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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998
Commission file number: 000-23735
PRECEPT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2487353
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1909 Woodall Rodgers Freeway, Suite 500 75201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 754-6600
Securities registered pursuant to 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Class A Common Stock (PBSIA) NASDAQ SmallCap Market
Warrants for Class A Common Stock (PBSIW) NASDAQ SmallCap Market
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The aggregate market value of the Class A Common Stock held by
non-affiliates as of September 23, 1998 was $44,800,553 and the aggregate
market value of the warrants to purchase shares of Class A Common Stock held
by non-affiliates as of September 23, 1998 was $453,750.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. /X/ Yes / / No
As of September 21, 1998, there were 52,712,556 outstanding shares of
Class A Common Stock, 4,145,000 outstanding shares of Class B Common Stock
and 1,815,000 outstanding warrants to purchase shares of Class A Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Items 9, 10, 11, 12 and 13 are incorporated by reference from the
Company's Proxy that is expected to be mailed to shareholders on or before
October 28, 1998.
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PRECEPT BUSINESS SERVICES, INC.
INDEX TO FORM 10-K
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DESCRIPTION PAGE
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Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 12
Item 4 Submission of Matters to a Vote of Security Holders. . . . . 13
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6 Financial Data . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 15
Item 8 Financial Statements and Supplementary Data. . . . . . . . . 22
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . 42
Item 10 Directors, Executive Officers, Promoters and Control
Persons of the Registrant. . . . . . . . . . . . . . . . . . 42
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . 42
Item 12 Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 13 Certain Relationships and Related Transactions . . . . . . . 42
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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Note - Pages 1 to 3 represent the first three pages of Precept's 1998 Annual
Report to Shareholders.
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ITEM 1 - BUSINESS
GENERAL
Precept Business Services, Inc. (the "Company" or "Precept") is an
operator and a consolidator of business products distribution and document
management companies and of transportation service companies. 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. The Company
operates from approximately 70 locations across the United States.
Precept was founded in 1988 as a subsidiary of Affiliated Computer
Services, Inc. ("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.
RECENT DEVELOPMENTS
ACQUISITION OF USTS AND LISTING ON NASDAQ
In March 1998, Precept acquired certain operations of a publicly traded
company, U.S. Transportation Systems, Inc. ("USTS"), and listed its Class A
common stock and warrants to purchase Class A common stock on the NASDAQ
SmallCap Market ("NASDAQ"). As part of the acquisition of USTS, Precept
issued 9,612,500 of its shares of Class A common stock to USTS and assumed
1,815,000 warrants held by former shareholders of USTS. In April 1998, USTS
distributed Precept's shares to the USTS shareholders. USTS was engaged in
business areas which relate to transportation, including providing bus,
chauffeured vehicle, and package and delivery transportation-related
services. The Company purchased nearly all of the operating assets and
assumed certain liabilities of USTS, after which USTS adopted a plan
providing for its liquidation and dissolution. The transaction was structured
as a tax-free reorganization under the Internal Revenue Service ("IRS") code
Section 368(a)(1)(C).
SALE OF U.S. TRUCKING, INC.
On June 1, 1998, the Company sold its 75% interest in the common stock
of U.S. Trucking, Inc., a Nevada corporation ("USTI"). Precept
Transportation had acquired its interests in USTI from USTS on March 19,
1998. USTI is in the long-haul trucking business. Prior to the
aforementioned divestiture, Precept Transportation owned an interest in 75%
of the common stock of USTI and Logistics Management owned the remaining 25%
of the common stock of USTI.
ACQUISITION OF INFOGRAPHIX
On April 13, 1998, Precept acquired all of the issued and outstanding
stock of InfoGraphix, Inc., a Massachusetts corporation ("InfoGraphix"),
Boston-based InfoGraphix is a single source provider of products and services
to corporate marketing departments and a distributor of document management
services.
ACQUISITION OF MBF
On June 19, 1998, Precept acquired all of the issued and outstanding
stock of MBF Corporation, a Louisiana corporation ("MBF") Louisiana-based MBF
is a single source distributor of printed products, distribution services and
information solutions.
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ACQUISITION OF CREATIVE
On September 4, 1998, Precept, through a wholly-owned subsidiary,
acquired Creative, a Maine corporation ("Creative") Prior to the acquisition,
in which Creative was merged with and into Creative Acquisition Corp.,
Creative operated a business providing printed business forms, distribution
services and information solutions to business customers throughout the New
England states and had three sales/distribution offices in Maine and two in
Massachusetts.
ACQUISITION OF SOUTHERN
On September 18, 1998, Precept, through a wholly-owned subsidiary,
acquired Southern Systems Business Forms & Supplies, Inc., a South Carolina
corporation ("Southern"), pursuant to that certain Agreement and Plan of
Merger dated as of August 26, 1998, by and among Precept, Precept Acquisition
Corporation (a wholly-owned subsidiary of Precept), Southern and the
shareholders of Southern. Prior to the acquisition, in which Southern was
merged with and into Precept Acquisition Corporation, Southern was a
Florence, South Carolina-based provider of printed products, distribution
services and information solutions with yearly revenues of approximately $14
million.
BUSINESS
Business products distributed by Precept 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 high level of customer
service and (ii) to continue its expansion through strategic acquisitions and
internal growth. Precept also operates five corporate transportation service
companies in the Dallas/Fort Worth, Metropolitan New York, Dearborn, Michigan
and Cincinnati, Ohio markets.
Since the founding and development of Precept, the Company's goal has
been to acquire or establish a centrally managed network of regional offices
and warehouses in major geographic markets throughout the United States.
Since 1991, Precept has completed 21 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 eliminating 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 the growth components
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 maintained 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) and ACS (NYSE:AFA), and now at Precept. Management also believes it
is the "consolidator of choice" in the business products distribution and
document management industries.
The two industries in which Precept operates are large, fragmented and,
Precept believes, rapidly consolidating. Precept believes that opportunities
exist to consolidate participants in both industries. Its principal
competitors in the business products industry are direct manufacturers and
other, smaller independent distributors of business products. Management
believes the market for business products is in excess of $20 billion
annually with the top independent distributors representing $1.7 billion
annually, or 8.5% of the total market. Over the last three years, total
revenues from the top 100 independent 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
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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 that
the chauffeured vehicle and the courier and delivery service segments of the
transportation industry, in particular, present an attractive opportunity for
consolidations. Based on industry data, Precept management understands that
in 1997 the chauffeured vehicle service industry represented approximately
$3.9 billion in revenues, consists of approximately 9,000 companies, is
highly fragmented and no single company controls more than 2% of the market.
In 1997, the courier and delivery service industry represented approximately
$6.0 billion in revenues to customers throughout the United States. Precept
management believes that there are approximately 5,000 companies providing
contract transportation services, primarily bus and shuttle services, which
generate $2.0 billion a year in revenue.
CONSOLIDATION STRATEGY
BUSINESS PRODUCTS
Precept believes numerous factors exist which create a favorable
environment and significant opportunities for continued consolidation of the
business products distribution and document management industry. Among
others, these factors include: (i) the fragmented nature of the industry,
(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
the leading consolidator of the business products distribution and document
management industry. 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
(i) the combination of 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 that 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, common stock
and promissory notes. Acquisitions are made pursuant to acquisition
agreements containing customary representations, warranties, covenants and
indemnification provisions. Precept typically obtains non-compete and
confidentiality agreements from selling owners.
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TRANSPORTATION SERVICES
Precept has identified the corporate and contract transportation
services industry as a second segment that has significant consolidation
opportunities. Precept intends to pursue a strategy of acquiring businesses
that provide chauffeured services, courier and delivery services and contract
transportation services.
Precept believes that there are significant advantages in consolidating
the chauffeured vehicle service, courier and delivery, and contract
transportation service segments of the transportation services 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.
PRECEPT BUSINESS PRODUCTS
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, will provide broader
manufacturing capability and enhanced delivery times as compared to direct
manufacturers. Precept's distribution business involved 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
specific customer needs. As a result, customers are provided customized
product usage and stock status reports, customized billing formats and other
custom reports important to their operations.
DISTRIBUTION
Precept believes that the current trend of downsizing and vendor
reductions, combined with customers' desire to maximize efficient commitment
of capital in the inventory of its business products, makes distributors the
customers' 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 customers' 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
offering only the products that it manufactures. Furthermore, by foregoing
the extensive capital investment required of a direct manufacturer (e.g.
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 each
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.
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To accomplish the above, Precept has developed the following capabilities:
DISTRIBUTION AND WAREHOUSING. Precept does not manufacture any business
products. 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 relationships with its preferred vendors
that typically provide business products at a lower cost. 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. Precept's
nationwide warehousing, along with the excess warehouse space offered to
Precept in conjunction with its manufacturing partners, gives Precept
location advantages superior to its competitors.
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 hands-on involvement with
a particular customer. In addition, Precept spends significant time with its
manufacturing partners on new product developments on behalf of its customers.
DOCUMENT MANAGEMENT SERVICE. Precept believes that its innovative
management system streamlines business product ordering and distribution,
which simplifies document monitoring and storage and encourages
"Just-in-Time" business product management. Through Precept's fully
integrated on-line 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 access 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 years 1998, 1997, and 1996. Precept relies on a commission only based
sales force dedicated to all of its products and services, thereby ensuring
product and service knowledge focused on its principal customers. Precept
emphasizes personal sales and marketing relationships with the customer by
providing 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 are accountable 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 a customer service representative,
maximize service and enhance long term customer relations. Precept believes
that its presence in 65 locations allows its sales representatives to service
customers ranging from small businesses to large, national corporations in
multiple locations. Through a continued effort to improve efficiency and
provide 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 functions. 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. Precept has performed a review of its hardware and software
systems and believes that the current management information systems owned or
leased by Precept are Year 2000 compliant with the exception of one acquired
subsidiary's information system. To the extent
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that any current means of electronic commerce are found to be non-compliant
with the year 2000, Precept believes that it will be able to continue to
conduct such commerce through other electronic or manual methods.
COMPETITION. Precept believes that its ability to compete successfully
in the business products distribution and document management business is
based upon its ability to offer a complete range of products and services and
to achieve favorable pricing by maintaining a significant volume of business
with its suppliers. Precept's principal competitors are manufacturers with a
direct sales force, local and regional independent distributors and divisions
of larger publicly held companies, including Global Docugraphix and Workflow
Management.
PRECEPT TRANSPORTATION SERVICES
Precept is engaged in the corporate transportation services industry in
Dallas/Fort Worth, Texas; Cincinnati, Ohio and Northern Kentucky; Dearborn,
Michigan; and in the New York metropolitan area. The transportation services
division provides chauffeured vehicle services, courier and delivery
services, and contract transportation services. Chauffeured vehicle
operations located in the Dallas/Fort Worth and New York City metropolitan
markets provide services under the names Precept Transportation of Texas and
Westchester Express using a fleet of town cars, stretch limousines, vans and
mini-buses. Courier and delivery services are provided primarily in the
Dallas/Fort Worth market. Contract transportation services are provided in
Dearborn, Michigan and at the Cincinnati/Northern Kentucky airport with a
fleet of buses.
CHAUFFEURED VEHICLE SERVICES
Precept's chauffeured vehicle service operations are located in
Westchester County, New York and Dallas County, Dallas and are performed for
corporate customers and the general public in the Greater New York and
Dallas/Fort Worth metropolitan markets. The Company operates a fleet of 92
vehicles consisting of a mixture of town cars, stretch limousines, vans and
mini-buses. The fleet in New York is primarily driver-owned or
driver-leased; the fleet in Dallas/Fort Worth is primarily company-owned.
The vehicles are used to provide services for airport shuttles, conventions,
social events, business meetings and leisure travel. Precept also makes this
chauffeured service available on a worldwide basis through an international
reservation and referral network. Corporate customers utilize the services
primarily to achieve more efficient use of their employees' time and other
resources. Approximately 200 regular customers are served by the two fleets
and 118 employees and drivers. There is significant competition in the
Dallas/Fort Worth and New York geographic markets.
COURIER AND DELIVERY SERVICE
The courier and delivery service is provided under the Wingtip and Relay
names within the Dallas/Fort Worth metropolitan area. Courier and delivery
services are provided on both a scheduled and an unscheduled pick-up and
delivery basis for approximately 1,000 customers using a fleet of 75 vehicles
that are company-owned, driver-owned and driver-leased. On-board computers
in the vehicles, along with automated tracking and dispatching, allow
packages to be picked up and delivered within various time constraints
including one-hour deliveries. There is significant competition in the
Dallas/Fort Worth market from several competitors. The market is
unregulated, price sensitive and constantly evolving through the development
of new services.
CONTRACT TRANSPORTATION SERVICE
This portion of Precept's business consists of supplying buses, vans or
customized vehicles to customers pursuant to written contracts or purchase
orders that are generally awarded on a competitive bid basis. Customers
include corporations and governmental agencies. Precept's operation in
Dearborn, Michigan uses a fleet of 14 vehicles and 30 employees to provide
parking lot transportation for Ford Motor Company and Rouge Steel. Precept's
operation in Northern Kentucky uses 13 vehicles and 48 employees to provide
long-term parking shuttle and downtown shuttle services at the airport and
from the airport to
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downtown Cincinnati. A smaller portion of each operation's business involves
charter bus service on demand based on the availability of buses.
GOVERNMENT REGULATION
Precept is subject to regulation by various agencies including the New
York, Michigan, Kentucky, Ohio and Texas State Departments of Transportation,
the Port Authorities of New York and New Jersey, Dallas and Cincinnati, 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 Precepts transportation
services.
EMPLOYEES
As of September 21, 1998, Precept and its subsidiaries had 731 full-time
employees, of which 437 are engaged in sales, sales support and warehouse
activities, 220 directly provide or support transportation services and 74 are
administrative, information systems and management employees. Two of Precept's
transportation livery services businesses employ 71 people participating in
collective bargaining agreements. These agreements expire in August 2000 and
July 2001. The Company believes that its relations with its employees and
unions are satisfactory.
RISK FACTORS AFFECTING THE COMPANY'S PROSPECTS
RAPID EXPANSION AND DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH
One of the company's strategies is to increase its revenues and the markets
it serves through the acquisition of additional business products distributors
and transportation service companies. Since 1991, the Company has completed the
acquisition of 29 businesses. Since the end of its 1998 fiscal year, Precept
has completed the acquisition of 4 business products distributors. Precept has
continued to actively negotiate to acquire additional businesses that offer
business products distribution and transportation services consistent with its
strategy of pursuing an aggressive acquisition program. There can be no
assurance, however, that definitive agreements for additional acquisitions will
be executed or that additional acquisitions will be completed. In addition,
there can be no assurance that the Company's management and financial controls,
personnel, computer systems and other corporate support systems will be adequate
to manage the anticipated increase in the size and scope of its operations and
acquisition activity.
The Company depends on both acquisitions and internally generated growth to
increase its revenue and earnings. There can be no assurance that it will
complete acquisitions in a manner that coincides with the end of its fiscal
quarters. The failure to complete acquisitions on a timely basis could have a
material adverse effect on the Company's ability to meet its quarterly projected
results and the projected results estimated by investors and analysts.
Likewise, delays in implementing planned integration strategies and activities
could also affect its quarterly earnings.
In addition, there can be no assurance that future acquisitions will occur
at the same pace or be available to the Company on favorable terms, if at all.
For example, if the Company is unable to use the Company's Class A common stock
as consideration in acquisitions because it believes that the market price of
the common stock is too low or because the owners of potential acquisition
targets conclude that the market price of the Company's common stock is too
volatile, the Company would need to use cash and seller notes to make
acquisitions and, therefore, would be unable to negotiate acquisitions that it
could account for under the pooling-of-interest method of accounting (which is
available only for all-stock acquisitions). This condition and the availability
of debt financing might adversely affect the pace of the Company's acquisition
program and the impact of acquisitions on the Company's quarterly results. In
addition, the consolidation of the business products distribution and
transportation services industries will reduce the number of mid- to large-sized
companies available for sale, which could lead to higher prices being paid for
the acquisition of the remaining business products distribution and
transportation service companies.
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RISKS RELATED TO EXPANSION INTO NEW PRODUCT AND SERVICE AREAS AND TO
ACQUISITIONS
The Company's ability to manage an aggressive consolidation program in its
industries has not yet been fully tested. The Company has increased the range
of products and services it offers through acquisitions of companies offering
products and services that are complementary to the products and services that
the Company has offered since it began operations. The Company's efforts to sell
additional products and services to existing customers are ongoing and there can
be no assurance that such efforts will be successful.
In addition, there can be no assurance that companies that have been
acquired or that may be acquired in the future will achieve sales and
profitability levels that justify the purchase prices paid by the Company.
Acquisitions may involve a number of special risks that could have a material
adverse effect on the Company's operations and financial performance, including
adverse short-term effects on its reported operating results; diversion of
management's attention; difficulties with the retention, hiring and training of
key personnel, particularly sales personnel; risks associated with unanticipated
problems or legal liabilities; and amortization of acquired intangible assets.
Finally, although the Company conducts due diligence and generally receives
representations, warranties and indemnification from the former owners of
acquired companies, there can be no assurance that such owners will have
accurately represented the financial and operating conditions of their
companies. If an acquired company's financial or operating results were
misrepresented, the acquisition could have a material adverse effect on the
results of operations and financial condition of the Company.
INTEGRATION OF ACQUISITIONS AND LIMITED COMBINED OPERATING HISTORY
The Company was founded in 1988 and has conducted operations since that
date. Since its inception, the Company has acquired 29 companies and continues
to execute its acquisition strategy. In most cases, the managers of the
acquired companies have continued to operate their companies after being
acquired by the Company. The Company has integrated the businesses acquired
prior to March 1998; however, there can be no assurance that the Company will be
able to integrate all of the companies acquired since March 1998 within its
operations without substantial costs, delays or other problems. In addition,
there can be no assurance that the Company's executive management group can
continue to oversee the Company and effectively implement its operating or
growth strategies in each of the markets it serves. There also can be no
assurance that the rapid pace of acquisition will not adversely affect the
Company's continuing efforts to integrate and manage those acquisitions
profitably.
DEPENDENCE ON IMPLEMENTATION AND OPERATION OF SYSTEMS
The Company believes that the successful operations of the businesses that
it has acquired and intends to acquire depends in part on the implementation of
computerized inventory management and order processing systems and warehouse
management and distribution systems. In January 1996, the Company selected and
began implementing Prelude's Automated Distribution System ("ADS") software
system as its primary software and management information system. The Company
may experience delays, complications or expenses in integrating and operating
its systems for its recently acquired subsidiaries and future operations, any of
which could have a material adverse effect on the Company's results of
operations and financial condition. In addition, although the Company has
performed a review of its hardware and software systems for compliance with year
2000 matters, there can be no assurance that the Company has detected all
non-compliance matters. Also, there can be no assurance that the effect of such
non-compliance would not have a material adverse effect on the Company's
operations.
SUBSTANTIAL COMPETITION AND INDUSTRY CONSOLIDATION
The Company operates in a highly competitive environment. In the markets
in which it operates, the Company generally competes with a large number of
larger and smaller companies offering business products and transportation
services, many of which are well-established in their markets. In addition, in
the business products distribution markets, the Company competes with several
national retail office
8
<PAGE>
products companies and national contract stationers, each of which has
significant financial resources. Most, if not all, of its large competitors
operate in many of its geographic and product markets. In addition, other
competitors may choose to enter the Company's geographic and product markets.
As a result of this competition, the Company may lose customers or have
difficulty acquiring new customers. As a result of competitive pressures on
the pricing of products, the Company's revenues or margins may decline.
The Company faces significant competition to acquire additional businesses
as the business products industry undergoes continuing consolidation.
Significant competition exists, or is expected to develop, in the other markets
that the Company serves or is planning to enter as consolidation occurs (or
accelerates) in those markets. The Company believes that its major competitors
are actively pursuing acquisitions in the United States and outside of the
United States. These companies, or other large companies, may compete with the
Company for acquisitions in its markets. Such competition could lead to higher
prices being paid for acquired companies.
In response to industry and market changes, including industry
consolidation and the continued volatility in the market price of shares of
common stock of companies in the industries served by the Company, Precept
considers, from time to time, additional strategies to enhance shareholder value
in light of such changes. These include, among others, strategic alliances and
joint ventures; spin-offs; purchase, sale or merger transactions with other
large companies; a recapitalization of the Company; and other similar
transactions. There can be no assurance that any one of these strategies will
be undertaken, or that, if undertaken, any such strategy will be successfully
completed.
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
The purchase price of the Company's acquisitions have not been established
by independent appraisals, but generally have been determined through
arms-length negotiations between the Company's management and representatives of
the acquired companies. The consideration paid for each acquisition has been
based primarily on the value of such company as a going concern rather than the
value of the acquired assets. Valuation of these companies determined solely by
appraisals of the acquired assets would have been less than the consideration
paid for the companies. No assurance can be given that the future performance
of such companies will be commensurate with the consideration paid. Moreover,
the company has incurred and expects to continue 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.
QUARTERLY FLUCTUATION IN OPERATING RESULTS
The Company's business is subject to seasonal influences, generally during
the first and second quarters of each fiscal year. The Company's historical
revenues and profitability in its two divisions have been lower in the first
quarter of its fiscal year, primarily due to the lower level of business
activity during the summer months. As the Company's mix of business evolves
through future acquisitions, these seasonal fluctuations may continue.
Quarterly results may also be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, general economic conditions and the retroactive restatements
in accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any one quarter are not necessarily indicative
of the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year. However, fluctuations in quarterly operating results
may have a material adverse effect on the market price of the Company's Class A
common stock.
VOLATILITY OF STOCK PRICE
9
<PAGE>
The market price of the Company's Class A common stock is subject to
significant fluctuations. These fluctuations can be caused by variations in
stock market conditions, changes in financial estimates by security analysts or
failure by the Company or its competition to meet such estimates, quarterly
operating results, announcements by the Company or its competitors, general
conditions in the business products and transportation service industries and
other factors. Since March 18, 1998, the date when the Company's Class A common
stock first traded on the NASDAQ SmallCap Market, the Company's Class A common
stock has traded in the range of $1.938 to $4.375 per share. The stock market
in recent years has experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating performance of publicly
traded companies. These broad fluctuations may have a material adverse effect
on the market price of the Company's Class A common stock.
NEED FOR ADDITIONAL FINANCING TO CONTINUE ACQUISITION STRATEGY
The Company expects that it will continue to finance acquisitions by using
cash as well as shares of the Company's Class A common stock. In addition, the
Company expects that future acquisitions may require a higher percentage of cash
as total consideration. In certain circumstances, the Company may be unable to
use stock for consideration for acquisitions. If it does not have sufficient
cash resources or available debt financing to pay the cash consideration for
acquisitions, the Company may be unable to continue the current pace of its
aggressive acquisition program, which could have a material adverse impact on it
and the market price of the Company's Class A common stock.
Assuming that the current pace of its acquisitions continues, the Company
will need debt or equity financing. There can be no assurance that it will be
able to obtain such financing if and when it is needed or that any such
financing will be available on terms it deems acceptable. The Company has a
revolving line of credit agreement with its lender, Wells Fargo Bank, which
provides it with $25,000,000 available for borrowing. The amount available to
be borrowed under the credit facility will vary from time to time depending upon
the level of the Company's consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") on a pro forma basis reflecting
completed acquisitions, its total indebtedness and related interest expense. As
of September 24, 1998, the Company had approximately $20.0 million outstanding
under the credit facility at an annual interest rate of approximately 8.5% and
$5.0 million available for future borrowing.
RELIANCE 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.
CONTROL BY MANAGEMENT AND SHAREHOLDERS
As of September 24, 1998, officers and directors of the Company and its
subsidiaries beneficially owned 41% of the outstanding shares of the Company's
Class A and Class B common stock and control 65% of the voting power of such
common stock. By virtue of his Class B ownership and proxies with the Company's
chief executive officer and chief operating officer, the Company's majority
shareholder effectively controls the outcome of matters submitted to a vote of
shareholders and, indirectly, controls all major decisions reached by the
Company's Board of Directors and officers. These shareholders acting together
may be able to elect a sufficient number of directors to control the Company's
Board of Directors and to approve or disapprove any matter submitted to a vote
of shareholders.
RISKS RELATED TO UNIONIZED EMPLOYEES
10
<PAGE>
A small number of the Company's employees are members of labor unions. If
unionized employees were to engage in a strike or other work stoppage, or if
other employees were to become unionized, the Company could experience a
disruption of operations or higher labor costs, which could have a material
adverse effect on operations.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF THE
COMPANY'S CLASS A COMMON STOCK
The Company has an aggressive acquisition program under which it has issued
20.7 million shares of its Class A common stock as of September 24, 1998. Under
the pooling-of-interests method of accounting, the affiliates of the acquired
companies, which are, in most cases, all of the shareholders of the companies
acquired by Precept, must be free to sell or otherwise transfer shares of the
Company's Class A common stock received in the acquisition, subject to their
compliance with the federal securities laws, as soon as the Company releases
results of operations that reflect the combined post-acquisition operations of
the Company and the acquired company for a minimum of 30 days. Approximately
6.1 million shares will become freely transferable (subject to certain volume
and other restrictions of Rule 145(d) under the Securities Act of 1933, as
amended) upon the Company's public announcement of results of operations
reflecting 30 days of combined post-acquisition operations of it and the
acquired companies. The Company expects to complete additional acquisitions in
the future that will be accounted for under the pooling-of-interests method. If
a significant number of shares of the Company's Class A common stock are issued
in acquisitions that are completed in close proximity to each other, such shares
will become freely tradable at the same time. If a large number of shares are
sold in the market by shareholders as soon as their shares become freely
transferable, the price of shares of the Company's Class A common stock could be
adversely affected.
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION AND BYLAWS AND OTHER
STOCKHOLDER PROTECTION MECHANISMS
Certain provisions of the Precept Articles and Bylaws may delay, defer, or
prevent a tender offer or takeover attempt that a shareholder might consider
being 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 at 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 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, thereby 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
11
<PAGE>
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
niterests of the Precept shareholders and Precept can be addressed in an
orderly and well-informed manner.
USTS RELATED LITIGATION
Although Precept has not been named a party to any significant litigation
involving USTS, its former shareholders or its former officers, the Company
believes that there is a risk that existing and future claims and litigation
involving former USTS shareholders, officers or business operations may arise in
the future to which the Company may be a party. The Company expects to
vigorously defend any such action; however, there can be no assurance that the
Company will succeed in such efforts without incurring damages, settlement costs
or legal fees.
ITEM 2 - PROPERTIES
Precept's executive offices are located at 1909 Woodall Rodgers Freeway,
Suite 500, Dallas, Texas in approximately 50,000 square feet of office space
leased with a term which expires in July 2001. The Company operates its
business products division from 70 sales offices, branch offices and regional
offices located primarily in the Southeast, Southwest, Northeast and Central
areas in the United States. These offices, including related warehouse space,
are primarily leased and range in size from 600 to 28,000 square feet, for a
total of approximately 110,000 square feet. The Company also owns 137,000
square feet of office space. In addition, the Company ships products from
approximately 25 warehouse locations in the United States. Its largest
warehouse facility consists of approximately 100,000 square feet in Dallas that
is managed and operated by a third party contractor under a short term
agreement. The Company generally owns the equipment, furniture and fixtures in
such locations.
In the transportation division, the Company operates from approximately
150,000 square feet of leased office, garage, and parking lot space from five
locations in the states of New York, Texas, Michigan and Kentucky. The Company
owns and leases its transportation equipment that consists principally of town
cars, limousines, vans, mini-buses and buses.
The Company maintains satisfactory relations with its landlords. The
Company considers its current office and warehouse space as adequate to serve
its existing business operations. The Company expects to replace its
transportation equipment on a recurring basis at the end of the equipment's
useful life.
ITEM 3 - LEGAL PROCEEDINGS
JOHN ALDEN LIFE INSURANCE CO.
On January 25, 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 $400,000 in past
due invoices. 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 $9,000,000 in damages. 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.
OTHER MATTERS
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
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<PAGE>
have a material adverse effect on the business, financial condition,
results of operations or liquidity of Precept.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1998.
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Class A common stock of the Company is listed on the NASDAQ SmallCap
Market under the symbol "PBSIA". The high and low prices for the Company's
Class A common stock since the common stock was approved for listing on March
20, 1998 are shown below:
QUARTER ENDED LOW PRICE HIGH PRICE
------------- --------- ----------
March 31, 1998 $4.189 $4.375
June 30, 1998 $2.375 $4.186
September 23, 1998 (quarter to date) $1.969 $3.469
As of September 21, 1998, there were approximately 3,300 holders of the
Company's Class A common stock, one holder of the Company's Class B common stock
and one holder of the Company's warrants to purchase Class A common stock. The
Company's warrants trade on the NASDAQ SmallCap Market under the symbol "PBSIW".
DIVIDEND POLICY
The Company has not declared or paid any cash or other dividends on its
common stock and does not expect to pay dividends for the foreseeable future.
Instead, the Company intends to retain earnings to reduce indebtedness and
support its growth strategy. As a holding company, the ability of the Company
to pay dividends in the future is dependent upon the receipt of dividends or
other payments from its principal operating subsidiaries. Any future
determination to pay dividends will be at the discretion of the Company's Board
of Directors and will depend upon, among other factors, the Company's results of
operations, financial condition, capital requirements and contractual
restrictions.
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<PAGE>
ITEM 6 - FINANCIAL DATA
PRECEPT BUSINESS SERVICES, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Amounts in thousands, except per share amounts)
The following table presents selected consolidated financial information
from continuing operations as of and for each of the five years in the period
ended June 30, 1998. The information as of and for each of the three years
in the period ended June 30, 1998 was derived from the audited consolidated
financial statements of the Company. The consolidated financial information
for each of the two years in the period ended June 30, 1995 was derived from a
combination of the Company's audited historical consolidated financial
statements for the years ended June 30, 1995 and 1994 and the unaudited
historical financial statements for two acquired businesses for similar
periods. The selected consolidated financial information should be read in
conjunction with management's discussion and analysis of the results of
operations and financial condition of the Company and with the consolidated
financial statements and notes thereto, included in this Form 10-K. The
selected consolidated financial information is significantly affected by the
businesses acquired by Precept for each of the periods presented. The
historical financial statements of the Company for all periods presented have
been restated to combine the financial statements of two businesses acquired
in 1998 that have been accounted for following the pooling of interests method.
The amounts presented below are in thousands, except per share data.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Business products. . . . . . . . . . . . . . $ 113,536 $ 109,397 $ 105,464 $ 87,392 $ 75,538
Transportation services. . . . . . . . . . . 9,456 6,566 5,840 6,005 5,483
---------- ---------- ----------- ----------- -----------
122,992 115,963 111,304 93,397 81,021
Cost of goods sold. . . . . . . . . . . . . . . . 85,281 79,729 75,687 58,994 41,988
Sales commissions . . . . . . . . . . . . . . . . 15,075 14,615 13,786 11,805 15,756
Selling, general and administrative expenses. . . 16,417 17,229 18,302 18,350 19,038
Depreciation and amortization . . . . . . . . . . 1,821 1,788 1,677 1,516 1,143
Non-recurring acquisition costs . . . . . . . . . 486 - - - -
---------- ---------- ----------- ----------- -----------
Operating income. . . . . . . . . . . . . . . . . 3,912 2,602 1,852 2,732 3,096
Interest and other expense. . . . . . . . . . . . 1,936 618 929 357 1,937
---------- ---------- ----------- ----------- -----------
Income before income taxes. . . . . . . . . . . . 1,976 1,984 923 2,375 1,159
Income tax provision. . . . . . . . . . . . . . . 790 828 16 355 791
---------- ---------- ----------- ----------- -----------
Net income. . . . . . . . . . . . . . . . . . . . $ 1,186 $ 1,156 $ 907 $ 2,019 $ 368
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
Diluted net income per share. . . . . . . . . . . $ 0.03 $ 0.03 $ 0.02 $ 0.05 $ 0.01
Diluted weighted average shares outstanding . . . 46,191 42,623 42,495 42,814 42,946
</TABLE>
<TABLE>
<CAPTION> JUNE 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Trade accounts receivable . . . . . . . . . . . . $ 15,595 $ 14,235 $ 15,089 $ 13,115 $ 4,073
Inventory . . . . . . . . . . . . . . . . . . . . 5,133 3,225 2,621 3,062 535
Working capital . . . . . . . . . . . . . . . . . 13,837 13,394 15,288 14,583 7,609
Total assets. . . . . . . . . . . . . . . . . . . 56,487 37,292 39,740 31,745 31,224
Long-term debt. . . . . . . . . . . . . . . . . . 20,085 7,821 5,397 1,128 1,047
Shareholders' equity. . . . . . . . . . . . . . . 22,002 16,102 19,059 18,846 18,545
</TABLE>
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<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 five corporate transportation service ("Transportation
Services") companies in the United States. 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 21 companies in the Business Products industry
plus eight in the Transportation Services industry.
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 that 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.
This section should be read in conjunction with Item 1 - Business, in
particular "Risk Factors Affecting the Company's Prospects", and with the
consolidated financial statements included in Item 8.
ACQUISITIONS
The Company's results of operations and the comparability of the
Company's results of operations from period to period have been significantly
affected by businesses acquired in each period. From 1991 through the end of
fiscal year 1998, the Company has completed 25 acquisitions. 17 business
products distribution companies and 8 transportation service companies. Two
business products companies acquired in fiscal year 1998 were accounted for
using the pooling-of-interests method and, as a result, the consolidated
financial statements of the Company have been restated to combine the
financial statements of the Company with the pooled companies' financial
statements for all periods presented. The remaining acquisitions by the
Company have been accounted for following the purchase method and, as a
result, the results of operations of the acquired companies have been
included in the Company's results of operations from the dates of acquisition.
In March 1998, the Company purchased three operating subsidiaries,
corporate assets and corporate obligations from USTS in exchange for issuing
9,612,500 shares of its Class A common stock to USTS and 1,815,000 warrants
to purchase Class A common stock to the former shareholders of USTS. In
addition, the Company repaid $5.3 million of USTS' outstanding debt. This
acquisition was accounted for following the purchase method of accounting
and, as a result, the operating results of the businesses acquired have been
included in Precept's operating results from the date of acquisition. The
total purchase price for USTS amounted to $10.8 million, of which $4.4
million was paid in Class A common stock and
15
<PAGE>
warrants, $5.3 million by assuming and repaying USTS' debt and $1.1 million
was incurred through direct acquisition costs. The purchase price has been
preliminarily allocated as follows: $12.8 million to goodwill, $0.9 million
to account receivable, $6.4 million to long-term debt, $3.7 million to
accounts payable and accrued liabilities and $0.8 million to other assets.
The Company has elected to amortize goodwill over an estimated useful life of
forty years. Subsequent to the acquisition of USTS, Precept sold its 75%
interest in a long-haul trucking company, U.S. Trucking, Inc. ("USTI") for
$0.2 million in cash and $1.8 million in notes receivable, which note has
been fully reserved. Also subsequent to the acquisition of USTS, the Company
entered into a separation and general release agreement with the former
chairman of USTS and also agreed to sell certain bus assets to the former
chairman. The sale of USTI, the separation and general release agreement and
the sale of the bus assets were reflected in the preliminary allocation of
the purchase price.
In April 1998, the Company acquired InfoGraphix, a business products
distribution company based in Boston, Massachusetts, with annual revenues of
approximately $23.3 million. This purchase was paid for with the issuance of
2.1 million shares of the Company's Class A common stock. In June 1998, the
Company acquired MBF Corporation, a business products distribution company
based in Monroe, Louisiana, with annual revenues of approximately $19.2
million. This purchase was paid for with the issuance of 4.1 million shares
of the Company's Class A common stock. The combined market value of the
Class A common stock issued in these pooling acquisitions amounted to $18.3
million. Both of these acquisitions were accounted for following the pooling
of interests method and, as a result, the Company's historical financial
statements have been restated to include the financial statements of
InfoGraphix and MBF for all periods presented.
Since June 30, 1998, the Company has completed the acquisition of four
business products distribution companies located in Salt Lake City, Utah;
Houston, Texas; Bangor, Maine; and Florence, South Carolina with combined
annual revenues of $34.3 million. Such acquisitions were paid for with an
aggregate of $7.8 million in cash, financed by the Company's revolving line
of credit, $1.4 million in seller notes, 5.3 million shares of Class A common
stock, and $0.8 million in assumed debt.
PURCHASE ACCOUNTING EFFECTS
The Company's acquisitions have been primarily accounted for using the
purchase accounting method. The acquisitions have currently affected, and
will prospectively affect, the Company's results of operations in certain
significant respects. The Company's revenues and operating expenses will be
directly affected by the timing of the acquisitions. The aggregate
acquisition costs, including assumption of debt, are allocated to the net
assets acquired based on the fair market value of such net assets. The
allocations of the purchase price results in an increase in the historical
book value of certain assets, including property and equipment, and generally
results in the allocation of a portion of the purchase price to goodwill,
which results in incremental annual amortization expense.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items from continuing operations as
a percentage of revenues for the fiscal years ended June 30, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenue:
Business products . . . . . . . . . . . . . . . . 92.3% 94.3% 94.7%
Transportation services . . . . . . . . . . . . . 7.7% 5.7% 5.3%
------ ------ ------
100.0% 100.0% 100.0%
Operating expenses:
Cost of goods sold. . . . . . . . . . . . . . . . 69.3% 68.8% 68.0%
Sales commissions . . . . . . . . . . . . . . . . 12.3% 12.6% 12.4%
Selling, general and administrative expenses. . . 13.3% 14.9% 16.4%
Depreciation and amortization . . . . . . . . . . 1.5% 1.5% 1.5%
Non-recurring acquisition costs . . . . . . . . . 0.4% 0.0% 0.0%
------ ------ ------
Operating income . . . . . . . . . . . . . . . . . . . 3.2% 2.2% 1.7%
Interest and other expense:
Interest expense. . . . . . . . . . . . . . . . . 0.9% 0.5% 0.5%
Other expense, net. . . . . . . . . . . . . . . . 0.7% 0.0% 0.4%
------ ------ ------
1.6% 0.5% 0.9%
------ ------ ------
Income before income tax provision . . . . . . . . . . 1.6% 1.7% 0.8%
Income tax provision . . . . . . . . . . . . . . . . . 0.6% 0.7% 0.0%
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . 1.0% 1.0% 0.8%
------ ------ ------
------ ------ ------
</TABLE>
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
REVENUE for 1998 increased by $7.0 million, or 6.1%, from $116.0 million
in 1997 to $123.0 million in 1998. In 1998, Business Products revenue
increased by $4.1 million or 3.8% and Transportation Services revenues
increased $2.9 million or 44.0%. The increase in Business Products revenue
was due to the acquisition of three business products companies during 1998,
which accounted for $2.1 million, and internal growth from existing and
pooled companies of $2.0 million. The internal growth offset the lost sales
from three customers who were acquired or who left the geographic markets
served by the Company. The increase in Transportation Services revenue of
$2.9 million in 1998 was primarily due to the acquisition of four
transportation companies.
COST OF GOODS SOLD for 1998 increased by $5.6 million, or 7.0%, from
$79.7 million in 1997 to $85.3 million in 1996. Cost of goods sold for
Business Products increased by $3.1 million of which approximately one-half
was due to companies acquired during the year and the remainder was due to
internal growth of existing and pooled companies. Transportation Services
cost of goods sold increased by $2.5 million due to the four transportation
companies acquired during 1998. As a percentage of revenue, cost of goods
sold for 1998 increased by 0.5% from 68.8% in 1997 to 69.3% in 1998. This
percentage increase was primarily due to the mix of business products sold
during the year.
SALES COMMISSIONS increased by $0.5 million, or 3.1%, in 1998, from
$14.6 million in 1997 to $15.1 million in 1998 due primarily to the increased
level of Business Products revenue. As a percentage of revenue, sales
commissions have been fairly consistent in 1997 and 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE decreased by $0.8 million or
0.4% in 1998 from $17.2 million in 1997 to $16.4 million in 1998. Increased
expenses of $0.8 million from business products and transportation services
companies acquired were offset by $1.6 million in reduced expenses in
existing business products and corporate functions. As a percentage of
revenue, selling, general and administrative expenses have declined by 1.6%
from 14.9% in 1997 to 13.3% in 1998. The reduced expenses in existing
17
<PAGE>
operations are primarily a result of the Company's continuing efforts and
strategy to realize synergies from acquisitions by merging common
administrative and support functions.
NON-RECURRING ACQUISITION COSTS amounted to $0.5 million in 1998 and
consist of accounting, legal and investment banking fees, real estate fees,
appraisal fees and various regulatory fees incurred in connection with the
acquisition of two companies which were accounted for following the pooling
of interests method.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.1 million in 1998
from $1.7 million in 1997 to $1.8 million in 1998 due largely to the size and
timing of the companies acquired in 1998.
INTEREST AND OTHER EXPENSE increased by $1.3 million or 213.4% during
1998, from $0.6 million in 1997 to $1.9 million in 1998. In 1998, interest
expense increased by $0.6 or 92.1%, from $0.6 million in 1997 to $1.2 million
in 1998 principally due to additional debt incurred by the Company in 1998 to
finance its acquisitions. Other expenses of $0.8 million in 1998 are due
primarily to a subsidiary's write-off of an investment and one-time payment
by the shareholder of an acquired subsidiary.
INCOME TAXES are provided at a 40.0% effective rate in 1998 compared to
a 41.7% rate in 1997. This reduction is due primarily to state income tax
and non-deductible expense reductions.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
REVENUE increased by $4.7 million or 4.2% in 1997 from $111.3 million in
1996 to $116.0 million in 1997. Approximately $3.7 million of this increase
is attributable to business products companies acquired during 1997. The
remaining $1.0 million increase in revenue was generated by existing
operations, $0.7 million in Transportation Services and $0.3 million in
Business Products.
COST OF GOODS SOLD increased by $4.1 million or 5.3% from $75.7 million
in 1996 to $79.8 million in 1997. Approximately $2.6 million of the increase
is related to the Business Products acquisitions completed during 1997 and
the remaining $1.5 million is due to existing operations. Cost of goods sold
increased by 0.8% in 1997 from 68.0% in 1996 to 68.8% in 1997 due to a higher
proportion of business products revenue from higher cost products.
SALES COMMISSIONS increased by $0.8 million, or 6.0%, in 1997 from $13.8
million in 1996 to $14.6 million in 1997, with the increase due to higher
Business Products revenue. As a percentage of revenue, sales commissions
were fairly consistent from 1996 to 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased by $1.1 million
or 5.9% in 1997 from $18.3 million in 1996 to $17.2 million in 1997. In
1997, these expenses were reduced by $1.1 million due largely to a reduction
in incentive based compensation paid to executive officers.
DEPRECIATION AND AMORTIZATION EXPENSE increased by $0.1 million in 1997
from $1.6 million in 1996 to $1.7 million in 1997 due largely to companies
acquired during 1997.
INTEREST AND OTHER EXPENSE decreased by $0.3 million in 1997 from $0.9
million in 1996 to $0.6 million in 1997. This reduction was primarily due to
interest expense of $0.4 million in 1996 related to sales and use tax
liabilities that did not recur in 1997.
INCOME TAXES are provided at a 41.7% effective tax rate in 1997 as
compared to a 1.6% effective tax rate in 1996. The effective tax rate for
1997 is higher than 40% due primarily to state income taxes and other
non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH FLOWS FROM OPERATING ACTIVITIES. In fiscal year 1998, the
Company used $4.4 million in cash from operations as compared to $0.7 million
generated in 1997 and $0.6 million used in 1996. During 1998,
18
<PAGE>
increases in accounts receivable, inventory and other current assets were
funded with borrowings under the Company's revolving line of credit. During
fiscal year 1998, the Company increased its net income due to the benefits of
companies acquired in the previous two years and the reduction of the losses
from discontinued operations. During fiscal years 1997 and 1996, the cash
flow generated by Business Products' and Transportation Services' continuing
operations was largely offset by the cash needs of the discontinued
operations of two subsidiaries, Precept Builders, Inc. ("Builders") and
Precept Holdings, Inc. ("Holdings"). The Company used its revolving line of
credit to supplement any cash needs that were not provided by operating
activities. During 1997 and 1996, cash flow from operations was
significantly reduced by the levels of accounts receivable and costs in
excess of billings on uncompleted contracts for one of its discontinued
operations. The working capital of continuing operations was a relatively
constant $13.0 million to $14.0 million during this period.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During fiscal year 1998,
Precept used $5.5 million in cash for investing activities as compared to
$3.1 million and $3.0 million in 1997 and 1996, respectively. In 1998, the
Company used $7.1 million in cash to purchase five businesses, including
paying contingent consideration of $0.1 million and direct acquisition costs
of $1.7 million incurred in connection with 8 of its business acquisitions.
During 1998, the Company acquired eight businesses, six of which were
accounted for following the purchase method and two of which were accounted
for following the pooling method. In 1998, the Company spent $0.9 million
for equipment. In addition, discontinued operations generated $2.4 million
in cash primarily from the sale of the Company's interest in a ranch and the
sale of a condominium. During 1997, the Company acquired two businesses for
$1.1 million and paid $0.1 million for contingent consideration. In addition,
the Company spent $1.9 million to acquire property and equipment, primarily
for information systems equipment, warehouse equipment, town cars and office
furniture and fixtures. During 1996, Precept spent $3.4 million to acquire
two businesses and $0.1 million for contingent consideration. The Company
also acquired $1.2 million of equipment, primarily information systems
equipment, town cars and office furniture and fixtures. In 1996, the Company
also redeemed a certificate of deposit for $1.7 million.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In fiscal year 1998, $9.7
million of cash was generated by financing activities as compared to $1.7
million and $4.2 million of cash generated by financing activities in fiscal
years 1997 and 1996, respectively. During 1998, Precept increased its
outstanding revolving line of credit balance by approximately $8.7 million in
order to finance acquisitions. In addition, the Company financed $0.3
million of its equipment purchases with capitalized lease obligations and
collected $0.8 million in notes receivable from shareholders for prior stock
purchases. During 1997, the Company increased its revolving line of credit
by approximately $1.8 million in order to finance its acquisitions of
property and equipment and its acquisitions of businesses. The Company also
borrowed $0.3 million in long-term debt to finance equipment purchases.
During 1996, the Company increased its outstanding revolving line of credit
balance by $4.5 million in order to finance acquisitions of businesses and to
fund the working capital needs of a discontinued operation, Builders. In
1996, the Company repaid $0.4 million in long-term debt by proceeds from its
revolving line of credit. In addition, the Company received a capital
contribution of $0.6 million from its shareholders. During fiscal years 1997
and 1996, one of the Company's acquired subsidiaries distributed dividends of
$0.3 million and $0.5 million to the subsidiary's former shareholder.
Management believes that based on current levels of operations, cash
flow from operations, the existing revolving line of credit agreement and
available cash on hand at June 30, 1998 of $2.3 million will be adequate for
fiscal year 1999 to make required payments of principal and interest on the
Company's indebtedness, to fund anticipated capital expenditures of
approximately $2.0 million in 1999, and to meet working capital needs.
The amount of debt available under the Company's current revolving line
of credit is $25,000,000. The revolving line of credit bears interest at the
lower of prime or LIBOR plus a margin range. The Company has the option of
electing a prime or LIBOR interest rate. The margin range is determined
based on the Company's performance against certain rations, primarily debt
and interest coverage. The Company's ability to borrow under this revolving
line of credit is based on a multiple of pro forma EBITDA. In addition,
substantially all the Company's operating assets are pledged as collateral
under this
19
<PAGE>
line of credit. As of September 24, 1998, the Company had approximately $20.0
million outstanding under the credit facility at an annual interest rate of
approximately 8.5% and $5.0 million available for future borrowing.
The Company is in the process of working with its bank, and to the
extent needed, other lenders, to implement a larger debt financing agreement.
It is likely that the new debt financing structure could be syndicated among
a group of lenders and will be a mix of senior and subordinated debt. The
Company believes that this larger debt structure will permit it to pursue its
current acquisition strategy during fiscal year 1999. The Company believes
that additional debt or equity financing will be required in future years for
the Company to pursue its current acquisition strategy beyond fiscal year
1999. The Company expects that the amount of debt available under its future
debt financing structure will be determined based on a multiple of pro forma
EBITDA. In addition, the Company expects that it will be subject to certain
restrictive covenants including debt coverage, interest coverage, dividends
and other debt. The Company also expects that substantially all of its assets
will be pledged as collateral for this future debt. There can be no
assurance that the Company will be successful in obtaining the new debt
financing. If the Company is unable to obtain the new debt financing, then
the Company will explore other courses of actions including, but not
necessarily limited to, additional equity financing, changes to its
acquisition strategy, sale of certain operating assets and reduction of its
operating expenses. In addition, if the Company is unable to obtain new debt
or equity financing, the Company will need to modify or significantly alter
its acquisition strategy.
OTHER
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. In the
last five to ten years, the prices for commodity grades of paper have shown
considerable volatility. Precept generally is able to pass such increased
costs on to its customers through price increases, although it may not be
able to adjust its prices immediately. Significant increases in paper and
other costs in the future could materially affect Precept's profitability if
these costs cannot be passed on to customers. In 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.
YEAR 2000 ISSUE
Precept has performed a review of its existing computer software and
hardware information systems. To date, the Company believes that its
existing management information systems are year 2000 compliant, except for a
management information system at a recently acquired subsidiary and except
for certain electronic commerce matters, as described more fully in the next
two paragraphs. To the extent that the Company will be required to expend
resources to ensure that the management information systems are year 2000
compliant, the Company does not expect that significant resources, either
cash flow or manpower will be needed.
One of the Company's subsidiaries in the business products division
operates with a management information system that is not year 2000
compliant. The Company is currently exploring two feasible solutions -
integration of the subsidiary management information system onto the
Company's existing systems or implementing a new management information
system at the subsidiary. At present, the Company has not reached a
conclusion on its course of action; however, the Company does not expect that
either course of action will require the Company to expend more than $500,000
in resources to ensure year 2000 compliance.
The Company conducts a certain portion of its business operations, in
particular sales orders, purchasing, billing and shipping, using electronic
means of communication outside the Company's management information systems.
The Company is in the process of contacting or being contacted by its
20
<PAGE>
significant vendors and customers to verify that the electronic means of
communication used are year 2000 compliant. Although this project is still
in process, the Company is not aware of any significant issues in this area.
If for some reason, electronic means of communication with certain of its
vendors and customers were not year 2000 compliant, the Company does not
expect that this condition would have a material adverse effect on its
operations at that time. If necessary, the Company has processes and
procedures in place to conduct such business operations without electronic
communication for those specific customers and vendors.
FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME, SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, and SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND
OTHER POST RETIREMENT PLANS, that are effective for financial statement
periods beginning after December 15, 1997, and SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, that is effective for
reporting periods beginning after June 15, 1999. As these statements require
only additional disclosures or do not cover matters relating to Precept, they
will have no effect on Precept's financial position, results of operations or
cash flows. Precept intends to adopt the disclosure requirements of these
standards during its fiscal year ended June 30, 1999.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form
10-K to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. This section should be
read in conjunction with the "Risk Factors Affecting the Company's Prospects"
located in Item I. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performance, and
underlying assumptions and other statements which are other than statements
of historical facts. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature. All such
subsequent forward-looking statements, whether written or oral and whether
made by or on behalf of the Company, are also expressly qualified by these
customary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties
that could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based,
in turn, upon further assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to
have a reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the Company's
records and other data available from third parties, but there can be no
assurance that management's expectations, beliefs or projections will result
or be achieved or accomplished. In addition to the other factors and matters
discussed elsewhere herein, the following are important factors that, in the
view of the Company, could cause actual results to differ materially from
those discussed in the forward-looking statements.
1. Changes in economic conditions, in particular those that affect the
end users of business products and transportation services,
primarily corporations.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the
Company's customers.
3. Changes in executive and senior management or control of the
Company.
4. Inability to obtain new customers or retain existing customers.
5. Significant changes in competitive factors, including product
pricing conditions, affecting the Company.
6. Governmental and regulatory actions and initiatives, including
those affecting financing.
7. Significant changes from expectations in operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital acquisitions
and other investments.
9. Significant changes in rates of interest, inflation or taxes.
21
<PAGE>
10. Significant changes in the Company's relationship with its
employees and the potential adverse effects if labor disputes or
grievance were to occur.
11. Changes in accounting principles and/or the application of such
principles to the Company.
The foregoing factors could affect the Company's actual results and
could cause the Company's actual results during fiscal year 1999 and beyond
to be materially different from any anticipated results expressed in any
forward-looking statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after the date of this
report on Form 10-K.
DISCONTINUED OPERATIONS
As part of its 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 operations, 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
Holdings, which owns and operates certain other real estate related
investments. Builders' revenues for fiscal years 1997 and 1996 were $82.5
million and $38.8 million, respectively. Holdings had minimal revenues for
each fiscal year presented. During 1998, the losses from discontinued
operations consist principally of the losses from the Holdings discontinued
operations. During fiscal year 1998, the Company generated $2.4 million in
cash from the sale of its interest in a ranch to a company controlled by the
Company's majority shareholder, the chief executive officer and the chief
operating officer, and from the sale of a condominium to the Company's
majority shareholder. In September 1998, the Company sold the remaining
assets of its discontinued operations consisting of land, building and an
interest in a restaurant to the Company's majority shareholder for $1.2
million in cash.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) of the Exhibit Index for a listing of the Company's
consolidated financial statements included with this Form 10-K.
PRECEPT BUSINESS SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Balance Sheets at June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Operations for the years ended June 30, 1998, 1997 and 1996 . . 30
Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 . . 31
Consolidated Statements of Changes in Shareholders' Equity for the three year period
ended June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Precept Business Services, Inc.
We have audited the accompanying consolidated balance sheets of Precept
Business Services, Inc., as of June 30, 1998 and 1997, and the related
consolidated statements of operations, cash flows, and changes in
shareholders' equity for each of the three years in the period ended June 30,
1998. 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 Business Services, Inc. at June 30, 1998 and 1997, and the
consolidated results of its operations, cash flows and changes in
shareholders' equity for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 23, 1998
23
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 2,291,303 $ 2,432,202
Trade accounts receivable, net of $404,000 and
$599,000 allowance for doubtful accounts,
respectively...................................... 15,595,234 14,235,193
Accounts receivable from affiliates................. 1,186,908 503,571
Other accounts receivable........................... 1,609,529 510,177
Inventory........................................... 5,133,484 3,225,470
Other current assets................................ 805,151 926,805
Income taxes refundable............................. -- 277,766
Deferred income taxes............................... 499,264 1,090,886
Net assets of discontinued operations............... 1,115,125 3,560,246
----------- -----------
Total current assets.............................. 28,235,998 26,762,316
Property and equipment, net........................... 5,751,487 3,549,201
Intangible assets, net................................ 19,558,050 5,039,906
Deferred income taxes................................. 1,102,372 615,019
Other assets.......................................... 1,838,697 1,325,104
----------- -----------
Total assets...................................... $56,486,604 $37,291,546
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................. $ 5,844,671 $ 5,964,755
Accrued compensation................................ 1,943,964 1,650,125
Sales and use taxes payable......................... 540,254 1,181,047
Other accounts payable and accrued expenses......... 4,649,014 2,095,753
Subsidiaries' notes payable to banks................ -- 2,234,235
Current portion of long-term debt................... 1,421,477 243,215
----------- -----------
Total current liabilities......................... 14,399,380 13,369,130
Long-term debt........................................ 20,084,756 7,820,773
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value; 3,000,000
authorized shares, none issued ...................
Class A common stock, $0.01 par value; 100,000,000
authorized shares and 48,090,880 and 32,520,383
issued shares in 1998 and 1997, respectively...... 480,909 325,204
Class B common stock, $0.01 par value; 10,500,000
authorized shares and 4,145,000 and 10,102,997
issued shares in 1998 and 1997, respectively...... 41,450 101,030
Additional paid-in-capital.......................... 23,067,285 17,437,778
Retained earnings (accumulated deficit)............. (1,395,905) (750,062)
----------- -----------
22,193,739 17,113,950
Class A treasury stock--478,844 shares.............. (191,271) (191,271)
Shareholder notes for stock purchases............... -- (821,036)
----------- -----------
Total shareholders' equity........................ 22,002,468 16,101,643
----------- -----------
Total liabilities and shareholders' equity...... $56,486,604 $37,291,546
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Business products.................. $113,536,213 $109,396,670 $105,463,909
Transportation services............ 9,455,575 6,565,838 5,839,916
------------ ------------ ------------
122,991,788 115,962,508 111,303,825
Costs and expenses:
Cost of goods sold................. 85,281,274 79,729,325 75,686,601
Sales commissions.................. 15,074,985 14,615,160 13,786,430
Selling, general and
administrative................... 16,416,142 17,228,760 18,301,558
Depreciation and amortization...... 1,820,935 1,787,624 1,676,533
Non-recurring acquisition costs.... 485,555 -- --
------------ ------------ ------------
119,078,891 113,360,869 109,451,122
Operating income..................... 3,912,897 2,601,639 1,852,703
Interest and other expense:
Interest expense................... 1,195,086 621,961 547,319
Other expense (income)............. 741,454 (4,211) 381,530
------------ ------------ ------------
1,936,540 617,750 928,849
------------ ------------ ------------
Income from continuing operations
before income taxes................ 1,976,357 1,983,889 923,854
Income tax provision................. 790,544 828,098 16,833
------------ ------------ ------------
Income from continuing operations.... 1,185,813 1,155,791 907,021
------------ ------------ ------------
Discontinued operations:
Loss from disposal of discontinued
operations, net of applicable
income taxes..................... -- (497,971) --
Loss from discontinued operations,
net of applicable income taxes... (467,392) (3,341,111) (64,394)
------------ ------------ ------------
Loss from discontinued
operations....................... (467,392) (3,839,082) (64,394)
------------ ------------ ------------
Net income (loss).................... $ 718,421 $ (2,683,291) $ 842,627
------------ ------------ ------------
------------ ------------ ------------
Basic net income (loss) per share:
Income from continuing
operations....................... $ 0.03 $ 0.03 $ 0.02
Loss from discontinued
operations....................... (0.01) (0.09) 0.00
------------ ------------ ------------
Net income (loss).................. $ 0.02 $ (0.06) $ 0.02
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares
outstanding...................... 45,362,272 42,623,332 42,495,000
Diluted net income (loss) per share:
Income from continuing
operations....................... $ 0.03 $ 0.03 $ 0.02
Loss from discontinued
operations....................... (0.01) (0.09) 0.00
------------ ------------ ------------
Net income (loss).................. $ 0.02 $ (0.06) $ 0.02
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares
outstanding...................... 46,190,596 42,623,332 42,495,000
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 718,421 $(2,683,291) $ 842,627
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...... 1,820,935 1,787,624 1,676,533
Write off of property and
equipment, net................... -- 408,245 --
Write off of intangible assets,
net.............................. -- 150,477 --
Loss from disposal of discontinued
operations....................... -- 497,971 --
Deferred income taxes.............. 104,269 (160,728) (529,668)
Changes in operating assets and
liabilities, net of effects from
acquisitions
Trade accounts receivable........ (483,981) 9,261,454 (7,890,237)
Accounts receivable from
affiliates..................... (683,337) -- (612,976)
Other accounts receivable........ (1,099,352) (49,504) (51,479)
Inventory........................ (1,902,976) (575,567) 440,939
Cost in excess of billings on
uncompleted contracts,
subcontracts payable and
retainage...................... -- (4,923,077) 3,385,213
Other current assets............. (772,583) (505,394) (541,214)
Income taxes refundable.......... 277,766 (277,766) --
Trade accounts payable........... (822,560) 281,101 205,370
Accrued compensation............. 293,839 (132,523) 331,335
Sales and use taxes payable...... (640,793) (1,450,960) 1,968,689
Other assets and liabilities,
net............................ (1,198,083) (925,409) 180,136
------------ ----------- -----------
Net cash provided by (used in)
operating activities............. (4,388,435) 702,653 (594,732)
------------ ----------- -----------
Cash flows provided by (used in)
investing activities:
Acquisitions of businesses, including
earnout payments................... (7,086,000) (1,185,575) (3,536,436)
Acquisition of property and
equipment, net..................... (857,713) (1,882,096) (1,178,781)
Sale of assets of discontinued
operations......................... 2,445,121 -- --
Maturity of restricted certificate of
deposit............................ -- -- 1,732,500
------------ ----------- -----------
Net cash used in investing
activities....................... (5,498,592) (3,067,671) (2,982,717)
------------ ----------- -----------
Cash flows provided by (used in)
financing activities:
Payments on long-term debt........... (41,000) 286,237 (377,429)
Issuance of common stock............. -- 30,900 --
Capital contribution (dividend to
shareholder), net.................. -- (307,000) 106,000
Purchase of treasury stock........... -- -- (50,000)
Issuance (payments) of capital lease
obligations........................ 257,972 (82,642) --
Repayment of shareholder notes....... 821,036 -- --
Borrowings on revolving line of
credit............................. 44,516,000 9,766,000 8,409,978
Payments on revolving line of
credit............................. (35,807,880) (7,979,819) (3,909,839)
------------ ----------- -----------
Net cash provided by financing
activities....................... 9,746,128 1,713,676 4,178,710
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents..................... (140,899) (651,342) 601,261
Cash and cash equivalents at beginning
of year.............................. 2,432,202 3,083,544 2,482,283
------------ ----------- -----------
Cash and cash equivalents at end of
year................................. $ 2,291,303 $ 2,432,202 $ 3,083,544
------------ ----------- -----------
------------ ----------- -----------
Supplemental disclosure:
Cash paid for:
Interest........................... $ 1,195,086 $ 621,961 $ 547,319
Income taxes....................... $ 790,543 $ 828,098 $ 16,833
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
CLASS A CLASS B ADDITIONAL EARNINGS TOTAL
COMMON COMMON PAID-IN (ACCUMULATED SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT) OTHER EQUITY
-------- -------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995.................. $237,001 $151,544 $16,621,507 $ 1,904,602 $ (68,863) $18,845,791
Capital contribution.................. -- -- 615,000 -- -- 615,000
Purchase of treasury stock............ -- -- -- -- (122,408) (122,408)
Issuance of shareholder notes......... -- -- -- -- (612,976) (612,976)
Distribution to shareholder of
acquired subsidiary................. -- -- -- (509,000) -- (509,000)
Conversion of Class B to Class A
common stock........................ 50,514 (50,514 ) -- -- -- --
Net income............................ -- -- -- 842,627 -- 842,627
-------- -------- ----------- ------------ ----------- -------------
Balance, June 30, 1996.................. 287,515 101,030 17,236,507 2,238,229 (804,247) 19,059,034
Exercise of stock options............. 37,689 -- 201,271 -- -- 238,960
Issuance of shareholder notes......... -- -- -- -- (208,060) (208,060)
Distribution to shareholder of
acquired subsidiary................. -- -- -- (305,000) -- (305,000)
Net loss.............................. -- -- -- (2,683,291) -- (2,683,291)
-------- -------- ----------- ------------ ----------- -------------
Balance, June 30, 1997.................. 325,204 101,030 17,437,778 (750,062) (1,012,307) 16,101,643
Repayment of shareholder notes........ -- -- -- -- 821,036 821,036
Contribution of retained earnings by
shareholder of acquired
subsidiary.......................... -- -- 1,364,264 (1,364,264) -- --
Acquisition of USTS................... 96,125 4,265,243 -- -- 4,361,368
Conversion of Class B to Class A
common stock........................ 59,580 (59,580) -- -- -- --
Net income............................ -- -- -- 718,421 -- 718,421
-------- -------- ----------- ------------ ----------- -------------
Balance, June 30, 1998.................. $480,909 $41,450 $23,067,285 $(1,395,905) $ (191,271) $22,002,468
-------- -------- ----------- ------------ ----------- -------------
-------- -------- ----------- ------------ ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. BUSINESS
Precept Business Services, Inc. and its subsidiaries ("Precept" or the
"Company") primarily engage in business products distribution management and
services and, to a lesser extent, in executive chauffeured limousine, livery
and courier services. The business products 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. Precept operates from
offices throughout the United States. The transportation services are
provided from locations in Texas, New York, Ohio and Michigan.
PUBLICLY TRADED COMPANY
In March 1998, Precept completed its acquisition of U. S. Transportation
Services, Inc. ("USTS"), a company whose common stock was publicly traded on
the NASDAQ SmallCap Market ("NASDAQ"). As part of this acquisition, Precept
listed its Class A common shares and its warrants to purchase Class A common
shares for public trading with NASDAQ and issued 9,612,500 shares of its
Class A common stock to USTS and 1,815,000 warrants to the former USTS
warrant holders. Precept's Class A common stock trades under the NASDAQ
symbol "PBSIA" and its warrants trade under the NASDAQ symbol "PBSIW."
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements comprise the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NAME CHANGE
During the fourth quarter of fiscal year 1998, in connection with its
strategic focus on being a consolidator in the business products and
transportation services industries, the Company changed its name from Precept
Investors, Inc. to Precept Business Services, Inc.
PRO FORMA INFORMATION
The pro forma information included in these financial statements and
notes is unaudited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
ACCOUNTING FOR ACQUISITIONS OF BUSINESSES
The Company evaluates each business acquisition separately. For
businesses acquired which have been or will be accounted for using the
purchase method of accounting, the cost to acquire the business includes the
current consideration and future contingent consideration provided by the
Company, debt assumed by the Company and direct acquisition costs. The
aggregate acquisition cost is allocated to the net assets and liabilities of
the business acquired based on the fair values of net assets and liabilities.
Any amount not specifically allocated to an identified asset and liability
is considered to be goodwill. The
28
<PAGE>
results of operations of the businesses acquired are included in the
operating results of the Company from the dates of acquisition.
For businesses acquired which have been or will be accounted for using
the pooling method of accounting, the non-recurring acquisition costs
incurred to acquire such businesses are charged to operating results in the
period that such acquisition is consummated. The historical financial
statements of the Company have been and will be restated for all periods
presented to include the financial statements of the businesses acquired.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid, interest-bearing instruments
with an original maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Revenue is recognized when the Company ships goods or provides
transportation services to its customer. 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, the Company enters into a business products management
agreement under which the customer asks 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, which also represents the time that title passes
to the customer.
Concentration of credit risk with respect to trade accounts receivable
is limited due to the large number of customers and their geographic
dispersion across the United States. The Company performs periodic credit
evaluations of its customers and does not require collateral. Historically,
the Company has not experienced significant losses related to individual
customers or groups of customers in any particular industry or geographic
area. The effects of returns, discounts and other incentives are estimated
and recorded at the time of shipment. Damaged or defective products may be
returned to the Company for replacement or credit. An allowance is
maintained at a level that management believes is sufficient to cover
potential credit losses, including damaged, defective and returned products
and discounts, on trade accounts receivable.
The allowance for doubtful accounts was $404,000, $599,000 and $499,000
as of June 30, 1998, 1997 and 1996. No customer accounted for more than 10%
of the Company's revenue in 1998, 1997 or 1996.
INVENTORY
Inventory consists of products held for resale and is valued at the
lower of cost or market; cost is determined on first-in first-out and
specific identification methods. Market value is determined based on
replacement cost or net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The cost of property and
equipment held under capital leases, primarily transportation equipment, is
equal to the lower of the net present value of the minimum lease payments or
the fair value of the leased property at the inception of the lease.
Depreciation of property and equipment and amortization of capitalized
leasehold rights are computed using the straight-line method over the
estimated useful lives of the assets. Significant repairs or betterments,
which extend the useful life of an asset, are capitalized and depreciated
over the assets' remaining useful lives.
29
<PAGE>
LONG-LIVED ASSETS
It is the Company's policy to periodically review the fair market value
of its business operations and assess the operating performance and cash
flows of its business operations. If based on such assessment, the Company
identifies situations which indicate potential impairment or negative cash
flow conditions, then the Company will evaluate the net carrying value of its
long-lived assets, including goodwill and intangible assets, through an
assessment of the estimated future cash flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated undiscounted net future cash flows, the assets will be adjusted for
impairment to a level commensurate with a discounted flow analysis of the
underlying assets. Based upon its most recent assessment, the Company does
not believe an impairment of long-lived assets exists at June 30, 1998.
INTANGIBLE ASSETS
Goodwill represents the cost in excess of fair value of the net assets
of companies acquired in purchase transactions. Goodwill is amortized using
the straight-line method over periods ranging from 10 to 40 years. Other
intangible assets represent amounts allocated to non-compete agreements
and are amortized using the straight-line method over periods ranging from
three to ten years.
DEBT ISSUANCE COSTS
Costs associated with obtaining and implementing the Company's revolver
and term debt agreements are capitalized and amortized using the effective
interest rate method over the terms of the related debt agreements.
INTERNALLY DEVELOPED SOFTWARE
Costs related to internally developed software such as supplies and
internal general and administrative salaries, except for programmers and
other employees directly associated with the projects, are expensed as
incurred as a component of selling, general and administrative expenses.
External costs and internal programming costs related to internally developed
software such as outside programmers and consultants are capitalized and
expensed over the expected useful life of the software, normally three to
five years.
INCOME TAXES
The Company accounts for income taxes following the liability method,
which prescribes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Deferred tax assets are recognized, net of any
valuation allowance, for deductible temporary differences and tax net
operating losses ("NOL") and tax credit carryforwards. Deferred tax expense
represents the change in the deferred tax asset or liability balances. The
Company periodically reviews the realizability of its deferred tax assets
and, as needed, records valuation allowances when realizability of the
deferred tax asset is not likely.
NET INCOME PER SHARE
Net income per share is presented in dual fashion - basic and diluted
net income (loss) per share. Basic net income (loss) per share excludes
dilution, is based on the number of shares actually outstanding, and is
computed by dividing the income available to common shareholders by the
weighted average number of shares outstanding for the period. Diluted net
income (loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The difference between the weighted-average
number of common shares used for the calculation of basic net income (loss)
per share and the weighted-average number of common shares used
30
<PAGE>
for diluted net income (loss) per share is comprised of the dilutive effect
of the outstanding common stock options and common stock which would be
issued upon the conversion of certain notes payable. However, the Company's
warrants and a certain portion of the Company's convertible notes payable
were not included in the computation of diluted net income (loss) per share
as they would not have been exercised.
The weighted average number of outstanding common shares is calculated
based on the historical timing of the common stock transactions, except that
the historical number of shares have been retroactively restated for any
shares issued in connection with businesses acquired as pooling of interests
transactions. In addition, the Company's 3.15438 for 1 stock split in March
1998 has been retroactively reflected in the Company's historical financial
statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of Precept's financial instruments approximate the
fair values of such instruments due either to the short-term nature of the
instruments, the variable interest rate associated with the instruments, or
the conversion features of the instruments. The Company's financial
instruments include, but are not limited to, cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, and long-term debt.
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 $0, $150,278 and $146,743 in 1998, 1997 and 1996, respectively. General
corporate administrative expenses have not been allocated to discontinued
operations.
RECLASSIFICATIONS
Certain reclassifications, none of which affect net income, have been
made to the 1997 and 1996 consolidated financial statements in order to
conform to the 1998 presentation.
3. ACQUISITIONS
During fiscal year 1998, Precept acquired 5 business products
distribution companies and 4 transportation companies. All the acquisitions
except for two business products distribution companies were accounted for
using the purchase method of accounting. For these purchase acquisitions,
the aggregate acquisition is allocated to the net assets acquired based on
the fair value of such net assets. The operating results of such companies
have been included in the Company's historical results of operations for all
periods following the acquisition. The aggregate acquisition cost for such
purchased businesses, except USTS, amounted to $3.6 million and consisted of
$0.4 million in cash, funded by working capital and the Company's revolver
line of credit and $3.2 million in seller notes and assumed debt.
The most significant of these acquisitions was Precept's purchase of
U.S. Transportation Systems, Inc., a publicly traded company in the
transportation services industry. On March 18, 1998, Precept issued
9,612,500 shares of its Class A common stock and 1,815,000 warrants to
purchase Class A common stock for a total value of $4.4 million, assumed and
repaid debt of $5.3 million and incurred $1.1 million in direct acquisition
costs. Precept acquired five of the operating businesses of USTS that
provided chauffeured limousine, livery and long haul trucking services based
in New York, Michigan, Ohio, Northern Kentucky and the Carolinas. In June
1998, Precept sold its 75% interest in the long-haul trucking business, U.S.
Trucking, Inc. ("USTI") to the owners of the 25% minority interest in USTI in
exchange for $0.2 million in cash and an interest bearing note receivable for
$1.8 million, which note has been fully reserved. The purchase price has been
preliminarily allocated as follows: $12.8 million to goodwill, $0.9 million
to account receivable, $6.4 million to long-term debt, $3.7 million to
accounts payable and accrued liabilities and $0.8 million to other assets.
31
<PAGE>
In fiscal year 1998, the Company issued 6,144,536 shares of its Class A
common stock with an aggregate fair market value of $18.3 million at the date
of acquisition in order to acquire two business products distribution
companies, InfoGraphix and MBF. These acquisitions have been accounted for
using the pooling of interests method of accounting. The Company's
consolidated financial statements give retroactive effect to the acquisitions
of such companies for all periods presented.
The following presents the separate results from continuing operations,
in each of the three periods presented, of the Company (excluding the results
of InfoGraphix and MBF prior to the dates on which they were acquired) and of
InfoGraphix and MBF up to the dates on which they were acquired.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Company (excluding InfoGraphix and MBF) $ 85,290,642 $ 77,343,925 $ 72,431,932
InfoGraphix 18,487,919 20,626,814 19,672,759
MBF 19,213,227 17,991,769 19,199,134
------------ ------------ ------------
Company $122,991,788 $115,962,508 $111,303,825
------------ ------------ ------------
------------ ------------ ------------
Net income (loss):
Company (excluding InfoGraphix and MBF) $ 658,890 $ 531,606 $ (265,775)
InfoGraphix 331,825 388,205 1,089,838
MBF 195,098 235,980 82,958
------------ ------------ ------------
Company $ 1,185,813 $ 1,155,791 $ 907,021
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
During fiscal year 1997, the Company completed the purchase of certain
assets of two business forms distributors for a total of $0.9 million plus up
to $6.3 million of contingent consideration based on the subsequent operating
results over a five year period for one of the businesses acquired. The
acquisitions were accounted for using the purchase method of accounting with
the majority of the purchase price attributable to accounts receivable,
inventory, equipment and goodwill. The transactions generated $0.3 million
of goodwill in fiscal year 1997. Approximately $0.1 million of the
contingent consideration was earned during 1997.
During fiscal year 1996, the Company acquired the assets of two business
forms distributors for a total of $3.0 million 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 method of accounting. Approximately $0.2
million, $0.3 million and $0.1 million of the contingent consideration were
earned during fiscal years 1998, 1997 and 1996, respectively. As of June 30,
1998, no additional contingent consideration related to one of the businesses
acquired is required since Precept entered into an agreement whereby all
rights to any additional contingent consideration were terminated in exchange
for a one time payment of $0.2 million in fiscal year 1997.
The following table summarized the consideration for the purchase
acquisitions completed and the fair value of the assets acquired.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
Purchase consideration: 1998 1997 1996
------------ ---------- ------------
<S> <C> <C> <C>
Cash paid . . . . . . . . . . . . . . . . . . . . . $ 5,735,000 $ 908,000 $ 3,056,000
Amounts due sellers of acquired businesses. . . . . 1,168,000 - -
Stock and warrants issued . . . . . . . . . . . . . 4,318,000 - -
Liabilities assumed . . . . . . . . . . . . . . . . 3,911,000 - -
Other . . . . . . . . . . . . . . . . . . . . . . . 60,000 - -
------------ ---------- ------------
Fair value of net assets acquired. . . . . . . . . . . $ 15,192,000 $ 908,000 $ 3,056,000
------------ ---------- ------------
------------ ---------- ------------
32
<PAGE>
Allocation of fair value of net assets acquired:
Goodwill and intangible assets. . . . . . . . . . . $ 15,154,000 $ 274,000 $ 2,762,000
Accounts receivable . . . . . . . . . . . . . . . . 878,000 400,000 -
Property and equipment. . . . . . . . . . . . . . . 2,441,000 - -
Inventory and other, net. . . . . . . . . . . . . . (3,281,000) 234,000 294,000
------------ ---------- ------------
$ 15,192,000 $ 908,000 $ 3,056,000
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
The following table presents the pro forma results of continuing
operations as if all the acquisitions described above had occurred at the
beginning of each year presented. Pro forma adjustments reflect additional
amortization expense since the fair value of the assets acquired is amortized
for a full year. Pro forma adjustments also reflect additional interest
expense due to the related debt being outstanding for a full year. The
income tax effect of the pro forma adjustments has also been reflected.
These pro forma results are presented for comparative purposes only and do
not purport to be indicative of what would have occurred had the businesses
actually been acquired as of those dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Total revenues. . . . . . . . . . . . . . $133,565,318 $136,060,668 $141,590,000
Income before income taxes. . . . . . . . $ 2,975,263 $ 4,649,734 $ 3,383,000
Net income. . . . . . . . . . . . . . . . $ 1,785,158 $ 2,708,879 $ 1,949,000
Basic and diluted net income per share. . $ 0.03 $ 0.05 $ 0.05
</TABLE>
During the first quarter of fiscal year 1999, Precept has acquired four
business products distribution companies. Aggregate consideration for these
transactions amounted to $21.0 million, paid $7.8 million in cash, $1.4
million in seller notes, 5.3 million shares of common stock with a market
value of $11.7 million and $0.1 million in debt assumed. Assets with a
preliminary aggregate fair value of $21.0 million were acquired with a
preliminary allocation as follows: $15.9 million to goodwill and intangible
assets, $4.0 million to accounts receivable, $1.5 million to inventory and
$0.4 million (net) to other liabilities.
If these acquisitions had been completed at the beginning of fiscal year
1998, the pro forma results of continuing operations would have been as shown
below. Pro forma adjustments have been recorded for amortization, interest
and income taxes.
<TABLE>
<CAPTION>
Year ended
June 30, 1998
-------------
<S> <C>
Total revenues. . . . . . . . . . . . . . . . . $ 167,900,000
Income before income taxes. . . . . . . . . . . $ 5,550,000
Net income. . . . . . . . . . . . . . . . . . . $ 3,335,000
Basic and diluted net income per share. . . . . $ 0.06
</TABLE>
33
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
ESTIMATED LIVES 1998 1997
--------------- ---------- ---------
<S> <C> <C> <C>
Land $ 411,000 $ 61,000
Buildings 15 to 40 years 1,670,926 1,654,390
Leasehold improvements 1 to 10 years 455,118 439,216
Equipment and vehicles 3 to 5 years 7,020,965 4,062,933
Capitalized leasehold rights 3 to 5 years 1,353,279 784,931
----------- -----------
10,911,288 7,002,470
Accumulated depreciation and amortization 5,159,801 3,453,269
----------- -----------
$ 5,751,487 $ 3,549,201
----------- -----------
----------- -----------
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,510,689 $ 8,704,812
Non-compete agreements. . . . . . . . . . . . . . . . . . . 1,200,659 810,659
------------- ------------
24,711,348 9,515,471
Accumulated amortization. . . . . . . . . . . . . . . . . . 5,153,298 4,475,565
------------- ------------
$ 19,558,050 $ 5,039,906
------------- ------------
------------- ------------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Revolving line of credit. . . . . . . . . . . . . . . . . . $ 15,965,478 $ 6,275,000
Note payable and long-term liability to shareholder . . . . 813,803 -
Convertible notes payable to sellers. . . . . . . . . . . . 2,114,435 -
Mortgage and equipment notes payable. . . . . . . . . . . . 317,813 284,849
Capitalized lease obligations . . . . . . . . . . . . . . . 960,261 702,289
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,334,443 801,850
-------------- -------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,506,233 8,063,988
Less current portion due within one year. . . . . . . . . . 1,421,477 243,215
-------------- -------------
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . $ 20,084,756 $ 7,820,773
-------------- -------------
-------------- -------------
</TABLE>
REVOLVING LINE OF CREDIT
The Company's revolving line of credit with its bank has $25.0 million
available for borrowing by the Company for working capital and acquisition
needs. The line of credit bears interest at prime, 8.5% at June 30, 1998, or
at LIBOR plus a maximum margin of 2.75%. The margin rate may be lower based
on the Company's ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). As of June 30, 1998, the margin
was 2.5%. The revolving line of credit includes restrictions as to the
current ratios and debt service coverage as well as borrowing restrictions
based upon accounts receivable, inventory and property and equipment. The
line of credit is secured by substantially all of the assets of the
continuing operations of the Company. The revolving line of credit is due and
payable on September 30, 2001.
34
<PAGE>
NOTE PAYABLE AND LONG- TERM LIABILITY TO SHAREHOLDER
The note payable to shareholder is unsecured, bears interest at 8.5% and
is payable in monthly installments of $32,378 through fiscal year 1999. The
long-term liability to shareholder is a non-interest bearing separation
obligation to a current shareholder and former director of the Company which
is payable at $21,075 monthly through March 2001.
CONVERTIBLE NOTES PAYABLE TO SELLERS
The convertible notes payable are unsecured, bear interest at rates from
6.75% to 8.5% and require annual payments ranging from $47,025 to $288,650
through October 2002. The notes may be converted at the sellers' options
into shares of the Company's Class A common stock at either the current
market value of the stock or the price of the stock when the Company became
publicly traded.
MORTGAGE AND EQUIPMENT NOTES PAYABLE
These notes are secured and bear interest at rates from 7% to 11.75% and
require annual payments ranging from $6,000 to $88,000 over the terms of the
notes. Land, building and equipment with a net book value of $2,076,521 at
June 30, 1998 are pledged as collateral for the notes.
CAPITALIZED LEASE OBLIGATIONS
Future minimum lease payments under the capital leases are as follows:
$360,225 in 1999, $296,165 in 2000, $254,276 in 2001, $45,798 in 2002, $3,797
in 2003 and none thereafter. Such amounts exclude payments for interest of
$211,561. Capitalized leasehold rights with a net book value of $872,940 at
June 30, 1998 are pledged as collateral under the lease agreements.
OTHER
Other long-term debt includes a note payable incurred in connection with
a stadium suite owned by the Company. The note accrues interest at 9% a year
and is paid $60,000 annually.
7. INCOME TAXES
The provision (benefit) for federal and state income taxes attributable
to continuing operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . $ 686,275 $ 988,826 $ 546,501
Deferred. . . . . . . . . . . . . . . . . . . . . . . . 104,269 (160,728) (529,668)
---------- ---------- --------
$ 790,544 $ 828,098 $ 16,833
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The provision for income taxes from continuing operations varies from
the statutory federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory income tax expense at statutory rate. . . . . $ 671,961 $ 674,522 $ 356,034
State income tax expense, less federal benefit. . . . . 98,864 119,033 62,830
Expenses treated differently for book and tax
reporting purposes . . . . . . . . . . . . . . . . . 221,217 233,589
Other - primarily pro forma difference
between income taxes on S and C
corporations for an acquired subsidiary. . . . . . . (201,498) (199,046) (402,031)
---------- ---------- ---------
Income tax provision. . . . . . . . . . . . . . . . . . $ 790,544 $ 828,098 $ 16,833
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
One of the Company's acquired subsidiaries was an S corporation, an entity
which is not subject to federal income tax. If the operating results of such
entity were subject to federal income tax then, on a pro forma basis, the
Company's net income (loss) would have been $939,638, $(2,916,880) and $472,082,
and the Company's diluted net income (loss) per share would have been $0.02,
$(0.07), and $0.01, respectively, for each of the years in the three year
period ended June 30, 1998.
35
<PAGE>
During fiscal year 1996, the Company received a federal income tax
refund related to physical inventory adjustments that pertained to years when
the Company was a subsidiary of ACS. Under the Company's tax sharing
agreement with ACS, the benefit of $0.6 million accrued to the company. At
the time of spin-off of the Company from ACS on June 30, 1994, the assets and
liabilities of Precept were recorded through a capital contribution equal to
the net book value of the assets and liabilities of Precept. Therefore, this
refund has been credited directly to paid-in capital as it results form
periods prior to the formation of the Company and would have affected paid-in
capital if it were known at June 30, 1994.
Temporary tax differences affected and categorized by financial
statement line item are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses . . . . . . . . . . . $ 981,150 $1,318,401
Asset book/tax basis difference. . . . 1,257,758 943,344
Accrued compensation . . . . . . . . . - 81,432
---------- ----------
Total deferred tax assets . . . . . 2,238,908 2,343,177
Valuation allowance . . . . . . . . . . . (637,272) (637,272)
---------- ----------
$1,601,636 $1,705,905
---------- ----------
---------- ----------
</TABLE>
8. EMPLOYEE BENEFIT PLANS
Precept maintains a 401(k) plan that is available to qualified employees
meeting certain eligibility requirements. Participants may contribute up to
15% of their compensation. On a discretionary basis, the Company may match
up to 6% of the participants' compensation. For the Company's primary plan,
the Company made no contributions in 1998, 1997 and 1996. Certain
subsidiaries of the Company have, or had prior to acquisition, 401(k) plans
that allow for voluntary pre-tax contributions by the employees and a
matching contribution by the subsidiaries. For these plans, the subsidiaries
made contributions of $67,069, $35,147 and $13,750 in 1998, 1997 and 1996,
respectively.
9. SHAREHOLDERS' EQUITY
STOCK SPLIT
In March 1998, the Company's board of directors approved a 3.15438 for 1
stock split for the Class A and Class B common stock. The financial statements
of the Company have been retroactively restated to reflect this stock split.
CLASS B COMMON STOCK
All the outstanding shares of Class B common stock are held by the
majority shareholder of the Company, who is also a director of the Company
and the Chairman and director of an affiliated company, ACS. The shares of
Class B common stock are convertible into Class A common stock at a one for
one conversion ratio at the option of the Class B shareholder. The shares of
Class B common stock have the right to ten votes per share for any matter to
be voted on by the Company's shareholders.
WARRANTS
Warrants to purchase 1,815,000 shares of common stock were issued by
Precept to replace USTS warrants previously outstanding. Each warrant allows
the holder to purchase one share of the Company's class A common stock at a
price of $3.82 per share. The warrants expire on August 26, 1999. Such
warrants are redeemable by the Company at $0.01 per share if the daily
closing price of the Company's Class A common stock remains above $5.165 for
at least ten consecutive days.
36
<PAGE>
1998 STOCK INCENTIVE PLAN
In February 1998, the Company adopted the 1998 Stock Incentive Plan
("1998 Plan"). The plan authorized the grant of up to 6,000,000 shares of
the Company's Class A common stock in the form of non-qualified stock
options. Generally, options granted vest over a five-year period. The
vesting period may be modified at the time of grant by the administrator.
The term of the options is at the discretion of the administrator, but not to
exceed ten years. In April 1998, three outside directors received options to
purchase 100,000 shares of Class A common stock at the fair market value of
$3.875 on the date of the grant.
1996 STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan"). The plan authorizes the grant of up to 4,100,694 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, 3,768,853 options were granted with immediate vesting, and exercised
for one share each of common stock at an exercise price of $0.063 per share.
In April 1997, 324,901 options were granted, with immediate vesting, and an
exercise price of $0.063 per share. These options remained outstanding as of
June 30, 1998 and are not exercisable until certain provisions of the grant
are met. In conjunction with the adoption of the 1998 Plan, the Company's
board of directors decided that there would be no further grants of options
under the 1996 Plan.
RIGHT TO PURCHASE SHARES OF CLASS A COMMON STOCK
On February 2, 1998, the Company's board of directors declared a
dividend of one common share purchase right (a "Right") for each outstanding
share of Precept's common stock. The dividend was made February 9, 1998 to
the shareholders of record at the close of business on that date. Each Right
entitles the registered holder to purchaser from Precept one share of Precept
Class A common stock at a price of $50.00, subject to adjustment. Class A
common stock issued after such dividend also incorporates such Right. The
terms of the Rights have been designed to provide the holders of the rights
with anti-takeover defenses. As of June 30, 1998, no Rights have been
exercised.
The remaining authorized, but unissued, shares of Class A common stock
are reserved for issuance for stock options, warrants and Rights.
CAPITAL TRANSACTIONS WITH SHAREHOLDER OF ACQUIRED SUBSIDIARY
In 1997 and 1996, one of the Company's acquired subsidiaries, which was
an S coporation, distributed dividends to the former shareholder of the
subsidiary. In addition, the retained earnings of such subsidiary at the date
of acquisition have been recorded as a contribution to paid in capital as the
shareholder of such S corporation is deemed to have distributed such earnings
to himself and subsequently contributed such amount as paid in capital.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company is obligated under non-cancelable operating leases for
office space, warehouse space and equipment which expire at various times
through 2007. Annual minimum lease commitments under these leases amount to
$2.2 million in 1999, $1.9 million in 2000, $1.4 million in 2001, $0.4
million in 2002, $0.2 million in 2003 and $0.9 million thereafter. Total
rent expense amounted to $2.6 million, $2.9 million and $2.4 million in 1998,
1997 and 1996, respectively.
37
<PAGE>
LITIGATION - JOHN ALDEN LIFE INSURANCE CO.
On January 25, 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 $0.4 million in
past due invoices. 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 $9.0 million in
damages. 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.
OTHER LITIGATION AND CLAIMS
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 the effects of any
pending claims are material, there can be no assurance that such the effect
of such claims, if adversely determined, will not have a material adverse
effect on the business, financial condition, results of operations or
liquidity of Precept.
11. 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 involve chauffeured limousine, livery
and courier services. Total revenue by industry includes both sales to
unaffiliated customers, as reported in the Company's consolidated statements
of operations, and intersegment sales, which are eliminated in the Company's
consolidated financial statements. Intersegment sales included in operating
profits below were $20,075, $25,028 and $35,735 for the business products
segment and $177,723, $220,363 and $230,165 in the transportation services
segment for the years ended June 30, 1998, 1997 and 1996, 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.
Depreciation expense and capital expenditures for each fiscal year by segment
are shown below. Identifiable assets by industry segment are those assets
that are used in the Company's operations in each industry. Corporate assets
are principally certain investments and net assets of discontinued operations.
Segment data as of and for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating income:
Business products. . . . . . . . . . . . . $ 3,893,954 $ 2,428,637 $ 1,852,064
Transportation . . . . . . . . . . . . . . 315,572 (116,271) 88,582
Other and corporate. . . . . . . . . . . . (296,629) 289,273 (87,943)
------------ ------------ ------------
Total operating income. . . . . . . . . $ 3,912,897 $ 2,601,639 $ 1,852,703
------------ ------------ ------------
------------ ------------ ------------
Depreciation and amortization:
Business products. . . . . . . . . . . . . $ 1,387,548 $ 1,336,099 $ 1,286,964
Transportation . . . . . . . . . . . . . . 412,194 414,717 316,611
Other and corporate. . . . . . . . . . . . 21,192 36,808 72,958
------------ ------------ ------------
Total depreciation and amortization . . $ 1,820,934 $ 1,787,624 $ 1,676,533
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Capital expenditures:
Business products. . . . . . . . . . . . . $ 184,495 $ 1,804,146 $ 1,178,781
Transportation . . . . . . . . . . . . . . 673,218 77,950 -
Other and corporate. . . . . . . . . . . . - - -
------------ ------------ ------------
Total capital expenditures. . . . . . . $ 857,713 $ 1,882,096 $ 1,178,781
------------ ------------ ------------
------------ ------------ ------------
Identifiable assets:
Business products. . . . . . . . . . . . . $ 37,978,428 $ 31,034,819 $ 29,239,629
Transportation . . . . . . . . . . . . . . 15,944,523 1,247,953 2,488,849
Other and corporate. . . . . . . . . . . . 2,563,653 5,008,774 8,011,130
------------ ------------ ------------
Total identifiable assets . . . . . . . $ 56,486,604 $ 37,291,546 $ 39,739,608
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
12. DISCONTINUED OPERATIONS
In February 1997, the Company decided to reduce its investment in
Builders and to sell the majority of the assets of 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
additional 1,000 shares, increasing its ownership to 90.5%, in exchange for a
contribution of capital of approximately $2.3 million. During 1998, Builders
sold 100,000 shares to the majority shareholder of the Company, diluting the
Company's ownership percentage to 1.8%. Consequently, the Company recorded
the net assets of Builders at the estimated expected value remaining at the
disposal date, which is zero.
During fiscal year 1998, the Company disposed of the majority of the
assets of Holdings. These assets included one condominium, a ranch, land and
building, and an investment in a restaurant. The condominium, land and
building and investment were sold to the majority shareholder of the Company
during fiscal year 1998 and the first quarter of fiscal year 1999. The sales
prices were equal to the carrying value of the assets at June 30, 1997 and
the assets were sold for cash. The ranch was also sold for cash during
fiscal year 1998 to a company owned by the majority shareholder, the chief
executive officer and the chief operating officer of Precept.
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 the consolidated
statements of operations. The net assets of the discontinued operations as
of June 30, 1998 and 1997, exclude amounts related to Builders, as described
above.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable and unbilled work. . . . $ - $ 66,055
Other current assets. . . . . . . . . . . . . - 34,907
Land, property and equipment, net . . . . . . 1,115,125 3,988,007
----------- -----------
Total assets . . . . . . . . . . . . . . . 1,115,125 4,088,969
Accounts payable and other accrued expenses - 525,286
Non-current liabilities . . . . . . . . . . . - 3,437
----------- -----------
Net assets of discontinued operations. . . $ 1,115,125 $ 3,560,246
----------- -----------
----------- -----------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
---------- ------------ -------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . $ 127,279 $ 82,661,862 $ 39,341,903
Costs and expenses. . . . . . . . . . . . 940,806 86,002,973 39,443,119
Loss from disposal. . . . . . . . . . . . - (497,971) -
---------- ------------ -------------
Loss before income taxes. . . . . . . . . (813,527) (3,839,082) (101,216)
Income tax benefit. . . . . . . . . . . . (346,135) - (36,822)
---------- ------------ -------------
Net loss from discontinued operations . . $ (467,392) $ (3,839,042) $ (64,394)
---------- ------------ -------------
---------- ------------ -------------
</TABLE>
A federal net operating loss ("NOL") carryforward of $2.9 million was
generated by discontinued operations during fiscal 1997. A deferred tax
asset of $1.4 million attributable to discontinued operations, most of which
is applicable to this NOL have been fully reserved with a valuation allowance
due to the uncertainty of the use of the asset to offset future taxable
income of discontinued operations.
13. TRANSACTIONS WITH AFFILIATES AND SHAREHOLDERS
SPIN-OFF FROM AFFILIATED COMPUTER SERVICES
On June 30, 1994, the businesses of the Company were merged and the
Company's common stock was distributed on a pro rata basis to the
shareholders of the Company's former parent, Affiliated Computer Services
("ACS"). The financial statements of the Company at the time of the spin-off
reflected the financial position and results of the combined businesses on a
historical cost basis. As a result of the spin-off from ACS, Precept and ACS
entered into a Reciprocal Services Agreement ("Services Agreement"), as
discussed below.
SERVICES AGREEMENT WITH ACS
Under terms of the Services Agreement, Precept will sell business forms
and supplies and provide courier and administrative services at prices that
result in an average gross margin of 30% (20% gross margin prior to June 30,
1997). Revenues for services provided to ACS under this agreement were $4.3
million, $5.4 million and $6.0 million in 1998, 1997 and 1996, respectively.
Amounts due from ACS were $1.1 million and $0.5 million at June 30, 1998 and
1997, respectively. In addition, the Company purchases certain general and
administrative services, including data processing, from ACS. Except for the
rental of office space and data processing support for its courier business,
Precept discontinued purchasing such services in the fourth quarter of fiscal
year 1998. Precept incurred expenses of $0.3 million, $0.4 million and $0.3
million from ACS for these services in 1998, 1997 and 1996, respectively.
LINKED SALES ARRANGEMENT WITH ACS SHAREHOLDERS
In connection with the spin-off from ACS, shareholders of ACS receiving
shares of Precept 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 $0.40 per 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 1996 and 1995, the Company repurchased 306,448 and
172,396 shares for $122,406 and $68,863, respectively, which is classified as
a reduction of shareholders' equity.
40
<PAGE>
LOANS TO CERTAIN EXECUTIVES
During the fiscal year ended June 30, 1996, the Company loaned certain
senior executives $0.8 million to be used exclusively to purchase the
Company's stock from selling shareholders. The shareholder notes were paid
down to $0.6 million as of June 30, 1997 and were fully repaid in fiscal year
ended June 30, 1998.
In conjunction with the purchase of Class A common stock and with the
exercise of stock options under the Company's stock option plan, a note
receivable, with recourse, was issued by the Company for the purchase of the
Company's stock by certain executives. As of June 30, 1997, such shareholder
notes were classified as a reduction of shareholders' equity. Such
shareholder notes were repaid during the fiscal year ended June 30, 1998.
CLASS B COMMON STOCK
Precept's 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 the
shareholders. During fiscal year 1998, the major shareholder converted
5,957,997 shares of Class B common stock into an equal number of shares of
Class A common stock.
SALE OF LAND, BUILDING AND INVESTMENT IN RESTAURANT
During September 1998, Precept completed the sale of land and building
and its investment in a restaurant business to its majority shareholder for
$1.1 million in cash. The property and equipment for such operations were
classified as net assets of discontinued operations at June 30, 1998.
LEASE OF RANCH
Precept is party to a five year lease for a limited use of a ranch which
is owned by a company controlled by the Company's majority shareholder, chief
executive officer and chief operating officer. This ranch was previously
owned by Precept and was sold to this company in November 1997 for
$1,200,000. Precept is liable for variable monthly lease payments of
approximately $10,000 during the lease term.
PROXIES
The majority shareholder has entered into proxies with the chief
executive and the chief operating officer of the Company whereby the majority
shareholder controls the votes that may be cast with shares owned by the two
officers. Such proxies continue until the majority shareholder's death or
his disability, whichever event occurs first.
TRANSACTIONS WITH FORMER DIRECTOR AND USTS FORMER CHAIRMAN
Subsequent to the USTS acquisition, ,Precept entered into a separation
agreement and general release with USTS' former chairman that included his
resignation from Precept's board of directors in exchange for monthly
payments of $21,075 through March 2001. In July 1998, Precept sold the owned
and leased buses of one of its businesses to USTS' former chairman in
exchange for a reduction of $0.6 million in Precept's note payable to him.
These events were considered in the allocation of the purchase price from the
acquisition of USTS.
14. SUBSEQUENT EVENTS
ACQUISITIONS
As discussed more fully in Note 3, Precept has completed four
acquisitions of businesses since June 30, 1998.
41
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable as there were no changes in or disagreements
with the Company's independent auditors on accounting and financial disclosures
for the period covered by this Form 10-K.
ITEM 10--DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
This item is incorporated by reference from the Company's 1998 Proxy.
ITEM 11--EXECUTIVE COMPENSATION
This item is incorporated by reference from the Company's 1998 Proxy.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference from the Company's 1998 Proxy.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference from the Company's 1998 Proxy.
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
Item 14(a) The following documents are filed as part of this Annual Report
on Form 10-K.
1. Consolidated Financial Statements: The financial statements
listed in the accompanying Index to Consolidated Financial
Statements are filed as part of this annual report. See
pages 27 to 46
2. Financial Statement Schedule--not applicable.
3. Exhibits: The exhibits listed on the accompanying Index to
Exhibits are filed or incorporated by reference as part of
this annual report. See page 48 to 49.
Item 14(b) Reports on Form 8-K
On April 28, 1998, the Company filed a report on Form 8-K in
connection with its acquisition of all of the issued and
outstanding stock of InfoGraphix, Inc.
On July 6, 1998, the Company filed a report on Form 8-K in
connection with its acquisition of all of the issued and
outstanding stock of MBF Corporation, a Louisiana corporation.
On September 18, 1998, the Company filed a report on Form
8-K in connection with its acquisition of Creative, a Maine
corporation.
On September 25, 1998, the Company filed a report on Form
8-K in connection with its acquisition of Southern Systems
Business Forms & Data Supplies Inc., a South Carolina
corporation.
Item 14(c) Exhibits required by Item 601 of Regulation S-K
</TABLE>
42
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
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. (1)
2.2 USTS Plan of Liquidation and Dissolution (1)
2.3 Stock Purchase Agreement by and among Precept Business Products,
Inc., Precept Business Services, Inc., InfoGraphix, Inc. and James
Gorin (3)
2.4 Stock Purchase Agreement dated as of June 13, 1998 by and among the
Company, Precept Business Products, Inc., MBF Corporation, and J.D.
Greco (4)
2.5 Agreement and Plan of Merger dated as of September 1, 1998 by and
among the Company, Creative Acquisition Corp., Creative, Edward
Curtis and Robert Bazinet (5)
2.6 Agreement and Plan of Merger dated as of August 26, 1998 by and
among the Company, Precept Acquisition Corp., Southern Systems
Business Forms & Data Supplies, Inc., a South Carolina corporation
("Southern") and each of the shareholders of Southern (6)
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (1)
3.1 Warrant Agent Agreement (1)
3.2 Form of Precept Class A Warrant Certificate (1)
3.3 Form of Precept Class A Common Stock Certificate (1)
3.4 Form of Rights Agreement between Precept and Continental Stock
Transfer & Trust Co. (1)
3.5 Form of Irrevocable Proxy granted to Darwin Deason by various
Precept Investors shareholders (1)
10.1 Form of Registration Rights Agreement by and among Precept
Investors, Inc., Michael Margolies, and The Margolies Family Trust
(1)
10.2 Form of Employment Agreement by and between Precept Investors, Inc.,
and Michael Margolies (1)
10.3 Form of Employment Agreement by and between Precept Investors, Inc.
and Ron Sorci (1)
10.4 Reciprocal Services Agreement (as amended), dated June 30, 1994,
between Precept and ACS (1)
10.5 First Amendment to Reciprocal Services Agreement, dated May 1, 1998,
between Precept and ACS (7)
10.6 Form of Directors Indemnification Agreement (1)
10.7 Precept 1996 Stock Option Plan (1)
10.8 Precept 1998 Stock Incentive Plan (1)
10.9 Credit Agreement and Line of Credit Note, dated as of July 1, 1997,
between Precept Investors, Inc. and Wells Fargo Bank (Texas),
National Association (1)
10.10 First Amended and Restated Credit Agreement and Line of Credit Note,
dated March 20, 1998, between Precept Business Services, Inc. and
Wells Fargo Bank (Texas), National Association (2)
10.11 Separation Agreement and General Release, dated July 20, 1998, by
and among Precept Business Services, Inc. and Michael Margolies (7)
13 Portions of the Annual Report to Shareholders for the fiscal year
ended June 30, 1998 expressly incorporated by reference herein
21 Precept Subsidiaries
23.1 Consent of Ernst & Young LLP (7)
27 Financial Data Schedule (7)
</TABLE>
- --------------------------------------------------------------------------------
43
<PAGE>
(1) Previously filed as an exhibit to the Company's registration
statement on Form S-4 (file no. 333-42689) and incorporated herein
by reference
(2) Previously filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended December 31, 1997
(3) Previously filed as an exhibit to the Company's Form 8-K dated April
28, 1998
(4) Previously filed as an exhibit to the Company's Form 8-K dated July
6, 1998
(5) Previously filed as an exhibit to the Company's Form 8-K filed
September 18, 1998
(6) Previously filed as an exhibit to the Company's Form 8-K filed
September 25, 1998
(7) Filed herewith
Item 14(d) Financial statement schedules required by Regulation S-X - not
applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of September 25,
1998.
PRECEPT BUSINESS SERVICES, INC.
/s/ David L. Neely
- ------------------------------------
David L. Neely
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below as of September 25, 1998 by the following persons
on behalf of the registrants and in the capacities indicated.
<TABLE>
<CAPTION>
/s/ Douglas R. Deason /s/ Darwin Deason
- ------------------------------------- --------------------------------------
<S> <C>
Douglas R. Deason Darwin Deason
President, Chief Operating Officer Director,
/s/ Layne A. Deutscher /s/ J. Livingston Kosberg
- ------------------------------------- --------------------------------------
Layne A. Deutscher J. Livingston Kosberg
Director Director
/s/ Sheldon I. Stein /s/ Robert Blackman
- ------------------------------------- --------------------------------------
Sheldon I. Stein Robert Blackman
Director Director
/s/ William W. Solomon, Jr.
- -------------------------------------
William W. Solomon, Jr.
Senior Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
44
<PAGE>
FIRST AMENDMENT TO
RECIPROCAL SERVICES AGREEMENT
THIS FIRST AMENDMENT TO RECIPROCAL SERVICES AGREEMENT (this "Agreement")
is made and entered into effective as of May 1, 1998, between Affiliated
Computer Services, Inc., a Delaware corporation ("ACS"), and Precept Business
Services, Inc., formerly known as Precept Business Products, Inc., a Texas
corporation ("Precept"). This Agreement is to amend certain terms and
provisions of the Reciprocal Services Agreement dated June 30, 1994 between
ACS and Precept (the "Original Amendment"). Except as expressly amended by
this Agreement, the Original Agreement shall continue in full force and
effect.
1. Section 1 of the Original Agreement is hereby deleted in its entirety,
and the following shall be substituted in lieu thereof:
SERVICES PROVIDED BY PRECEPT TO ACS
During the term of this Agreement, Precept shall be ACS' exclusive
provider of the goods and services described in the following
schedules attached hereto. This includes both existing and future
ACS operations and/or subsidiaries; provided, that in the event that
ACS hereafter acquires a subsidiary or operation, Precept shall
begin to provide said goods and services after a reasonable period of
time to permit a non-disruptive transition. This Agreement shall not
apply to any subsidiary or operation which ceases to be an operation
or subsidiary of ACS. Further, if Precept does not elect to provide
certain services or goods, ACS may acquire same from another vendor.
Schedule A - Forms, Business Products and Printing Services
Schedule B - Courier Services
Schedule C - Corporate Transportation Services
2. Section 3 of the Agreement is hereby modified and amended as follows:
TERM OF AGREEMENT
The term of the Original Agreement is hereby extended and shall
continue until April 30, 2005 unless earlier terminated in accordance
with the terms and provisions of this Agreement. Thereafter, the term
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 term at the end of the then-current annual term.
However, ACS may terminate this Agreement at any time prior to April
30, 2005 provided it notifies Precept of such termination at least
six (6) months prior to June 30th of any year during the term of
this Agreement.
<PAGE>
3. Section 7 of the Original Agreement is hereby deleted.
Entered into effective as of the date first written above.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark King
------------------------------
Mark King
------------------------------
(Type or Print Name)
Title: EVP & CFO
----------------------------
PRECEPT BUSINESS SERVICES, INC.
By: /s/ David L. Neely
------------------------------
David L. Neely
------------------------------
(Type or Print Name)
Title: Chairman & CEO
----------------------------
<PAGE>
SCHEDULE A
FORMS, BUSINESS PRODUCTS AND PRINTING SERVICES
SERVICES:
- Provide and manage all forms and printing requirements where
reasonably practicable, as reasonably determined by ACS.
- 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.
<PAGE>
SCHEDULE B
COURIER SERVICES
SERVICES:
- On-call courier services in locations serviced by Precept courier
companies.
CHARGES:
- Standard charges for courier services less a 10% discount.
<PAGE>
SCHEDULE C
CORPORATE TRANSPORTATION
SERVICES:
- Corporate limousine and towncar transportation services nationwide, as
provided by Precept Transportation Services, L.L.C.
CHARGES:
- Standard rates for limousine and sedan services less a 10% discount.
<PAGE>
SEPARATION AGREEMENT AND GENERAL RELEASE
This Separation Agreement and General Release (this "Agreement"), by and
between Michael Margolies ("Margolies"), an individual residing at 2101 N. 51st
Avenue, Hollywood, FL 33201, and Precept Business Services, Inc., a Texas
corporation ("Precept") is made and entered into as of the date of Margolies'
execution of this Agreement.
RECITAL
Margolies and Precept have agreed that it is in the best interests of
Margolies and Precept to terminate their relationship as provided herein.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. RESIGNATION. Simultaneously with the execution of this Agreement,
Margolies has tendered to Precept his resignation, a copy of which is
attached as Exhibit A hereto, effective as of the close of business on June
30, 1998, (the "Resignation Date") as an officer, director, employee and
agent of Precept and its affiliates, and after the Resignation Date, except
as specifically provided in Section 4, neither Margolies nor Precept shall
represent or state to any party that Margolies has any authority to act for
or on behalf of Precept or its affiliates or has any relationship with
Precept or its affiliates other than as a shareholder. The resignation
letter reflects that Margolies voluntarily resigned from any and all
positions of officer and/or director he held with Precept, its affiliates and
subsidiaries.
2. SEVERANCE. For a period commencing as of the Resignation Date
and ending March 31, 2000 (the "Severance Period"), Precept shall (A) pay to
Margolies on a monthly basis, net of any applicable withholding for taxes and
any other authorized deductions, an amount equal to $21,075 (the "Monthly
Payment"), (B) maintain in full force and effect Precept's health, disability
and life insurance currently available to Margolies to the same extent and in
the same manner as would be available to Margolies if he remained as a
full-time Vice Chairman of Precept; including, but not limited to, all
deductions required to cover Margolies' contribution to the monthly cost of
such insurance and (C) pay the premiums associated with the current personal
life insurance policy covering Margolies' life (not to exceed 5 quarterly
amounts of $12,500 for an aggregate of $62,500), with gross proceeds payable
to the Margolies Family Trust.
3. MUTUAL RELEASES. (a) Margolies hereby for himself and on behalf
of anyone claiming through him irrevocably and unconditionally releases,
acquits and discharges forever Precept, its successors, assigns, divisions,
subsidiaries, shareholders, affiliates, predecessors, employees, agents,
officers, directors, and attorneys (the "Releasees") from any and all causes
of action, claims and demands existing on or before the date of this
Agreement, whether known or unknown, including, but not limited to, claims
arising in any way from his employment with Precept, its affiliates or
predecessors, the separation of his employment with Precept and its
affiliates, his service as an officer and director of Precept or its
affiliates or predecessors (hereafter in this Section 3(a) collectively
referred to as the "Claims" or individually as the "Claim"). Said Claims
include, but are not limited to, Claims for: (1) violation of the Age
Discrimination in Employment Act of 1967, as amended, (2) employment
discrimination (including
1
<PAGE>
claims of sex discrimination or sexual harassment) or retaliation under Title
VII (42 U.S.C. section 2000 et seq., and under 42 U.S.C. Section 1981 through
Section 1983); (3) disputed wages; (4) wrongful discharge or breach of any
alleged employment contract, express or implied; and (5) any tort, including
invasion of privacy, defamation, fraud and infliction of emotional distress.
The release contained in this Section 3 (a) shall not affect any rights that
may be granted to Margolies, or obligations of Precept, under the terms of
this Agreement, that certain Registration Rights Agreement, dated March 19,
1998, by and among Precept, Margolies and The Margolies Family Trust; and
that certain Agreement and Plan of Reorganization, dated November 16, 1997,
by and among U.S. Transportation Systems, Inc., Precept and Precept
Transportation Services, L.L.C. Margolies hereby agrees to not bring any
legal action, either civil or criminal, against any of the Releasees for any
Claim released under this Agreement and represents and warrants that no such
Claim has been transferred and that no such legal action has been filed to
date. Margolies agrees that he will not accept any award of damages if any
Claim is brought on his behalf and further will assign any such award to
Precept.
(b) Precept on behalf of itself and its subsidiaries and other entities
under its control, hereby releases and discharges forever Margolies, his
family, heirs, successors, assigns, agents, and attorneys from any and all
causes of action, claims and demands existing on or before the date of this
Agreement, whether known or unknown, including, but not limited to, claims
arising in any way from Margolies' employment by Precept or its affiliates or
predecessors, his service as an officer, employee, or director of Precept or
its affiliates or predecessors, and his status as a shareholder of Precept or
its affiliates or predecessors; provided, however, that the release contained
in this Section 3 (b) shall not affect any rights that may be granted to
Precept, or obligations of Margolies, under the terms of this Agreement, that
certain Registration Rights Agreement, dated March 19, 1998, by and among
Precept, Margolies and The Margolies Family Trust; and any executory
obligations of Margolies, individually, as an officer and/or director of
Transportation Equities, Inc. ("TEI"), and as trustee of the Liquidating
Trust all as contemplated by and pursuant to that certain Agreement and Plan
of Reorganization, dated November 16, 1997, by and among U.S. Transportation
Systems, Inc., Precept and Precept Transportation Services, L.L.C. Precept
hereby agrees to not bring any legal action, either civil or criminal,
against Margolies for any claim released under this Agreement and represents
and warrants that no such claim has been filed to date.
(c) Margolies and Precept agree that Margolies will not, directly or
indirectly, disclose the fact of and terms of this Agreement, including the
severance benefits, to anyone, except legal and tax advisors (each of which
must be informed of, and must agree to comply with, this confidentiality
provision) or as otherwise required by law.
4. FINDER. (a) During the Severance Period Margolies agrees to assist
Precept exclusively in acquiring through merger, stock or asset purchase, the
entities listed on Exhibit B (collectively the "Companies" and individually
the "Company") or otherwise entering into a transaction with substantially
such effect (a "Transaction"). Margolies may submit additional names of
prospects for consideration to Douglas R. Deason ("Deason"), the President
and Chief Operating Officer of Precept. A prospect will not be added and
included if the prospect has been previously introduced to Precept by a
person other than Margolies. Margolies shall use his best efforts to assist
Precept in consummating the Transaction, including introducing the parties,
providing information to Precept which would be helpful in analyzing the
transaction subject to any applicable
2
<PAGE>
legal restrictions; and otherwise assisting Precept as reasonably requested
until the closing of the Transaction. Although Margolies shall at all times
act as an independent contractor and not as an agent or partner of Precept,
Margolies shall cooperate with Precept as reasonably required by Precept in
order to ensure an appropriate and satisfactory introduction and continuing
relationship between Precept and the Company.
(b) Margolies shall be paid a fee in cash (the "Fee") on the
basis set forth on Exhibit B at the final legal closing of the Transaction
("Closing"). In the event a definitive agreement, with respect to a prospect
listed on Exhibit B, is fully executed within 6 months of when the "Finder"
relationship between Margolies and Precept expires, then Margolies shall be
paid upon the Closing of the Transaction contemplated in such definitive
agreement.
(c) In the event 75% of the aggregate of all Fees paid to Margolies
shall exceed $63,225 (the "Fee Threshold") then the Monthly Payment for each
of January, February and March 2000 shall be reduced, dollar for dollar, by
the amount by which such 75% exceeds the Fee Threshold. Such reduction can in
no event exceed $63,225. For example, if 75% of all Fees, at any time,
totaled $83,225, than the March, 2000 Monthly Payment would be reduced by
$20,000.
5. COOPERATION. During the Severance Period Margolies shall provide
the following as reasonably requested by Precept:
(a) information relating to Margolies and his ownership of Precept
Class A common stock that is required for filings under the Securities Act of
1933 and reports filed by Precept under the Securities Exchange Act of 1934
("Exchange Act");
(b) assistance in any litigation in which Precept is involved that
relates to matters in which Margolies participated or about which Margolies
may have knowledge; and
(c) technical advice relating to transportation services matters.
Precept shall cause Ron Sorci to be reasonably available to
Margolies with respect to matters involving TEI and The Liquidating Trust and
shall cooperate with Margolies, TEI and The Liquidating Trust with respect to
making available documents, information and the like for purposes of the
winding up and liquidation of TEI and The Liquidating Trust.
6. CONFIDENTIALITY AND NON-COMPETITION. In his various positions with
Precept and its affiliates, and their predecessors, Margolies has had access
to and has become acquainted with various confidential information.
Margolies agrees to treat such information as confidential and not to
disclose any such information to anybody. Until the end of the Severance
Period, Margolies shall not, without the prior written consent of Precept,
directly or indirectly, engage in any non transportation business similar to
what Precept or any of its affiliates is currently involved, or
transportation service businesses of the type currently conducted by Precept
or its affiliates in the geographical locations such business are conducted
or any business which Margolies is paid a Fee pursuant to Section 4 of this
Agreement.
3
<PAGE>
7. OTHER AGREEMENTS. (a) Simultaneously with the execution of this
Agreement, that certain Executive Employment Agreement by and between
Margolies and Precept, dated March 19, 1998, shall terminate.
(b) Any other written agreements or instruments that may exist on
the date of this Agreement shall remain in place and shall not be affected by
the terms and provisions of this Agreement.
8. GENERAL.
(a) AMENDMENT AND WAIVER. This Agreement may not be amended or
modified or any provision hereof waived except by an instrument in writing
signed by or on behalf of each of the parties hereto. Notwithstanding
anything to the contrary contained herein, a wavier that does not adversely
affect all of the parties hereto may be executed only by the adversely
affected party.
(b) HEADINGS. The descriptive headings contained in this Agreement
are for convenience of reference only and shall not affect in any way the
meaning on interpretation of this Agreement.
(c) ASSIGNMENT. Neither party may assign its rights or delegate
its obligations hereunder without the prior written consent of the other
party.
(d) NOTICES. All notices required or permitted to be given
hereunder shall be in writing and shall be given or made by delivery in
person, by courier services, telecopy, telegram, telex or registered or
certified mail (postage prepaid, return receipt required) to the respective
parties at the following addresses:
If to Precept: Precept Business Services
1909 Woodall Rodgers Freeway
Suite 500
Dallas, Texas 75201
Attention: General Counsel
If to Margolies: Michael Margolies
2101 N. 51st Avenue
Hollywood, FL 33201
With a copy to: Robert Brantl, Esq.
Bressler, Amery & Ross
17 State Street
New York, NY 10004
(e) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and undertakings, both written and oral,
among the parties hereto with respect to the subject matter.
4
<PAGE>
(f) GOVERNING LAW. This Agreement will be governed by, and
constructed in accordance with, the laws of the State of Texas.
(g) SEVERABILITY. If any term or other provision of this
Agreement is finally determined by a court of competent jurisdiction to be
invalid, illegal or incapable of being enforced under any law or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the
parties hereto will negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner. Specifically excepted from this requirement to negotiate
are any questions concerning the reasonableness of the limitations upon
competition.
(h) SPECIFIC PERFORMANCE. The parties hereto acknowledge that
irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that neither party
will have an adequate remedy at law in such case. Accordingly, the parties
hereto agree and consent that the other will be entitled to a decree of
specific performance, injunctive relief mandamus or other appropriate remedy
to enforce performance of this Agreement, in addition to any other remedy at
law or equity.
(i) FEDERAL OLDER WORKS BENEFIT PROTECTION ACT. Margolies
acknowledges that he has been informed of his rights under the Federal Older
Workers Benefit Protection Act that:
(A) He has the right to consult with an attorney before signing
this Agreement;
(B) He does not release rights or claims under the Age
Discrimination in Employment Act of 1967, as amended, that
may arise after the date this Agreement is executed by
Margolies;
(C) He has twenty-one (21) days from the date above to consider
this Agreement; and
(D) He has seven (7) days after signing this Agreement to revoke
this Agreement, but only to the extent it releases a claim
for age discrimination under the Age Discrimination in
Employment Act of 1967, as amended. This revocation can be
made by delivering a written notice of revocation to
Precept's General Counsel, at the following address: 1909
Woodall Rodgers Fwy, Dallas, Texas 75201. For this
revocation to be effective, written notice must be received
by Precept no later than 5:00 p.m. on the seventh day after
Margolies signs this Agreement. Margolies understands that
the severance allowance will not be paid until after the
seven-day revocation period has passed without Margolies
having given notice of revocation.
5
<PAGE>
(j) NO DISPARAGING REMARKS. Margolies agrees to refrain from
making disparaging, negative or other similar remarks concerning Precept or
any of its subsidiary or affiliated corporations or entities, or their past
and present respective officers, directors, shareholders, clients or
employees.
(k) TAXABILITY. Margolies agrees and acknowledges that no
representations have been made to him or to his representatives concerning
the taxable nature of any consideration provided to him pursuant to this
Agreement.
(l) ARBITRATION. Any controversy or claim arising out of, or
relating to, this Agreement, or its breach, shall be settled by arbitration
in the City of Chicago in accordance with the then governing rules of the
American Arbitration Association. Judgement upon the award rendered may be
entered and enforced in any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement.
PRECEPT BUSINESS SERVICES, INC.
By:
------------------------------------
Name: David L. Neely
Title: Chairman of the Board
and Chief Executive Officer
------------------------------
Date
---------------------------------------
Michael Margolies
------------------------------
Date
6
<PAGE>
EXHIBIT A
---------
July 1, 1998
Mr. David L. Neely
Chairman of the Board
and Chief Executive Officer
Precept Business Services, Inc.
1909 Woodall Rodgers Fwy. Suite 500
Dallas, Texas 750201
Dear David:
As we discussed and agreed, I hereby voluntarily tender my resignation
effective as of the close of business on July 1, 1998, on the terms and
conditions set forth in the Severance Agreement between Precept Business
Services, Inc. ("Precept") and me dated as of July 1, 1998, as Vice Chairman
of the Board of Directors of Precept, and, as appropriate, as an officer,
director, employee and agent of any and all Precept affiliates. My
resignation is not conditioned upon acceptance by the Precept Board of
Directors or the Board of Directors of any of its affiliates.
Best wishes for your continued success.
Sincerely yours,
Michael Margolies
cc: Precept Board of Directors
7
<PAGE>
EXHIBIT "B"
-----------
IDENTIFICATION OF THE COMPANY:
- ------------------------------
EXPENSES: Expenses will be reimbursed only in the event they have been approved
- -------- by David L. Neely.
FINDER'S FEE:
- -------------
1% of the last twelve months revenue of the Company as reflected in the
most recent, available financial statements of the Company used in
determining the purchase price in the Transaction.
8
<PAGE>
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-59815) pertaining to the Precept Business Services, Inc. 1998 Stock
Incentive Plan and Precept Business Services, Inc. 1996 Stock Option Plan of our
report dated September 23, 1998, with respect to the consolidated financial
statements of Precept Business Services, Inc. included in the Annual Report
(Form 10-K) for the year ended June 30, 1998.
ERNST & YOUNG
Dallas, Texas
September 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,291,303
<SECURITIES> 0
<RECEIVABLES> 15,999,000
<ALLOWANCES> (404,000)
<INVENTORY> 5,133,484
<CURRENT-ASSETS> 805,151
<PP&E> 10,911,288
<DEPRECIATION> (5,159,801)
<TOTAL-ASSETS> 56,486,604
<CURRENT-LIABILITIES> 14,399,380
<BONDS> 0
0
0
<COMMON> 522,359
<OTHER-SE> (191,271)
<TOTAL-LIABILITY-AND-EQUITY> 56,486,604
<SALES> 122,991,788
<TOTAL-REVENUES> 122,991,788
<CGS> 85,281,274
<TOTAL-COSTS> 119,078,891
<OTHER-EXPENSES> 1,936,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,195,086
<INCOME-PRETAX> 1,976,357
<INCOME-TAX> 790,544
<INCOME-CONTINUING> 1,185,813
<DISCONTINUED> (467,392)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 718,421
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
