of such guaranties which were
outstanding immediately prior to such replacement, renewal, extension, or
amendment and with respect to the replacement of any guaranties, the terms
and conditions of any replacement guaranty are not materially different from
the guarantee being replaced; (c) guaranties with respect to customary
indemnification and purchase price adjustment obligations incurred in
connection with asset acquisitions, leases, and asset dispositions and
guaranties of any Borrower or
-13-
<PAGE>
any Borrowers' subsidiaries as a guarantor of a lessee under any lease in
which any Borrower or any such subsidiary is the lessee so long as such lease
is permitted hereunder; (d) guaranties incurred in the ordinary course of
business (i) with respect to surety and appeal bonds and return-of-money
bonds and other similar obligations, not exceeding at any time outstanding
$250,000 in an aggregate liability; and (ii) with respect to performance
bonds; (e) guaranties with respect to indebtedness permitted by Section 5.3;
(f) In addition to the guaranties permitted by clauses (a) through (e) above,
Borrowers may become and remain liable with respect to guaranties not to
exceed in the aggregate at any one time outstanding $500,000. Any amounts
that are included in the calculation of this clause (f) shall not be included
in calculating the guaranties permitted under any other clauses of this
Section 5.5 and any amounts that are included shall not be included in
calculating guaranties permitted under this clause (f) of this Section 5.5.
SECTION 5.6. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity, except (a) any of the foregoing
existing as of, and disclosed to Bank prior to, the date hereof, (b)
additional investments in any person or entity, in amounts not to exceed an
aggregate of $1,000,000 in any fiscal year, and (c) investments in readily
marketable securities.
SECTION 5.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock
now or hereafter outstanding, nor redeem, retire, repurchase or otherwise
acquire any shares of any class of Borrower's stock now or hereafter
outstanding.
SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor
of Bank or which is existing as of, and disclosed to Bank in writing prior
to, the date hereof.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute
an "Event of Default" under this Agreement:
(a) Any Borrower shall fail to pay within five (5) business days of
when due any principal, interest, fees or other amounts payable under any of
the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made
-14-
<PAGE>
by any Borrower or any other party under this Agreement or any other Loan
Document shall prove to be incorrect, false or misleading in any material
respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other
Loan Document (other than those referred to in subsections (a) and (b)
above), and with respect to any such default which by its nature can be
cured, such default shall continue for a period of thirty (30) days from its
occurrence.
(d) Any default in the payment or performance of any material
obligation, or any defined event of default, under the terms of any contract
or instrument (other than any of the Loan Documents) pursuant to which any
Borrower has incurred any debt or other liability to any person or entity,
including Bank.
(e) The filing of a notice of any material judgment lien against any
Borrower; or the recording of any material abstract of judgment against any
Borrower in any county in which such Borrower has an interest in real
property; or the service of any material notice of levy and/or of any
material writ of attachment or execution, or other like process, against the
assets of any Borrower; or the entry of any material judgment against any
Borrower; provided any such judgement, notice of levy and/or writ of
attachment or execution or other like process remains undischarged,
unvacated, unbonded, or unstayed for a period of thirty (30) days or in any
event later than five (5) days prior to the date of any execution of such
judgement, levy, writ of attachment or similar action.
(f) Any Borrower shall become insolvent, or shall suffer or consent to
or apply for the appointment of a receiver, trustee, custodian or liquidator
of itself or any of its property, or shall generally fail to pay its debts as
they become due, or shall make a general assignment for the benefit of
creditors; any Borrower shall file a voluntary petition in bankruptcy, or
seeking reorganization, in order to effect a plan or other arrangement with
creditors or any other relief under the Bankruptcy Reform Act, Title 11 of
the United States Code, as amended or recodified from time to time
("Bankruptcy Code"), or under any state or federal law granting relief to
debtors, whether now or hereafter in effect; or any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for
debtors is filed or commenced against any Borrower, or any Borrower shall
file an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition; or any Borrower shall be adjudicated
a bankrupt, or an order for relief shall be entered against any Borrower by
any court of competent jurisdiction under the Bankruptcy Code or any other
applicable state or federal law
-15-
<PAGE>
relating to bankruptcy, reorganization or other relief for debtors.
(g) There shall exist or occur any event or condition which Bank in
good faith believes materially impairs, or is substantially likely to
materially impair, the prospect of payment or performance by any Borrower of
its obligations under any of the Loan Documents.
(h) The dissolution or liquidation of any Borrower; or any Borrower, or
any of its directors, stockholders or members, shall take action seeking to
effect the dissolution or liquidation of any Borrower.
(i) Any change in ownership during the term of this Agreement of an
aggregate of fifty percent (50%) or more of the common stock of any Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default:
(a) all principal and accrued and unpaid interest outstanding under each of
the Loan Documents, any term thereof to the contrary notwithstanding, shall
at Bank's option and without notice become immediately due and payable
without presentment, demand, or any notices of any kind, including without
limitation notice of nonperformance, notice of protest, protest, notice of
dishonor, notice of intention to accelerate or notice of acceleration, all of
which are hereby expressly waived by each Borrower; (b) the obligation, if
any, of Bank to extend any further credit under any of the Loan Documents
shall immediately cease and terminate; and (c) Bank shall have all rights,
powers and remedies available under each of the Loan Documents, or accorded
by law, including without limitation the right to resort to any or all
security for any of the Credits and to exercise any or all of the rights of a
beneficiary or secured party pursuant to applicable law. All rights, powers
and remedies of Bank may be exercised at any time by Bank and from time to
time after the occurrence of an Event of Default, are cumulative and not
exclusive, and shall be in addition to any other rights, powers or remedies
provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank
in exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver of such right, power or remedy; nor shall
any single or partial exercise of any such right, power or remedy preclude,
waive or otherwise affect any other or further exercise thereof or the
exercise of any other right, power or remedy. Any waiver, permit, consent or
approval of any kind by Bank of any breach of
-16-
<PAGE>
or default under any of the Loan Documents must be in writing and shall be
effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any
provision of this Agreement must be in writing delivered to each party at the
following address:
BORROWERS c/o Precept Investors, Inc.
1909 Woodall Rodgers Freeway, Ste. 500
Dallas, Texas 75201
Attn: CFO & General Counsel
BANK: WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
Dallas Regional Commercial Banking Office
1445 Ross Avenue, 3rd Floor
Dallas, Texas 75202
Attn: Mr. Brent Bertino or Mr. Drew Keith
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit
in the U.S. mail, first class and postage prepaid; and (c) if sent by
telecopy, upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrowers shall pay
to Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all reasonable allocated costs of Bank's in-house
counsel to the extent permissible), expended or incurred by Bank in
connection with (a) Bank's continued administration hereof and thereof, and
the preparation of any amendments and waivers hereto and thereto, (b) the
enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (c) the prosecution
or defense of any action in any way related to any of the Loan Documents,
including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary
proceeding, contested matter or motion brought by Bank or any other person)
relating to any Borrower or any other person or entity. With regard to any
expenses or fees expended or incurred by Bank resulting from any actions
under Section 4.2, Borrower shall be liable for no more than $3,000 annually.
-17-
<PAGE>
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that no Borrower may assign or transfer its interest hereunder without Bank's
prior written consent. Bank reserves the right to sell, assign, transfer,
negotiate or grant participations in all or any part of, or any interest in,
Bank's rights and benefits under each of the Loan Documents; provided that
the amount of commitments and loans of the Bank being assigned shall in no
event be less than the lesser of (i) $3,000,000 or (ii) the entire amount of
the commitment and loans of Bank. In case of an assignment authorized under
this subsection 7.4, the assignee shall have, to the extent of such
assignment, the same rights, benefits, and obligations as it would have if it
were the Bank. Bank may sell participations in all or any part of any loans
made by it to Borrowers; provided, however, that, Borrowers shall continue to
deal solely and directly with Bank in connection with Bank's rights and
obligations under this Agreement; provided, further, that all amounts payable
by Borrower's hereunder shall be calculated as if Bank had not sold such
participation and the holder of any such participation shall not be entitled
to require Bank to take or omit to take any action hereunder; provided,
further, that the amount of loans of Bank being participated shall in no
event be less than the lesser of (a) $3,000,000 or (b) the entire amount of
loans of Bank. Bank shall not, as between Borrower and Bank, be relieved of
any of its obligations hereunder as a result of any sale, assignment,
transfer, or negotiation of, or granting of participation in, all or any part
of the Loan, the Notes, or other obligations owed to Bank. In connection
therewith, Bank may disclose all documents and information which Bank now has
or may hereafter acquire relating to any of the Credits, any Borrower or its
business, or any collateral required hereunder, with prior written notice to
Borrower.
SECTION 7.5. AMENDMENT. This Agreement may be amended or modified
only in writing signed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or indirect
cause of action or claim in connection with, this Agreement or any other of
the Loan Documents to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under
-18-
<PAGE>
applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity without invalidating the remainder of such
provision or any remaining provisions of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall
constitute one and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
SECTION 7.11. SAVINGS CLAUSE. It is the intention of the parties to
comply strictly with applicable usury laws. Accordingly, notwithstanding any
provision to the contrary in the Loan Documents, in no event shall any Loan
Documents require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
applicable laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the "Maximum Rate"). If
any such excess interest is called for, contracted for, charged, taken,
reserved or received in connection with any Loan Documents, or in any
communication by Bank or any other person to any Borrower or any other
person, or in the event that all or part of the principal or interest hereof
or thereof shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of
interest contracted for, charged, taken, reserved or received on the amount
of principal actually outstanding from time to time under the Loan Documents
shall exceed the Maximum Rate, then in such event it is agreed that: (i) the
provisions of this paragraph shall govern and control; (ii) neither Borrowers
nor any other person or entity now or hereafter liable for the payment of any
Loan Documents shall be obligated to pay the amount of such interest to the
extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Bank, notwithstanding this paragraph, shall
be credited against the then unpaid principal balance hereof or thereof, or
if any of the Loan Documents has been or would be paid in full by such
credit, refunded to Borrowers; and (iv) the provisions of each of the Loan
Documents, and any other communication to any Borrower, shall immediately be
deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the Maximum Rate. The right to accelerate
the maturity of the Loan Documents does not include the right to accelerate,
collect or charge unearned interest, but only such interest that has
otherwise accrued as of the date of acceleration. Without limiting the
foregoing, all calculations of the rate of interest contracted for, charged,
taken, reserved or received in connection with any of the Loan Documents
which
-19-
<PAGE>
are made for the purpose of determining whether such rate exceeds the Maximum
Rate shall be made to the extent permitted by applicable laws by amortizing,
prorating, allocating and spreading during the period of the full term of
such Loan Documents; including all prior and subsequent renewals and
extensions hereof or thereof, all interest at any time contracted for,
charged, taken, reserved or received by Bank. The terms of this paragraph
shall be deemed to be incorporated into each of the other Loan Documents.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes
is relevant to Bank for the purpose of determining the Maximum Rate, Bank
hereby elects to determine the applicable rate ceiling under such Article by
the indicated (weekly) rate ceiling from time to time in effect, subject to
Bank's right subsequently to change such method in accordance with applicable
law, as the same may be amended or modified from time to time.
SECTION 7.12. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the
occurrence of an Event of Default except Section 6.1(d), (a) each Borrower
hereby authorizes Bank, at any time and from time to time, without notice,
which is hereby expressly waived by each Borrower, and whether or not Bank
shall have declared the Credits to be due and payable in accordance with the
terms hereof, to set off against, and to appropriate and apply to the payment
of, any Borrower's obligations and liabilities under the Loan Documents
(whether matured or unmatured, fixed or contingent, liquidated or
unliquidated), any and all amounts owing by Bank to any Borrower (whether
payable in U.S. dollars or any other currency, whether matured or unmatured,
and in the case of deposits, whether general or special (except trust and
escrow accounts), time or demand and however evidenced), and (b) pending any
such action, to the extent necessary, to hold such amounts as collateral to
secure such obligations and liabilities and to return as unpaid for
insufficient funds any and all checks and other items drawn against any
deposits so held as Bank, in its sole discretion, may elect. Each Borrower
hereby grants to Bank a security interest in all deposits and accounts
maintained with Bank and with any other financial institution to secure the
payment of all obligations and liabilities of Borrowers to Bank under the
Loan Documents.
SECTION 7.13. BUSINESS PURPOSE. Each Borrower represents and warrants
that the Credits are for a business, commercial, investment, agricultural or
other similar purpose and not primarily for a personal, family or household
use.
SECTION 7.14. JOINT AND SEVERAL LIABILITY.
(a) Each Borrower has determined and represents to Bank that it is in
its best interests and in pursuance of its legitimate business purposes to
induce Bank to extend credit
-20-
<PAGE>
pursuant to this Agreement. Each Borrower acknowledges and represents that
its business is related to the business of the other Borrowers, the
availability of the commitments provided herein benefits all Borrowers, and
advances and other credit extensions made hereunder will inure to the benefit
of Borrowers individually and as a group.
(b) Each Borrower has determined and represents to Bank that it has,
and after giving effect to the transactions contemplated by this Agreement
will have, assets having a fair saleable value in excess of its debts, after
giving effect to any rights of contribution or subrogation that may be
available to such Borrower, and each Borrower has, and will have, access to
adequate capital for the conduct of its business and the ability to pay its
debts as such debts mature.
(c) Each Borrower agrees that it is jointly and severally liable to
Bank for, and each Borrower agrees to pay to Bank when due the full amount
of, all indebtedness now existing or hereafter arising to Bank under or in
connection with the Credits and all modifications, extensions and renewals
thereof, including without limitation all advances disbursed to any Borrower
under the Credits, all interest which accrues thereon and all fees, costs and
expenses chargeable to Borrowers or any of them in connection therewith.
(d) The liability of each Borrower for the Credits shall be reinstated
and revived and the rights Of Bank shall continue if and to the extent that
for any reason any amount at any time paid on account of any of the Credits
is rescinded or must otherwise be restored by Bank, whether as a result of
any proceedings in bankruptcy or reorganization or otherwise, all as though
such amount had not been paid.
(e) Each Borrower authorizes Bank, and without affecting such
Borrower's liability for the Credits, from time to time to: (i) alter,
compromise, extend, accelerate or otherwise change the time for payment of,
or otherwise change the terms of, the liabilities and obligations of any
other Borrower to Bank on account of any of the Credits; (ii) take and hold
security from any other Borrower for the payment of any of the Credits, and
exchange, enforce, waive, subordinate or release any such security; (iii)
apply such security and direct the order or manner of sale thereof, including
without limitation, a non-judicial sale permitted by the terms of the
controlling security agreement or deed of trust, as Bank in its discretion
may determine; (iv) release or substitute any one or more of the endorsers or
any guarantors of any of the Credits, or any other party obligated thereon;
and (e) apply payments received by Bank from any other Borrower to
indebtedness of such other Borrower to Bank other than the Credits.
-21-
<PAGE>
(f) Each Borrower represents and warrants to Bank that it has
established adequate means of obtaining from all other Borrowers on a
continuing basis financial and other information pertaining to such
Borrowers' financial condition, and each Borrower agrees to keep adequately
informed from such means of any facts, events or circumstances which might in
any way affect its risks hereunder. Each Borrower further agrees that Bank
shall have no obligation to disclose to it any information or material about
any other Borrower that is acquired by Bank in any manner.
(e) Each Borrower waives any right to require Bank to: (i) proceed
against any other Borrower or any other person; (ii) marshal assets or
proceed against or exhaust any security held from any of the Borrowers or any
other person; (iii) take any action or pursue any other remedy in Bank's
power; or (iv) make any presentment or demand for performance, or give any
notices of any kind, including without limitation, any notice of
nonperformance, protest, notice of protest, notice of dishonor, notice of
intention to accelerate or notice of acceleration hereunder or in connection
with any obligations or evidences of Credits held by Bank as security for or
which constitute in whole or in part the Credits guaranteed hereunder, or in
connection with the creation of new or additional Credits.
(f) Each Borrower waives any defense to its obligations hereunder based
upon or arising by reason of: (i) any disability or other defense of any of
the Borrowers or any other person; (ii) the cessation or limitation from any
cause whatsoever, other than payment in full, of the Credits of any of the
Borrowers or any other person; (iii) any lack of authority of any officer,
director, partner, agent or any other person acting or purporting to act on
behalf of any of the Borrowers which is a trust, corporation, partnership or
other type of entity, or any defect in the formation of any such Borrower;
(iv) the application by any of the Borrowers of the proceeds of any Credits
for purposes other than the purposes represented by Borrowers to, or intended
or understood by, Bank or Borrower; (v) any act or omission by Bank which
directly or indirectly results in or aids the discharge of any of the
Borrowers or any portion of the Credits by operation of law or otherwise, or
which in any way impairs or suspends any rights or remedies of Bank against
any of the Borrowers; (vi) any impairment of the value of any interest in any
security for the Credits or any portion thereof, including without
limitation, the failure to obtain or maintain perfection or recordation of
any interest in any such security, the release of any such security without
substitution, and/or the failure to preserve the value of, or to comply with
applicable law in disposing of, any such security; or (vii) any modification
of the Credits, in any form whatsoever, including any modification made after
revocation hereof to any Credits incurred prior to such revocation, and
including without limitation the renewal extension, acceleration or other
change in time for payment of,
-22-
<PAGE>
or other change in the terms of, the Credits or any portion thereof,
including increase or decrease of the rate of interest thereon. Until all
Credits shall have been paid in full, no Borrower shall have any right of
subrogation, and each Borrower waives any right to enforce any remedy which
Bank now has or may hereafter have against any of the Borrowers or any other
person, and waives any benefit of, or any right to participate in, any
security now or hereafter held by Bank. Each Borrower further waives all
rights and defenses such Borrower may have arising out of (A) any election of
remedies by Bank, even though that election of remedies, such as a
non-judicial foreclosure with respect to any security for any portion of the
Credits, destroys its rights of subrogation or its rights to proceed against
any other Borrower for reimbursement, or (B) any loss of rights Borrower may
suffer by reason of any rights, powers or remedies of any of other Borrower
in connection with any anti-deficiency laws or any other laws limiting,
qualifying or discharging any Borrower's indebtedness, whether by operation
of law or otherwise, including any rights Borrower may have to a fair market
value hearing to determine the size of a deficiency following any trustee's
foreclosure sale or other disposition of any real property security for any
portion of the Credits.
(g) Each Borrower further waives (i) each and every right to which it
may be entitled by virtue of any suretyship law, including without
limitation, any rights arising pursuant to Rule 31 of the Texas Rules of
Civil Procedure, Section 17.001 of the Texas Civil Practice and Remedies Code
and Chapter 34 of the Texas Business and Commerce Code, as the same may be
amended from time to time, and (ii) without limiting any of the waivers set
forth herein, any other fact or event that, in the absence of this provision,
would or might constitute or afford a legal or equitable discharge or release
of or defense to such Borrower.
(h) If any of the waivers herein is determined to be contrary to any
applicable law or public policy, such waiver shall be effective only to the
extent permitted by law.
(i) It is the position of the Borrowers that each Borrower benefits
from the Credits that have been made available by Bank under this Agreement
and from each extension of credit thereunder, regardless of whether such
credit is disbursed to a joint account of Borrowers or to or for the account
of any Borrower.
SECTION 7.15. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan
-23-
<PAGE>
Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary Proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
Loan Documents. The arbitration shall be conducted at a location in Texas
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set
forth herein shall control. All statutes of limitation applicable to any
Dispute shall apply to any arbitration Proceeding. All discovery activities
shall be expressly limited to matters directly relevant to the Dispute being
arbitrated. Judgment upon any award rendered in an arbitration may be
entered in any court having jurisdiction; provided however, that nothing
contained herein shall be deemed to be a waiver by any party that is a bank
of the protections afforded to it under 12 U.S.C. Section 91 or any similar
applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the Texas State Bar with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered
to resolve Disputes by summary rulings in response to motions filed prior to
the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of Texas, (ii) may grant any
remedy or relief that a court of the state of Texas could order or grant
within the scope hereof and
-24-
<PAGE>
such ancillary relief as is necessary to make effective any award, and (iii)
shall have the power to award recovery of all costs and fees, to impose
sanctions and to take such other actions as they deem necessary to the same
extent a judge could pursuant to the Federal Rules of Civil Procedure, the
Texas Rules of Civil Procedure or other applicable law. Any Dispute in which
the amount in controversy is $5,000,000 or less shall be decided by a single
arbitrator who shall not render an award of greater than $5,000,000
(including damages, costs, fees and expenses) By submission to a single
arbitrator, each party expressly waives any right or claim to recover more
than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (i) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (ii) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of Texas, and (iii) the parties shall have in addition to
the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether
the findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of Texas. Judgment confirming an award in such
a proceeding may be entered only if a court determines the award is supported
by substantial evidence and not based on legal error under the substantive
law of the state of Texas.
(f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision
shall survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties.
-25-
<PAGE>
NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
PRECEPT INVESTORS, INC.
By: /s/ Scott B. Walker By: /s/ Brent Bertram
------------------------------ -------------------------------
Title: Chief Financial Officer Title: Banking Officer
--------------------------- ----------------------------
WINGTIP COURIERS, INC. PRECEPT BUSINESS PRODUCTS, INC.
By: /s/ Scott B. Walker By: /s/ Scott B. Walker
------------------------------ -------------------------------
Title: Chief Financial Officer Title: Chief Financial Officer
--------------------------- ----------------------------
LSL ACQUISITION CORPORATION
By: /s/ Scott B. Walker
------------------------------
Title: Chief Financial Officer
---------------------------
-26-
<PAGE>
Exhibit "A"
REVOLVING LINE OF CREDIT NOTE
$10,000,000.00
Dallas, Texas
July 1, 1997
FOR VALUE RECEIVED, the undersigned PRECEPT INVESTORS, INC., PRECEPT
BUSINESS PRODUCTS, INC., LSL ACQUISITION CORPORATION, AND WINGTIP COURIERS,
INC. (collectively, the "Borrowers") each promises to pay to the order of
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank") at its office at 1445
Ross Avenue, Suite 300, Dallas, Texas, or at such other place as the holder
hereof may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of Ten Million Dollars
($10,000,000.00), or so much thereof as may be advanced and be outstanding,
with interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning
set forth at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in Texas are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2) or three (3) months, as designated by
Borrower, during which all or a portion of the outstanding principal balance
of this Note bears interest determined in relation to LIBOR; provided
however, that no Fixed Rate Term may be selected for a principal amount less
than one hundred thousand Dollars ($100,000); and provided further, that no
Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If
any Fixed Rate Term would end on a day which is not a Business Day, then such
Fixed Rate Term shall be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) and determined pursuant to the following formula:
BASE LIBOR
LIBOR = -------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans
<PAGE>
making reference thereto, on the first day of a Fixed Rate Term for delivery
of funds on said date for a period of time approximately equal to the number
of days in such Fixed Rate Term and in an amount approximately equal to the
principal amount to which such Fixed Rate Term applies. Borrower understands
and agrees that Bank may base its quotation of the Inter-Bank Market Offered
Rate upon such offers or other market indicators of the Inter-Bank Market as
Bank in its discretion deems appropriate including, but not limited to, the
rate offered for U.S. dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor)
for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal
Reserve Board, as amended), adjusted by Bank for expected changes in such
reserve percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as
the basis upon which effective rates of interest are calculated for those
loans making reference thereto, and is evidenced by the recording thereof
after its announcement in such internal publication or publications as Bank
may designate.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed,
unless such calculation would result in a usurious rate, in which case
interest shall be computed on the basis of a 365/366-day year, as the case
may be, actual days elapsed) at the lesser of (i) either (A) a fluctuating
rate per annum equal to the Prime Rate in effect from time to time, or (B) a
fixed rate per annum determined by Bank to be equal to the LIBOR Margin above
LIBOR in effect on the first day of the applicable Fixed Rate Term, or (ii)
the Maximum Rate. When interest is determined in relation to the Prime Rate,
each change in the rate of interest hereunder shall become effective on the
date each Prime Rate change is announced within Bank. With respect to each
LIBOR selection hereunder, Bank is hereby authorized to note the date,
principal amount, interest rate and Fixed Rate Term applicable thereto and
any payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which
notations shall be prima facie evidence of the accuracy of the information
noted.
(b) SELECTION OF INTEREST RATE OPTIONS. At any time any portion of
this Note bears interest determined in relation to
-2-
<PAGE>
LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term
applicable thereto so that all or a portion thereof bears interest determined
in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term
designated by Borrower. At any time any portion of this Note bears interest
determined in relation to the Prime Rate, Borrower may convert all or a
portion thereof so that it bears interest determined in relation to LIBOR for
a Fixed Rate Term designated by Borrower. At such time as Borrower requests
an advance hereunder or wishes to select a LIBOR option for all or a portion
of the outstanding principal balance hereof, and at the end of each Fixed
Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate
option selected by Borrower; (ii) the principal amount subject thereto; and
(iii) for each LIBOR selection, the length of the applicable Fixed Rate Term.
Any such notice may be given by telephone so long as, with respect to each
LIBOR selection, (A) Bank receives written confirmation from Borrower not
later than three (3) Business Days after such telephone notice is given, and
(B) such notice is given to Bank prior to 10:00 a.m., California time, on the
first day of the Fixed Rate Term. For each LIBOR option requested hereunder,
Bank will quote the applicable fixed rate to Borrower at approximately 10:00
a.m., California time, on the first day of the Fixed Rate Term. If Borrower
does not immediately accept the rate quoted by Bank, any subsequent
acceptance by Borrower shall be subject to a redetermination by Bank of the
applicable fixed rate; provided however, that if Borrower fails to accept any
such rate by 11:00 a.m., California time, on the Business Day such quotation
is given, then the quoted rate shall expire and Bank shall have no obligation
to permit a LIBOR option to be selected on such day. If no specific
designation of interest is made at the time any advance is requested
hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to
have made a Prime Rate interest selection for such advance or the principal
amount to which such Fixed Rate Term applied.
(c) ADDITIONAL LIBOR PROVISIONS.
(i) If Bank at any time shall determine that for any reason adequate
and reasonable means do not exist for ascertaining LIBOR, then Bank shall
promptly give notice thereof to Borrower. If such notice is given and until
such notice has been withdrawn by Bank, then (A) no new LIBOR option may be
selected by Borrower, and (B) any portion of the outstanding principal
balance hereof which bears interest determined in relation to LIBOR,
subsequent to the end of the Fixed Rate Term applicable thereto, shall bear
interest determined in relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in
-3-
<PAGE>
Law") shall make it unlawful for Bank (A) to make LIBOR options available
hereunder, or (B) to maintain interest rates based on LIBOR, then in the
former event, any obligation of Bank to make available such unlawful LIBOR
options shall immediately be cancelled, and in the latter event, any such
unlawful LIBOR-based interest rates then outstanding shall be converted, at
Bank's option, so that interest on the portion of the outstanding principal
balance subject thereto is determined in relation to the Prime Rate; provided
however, that if any such Change in Law shall permit any LIBOR-based interest
rates to remain in effect until the expiration of the Fixed Rate Term
applicable thereto, then such permitted LIBOR-based interest rates shall
continue in effect until the expiration of such Fixed Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank
for any fines, fees, charges, penalties or other costs incurred or payable by
Bank as a result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any
LIBOR options, or change the basis of taxation of payments to Bank of
principal, interest, fees or any other amount payable hereunder
(except for changes in the rate of tax on the overall net income of
Bank); or
(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce
any amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available
to Borrower hereunder, any reasonable allocation made by Bank among its
operations shall be conclusive and binding upon Borrower.
-4-
<PAGE>
(d) PAYMENT OF INTEREST. Interest accrued on this Note shall be
payable on the first day of each month, commencing August 1, 1997.
(e) DETERMINATION OF LIBOR MARGIN. The "LIBOR Margin" shall be
determined as of the first day of each month according to the following grid:
SENIOR FUNDED DEBT TO LIBOR
EBITDA RATIO MARGIN
LESS THAN 2.00 to 1.00 1.75%
GREATER THAN
OR EQUAL TO 2.00 to 1.00 and LESS THAN 3.00 to 1.00 2.25%
GREATER THAN
OR EQUAL TO 3.00 to 1.00 2.50%
The Bank shall make such determination based on the financial
information submitted by the Borrower to the Bank for the calendar month
preceding each month. Each change in the rate of interest under this Note
based on a change in the Applicable Prime Rate Margin or LIBOR Margin shall
be effective on the first day of the next calendar month.
From the date hereof until August 1, 1997, the LIBOR Margin shall be two
and one-half percent (2.50%)
As used herein, "Senior Funded Debt to EBITDA Ratio" shall mean the
ratio of "Senior Funded Debt" to "EBITDA", with "Senior Funded Debt" defined
as total funded unsubordinated indebtedness, according to GAAP and including
capital leases, of Borrowers, and "EBITDA" defined as (a) net income, after
income taxes, determined in conformity with GAAP; plus (b) income taxes
deducted in determining net income; plus (c) interest expense deducted in
determining net income; plus (d) amortization and depreciation expenses
deducted in determining net income; plus (e) other non-cash charges
(excluding accruals in the normal course of business), deducted in
determining net income.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings
under this Note shall not at any time exceed the principal amount stated
above. The unpaid principal balance of this obligation at any time shall be
the total amounts advanced hereunder by
-5-
<PAGE>
the holder hereof less the amount of principal payments made hereon by or for
any Borrower, which balance may be endorsed hereon from time to time by the
holder. The outstanding principal balance of this Note shall be due and
payable in full on June 30, 2000.
(b) ADVANCES. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) Scott Walker or Stuart Walker, any one acting alone, who are authorized to
request advances and direct the disposition of any advances until written
notice of the revocation of such authority is received by the holder at the
office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made
to or for the benefit of each Borrower regardless of the fact that persons
other than those authorized to request advances may have authority to draw
against such account. The holder shall have no obligation to determine
whether any person requesting an advance is or has been authorized by any
Borrower.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be
applied first, to the outstanding principal balance of this Note which bears
interest determined in relation to the Prime Rate, if any, and second, to the
outstanding principal balance of this Note which bears interest determined in
relation to LIBOR, with such payments applied to the oldest Fixed Rate Term
first.
PREPAYMENT:
(a) PRIME RATE. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to the Prime Rate at any
time, in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of one hundred thousand Dollars ($100,000); provided however,
that if the outstanding principal balance of such portion of this Note is
less than said amount, the minimum prepayment amount shall be the entire
outstanding principal balance thereof. In consideration of Bank providing
this prepayment option to Borrower, or if any such portion of this Note shall
become due and payable at any time prior to the last day of the Fixed Rate
Term applicable thereto, Borrower shall pay to Bank immediately upon demand a
fee which is the sum of the discounted monthly differences for each month
from the month of prepayment through the month in which such Fixed Rate Term
matures, calculated as follows for each such month:
-6-
<PAGE>
(i) DETERMINE the amount of interest which would have accrued each month
on the amount prepaid at the interest rate applicable to such amount
had it remained outstanding until the last day of the Fixed Rate Term
applicable thereto.
(ii) SUBTRACT from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the amount
prepaid for the remaining term of such Fixed Rate Term at LIBOR in
effect on the date of prepayment for new loans made for such term and
in a principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate
of the prepayment costs, expenses and/or liabilities of Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions
of that certain Credit Agreement between Borrower and Bank dated as of July
1, 1997, as amended from time to time (the "Credit Agreement"). Any default
in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an
"Event of Default" under this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the sale, transfer, hypothecation, assignment or
other encumbrance, whether voluntary, involuntary or by operation of law, of
all or any interest in any real property securing this Note, or upon the
occurrence of any Event of Default, the holder of this Note, at the holder's
option, may declare all sums of principal and accrued and unpaid interest
outstanding hereunder to be immediately due and payable without presentment,
demand, or any notices of any kind, including without limitation notice of
nonperformance, notice of protest, protest, notice of dishonor, notice of
intention to accelerate or notice of acceleration, all of which are expressly
waived by each Borrower, and the obligation, if any, of the holder to extend
any further credit hereunder shall immediately cease and terminate. Each
Borrower shall pay to the holder immediately upon demand the full amount of
all reasonable payments, advances, charges, costs
-7-
<PAGE>
and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel to the
extent permissible), expended or incurred by the holder in connection with
the enforcement of the holder's rights and/or the collection of any amounts
which become due to the holder under this Note, and the prosecution or
defense of any action in any way related to this Note, including without
limitation, any action for declaratory relief, whether incurred at the trial
or appellate level, in an arbitration proceeding or otherwise, and including
any of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to any Borrower or any
other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower
shall be joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) SAVINGS CLAUSE. It is the intention of the parties to comply
strictly with applicable usury laws. Accordingly, notwithstanding any
provision to the contrary in this Note, or in any contract, instrument or
document evidencing or securing the payment hereof or otherwise relating
hereto (each, a "Related Document"), in no event shall this Note or any
Related Document require the payment or permit the payment, taking,
reserving, receiving, collection or charging of any sums constituting
interest under applicable laws that exceed the maximum amount permitted by
such laws, as the same may be amended or modified from time to time (the
"Maximum Rate"). If any such excess interest is called for, contracted for,
charged, taken, reserved or received in connection with this Note or any
Related Document, or in any communication by Bank or any other person to
Borrower or any other person, or in the event that all or part of the
principal or interest hereof or thereof shall be prepaid or accelerated, so
that under any of such circumstances or under any other circumstance
whatsoever the amount of interest contracted for, charged, taken, reserved or
received on the amount of principal actually outstanding from time to time
under this Note shall exceed the Maximum Rate, then in such event it is
agreed that: (i) the provisions of this paragraph shall govern and control;
(ii) neither Borrower nor any other person or entity now or hereafter liable
for the payment of this Note or any Related Document shall be obligated to
pay the amount of such interest to the extent it is in excess of the Maximum
Rate; (iii) any such excess interest which is or has been received by Bank,
notwithstanding this paragraph, shall be credited against the then unpaid
principal balance hereof or thereof, or if this Note or any Related Document
has been or would be paid in full by such
-8-
<PAGE>
credit, refunded to Borrower; and (iv) the provisions of this Note and each
Related Document, and any other communication to Borrower, shall immediately
be deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the Maximum Rate. The right to accelerate
the maturity of this Note or any Related Document does not include the right
to accelerate, collect or charge unearned interest, but only such interest
that has otherwise accrued as of the date of acceleration. Without limiting
the foregoing, all calculations of the rate of interest contracted for,
charged, taken, reserved or received in connection with this Note and any
Related Document which are made for the purpose of determining whether such
rate exceeds the Maximum Rate shall be made to the extent permitted by
applicable laws by amortizing, prorating, allocating and spreading during the
period of the full term of this Note or such Related Document, including all
prior and subsequent renewals and extensions hereof or thereof, all interest
at any time contracted for, charged, taken, reserved or received by Bank.
The terms of this paragraph shall be deemed to be incorporated into each
Related Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes
is relevant to Bank for the purpose of determining the Maximum Rate, Bank
hereby elects to determine the applicable rate ceiling under such Article by
the indicated (weekly) rate ceiling from time to time in effect, subject to
Bank's right subsequently to change such method in accordance with applicable
law, as the same may be amended or modified from time to time.
(e) RIGHT OF SETOFF: DEPOSIT ACCOUNTS. Upon and after the occurrence
of an Event of Default except under Section 6.1(d), (i) Borrower hereby
authorizes Bank, at any time and from time to time, without prior notice,
which is hereby expressly waived by Borrower, and whether or not Bank shall
have declared this Note to be due and payable in accordance with the terms
hereof, to set off against, and to appropriate and apply to the payment of,
Borrower's obligations and liabilities under this Note (whether matured or
unmatured, fixed or contingent, liquidated or unliquidated), any and all
amounts owing by Bank to Borrower (whether payable in U.S. dollars or any
other currency, whether matured or unmatured, and in the case of deposits,
whether general or special (except trust and escrow accounts), time or demand
and however evidenced), and (ii) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Bank agrees to provide notice to Borrower of any
action taken by Bank under this paragraph (e) within 3 business days.
Borrower hereby grants to Bank a security interest in all deposits and
accounts maintained with Bank and with any other
-9-
<PAGE>
financial institution to secure the payment of all obligations and
liabilities of Borrower to Bank under this Note.
(f) BUSINESS PURPOSE. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment,
agricultural or other similar purpose and not primarily for a personal,
family or household use.
(g) CERTAIN TRI-PARTY ACCOUNTS. Borrower and Bank agree that Tex. Rev.
Civ. Stat. Ann. Art. 5056, ch. 15 (which regulates certain revolving credit
loan accounts and revolving triparty accounts) shall not apply to any
revolving loan accounts created under this Note or maintained in connection
herewith.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
EVIDENCED HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS
NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
PRECEPT INVESTORS, INC.
By:
----------------------------------
Title:
-------------------------------
WINGTIP COURIERS, INC. PRECEPT BUSINESS PRODUCTS, INC.
By: By:
---------------------------------- ----------------------------------
Title: Title:
------------------------------- -------------------------------
LSL ACQUISITION CORPORATION
By:
----------------------------------
Title:
-------------------------------
-10-
<PAGE>
REVOLVING LINE OF CREDIT NOTE
$10,000,000.00 Dallas, Texas
July 1, 1997
FOR VALUE RECEIVED, the undersigned PRECEPT INVESTORS, INC., PRECEPT
BUSINESS.PRODUCTS, INC., LSL ACQUISITION CORPORATION, AND WINGTIP COURIERS,
INC. (collectively, the "Borrowers") each promises to pay to the order of
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank") at its office at 1445
Ross Avenue, Suite 300, Dallas, Texas, or at such other place as the holder
hereof may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of Ten Million Dollars
($10,000,000.00), or so much thereof as may be advanced and be outstanding,
with interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning
set forth at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in Texas are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2) or three (3) months, as designated by
Borrower, during which all or a portion of the outstanding principal balance
of this Note bears interest determined in relation to LIBOR; provided
however, that no Fixed Rate Term may be selected for a principal amount less
than one hundred thousand Dollars ($100,000); and provided further, that no
Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If
any Fixed Rate Term would end on a day which is not a Business Day, then such
Fixed Rate Term shall be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = BASE LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans
<PAGE>
making reference thereto, on the first day of a Fixed Rate Term for delivery
of funds on said date for a period of time approximately equal to the number
of days in such Fixed Rate Term and in an amount approximately equal to the
principal amount to which such Fixed Rate Term applies. Borrower understands
and agrees that Bank may base its quotation of the Inter-Bank Market Offered
Rate upon such offers or other market indicators of the Inter-Bank Market as
Bank in its discretion deems appropriate including, but not limited to, the
rate offered for U.S. dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor)
for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal
Reserve Board, as amended), adjusted by Bank for expected changes in such
reserve percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as
the basis upon which effective rates of interest are calculated for those
loans making reference thereto, and is evidenced by the recording thereof
after its announcement in such internal publication or publications as Bank
may designate.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed,
unless such calculation would result in a usurious rate, in which case
interest shall be computed on the basis of a 365/366-day year, as the case
may be, actual days elapsed) at the lesser of (i) either (A) a fluctuating
rate per annum equal to the Prime Rate in effect from time to time, or (B) a
fixed rate per annum determined by Bank to be equal to the LIBOR Margin above
LIBOR in effect on the first day of the applicable Fixed Rate Term, or (ii)
the Maximum Rate. When interest is determined in relation to the Prime Rate,
each change in the rate of interest hereunder shall become effective on the
date each Prime Rate change is announced within Bank. With respect to each
LIBOR selection hereunder, Bank is hereby authorized to note the date,
principal amount, interest rate and Fixed Rate Term applicable thereto and
any payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which
notations shall be prima facie evidence of the accuracy of the information
noted.
(b) SELECTION OF INTEREST RATE OPTIONS. At any time any portion of this
Note bears interest determined in relation to
-2-
<PAGE>
LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term
applicable thereto so that all or a portion thereof bears interest determined
in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term
designated by Borrower. At any time any portion of this Note bears interest
determined in relation to the Prime Rate, Borrower may convert all or a
portion thereof so that it bears interest determined in relation to LIBOR for
a Fixed Rate Term designated by Borrower. At such time as Borrower requests
an advance hereunder or wishes to select a LIBOR option for all or a portion
of the outstanding principal balance hereof, and at the end of each Fixed
Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate
option selected by Borrower; (ii) the principal amount subject thereto; and
(iii) for each LIBOR selection, the length of the applicable Fixed Rate Term.
Any such notice may be given by telephone so long as, with respect to each
LIBOR selection, (A) Bank receives written confirmation from Borrower not
later than three (3) Business Days after such telephone notice is given, and
(B) such notice is given to Bank prior to 10:00 a.m., California time, on the
first day of the Fixed Rate Term. For each LIBOR option requested hereunder,
Bank will quote the applicable fixed rate to Borrower at approximately 10:00
a.m., California time, on the first day of the Fixed Rate Term. If Borrower
does not immediately accept the rate quoted by Bank, any subsequent
acceptance by Borrower shall be subject to a redetermination by Bank of the
applicable fixed rate; provided however, that if Borrower fails to accept any
such rate by 11:00 a.m., California time, on the Business Day such quotation
is given, then the quoted rate shall expire and Bank shall have no obligation
to permit a LIBOR option to be selected on such day. If no specific
designation of interest is made at the time any advance is requested
hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to
have made a Prime Rate interest selection for such advance or the principal
amount to which such Fixed Rate Term applied.
(c) ADDITIONAL LIBOR PROVISIONS.
(i) If Bank at any time shall determine that for any reason adequate
and reasonable means do not exist for ascertaining LIBOR, then Bank shall
promptly give notice thereof to Borrower. If such notice is given and until
such notice has been withdrawn by Bank, then (A) no new LIBOR option may be
selected by Borrower, and (B) any portion of the outstanding principal
balance hereof which bears interest determined in relation to LIBOR,
subsequent to the end of the Fixed Rate Term applicable thereto, shall bear
interest determined in relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a court
or governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in
-3-
<PAGE>
Law") shall make it unlawful for Bank (A) to make LIBOR options available
hereunder, or (B) to maintain interest rates based on LIBOR, then in the
former event, any obligation of Bank to make available such unlawful LIBOR
options shall immediately be cancel led, and in the latter event, any such
unlawful LIBOR-based interest rates then outstanding shall be converted, at
Bank's option, so that interest on the portion of the outstanding principal
balance subject thereto is determined in relation to the Prime Rate; provided
however, that if any such Change in Law shall permit any LIBOR-based interest
rates to remain in effect until the expiration of the Fixed Rate Term
applicable thereto, then such permitted LIBOR-based interest rates shall
continue in effect until the expiration of such Fixed Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank
for any fines, fees, charges, penalties or other costs incurred or payable by
Bank as a result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any
LIBOR options, or change the basis of taxation of payments to Bank of
principal, interest, fees or any other amount payable hereunder
(except for changes in the rate of tax on the overall net income of
Bank); or
(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce
any amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available
to Borrower hereunder, any reasonable allocation made by Bank among its
operations shall be conclusive and binding upon Borrower.
-4-
<PAGE>
(d) PAYMENT OF INTEREST. Interest accrued on this Note shall be
payable on the first day of each month, commencing August 1, 1997.
(e) DETERMINATION OF LIBOR MARGIN. The "LIBOR Margin" shall be
determined as of the first day of each month according to the following grid:
SENIOR FUNDED DEBT TO LIBOR
EBITDA RATIO MARGIN
LESS THAN 2.00 to 1.00 1.75%
GREATER THAN OR EQUAL TO 2.00 to 1.00 and LESS THAN 3.00 to 1.00 2.25%
GREATER THAN OR EQUAL TO 3.00 to 1.00 2.50%
The Bank shall make such determination based on the financial
information submitted by the Borrower to the Bank for the calendar month
preceding each month. Each change in the rate of interest under this Note
based on a change in the Applicable Prime Rate Margin or LIBOR Margin shall
be effective on the first day of the next calendar month.
From the date hereof until August 1, 1997, the LIBOR Margin shall be two
and one-half percent (2.50%)
As used herein, "Senior Funded Debt to EBITDA Ratio" shall mean the
ratio of "Senior Funded Debt" to "EBITDA", with "Senior Funded Debt" defined
as total funded unsubordinated indebtedness, according to GAAP and including
capital leases, of Borrowers, and "EBITDA" defined as (a) net income, after
income taxes, determined in conformity with GAAP; plus (b) income taxes
deducted in determining net income; plus (c) interest expense deducted in
determining net income; plus (d) amortization and depreciation expenses
deducted in determining net income; plus (e) other non-cash charges
(excluding accruals in the normal course of business), deducted in
determining net income.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time
during the term of this Note borrow, partially or wholly repay its
outstanding borrowings, and reborrow, subject to all of the limitations,
terms and conditions of this Note and of any document executed in connection
with or governing this Note; provided however, that the total outstanding
borrowings under this Note shall not at any time exceed the principal amount
stated above. The unpaid principal balance of this obligation at any time
shall be the total amounts advanced hereunder by the
-5-
<PAGE>
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the
holder. The outstanding principal balance of this Note shall be due and
payable in full on June 30, 2000.
(b) ADVANCES. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i)Scott Walker or Stuart Walker, any one acting alone, who are authorized to
request advances and direct the disposition of any advances until written
notice of the revocation of such authority is received by the holder at the
office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made
to or for the benefit of each Borrower regardless of the fact that persons
other than those authorized to request advances may have authority to draw
against such account. The holder shall have no obligation to determine
whether any person requesting an advance is or has been authorized by any
Borrower.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be
applied first, to the outstanding principal balance of this Note which bears
interest determined in relation to the Prime Rate, if any, and second, to the
outstanding principal balance of this Note which bears interest determined in
relation to LIBOR, with such payments applied to the oldest Fixed Rate Term
first.
PREPAYMENT:
(a) PRIME RATE. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to the Prime Rate at any
time, in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of one hundred thousand Dollars ($100,000); provided however,
that if the outstanding principal balance of such portion of this Note is
less than said amount, the minimum prepayment amount shall be the entire
outstanding principal balance thereof. In consideration of Bank providing
this prepayment option to Borrower, or if any such portion of this Note shall
become due and payable at any time prior to the last day of the Fixed Rate
Term applicable thereto, Borrower shall pay to Bank immediately upon demand a
fee which is the sum of the discounted monthly differences for each month
from the month of prepayment through the month in which such Fixed Rate Term
matures, calculated as follows for each such month:
-6-
<PAGE>
(i) DETERMINE the amount of interest which would have accrued each month
on the amount prepaid at the interest rate applicable to such amount
had it remained outstanding until the last day of the Fixed Rate Term
applicable thereto.
(ii) SUBTRACT from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the amount
prepaid for the remaining term of such Fixed Rate Term at LIBOR in
effect on the date of prepayment for new loans made for such term and
in a principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate
of the prepayment costs, expenses and/or liabilities of Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions
of that certain Credit Agreement between Borrower and Bank dated as of July
1, 1997, as amended from time to time (the "Credit Agreement") . Any default
in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an
"Event of Default" under this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the sale, transfer, hypothecation, assignment or
other encumbrance, whether voluntary, involuntary or by operation of law, of
all or any interest in any real property securing this Note, or upon the
occurrence of any Event of Default, the holder of this Note, at the holder's
option, may declare all sums of principal and accrued and unpaid interest
outstanding hereunder to be immediately due and payable without presentment,
demand, or any notices of any kind, including without limitation notice of
nonperformance, notice of protest, protest, notice of dishonor, notice of
intention to accelerate or notice of acceleration, all of which are expressly
waived by each Borrower, and the obligation, if any, of the holder to extend
any further credit hereunder shall immediately cease and terminate. Each
Borrower shall pay to the holder immediately upon demand the full amount of
all reasonable payments, advances, charges, costs
-7-
<PAGE>
and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel to the
extent permissible), expended or incurred by the holder in connection with
the enforcement of the holder's rights and/or the collection of any amounts
which become due to the holder under this Note, and the prosecution or
defense of any action in any way related to this Note, including without
limitation, any action for declaratory relief, whether incurred at the trial
or appellate level, in an arbitration proceeding or otherwise, and including
any of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to any Borrower or any
other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower
shall be joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) SAVINGS CLAUSE. It is the intention of the parties to comply
strictly with applicable usury laws. Accordingly, notwithstanding any
provision to the contrary in-this Note, or in any contract, instrument or
document evidencing or securing the payment hereof or otherwise relating
hereto (each, a "Related Document"), in no event shall this Note or any
Related Document require the payment or permit the payment, taking,
reserving, receiving, collection or charging of any sums constituting
interest under applicable laws that exceed the maximum amount permitted by
such laws, as the same may be amended or modified from time to time (the
"Maximum Rate") . If any such excess interest is called for, contracted for,
charged, taken, reserved or received in connection with this Note or any
Related Document, or in any communication by Bank or any other person to
Borrower or any other person, or in the event that all or part of the
principal or interest hereof or thereof shall be prepaid or accelerated, so
that under any of such circumstances or under any other circumstance
whatsoever the amount of interest contracted for, charged, taken, reserved or
received on the amount of principal actually outstanding from time to time
under this Note shall exceed the Maximum Rate, then in such event it is
agreed that: (i) the provisions of this paragraph shall govern and control;
(ii) neither Borrower nor any other person or entity now or hereafter liable
for the payment of this Note or any Related Document shall be obligated to
pay the amount of such interest to the extent it is in excess of the Maximum
Rate; (iii) any such excess interest which is or has been received by Bank,
notwithstanding this paragraph, shall be credited against the then unpaid
principal balance hereof or thereof, or if this Note or any Related Document
has been or would be paid in full by such
-8-
<PAGE>
credit, refunded to Borrower; and (iv) the provisions of this Note and each
Related Document, and any other communication to Borrower, shall immediately
be deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the Maximum Rate. The right to accelerate
the maturity of this Note or any Related Document does not include the right
to accelerate, collect or charge unearned interest, but only such interest
that has otherwise accrued as of the date of acceleration. Without limiting
the foregoing, all calculations of the rate of interest contracted for,
charged, taken, reserved or received in connection with this Note and any
Related Document which are made for the purpose of determining whether such
rate exceeds the Maximum Rate shall be made to the extent permitted by
applicable laws by amortizing, prorating, allocating and spreading during the
period of the full term of this Note or such Related Document, including all
prior and subsequent renewals and extensions hereof or thereof, all interest
at any time contracted for, charged, taken, reserved or received by Bank.
The terms of this paragraph shall be deemed to be incorporated into each
Related Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes
is relevant to Bank for the purpose of determining the Maximum Rate, Bank
hereby elects to determine the applicable rate ceiling under such Article by
the indicated (weekly) rate ceiling from time to time in effect, subject to
Bank's right subsequently to change such method in accordance with applicable
law, as the same may be amended or modified from time to time.
(e) RIGHT OF SETOFF: DEPOSIT ACCOUNTS. Upon and after the occurrence of
an Event of Default except under Section 6.1 (d), (i) Borrower hereby
authorizes Bank, at any time and from time to time, without prior notice,
which is hereby expressly waived by Borrower, and whether or not Bank shall
have declared this Note to be due and payable in accordance with the terms
hereof, to set off against, and to appropriate and apply to the payment of,
Borrower's obligations and liabilities under this Note (whether matured or
unmatured, fixed or contingent, liquidated or unliquidated), any and all
amounts owing by Bank to Borrower (whether payable in U.S. dollars or any
other currency, whether matured or unmatured, and in. the case of deposits,
whether general or special (except trust and escrow accounts), time or demand
and however evidenced), and (ii) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Bank agrees to provide notice to Borrower of any
action taken by Bank under this paragraph (e) within 3 business days.
Borrower hereby grants to Bank a security interest in all deposits and
accounts maintained with Bank and with any other
-9-
<PAGE>
financial institution to secure the payment of all obligations and
liabilities of Borrower to Bank under this Note.
(f) BUSINESS PURPOSE. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment,
agricultural or other similar purpose and not primarily for a personal,
family or household use.
(g) CERTAIN TRI-PARTY ACCOUNTS. Borrower and Bank agree that Tex.
Rev. Civ. Stat. Ann. Art. 5056, ch. 15 (which regulates certain revolving
credit loan accounts and revolving triparty accounts) shall not apply to any
revolving loan accounts created under this Note or maintained in connection
herewith.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
EVIDENCED HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS
NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
PRECEPT INVESTORS,
By: /s/ ILLEGIBLE
---------------------------
Title: CFO
-------------------------
WINGTIP COURIERS, PRECEPT BUSINESS PRODUCTS,INC.
By: /s/ ILLEGIBLE By: /s/ ILLEGIBLE
--------------------------- -----------------------------
Title: CFO Title: CFO
------------------------ --------------------------
LSL ACQUISITION CORPORATION
By: /s/ ILLEGIBLE
---------------------------
Title: CFO
-------------------------
-10-
<PAGE>
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 19, 1997 on the Consolidated Financial
Statements of Precept Investors, Inc., in the Registration Statement (Form S-4
No. 333-42689) and related Proxy Statement/Prospectus of Precept Business
Services, Inc. dated January 30, 1998.
/s/ Ernst & Young LLP
Dallas, Texas
January 29, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 26, 1997 with respect to the financial
statements of U.S. Transportation Systems, Inc., included in the Registration
Statement (Form S-4, No. 333-42689) and related Proxy Statement/Prospectus of
Precept Business Services, Inc.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
January 28, 1997
<PAGE>
EXHIBIT 99.2
CONSENT OF MICHAEL MARGOLIES
Pursuant to Rule 438, I hereby consent to the identification of me as a
person who will become a director of Precept Business Services, Inc. after
completion of the proposed Transactions in the Registration Statement (Form S-4,
No. 333-42689) and related Proxy Statement/Prospectus of Precept Business
Services, Inc.
/s/ MICHAEL MARGOLIES
---------------------------------------
Michael Margolies
Elmsford, New York
January 27, 1998
<PAGE>
Exhibit 99.3
CONSENT OF ROBERT BLACKMAN
Pursuant to Rule 438, I hereby consent to the identification of me as a
person who will become a director of Precept Business Services, Inc. after
completion of the proposed Transactions in the Registration Statement (Form
S-4, No. 333-42689) and related Proxy Statement/Prospectus of Precept
Business Services, Inc.
/s/ Robert Blackman
Elmsford, New York
January 27, 1998
<PAGE>
EXHIBIT 99.4
CONSENT OF SCOTT B. WALKER
Pursuant to Rule 438, I hereby consent to the identification of me as a
person who will become a director of Precept Business Services, Inc. after
completion of the proposed Transactions in the Registration Statement (Form S-4,
No. 333-42689) and related Proxy Statement/Prospectus of Precept Business
Services, Inc.
/s/ SCOTT B. WALKER
---------------------------------------
Scott B. Walker
Dallas, Texas
January 29, 1998
<PAGE>
Exhibit 99.5
CONSENT OF LAYNE A. DEUTSCHER
Pursuant to Rule 438, I hereby consent to the identification of me as a
person who will become a director of Precept Business Services, Inc. after
completion of the proposed Transactions in the Registration Statement (Form
S-4, No. 333-42689) and related Proxy Statement/Prospectus of Precept
Business Services, Inc.
/s/ LAYNE A. DEUTSCHER
--------------------------------
Layne A. Deutscher
Dallas, Texas
January 29, 1998
