<PAGE>
As filed with the Securities and Exchange Commission on June 15, 1999
Registration No. 333-42689
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRECEPT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
TEXAS 7389 75-2487353
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
<CAPTION>
<C> <C>
WILLIAM W. SOLOMON, JR.
PRECEPT BUSINESS SERVICES, INC. PRECEPT BUSINESS SERVICES, INC.
1909 WOODALL RODGERS FRWY. SUITE 500 1909 WOODALL RODGERS FRWY. SUITE 500
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 754-6600 (214) 754-6600
(Address and telephone of registrant's principal (Address and telephone of registrant's principal
executive offices) executive offices)
</TABLE>
COPIES OF COMMUNICATIONS TO:
CHARLES D. MAGUIRE, JR.
JACKSON WALKER L.L.P.
901 MAIN STREET, SUITE 6000
DALLAS, TEXAS 75202-3797
TELEPHONE: (214) 953-6000
TELECOPIER: (214) 953-5822
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: [ ]
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 15, 1999
PROSPECTUS
7,118,181 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A COMMON STOCK
----------------------
This Prospectus relates to our offer and issuance of up to 6,366,428
shares of our Class A Common Stock from time to time in connection with future
business combinations, mergers and/or acquisitions.
- The stock will be issued at the prices and on the terms that
we negotiate with the owners or officers of the businesses we
plan to acquire.
- We will value the shares issued in each acquisition based on
prices reasonably related to market prices of the Class A
Common Stock at the time of the acquisition agreement,
delivery of the shares or otherwise. We have not fixed a
period of time within which the shares may be offered or sold.
- We will pay all of the expenses of this offering. There will
not be any underwriting discounts or commissions in connection
with the issuance of shares in business acquisitions.
_ We will provide a prospectus supplement each time we issue
shares in an acquisition. The prospectus supplement will
provide specific information about the terms of that offering
and also may add, update or change information contained in
this Prospectus.
When we issue shares under this Prospectus, we may promise the
recipient that the amount the recipient receives from a later sale of such
shares will not be lower than the valuation (or a specific amount related to
such valuation) we used at the time we originally issued the shares. This
guaranty will be limited in duration and may require us to make up any shortfall
(including any shortfall attributable to brokers' commissions and selling
expenses) in cash or by issuing additional shares under this Prospectus.
Certain of our shareholders listed under "Principal and Selling
Shareholders" on page 40, below, are offering and selling up to 751,753 shares
of Class A Common Stock under this Prospectus. The selling shareholders acquired
the shares in connection with certain of our recent acquisitions. Additionally,
with our consent, persons who will receive shares under this Prospectus in
connection with acquisitions may use this Prospectus to sell such shares at a
later date. The selling shareholders may offer their shares through public or
private transactions, on or off the Nasdaq National Market, at prevailing market
prices or at privately negotiated prices. We will not receive any of the
proceeds from the sale of shares by the selling shareholders. The selling
shareholders will pay any selling commissions from the sales, and we will pay
all other registration expenses relating to the offer and sale of the stock.
Our Class A Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "PBSI" On June 8, 1999, the closing sale price of the common stock
was $4.81 per share.
--------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISK. BEFORE YOU INVEST,
YOU SHOULD CONSIDER CAREFULLY THE "RISK FACTORS" ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CLASS A COMMON STOCK OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is _______________, 1999.
The information contained in this Prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities Exchange Commission becomes effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any State where the offer or sale is not permitted.
1
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Where You Can Find More Information...............................................................................2
Prospectus Summary................................................................................................3
Risk Factors......................................................................................................6
Dividend Policy .................................................................................................13
Price Range of Common Stock......................................................................................13
Selected Consolidated Financial Data.............................................................................14
Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 16
Business.........................................................................................................25
Management.......................................................................................................33
Certain Relationships and Related Transactions...................................................................38
Principal and Selling Shareholders ..............................................................................40
Description of Securities........................................................................................42
Shares Eligible for Future Sale..................................................................................47
Plan of Distribution.............................................................................................48
Legal Matters....................................................................................................48
Experts..........................................................................................................48
Index to Financial Statements...................................................................................F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission. You may read and
copy any documents we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should
call 1-800-SEC-0330 for more information on the public reference room.
Additionally, the SEC maintains a Website at http://www.sec.gov where certain
information regarding issuers, including Precept, may be found.
This Prospectus is part of a Registration Statement that we filed with
the SEC. This Prospectus does not contain all the information set forth in the
Registration Statement, such as certain exhibits and schedules. You can get a
copy of the Registration Statement from the SEC at the address listed above or
from its Website.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PRECEPT
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL OR TO OR FROM ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS AND IS NOT COMPLETE. THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, CONTAINED ELSEWHERE IN THIS PROSPECTUS. THE TERM
"PRECEPT" REFERS TO PRECEPT BUSINESS SERVICES, INC. AND ITS WHOLLY OWNED
SUBSIDIARIES. ALL SHARE NUMBERS REFLECT A 1 FOR 7 REVERSE STOCK SPLIT EFFECTED
ON DECEMBER 4, 1998. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADER "RISK FACTORS" ON PAGE 6, BELOW.
THE COMPANY
Precept is an independent distributor offering single source solutions
for automated document management services, inventory control and order
processing via the internet, as well as many other E-commerce services, while
providing top quality custom and stock business products to companies of all
sizes throughout the United States. We also operate various corporate
transportation services companies focusing on chauffeured town car and limousine
services. We were founded in 1988 as a regional business products distributor in
Dallas, Texas, and since that time have grown, both internally and through
acquisitions, to 58 locations throughout the United States. Business products we
distribute include custom business forms, commercial printing/graphic arts,
electronic forms, custom stock labels, computer supplies, envelopes and
advertising specialty products. We provide comprehensive information solutions
for our customers' business products, inventory control and document management
needs. In addition, we provide electronic forms capabilities and integration of
our customers accounting operations to streamline information flow and reduce
overall operating costs. Our business strategy is (1) to act as a premier sole
source "corporate outsourcer" providing a broad array of business products to
our customers while reducing overall procurement costs and providing a high
level of customer service, (2) to continue to expand the transportation
operations, emphasizing executive town car and limousine chauffeured services,
particularly in the tri-state New York area, the Northeastern United States, and
pursue selected acquisition opportunities focusing on the 30 to 40 largest
population centers in the United States, and (3) to continue our expansion
through strategic acquisitions and internal growth.
Our goal in the business products and document management business has
been to acquire or establish centrally managed networks of regional offices and
warehouses in major metropolitan markets throughout the United States. As a
result, we have completed 21 acquisitions of these regional business products
distributors since inception. Once a regional office/warehouse is acquired or
established, we seek to leverage our distribution capabilities by acquiring
smaller companies or opening satellite sales offices in the surrounding areas.
We also seek to increase the sales and profitability of our acquired companies
by integrating our business strategy and through elimination of redundant
operating expenses. We plan to continue to actively pursue this consolidation
strategy within the business products distribution and document management
industries.
We believe that the acquisition and operational experience of our
management team provides us with the ability to execute upon the growth
component of our business strategy. In our fifth year of existence, we were
recognized as the largest independent business products distributor by a
national business products magazine and are currently one of the top three
independent distributors in the United States. Our management team brings
extensive experience in the acquisition and integration of businesses. We
believe we can and will become the "consolidator of choice" in the business
products distribution and document management industries.
The industry in which we operate is large, fragmented and, we believe,
rapidly consolidating. We believe that opportunities exist to consolidate
participants in the industry and that our principal competitors are direct
manufacturers and independent distributors of business products. We also believe
the market for the business products we distribute is in excess of $20 billion
annually with the top 100 independent distributors representing $1.6 billion
annually, or 7.8% of the total market. We believe independent distributors'
market share will continue to grow in the future as more target customers make
the decision to outsource the distribution of their business products and
document management needs.
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We believe that similar consolidation possibilities exist in the
corporate transportation services industry. We believe the chauffeured vehicle
service industry, in particular, presents an attractive opportunity for
consolidation. In 1998, the chauffeured vehicle service business accounted for
approximately $4.0 billion in revenues to at least 3,000 companies throughout
the United States. We believe that no one company currently represents more than
2% of the overall market.
Precept was incorporated under the laws of the State of Texas in May
1993. We previously operated under the name "Precept Investors, Inc." which name
was changed to "Precept Business Services, Inc." on February 6, 1998. We became
a publicly-owned company on March 20, 1998, when we completed the acquisition of
substantially all of the operations of U.S. Transportation Systems, Inc.
("USTS"). Our principal corporate offices are located at 1909 Woodall Rodgers
Frwy, Suite 500, Dallas, Texas 75201, and our telephone number at that address
is (214) 754-6600.
RECENT DEVELOPMENTS
In March 1998, we acquired nearly all of the assets of USTS and listed
our Class A Common Stock and warrants to purchase Class A Common Stock on the
Nasdaq SmallCap Market. As part of the acquisition of USTS, we issued 1,373,214
shares of Class A Common Stock to USTS and assumed 259,286 warrants held by
former shareholders of USTS. In April 1998, USTS distributed the shares of Class
A Common Stock to USTS' shareholders.
On June 1, 1998, we sold our 75% interest in the common stock of U.S.
Trucking, Inc., a long-haul trucking business, which we acquired from USTS in
March of the same year. We have also completed the following recent
acquisitions: (1) on April 13, 1998, we acquired all of the issued and
outstanding stock of InfoGraphix, Inc., a Boston-based business product and
service provider and document management service distributor, (2) on June 19,
1998, we acquired all of the issued and outstanding stock of MBF Corporation, a
Louisiana-based provider of printed products, distribution services and
information solutions, (3) on September 4, 1998, we acquired through a merger
Creative, Inc., a New England-based provider of printed business forms,
distribution services and information solutions, (4) on September 18, 1998, we
acquired through a merger Southern Systems Business Forms & Data Supply, Inc., a
South Carolina-based provider of printed products, distribution services and
information solutions, (5) on October 1, 1998, we acquired through a merger
Garden State Leasing & Rent-A-Car Corporation, a New Jersey-based provider of
corporate transportation services and (6) on May 5, 1999, we acquired through
mergers Ambassador Limousine Services, Inc. and Ambassador Transportation
Services, Inc., both Connecticut corporations, and we acquired the assets of
Ambassador Executive Coaches, L.L.C., a Connecticut limited liability company.
In 1999, we also acquired two additional business products companies and two
additional transportation services companies.
On March 22, 1999, we entered into a Revolving Line of Credit Agreement
with Bank One, Texas, N.A. which provides us up to $40 million for borrowing to
be used for acquisitions, working capital and general corporate purposes.
In the third quarter of fiscal 1999, we recorded goodwill write-down
and other non-recurring charges totaling $14.3 million relating to events which
occurred during that quarter.
In April 1999, David Neely, our former Chairman and Chief Executive
Officer, resigned from his position as an officer and director.
On December 4, 1998, we effected a 1 for 7 reverse stock split of our
Class A Common Stock. Our Class A Common Stock is traded through the Nasdaq
SmallCap Market, and we have applied to have our Class A Common Stock approved
for quotation on the Nasdaq National Market.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Class A Common Stock offered............................. 7,118,181 shares (of which up to 751,753 shares may
be sold by selling shareholders)
Class A Common Stock outstanding as of May 15, 1999 ..... 8,557,045 shares
4
<PAGE>
Class A Common Stock offered............................. 7,118,181 shares (of which up to 751,753 shares may
be sold by selling shareholders)
Nasdaq SmallCap Market symbol............................ PBSI
</TABLE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See
"Risk Factors" beginning on page 6, below.
SUMMARY FINANCIAL AND OPERATING DATA
The following table presents summary financial and operating
information from continuing operations as of and for each of the five years in
the period ended June 30, 1998 as well as the nine month periods ended March 31,
1999 and 1998. This financial information is significantly affected by the
businesses acquired by Precept for each of the periods presented. The historical
financial statements of Precept 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>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------- -----------------
1998 1997 1996 1995 1994 1999 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations data:
Total revenue.............. $122,992 $115,963 $111,304 $93,397 $81,021 $121,865 $86,180
Total operating expenses... 119,080 113,361 109,452 90,665 77,925 130,600 84,641
-------- -------- -------- ------- ------- -------- -------
Operating income (loss).... 3,912 2,602 1,852 2,732 3,096 (8,735) 1,539
Interest and other expense. 1,936 618 929 357 1,937 1,857 543
Income tax provision(benefit) 790 828 16 356 791 (1,532) 398
-------- -------- -------- ------- ------- -------- -------
Net income (loss).......... $ 1,186 $ 1,156 $ 907 $ 2,019 $ 368 $(9,060) $ 598
-------- -------- -------- ------- ------- -------- -------
-------- -------- -------- ------- ------- -------- -------
Net income (loss) per share:
Basic..................... $ 0.18 $ 0.19 $ 0.15 $ 0.33 $ 0.06 $(1.10) $ 0.09
Diluted................... $ 0.18 $ 0.19 $ 0.15 $ 0.33 $ 0.06 $(1.10) $ 0.09
Weighted average shares:
Basic..................... 6,480 6,089 6,071 6,116 6,135 8,208 6,392
Diluted(1)................ 6,599 6,089 6,071 6,116 6,135 8,208 6,437
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, MARCH 31,
------------------------------------------------------- ---------
1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Trade accounts receivable... $15,595 $14,235 $15,089 $13,115 $4,073 $20,464
Inventory................... 5,133 3,225 2,621 3,062 535 5,598
Working capital............. 13,837 13,394 15,288 14,583 7,609 6,279
Property and equipment, net. 5,751 3,549 2,427 1,961 870 7,531
Intangible assets, net...... 19,558 5,040 4,774 2,290 -- 38,785
Total assets................ 56,487 37,292 39,740 31,745 31,224 80,877
Long-term debt.............. 20,085 7,821 5,397 1,128 1,047 29,677
Shareholders' equity........ 22,002 16,102 19,059 18,846 18,545 24,870
</TABLE>
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(1) Weighted average common outstanding shares for the year ended June
30, 1994 represent the number of shares outstanding as of June 30, 1994, since
the actual weighted average common outstanding shares during those years in
which Precept was a division of a previous consolidated group is not useful. Pro
forma per share and weighted average common outstanding shares reflect the 1 for
7 reverse stock split effected in December 1998.
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RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE PURCHASING ANY OF THE
SHARES OF CLASS A COMMON STOCK. FURTHER, THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF OUR PLANS, GOALS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. YOU ARE
CAUTIONED THAT, WHILE THE FORWARD-LOOKING STATEMENTS REFLECT OUR GOOD FAITH
BELIEFS, THEY ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THIS PROSPECTUS. SOME OF THE FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE THE RISK FACTORS DISCUSSED BELOW, AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD SUFFER
AND THE TRADING PRICE OF OUR CLASS A COMMON STOCK MAY DECLINE.
COMPETITION FOR ACQUISITIONS MAY IMPEDE OUR BUSINESS STRATEGY
We believe that the fragmentation of our industries and the
consolidation trend has intensified competition for acquisition targets. This
results in fewer acquisition targets and increased acquisition expectations by
potential targets. Thus, it will be more difficult to purchase acquisition
targets at reasonable prices or at all. Because our success is based on our
ability to grow quickly, and we intend to grow primarily through acquisitions,
this competition could negatively affect our profitability. Furthermore,
increased acquisitions in the industry will make it more difficult to maintain
and internally grow our customer base due to a reduced available market share.
Since 1991, we have completed the acquisition of 33 businesses. Since
the end of our 1998 fiscal year, we have completed the acquisition of four
business products distributors and four transportation services companies. We
have continued to actively negotiate to acquire additional businesses that offer
business products distribution and transportation services. However, there can
be no assurance that future acquisitions will occur at the same pace or be
available to us on favorable terms, or at all. Also, there can be no assurance
that we will complete acquisitions in a manner that coincides with the end of
our fiscal quarters. The failure to complete acquisitions on a timely basis
could have a material adverse effect on our ability to meet our quarterly
projected results and the projected results estimated by investors and analysts.
Likewise, delays in implementing planned integration strategies and activities
could also affect our quarterly earnings.
Furthermore, the volatility of our stock price may impede our ability
to complete acquisitions. For example, if we are unable to use our Class A
Common Stock as consideration in acquisitions because we believe the market
price of such stock is too low or because the acquisition targets conclude that
the market price of such stock is too volatile, we would need to use cash and/or
notes to make acquisitions. In that case, we would be unable to account for such
acquisitions under the pooling-of-interest method of accounting (which is
available only for all-stock acquisitions). This condition and the
unavailability of cash or debt financing might adversely affect the pace of our
acquisition program and the impact of acquisitions on our quarterly results.
IF WE FAIL TO INTEGRATE OUR ACQUISITIONS SUCCESSFULLY, OUR RESULTS OF OPERATIONS
WILL SUFFER; WE WILL HAVE A LIMITED COMBINED OPERATING HISTORY
One of our business strategies, to grow through acquisitions of
existing business products distributors and transportation service companies,
involves numerous risks, including, among others, the following:
- the difficulty of assimilating the acquired operations and
personnel;
- the potential disruption of our ongoing business;
- the potential inability of management to successfully
incorporate acquired products and services into our product
and service offerings and to maintain uniform standards,
controls, procedures and policies;
- the risks of entering markets in which we have little or no
direct prior experience;
6
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- the potential impairment of relationships with employees and
customers as a result of changes in management;
- the risk that critical members of the sales force of the
acquired operations leave and become competitors of our
ongoing business; and
- the risk that our management and financial controls,
personnel, computer systems and other corporate support
systems will not be adequate to manage the increase in the
size and scope of increased operations.
We may not be successful in overcoming these risks or any other
problems encountered in connection with future acquisitions. In addition, any
such transaction could negatively affect our operating results due to dilutive
issuances of equity securities, the incurrence of additional debt and the
amortization of expenses related to goodwill and other intangible assets, if
any.
Since our inception, we have acquired 33 companies and continue to
execute our acquisition strategy. In most cases, the managers of the acquired
companies have continued to operate their companies after being acquired. We
have integrated the businesses acquired prior to April 1998; however, there can
be no assurance that we will be able to integrate all of the companies acquired
since April 1998 within our operations without substantial costs, delays or
other problems. In addition, our executive management group may not be able to
continue to oversee and effectively implement our operating or growth strategies
in each of the markets we serve. Finally, the rapid pace of acquisitions may
adversely affect our continuing efforts to integrate and manage those
acquisitions profitably.
WE HAVE EXPERIENCED SIGNIFICANT GOODWILL WRITE-DOWNS
In the third quarter of fiscal 1999, we recorded goodwill write-downs
and other non-recurring charges totaling $14.3 million relating to acquisitions
and other events which occurred during that quarter. For example, a customer's
nonrenewal of its contract with us and the departure of substantially all of the
management and sales force of a company we acquired necessitated a write-down of
the goodwill associated with those acquisitions. Although management does not
expect further write-downs, it is possible that they may occur in connection
with future acquisitions or other events.
RISKS RELATED TO EXPANSION INTO NEW PRODUCT AND SERVICE AREAS, PARTICULARLY BY
ACQUISITIONS
Our ability to manage an aggressive consolidation program in our
industries has not yet been fully tested. We have increased the range of
products and services we offer through acquisitions of companies offering
products and services that are complementary to ours. Our 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 us. Acquisitions
may involve a number of special risks that could have a material adverse effect
on our operations and financial performance, including (1) adverse short-term
effects on our reported operating results, (2) diversion of management's
attention, (3) difficulties with the retention, hiring and training of key
personnel, particularly sales personnel, (4) risks associated with unanticipated
problems or legal liabilities and (5) amortization of acquired intangible
assets. Finally, although we conduct due diligence and generally receive
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 our
results of operations and financial condition.
INTENSE COMPETITION AND INDUSTRY CONSOLIDATION MAY RESULT IN REDUCED REVENUES
AND PROFITABILITY
We operate in a highly competitive environment. In our markets, we
generally compete with numerous 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, we
compete with several national retail office
7
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products companies and national contract stationers. Many of these
competitors possess greater financial, personnel and other resources than we
have. Most, if not all, of our large competitors operate in many of our
geographic and product markets. In addition, other competitors may choose to
enter our geographic and product markets. As a result of this competition, we
may lose customers or have difficulty acquiring new customers. As a result of
competitive pressures on the pricing of products, our revenues or margins may
decline.
We also face 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 we serve or are planning to enter as consolidation occurs (or accelerates)
in those markets. We believe that our major competitors are actively pursuing
acquisitions in the United States and outside of the United States. Many of
these entities are well established and have extensive experience in effecting
business combinations. These companies, or other large companies, may compete
with us for acquisitions in our 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 stock of
companies in our industries, we consider, 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, recapitalizations 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 PAID FOR ACQUISITIONS MAY EXCEED ASSET VALUE
The purchase price of our acquisitions to date have not been
established by independent appraisals, but generally have been determined
through arms-length negotiations between our 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, we
have incurred and expect 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. We may continue to make acquisitions in this
manner in the future.
OUR FINANCING MAY NOT BE SUFFICIENT TO CONTINUE OUR ACQUISITION STRATEGY
We expect to continue to finance acquisitions by using cash as well as
shares of Class A Common Stock. In addition, we expect that future acquisitions
may require a higher percentage of cash as total consideration. In certain
circumstances, we may be unable to use stock for consideration for acquisitions.
If we do not have sufficient cash resources or available debt financing to pay
the cash consideration for acquisitions, we may be unable to continue the
current pace of our aggressive acquisition program. As a result, our business
may not produce the level of profitability we hope to achieve and the price of
our Class A Common Stock may drop.
Assuming that the current pace of our acquisitions continues, we will
need debt or equity financing. We may not be able to obtain such financing if
and when it is needed or any such financing may not be available on acceptable
terms. We have a revolving line of credit agreement with our lenders, Bank One
and Wells Fargo Bank, which provides us with up to $40 million available for
borrowing. The amount available to be borrowed under the credit facility will
vary from time to time depending upon the level of our consolidated earnings
before interest, taxes, depreciation and amortization on a pro forma basis
reflecting completed acquisitions, our total indebtedness and related interest
expense. As of May 31, 1999, we had approximately $32 million outstanding under
the credit facility at an average annual interest rate of approximately 9.0% and
$1.5 million available for future borrowing.
8
<PAGE>
FUTURE RAPID GROWTH MAY STRAIN OUR RESOURCES
For our business to grow rapidly, we must have an effective planning
and management process. Otherwise, we may not successfully implement our
expansion program in whole or in part. Our growth will place a significant
strain on our managerial, operational and financial resources. To manage this
growth effectively, we must further improve our operational, financial and
management information systems and continue to identify, attract, train,
integrate and retain qualified personnel. These demands may require the addition
of new management personnel and the development of additional expertise by
existing management. In particular, the successful integration of acquired
businesses and the implementation of an expansion strategy will require (1)
close monitoring of quality of service, (2) identification and acquisition of
physical sites, (3) acquisition and installation of equipment and facilities,
(4) implementation of marketing efforts in new as well as existing markets, (5)
employment of qualified personnel for such sites and (6) expansion of our
managerial, operational and financial resources. Our resources, including our
management personnel, operational and management information systems and
financial systems, may not be sufficient to manage the growth in our business.
WE ARE DEPENDENT UPON THE IMPLEMENTATION AND OPERATION OF CERTAIN SYSTEMS
Any failure of our computerized inventory management and order
processing systems and warehouse management and distribution systems would cause
our operations to suffer. Any failure of our primary software and management
information system, Prelude's Automated Distribution System, may cause our
revenues to decrease. Additionally, we may experience delays, complications or
expenses in integrating and operating our systems for our recently acquired
subsidiaries and future operations, any of which could have a material adverse
effect on our results of operations and financial condition.
WE HAVE QUARTERLY FLUCTUATIONS IN OUR OPERATING RESULTS
Our business is subject to seasonal influences, generally during the
first and second quarters of each fiscal year. Our historical revenues and
profitability have been lower in the first quarter of our fiscal year, primarily
due to the lower level of business activity during the summer months. As our mix
of business evolves through future acquisitions, these seasonal fluctuations may
continue.
Quarterly results may also be materially affected by numerous factors,
including (1) the timing of acquisitions, (2) the timing and magnitude of costs
related to such acquisitions, (3) variations in the prices paid by us for the
products we sell, (4) the mix of products sold, (5) general economic conditions
and (6) the retroactive restatements in accordance with generally accepted
accounting principles of our consolidated financial statements for acquisitions
accounted for under the pooling-of-interests method. Moreover, the operating
margins of companies we acquire may differ substantially from ours, which could
contribute to the further fluctuation in our quarterly operating results.
Therefore, results for any one quarter are not necessarily indicative of the
results that we 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 our Class A Common Stock.
OUR CLASS A COMMON STOCK MAY BE DIFFICULT TO RESELL AND YOU MAY NOT BE ABLE TO
RESELL SHARES FOR MORE THAN YOU PAID
The market price of the Class A Common Stock is subject to significant
fluctuations. You may not be able to resell your shares at or above the price
you pay for them due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance
or changes in financial estimates of securities analysts;
- announcements by us or our existing or future competitors;
- conditions and trends in the business products or
transportation services industries;
9
<PAGE>
- adoption of new accounting standards affecting our industries;
- departures of management or key personnel;
- the operating and stock price performance of other comparable
companies; or
- general market conditions.
The stock market has recently experienced and may continue to
experience extreme price and volume fluctuations that often are unrelated or
disproportionate to the operating performance of any specific company. If
continued, these broad market fluctuations may adversely affect the trading
price of the Class A Common Stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
a company's stock, securities class action litigation has often been instituted
against the issuing company. We cannot be certain that such litigation will not
occur in the future with respect to us. Such litigation could result in
substantial costs and would at a minimum divert management's attention and
resources. Any adverse determination in such litigation could also subject us to
significant liabilities.
IF WE CANNOT ATTRACT OR RETAIN MANAGEMENT, OUR BUSINESS WILL SUFFER
Our success is dependent upon the services of our executive officers.
We do not carry key man insurance on these officers. We may not be able to
locate and retain qualified persons to replace any member of management or to
expand our current management if necessary. In addition, our operations are
located in diverse geographical locations throughout the United States, further
taxing the members of our 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 our business. In April 1999, David
Neely, our Chairman and Chief Executive Officer resigned. Darwin Deason has
assumed the role of Chairman, but the position of Chief Executive Officer has
not been filled.
CONTROL BY MANAGEMENT AND SHAREHOLDERS
As of May 15, 1999, our officers and directors beneficially owned 32.5%
of the outstanding shares of the Class A Common Stock and all of the Class B
Common Stock and control 59.7% of the voting power of such Common Stock. By
virtue of his Class B ownership and proxies with our chief operating officer and
former chief executive officer, Darwin Deason, our majority shareholder,
effectively controls the outcome of matters submitted to a vote of shareholders
and, indirectly, controls all major decisions reached by our Board of Directors
and officers.
A STRIKE BY UNIONIZED EMPLOYEES COULD AFFECT OUR PROFITABILITY
A small number of our 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, we could experience a disruption of
operations or higher labor costs. This could have a material adverse effect on
operations.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR ABILITY TO
PROVIDE SERVICES
The Year 2000 issue could result in system failures or miscalculations,
causing disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar business activities. For
further information on our efforts to handle the Year 2000 issue, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Issue" on page 22, below.
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY LOWER OUR STOCK PRICE AND
IMPAIR OUR ABILITY TO RAISE FUNDS IN FUTURE OFFERINGS
If our shareholders sell substantial amounts of our Class A Common
Stock in the public market, the market price of such stock could fall. The price
of our Class A Common Stock could also drop as a result of the exercise of
options for Common Stock or the perception that such sales or exercise of
options could occur. These factors also could make it more difficult for us to
raise funds through future offerings of Class A Common Stock.
10
<PAGE>
As of May 15, 1999, there were 8,557,045 shares of Class A Common Stock
outstanding. In addition, as of May 15, 1999, we had outstanding warrants and
options to purchase 846,987 shares of Class A Common Stock. The resale of up to
751,753 of the 8,557,045 outstanding shares will be registered by the
Registration Statement of which this Prospectus is a part. We believe that the
remaining shares outstanding are freely transferable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares held by our "affiliates," as defined in
Rule 144 under the Securities Act. The shares covered by this Prospectus are
freely transferable unless held by our affiliates, subject to the restrictions
of Rule 145 of the Securities Act.
The holders of approximately 1,055,000 outstanding shares have certain
rights to have shares registered under the Securities Act pursuant to the terms
of agreements between such holders and us. The resale of 620,342 of those
1,055,000 shares will be registered by the Registration Statement of which this
Prospectus is a part. We believe that the remaining shares are freely tradeable,
subject in certain cases to the restrictions of Rule 144. In addition, we have
filed a registration statement on Form S-8 to register a total of 903,557 shares
of Class A Common Stock, which is all shares reserved for issuance under our
1998 Stock Incentive Plan, as well as shares underlying certain options granted
under a prior stock option plan.
ADDITIONAL SHARES REGISTERED FOR USE IN FUTURE ACQUISITIONS MAY RESULT IN
DILUTION
The Registration Statement of which this Prospectus is a part covers
the issuance of up to 6,366,428 shares of Class A Common Stock from time to time
in the future, in one or more business combination transactions. We anticipate
issuing some or all of such shares in one or more acquisitions in the future. We
may also file additional registration statements in the future covering the
issuance of additional shares for acquisitions or other purposes. The use of
shares of Class A Common Stock for a portion or all of the consideration to be
paid in future acquisitions could result in dilution to the holders of the
outstanding Class A Common Stock.
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION AND BYLAWS AND OTHER
SHAREHOLDER PROTECTION MECHANISMS
Certain provisions of our 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. This includes attempts that might
result in a premium over the market price for the Class A Common Stock. In this
regard, our 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. This provision would restrict the ability of a party to gain
control of our Board by acquiring a majority of our voting stock, removing all
of the directors and then replacing them with the directors seeking to benefit
such party. Additionally, our Bylaws provide that the number of directors shall
be fixed, from time to time, by resolution of the Board. Currently, our Board is
divided into three classes of directors that are elected for staggered
three-year terms. Thus, in any given year, only a portion of our directors would
be eligible for election, thereby eliminating the ability of a hostile party to
gain control of our Board in a single proxy contest. This makes any unsolicited
takeover attempt (including an attempt that is in our shareholders' best
interest) more expensive and more difficult. Our 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, our Articles permit the Board to establish by resolution one or more
series of preferred stock and to establish the powers, designations, preferences
and relative, participating, optional, or other special rights of each series of
preferred stock. The preferred stock could be issued on terms that are
unfavorable to the holders of Class A Common Stock or that could make a takeover
or change in control more difficult. Further, we have instituted a shareholder
rights plan, which plan may have the effect of discouraging an unsolicited
takeover proposal. Moreover, we are subject to the Texas Business Combination
Law, which places restrictions on certain business combinations with certain
shareholders that could render a change in control more difficult. The Articles
and Bylaws, together with the provision of shareholder rights plan and Texas
law, may have the effect of discouraging a future takeover attempt by a third
party that is not approved by the Board and render the removal of the incumbent
management more difficult.
11
<PAGE>
USTS RELATED LITIGATION
Although we have not been named a party to any significant litigation
involving USTS, its former shareholders or its former officers, we believe 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 we may be a party. We would vigorously defend any such action; however,
there can be no assurance that we will succeed in such efforts without incurring
damages, settlement costs or legal fees.
DISCLOSURE ABOUT MARKET RISK
Our credit facility subjects us to certain market risks. Our revolving
line of credit provides for interest to be charged at the prime rate or at a
LIBOR rate plus a margin of 2.75%. Based on our current level of outstanding
revolving line of credit, a 1.0% change in interest rate would result in a $0.3
million annual change in interest expense. The remainder of our debt is at fixed
interest rates that are not subject to changes in interest rates. We do not own
nor are we obligated for other significant debt or equity securities that would
be affected by fluctuations in market risk.
12
<PAGE>
DIVIDEND POLICY
We do not anticipate that dividends will be declared or paid on our
Class A Common Stock in the foreseeable future. Rather, we intend to retain any
earnings to finance the growth and development of our business. Any payment of
cash dividends on our Class A Common Stock in the future will be dependent,
among other things, upon our earnings, financial condition, capital requirements
and other factors which the Board of Directors deems relevant.
PRICE RANGE OF COMMON STOCK
Our Class A Common Stock began trading on the Nasdaq SmallCap Market on
March 20, 1998 under the symbol "PBSI." Before that date, there was no
established public trading market for the Class A Common Stock. As of June 8,
1999, we had approximately 3,000 holders of record of our Class A Common Stock.
The closing sales price of the Class A Common Stock on June 8, 1999 was $4.81
per share. The following table sets forth, for the period indicated, the high
and low sales price of the Class A Common Stock.
<TABLE>
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C>
Quarter ended March 31, 1998
(from March 20, 1998)................... $34.58 $29.89
Quarter ended June 30, 1998....................... 30.67 15.54
Quarter ended September 30, 1998.................. 24.51 9.41
Quarter ended December 31, 1998................... 18.82 5.63
Quarter ended March 31, 1999...................... 19.38 7.50
Quarter ending June 30, 1999
(up to June 8, 1999).................... 12.44 4.25
</TABLE>
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
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 as well as the nine month periods ended March 31,
1999 and 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 Precept. The consolidated financial information for each of the
two years in the period ended June 30, 1995 was derived from a combination of
Precept'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 information for the nine
month periods ended March 31, 1999 and 1998 is derived from Precept's unaudited
consolidated financial statements, which, in the opinion of management, reflect
all adjustments (consisting of normal recurring adjustments and certain other
adjustments) necessary for a fair presentation of results for such periods. The
results for the nine months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the full fiscal year. The selected
consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the consolidated financial statements and notes thereto,
included in this Prospectus. 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 Precept 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>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------- -----------------
1998 1997 1996 1995 1994 1999 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Business products...................... $113,536 $109,397 $105,464 $87,392 $75,538 $103,873 $80,517
Transportation services................ 9,456 6,566 5,840 8,005 5,483 17,992 5,663
-------- -------- -------- ------- ------- -------- -------
122,992 115,963 111,304 93,397 81,021 121,865 86,180
Cost of goods sold....................... 85,281 79,729 75,687 58,994 41,988 80,485 56,742
Sales commissions........................ 15,075 14,615 13,786 11,805 15,756 14,090 10,534
Selling, general and administrative 16,417 17,229 18,302 18,350 19,038 19,102 15,615
expenses...................................
Depreciation and amortization............ 1,821 1,788 1,677 1,516 1,143 2,460 1,264
Goodwill write-down and other -- -- -- -- -- 14,283 --
non-recurring costs........................
Non-recurring acquisition costs.......... 486 -- -- -- -- 180 486
-------- -------- -------- ------- ------- -------- -------
Operating income (loss).................. 3,912 2,602 1,852 2,732 3,096 (8,735) 1,539
Interest and other expense .............. 1,936 618 929 357 1,937 1,857 543
Income (loss) before income taxes........ 1,976 1,984 923 2,375 1,159 (10,592) 996
Income tax provision (benefit)........... 790 828 16 356 791 (1,532) 398
Net income (loss)........................ $ 1,186 $ 1,156 $ 907 $ 2,019 $368 $ (9,060) $ 598
-------- -------- -------- ------- ------- -------- -------
-------- -------- -------- ------- ------- -------- -------
Diluted net income (loss) per share...... $ 0.18 $ 0.19 $ 0.15 $ 0.33 $0.06 $ (1.10) $ 0.09
Diluted weighted average shares 6,599 6,089 6,071 6,116 6,135 8,208 6,437
outstanding(1).............................
<CAPTION>
AS OF
AS OF JUNE 30, MARCH 31,
------------------------------------------------------ ---------
1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Trade accounts receivable................ $15,595 $14,235 $15,089 $13,115 $4,073 $20,464
Inventory................................ 5,133 3,225 2,621 3,062 535 5,598
Working capital.......................... 13,837 13,394 15,288 14,583 7,609 6,279
Property and equipment, net.............. 5,751 3,549 2,427 1,961 570 7,531
Intangible assets, net................... 19,558 5,040 4,774 2,290 -- 38,785
Total assets............................. 56,487 37,292 39,740 31,745 31,224 80,877
Long-term debt........................... 20,085 7,821 5,397 1,128 1,047 29,677
Shareholders' equity..................... 22,002 16,102 19,059 18,846 18,545 24,870
</TABLE>
14
<PAGE>
- ---------------------
(1) Weighted average common outstanding shares for the year ended June
30, 1994 represent the number of shares outstanding as of June 30, 1994, since
the actual weighted average common outstanding shares during those years in
which Precept was a division of a previous consolidated group is not useful. Pro
forma per share and weighted average common outstanding shares reflect the 1 for
7 reverse stock split effected in December 1998.
15
<PAGE>
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. We also
operate corporate transportation services ("Transportation Services") companies
in the United States. We were founded in 1988 as a subsidiary of Affiliated
Computer Services, Inc. ("ACS") and have grown since then, both internally and
through acquisitions. In June 1994, we were spun-off from ACS in a tax-free
stock exchange to ACS shareholders in connection with the initial public
offering of ACS.
We were one of the first organizations to begin nationwide
consolidation of operating companies in the Business Products industry. Since
1991, we have acquired 21 companies in the Business Products industry plus 12 in
the Transportation Services industry.
A component of our business strategy is to increase the size of our
operations through strategic acquisitions and internally generated growth. We
place substantial emphasis on improving operational and information system
capabilities while integrating acquired operations. Our 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. We believe that these strategies will lead to lower cost of goods
and increased sales of various products and services to existing and new
customers.
ACQUISITIONS
Our results of operations and the comparability of our results of
operations from period to period have been significantly affected by businesses
acquired in each period. From 1991 through the end of the third quarter of
fiscal year 1999, we completed 33 acquisitions: 21 Business Products
distribution companies and 12 Transportation Services companies. Two Business
Products companies acquired in fiscal year 1998 were accounted for using the
pooling-of-interests method and, as a result, our consolidated financial
statements have been restated to combine our financial statements with the
pooled companies' financial statements for all periods prior to the completion
of the acquisitions. The remaining acquisitions have been accounted for
following the purchase method and, as a result, the results of operations of the
acquired companies have been included in our results of operations from the
dates of acquisition.
In the quarter ended March 31, 1999, we acquired one Transportation
Services company which provides executive town car and limousine service
primarily in the tri-state New York metropolitan area with annual revenues of
$2.0 million. The aggregate consideration for this transaction amounted to $1.3
million, paid $0.2 million in cash and $1.1 million in seller notes and debt
assumed.
In the three-month period ended December 31, 1998, we acquired one
Transportation Services company located in North Arlington, New Jersey, which
provides executive town car and limousine service to the tri-state New York
metropolitan area with annual revenues of $14.0 million. This acquisition was
paid for with $3.4 million in cash, financed by our revolving line of credit,
$3.0 million in fair market value of 336,000 shares of Class A Common Stock, and
$2.6 million in assumed debt.
In the three-month period ended September 30, 1998, we completed the
acquisitions of four Business Products 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 $5.7 million in cash, financed by our working capital and revolving
line of credit, $1.4 million in seller notes, 729,000 shares of Class A Common
Stock with a fair market value of $9.6 million, and $1.1 million in assumed
debt.
16
<PAGE>
In the third quarter of fiscal year 1998, we acquired substantially all
of the assets of U.S. Transportation Systems, Inc. ("USTS"), a publicly traded
company in the Transportation Services industry. On March 18, 1998, we issued
1,373,214 shares of Class A Common Stock and 259,286 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. We 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 the fourth quarter of 1998, we sold our
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 of USTS has been allocated as follows:
$12.8 million to goodwill, $0.9 million to accounts receivable, $6.4 million to
long-term debt, $3.7 million to accounts payable and accrued liabilities and
$0.8 million to other assets.
In the three month period ended December 31, 1997, we completed the
acquisition of two Business Products companies located in Tempe, Arizona and
Austin, Texas and one Transportation Services company located in Dallas, Texas.
Total annual revenues for the two Business Products companies amounted to $3.5
million. These companies were acquired with seller notes and assumed debt of
$1.3 million. The Transportation Services company's annual revenues totaled $3.4
million. This acquisition was paid for with a seller note of $0.4 million and
assumed debt of $0.2 million.
In the three month period ended September 30, 1997, we completed the
acquisition of two Business Products companies located in New York and Fort
Worth, Texas with annual revenues of $0.6 million. These acquisitions were paid
for with $0.5 million in cash, financed by our revolving line of credit.
PURCHASE ACCOUNTING EFFECTS
Our acquisitions have been primarily accounted for using the purchase
accounting method. The acquisitions have currently affected, and will
prospectively affect, our results of operations in certain significant respects.
Our 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
will generally result in the allocation of a portion of the purchase price to
goodwill, which results in incremental annual and quarterly amortization
expense.
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 and for the nine months ended March 31, 1999 and 1998.
<TABLE>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- -----------------
1998 1997 1996 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Business products.............................. 92.3% 94.3% 94.7% 85.2% 93.4%
Transportation services........................ 7.7% 5.7% 5.3% 14.8% 6.6%
------ ------ ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Cost of goods sold............................. 69.3% 68.8% 68.0% 66.0% 65.8%
Sales commissions.............................. 12.3% 12.6% 12.4% 11.6% 12.2%
Selling, general and administrative............ 13.3% 14.9% 16.4% 15.7% 18.1%
Depreciation and amortization.................. 1.5% 1.5% 1.5% 2.0% 1.5%
Goodwill write-down and non recurring charges.. 0.0% 0.0% 0.0% 11.7% 0.0%
Non-recurring acquisition costs................ 0.4% 0.0% 0.0% 0.2% 0.6%
------ ------ ------ ------ ------
96.8% 97.8% 98.3% 107.2% 98.2%
17
<PAGE>
Operating income (loss)........................... 3.2% 2.2% 1.7% (7.2%) 1.8%
Interest and other expense........................ 1.6% 0.5% 0.9% 1.5% 0.6%
------ ------ ------ ------ ------
Income (loss) before income taxes................. 1.6% 1.7% 0.8% (8.7%) 1.2%
Income tax provision (benefit).................... 0.6% 0.7% 0.0% (1.3%) 0.5%
------ ------ ------ ------ ------
Net income (loss)................................. 1.0% 1.0% 0.8% (7.4%) 0.7%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
REVENUE for 1999 increased by $35.7 million, or 41.4%, from $86.2
million in 1998 to $121.9 million in 1999. In 1999, Business Products revenue
increased by $23.4 million or 29.0% and Transportation Services revenue
increased by $12.3 million or 217.7%. The increase in Business Products revenue
was due to the acquisition of nine business products companies during fiscal
years 1998 and 1999, which accounted for $21.3 million, and internal growth of
$2.1 million. Of the total increase in Transportation Services revenue in 1999,
$12.5 million was due to the acquisition of five transportation companies.
COST OF GOODS SOLD for 1999 increased by $23.7 million, or 41.8%, from
$56.7 million in 1998 to $80.4 million in 1999. Cost of goods sold for Business
Products increased by $16.6 million of which approximately $7.3 million was due
to companies acquired after the beginning of fiscal year 1998. Transportation
Services cost of goods sold increased by $5.7 million due primarily to the five
transportation companies acquired since the beginning of 1998. As a percentage
of revenue, cost of goods sold for 1999 increased by 0.2% from 65.8% in 1998 to
66.0% in 1999. This increase was primarily due to the mix of products sold.
SALES COMMISSIONS increased by $3.6 million, or 33.8%, in 1999, from
$10.5 million in 1998 to $14.1 million in 1999 due primarily to the increased
level of Business Products revenue. Sales commissions for the Business Products
division increased from 13.0% to 13.5% of Business Products revenue primarily
due to the effect of the commission plans of companies acquired since July 1,
1998 and to the increased dollar amount of gross profit in 1999. Total
commission expense decreased by 0.6% from 12.2% in 1998 to 11.6% in 1999 because
the Transportation Services division contributed a higher proportion of
consolidated revenue in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $3.5 million
or 33.8% in 1999 from $15.6 million in 1998 to $19.1 million in 1999, which
included increased expenses of $4.0 million from business products and
transportation services companies acquired. As a percentage of revenue, selling,
general and administrative expenses have declined by 2.4% from 18.1% in 1998 to
15.7% in 1999. The reduced expenses in existing operations are primarily a
result of our continuing efforts and strategy to realize synergies from
acquisitions by merging common administrative and support functions.
DEPRECIATION AND AMORTIZATION EXPENSE increased $1.2 million in 1999
from $1.2 million in 1998 to $2.4 million in 1999 due largely to the size and
timing of the companies acquired since the beginning of 1998.
GOODWILL WRITE-DOWN AND OTHER NON-RECURRING CHARGES. In the third
quarter of fiscal year 1999, we recorded goodwill write-down and other
non-recurring charges totaling $14.3 million relating to matters and events
which occurred during the third quarter of fiscal year 1999. The significant
components are described below.
GOODWILL
We received formal notification from Ford Motor Company that the
contract for employee bus shuttle service would not be renewed after June 30,
1999. As a result, we evaluated the undiscounted cash flows that will be
generated by the remaining operations at our Dearborn, Michigan location. We
determined that the cash flows were less than the
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carrying amount of the net book value of the intangible assets for the
location. As a result, we wrote off the amount, $7.4 million, by which the
net book value of the intangible assets exceeded the discounted cash flows
expected to be generated by the operations in Dearborn. In addition, as part
of our periodic assessment of the appropriateness of the carrying value of
our long-lived assets, we also wrote-off the net book value of the intangible
assets associated with one of our branch offices.
We expect that the revenue, earnings, and cash flow generated by the
Ford contract will be replaced during the next year by contributions from other
town car and limousine companies which have been acquired, or which are expected
to be acquired during the next fiscal year. We expect that the level of revenue
necessary to replace earnings from the Ford contract will need to be higher than
the revenue generated by the Ford contract.
MBF
On February 16, 1999, substantially all of the management, sales force
and employees of MBF Corporation ("MBF") and Mail/Source, Inc. resigned to join
a competitor, Peregrine Corporation ("Peregrine") that had been founded and
funded by the same individuals. In response to this departure, we have sued
Peregrine and the former legal officers of MBF for damages. As of the date
hereof, we continue to pursue this litigation for damages while also discussing
potential financial settlements. As a result of this departure, we are in the
process of closing and selling certain sales offices and warehouses, collecting
outstanding accounts receivable, selling inventories and settling certain
remaining trade, lease, tax and other obligations. As part of this effort, we
have identified $2.6 million of asset write-downs and other charges expected to
be incurred in connection with winding down the operations of MBF. These charges
include expected losses on the sale of inventories and of land and buildings,
expected losses on the collection of accounts receivable, remaining lease
obligations, litigation costs, termination costs, and other liabilities.
During the third quarter ended March 31, 1999, the Business Products
revenue from existing operations declined by $2.9 million, principally due to
the departure of substantially all of the sales force of MBF. As we wind down
and close the sales offices and warehouses of MBF, we expect that our operating
income will be negatively affected by approximately $0.4 to $0.6 million during
the fourth quarter of 1999 and to a lesser extent, during the first quarter of
2000. In addition, our annual revenues will be negatively affected by
approximately $16 million due to the departure of substantially all of the sales
force. While we expect that our internal revenue, cash flow, earnings, and cash
flow growth rate will offset the loss of MBF's revenues and earnings, there can
be no assurance that such revenue and earnings will be recovered.
OTHER
During the third quarter of 1999, we recorded $4.3 million of
non-recurring charges. These included an investment of $0.5 million in the
preferred stock of an entertainment company which was written down to zero value
to reflect management's estimate of the recoverability of its investment due to
financial difficulties and financial restructuring of the entertainment company.
As part of the ongoing litigation with John Alden Insurance Company, we adjusted
the value of our trade receivable by $0.5 million to reflect the expected
settlement of the litigation. We also wrote down the value of certain notes
receivable by $0.5 million to their expected net realizable value. Inventory and
trade accounts receivable valuation reserves were increased by $0.9 million. We
increased our health claim reserve by $0.3 million based on health claim payment
trends during the third quarter of 1999. Other reserves and liabilities
increased by $1.6 million to address various matters and events which occurred
during the third quarter of 1999.
INTEREST EXPENSE increased by $1.4 million or 242.0% during 1999, from
$0.5 million in 1998 to $1.9 million in 1999 principally due to additional debt
incurred by us in 1998 and 1999 to finance our business acquisitions.
INCOME TAXES are provided at a 14.5% effective rate in 1999 compared to
a 40.0% rate in 1998. The change in the effective tax rate for 1999 is due to
the non-deductibility of the goodwill write-down and other non-recurring charges
and to the goodwill amortization in 1999.
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NET INCOME (LOSS) FROM CONTINUING OPERATIONS decreased by $9.7 million
in 1999, from $0.6 million in 1998 to $(9.1) million in 1999, due to the reasons
described above. Diluted earnings per share decreased $1.19 from $0.09 in 1998
to $(1.10) in 1999. Diluted earnings per share for the nine months ended March
31, 1999 are not equal to the sum of the quarterly earnings per share due to the
difference in the weighted average number of shares caused primarily by the
timing of acquisitions where Class A Common Stock was used as part of the
purchase consideration.
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 we serve. 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 operations are primarily a
result of our 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 us in 1998 to finance our
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.
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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 the first nine months of
fiscal year 1999, we generated $8.6 million in cash from operations as compared
to cash provided of $3.3 million in the first nine months of fiscal year 1998.
Cash flow from operations increased as a result of companies acquired during the
nine month period ended March 31, 1999 and integration efforts relating to prior
acquisitions. In addition, we reduced our working capital by $7.6 million.
During the first nine months of 1998, we reduced our working capital by $4.4
million due to the acquisition of USTS.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first nine months
of fiscal year 1999, we used $15.2 million in cash for investing activities as
compared to a use of $7.9 million for investing activities in the first nine
months of fiscal year 1998. During 1999, we acquired four Business Products
companies and two Transportation Service companies and used $16.1 million in
cash to finance these acquisitions and to pay for contingent consideration on
previous acquisitions. During 1998, we acquired three products distribution
businesses and four corporate transportation service companies for $7.0 million
in cash and acquired $0.9 million of equipment.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first nine months of
1999, $4.8 million of cash was generated by financing activities as compared to
$4.3 million of cash generated by financing activities in the first nine months
of fiscal year 1998. During the first nine months of 1999, we increased our
outstanding revolving line of credit balance by approximately $8.5 million,
primarily to finance acquisitions. In addition, we repaid $3.7 million of
existing long-term debt, including capital lease obligations. During the first
nine months of 1998, we decreased our long-term
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debt and capital lease obligations by $0.3 million, increased our outstanding
revolving line of credit balance by $4.4 million and received $0.2 million in
payments in shareholder notes receivable.
Although the goodwill write-down and other non-recurring charges
affected our operating results for 1999, such items did not affect our cash flow
from operations. As certain of the obligations provided for in the non-recurring
charges are settled, there is likely to be a use of approximately $2.5 million
in cash principally during the remainder of 1999 and fiscal year 2000.
Management believes that the current levels of operations and the cash
flow from such operations, the amount available for borrowing under the existing
revolving line of credit agreement of $3.2 million and the available cash on
hand at March 31, 1999 of $0.5 million will be adequate for fiscal year 1999 to
make required payments of principal and interest on our indebtedness, to fund
anticipated capital expenditures of approximately $1.0 million for the remainder
of fiscal year 1999, and to meet working capital needs.
On March 22, 1999, we signed a Revolving Line of Credit Agreement
("Credit Agreement") with Bank One, Texas, N.A. The Credit Agreement provides up
to $40 million for borrowing by us to be used for acquisitions, working capital,
and general corporate purposes. The amount available under the Credit Agreement
is determined based on a multiple of three times the trailing twelve months pro
forma EBITDA. EBITDA is defined as earnings before interest, taxes,
depreciation, and amortization. EBITDA is also adjusted for the historical
EBITDA of acquired companies for the periods during the trailing twelve months
that the acquired companies results of operations are not included in our
historical operating results. The operating results of acquired companies are
also adjusted on a pro forma basis for interest, depreciation, amortization,
owners' compensation and non-recurring charges.
Two banks, Bank One, Texas, NA and Wells Fargo Bank, NA, participated
in this Credit Agreement. The Credit Agreement provides for an increase of $10
million if new lenders join the banking group or existing lenders increase their
levels of commitment.
The Credit Agreement includes other customary covenants and conditions
relating to the conduct and operation of our business. Specifically, each
quarter, we will be subject to a 3:1 EBITDA to interest coverage ratio, to
minimum net worth levels, and to limits on capital expenditures. In addition,
acquisitions of companies with a purchase price greater than $7.5 million
individually and $25.0 million on an aggregate annual basis will require
approval from the banking group.
INFLATION
Certain of our 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. We generally are able to pass such increased costs on to our
customers through price increases, although we may not be able to adjust our
prices immediately. Significant increases in paper and other costs in the future
could materially affect our profitability if these costs cannot be passed on to
customers. In general, we do not believe that inflation has had a material
effect on our results of operations in recent years. However, there can be no
assurance that our business will not be affected by inflation in the future.
YEAR 2000 ISSUE
We have performed a review of our existing computer software and
hardware information systems. To date, we believe that our existing management
information systems are year 2000 compliant, except for management information
systems at recently acquired subsidiaries and except for certain electronic
commerce matters, as described more fully in the next two paragraphs. To the
extent that we will be required to expend resources to ensure that the
management information systems are year 2000 compliant, we do not expect that
significant resources, either cash flow or manpower will be needed.
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Our management identified two subsidiaries that have key information
systems that are not year 2000 compliant. We have determined that an upgrade to
the key information systems will be sufficient to solve the year 2000 compliance
issue at one subsidiary. At the second subsidiary, a conversion of its
management information system to our management information system will solve
the year 2000 problem. The cost to install the software upgrade and convert
information systems at these subsidiaries is expected to range from $400,000 to
$700,000 during the remainder of calendar year 1999.
We conduct a certain portion of our business operations, in particular
sales orders, purchasing, billing and shipping, using electronic means of
communication outside our management information systems. We are in the process
of contacting or being contacted by our significant vendors and customers to
verify that the electronic means of communication used are year 2000 compliant.
Although this project is still in process, we are not aware of any significant
issues in this area. If for some reason, electronic means of communication with
certain of our vendors and customers were not year 2000 compliant, we do not
expect that this condition would have a material adverse effect on our
operations at that time. If necessary, we have 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. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, that is effective for reporting periods
beginning after June 15, 1999. As this statement requires only additional
disclosures or does not cover matters relating to us, it will have no effect on
our financial position, results of operations or cash flows. We intend to adopt
the disclosure requirements of this standard during our fiscal year ended June
30, 2000.
DISCLOSURE ABOUT MARKET RISK
Our revolving line of credit provides for interest to be charged at the
prime rate or at a LIBOR rate plus a margin of 2.75%. Based on our current level
of outstanding revolving line of credit, a 1.0% change in interest rate would
result in a $0.3 million annual change in interest expense. The remainder of our
debt is at fixed interest rates that are not subject to changes in interest
rates. We do not own nor are we obligated for other significant debt or equity
securities that would be affected by fluctuations in market risk.
FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this Prospectus
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 us. This section should be read in
conjunction with the "Risk Factors" beginning on page 6 of this Prospectus.
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, we 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 us, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties that
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The forward-looking statements contained
herein are based on various assumptions, many of which are based, in turn, upon
further assumptions. Our expectations, beliefs and projections are expressed in
good faith and are believed by us to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in our 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
our view, could cause actual results to differ materially from those discussed
in the forward-looking statements:
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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 our customers.
3. Changes in our executive and senior management or control.
4. Inability to obtain new customers or retain existing customers
and contracts.
5. Significant changes in the composition of our sales force.
6. Significant changes in competitive factors, including product
pricing conditions, affecting us.
7. Governmental and regulatory actions and initiatives, including
those affecting financing.
8. Significant changes from expectations in operating expenses.
9. Occurrences affecting our ability to obtain funds from
operations, debt or equity to finance needed capital
acquisitions and other investments.
10. Significant changes in rates of interest, inflation or taxes.
11. Significant changes in our relationship with our employees and
the potential adverse effects if labor disputes or grievance
were to occur.
12. Changes in accounting principles and/or the application of
such principles to us.
The foregoing factors could affect our actual results and could cause
our 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 us. We disclaim any obligation to update any forward-looking
statements to reflect events or other circumstances after the date of this
Prospectus.
DISCONTINUED OPERATIONS
As part of our business strategy, we decided to focus on our core
businesses and discontinue certain non-core business operations. During the
first nine months of fiscal 1998, the losses from discontinued operations
consisted principally of the losses from Precept Holdings, Inc., which owned and
operated certain real estate related investments. During fiscal year 1998, we
generated $2.4 million in cash from the sale of our interest in a ranch to a
company controlled by our majority shareholder, the former chief executive
officer and the chief operating officer, and from the sale of a condominium to
our majority shareholder. In September 1998, we sold the remaining assets of our
discontinued operations consisting of land, building and an interest in a
restaurant to our majority shareholder for $1.2 million in cash.
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BUSINESS
Precept is an independent distributor offering single source solutions
for automated document management services, inventory control and order
processing via the internet, as well as many other E-commerce services, while
providing top quality custom and stock business products to companies of all
sizes throughout the United States. We also operate various corporate
transportation services companies focusing on chauffeured town car and limousine
services. We were founded in 1988 as a regional business products distributor in
Dallas, Texas as a subsidiary of ACS and have grown since then, both internally
and through acquisitions. In June 1994, we were spun-off from ACS in a tax-free
stock exchange to ACS' shareholders in connection with the initial public
offering of ACS. In March 1998, our Class A Common Stock became publicly-traded
upon the completion of our merger with USTS. We presently operate from
approximately 70 locations throughout the United States.
RECENT DEVELOPMENTS
ACQUISITION OF USTS AND LISTING ON NASDAQ. In March 1998, we acquired
certain operations of USTS and listed our Class A Common Stock and warrants to
purchase Class A Common Stock on the NASDAQ SmallCap Market. As part of the
acquisition of USTS, we issued 1,373,214 shares of Class A Common Stock to USTS
and assumed 259,286 warrants held by former shareholders of USTS. In April 1998,
USTS distributed such shares to USTS' shareholders. USTS was engaged in business
areas which relate to transportation, including providing bus, chauffeured
vehicle, and package and delivery transportation-related services. We purchased
nearly all of the operating assets and assumed certain liabilities of USTS,
after which USTS liquidated and dissolved. 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, we sold our interest in
the common stock of U.S. Trucking, Inc., a long-haul trucking business, which we
had acquired from USTS on March 19, 1998 to Logistics Management, Inc. Prior to
divestiture, we owned an interest in 75% of the common stock of U.S. Trucking,
and Logistics Management owned the remaining 25% of the common stock of U.S.
Trucking.
ACQUISITION OF INFOGRAPHIX. On April 13, 1998, we acquired all of the
issued and outstanding stock of InfoGraphix, Inc., a Massachusetts corporation.
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, we acquired all of the issued and
outstanding stock of MBF Corporation, a Louisiana corporation. MBF Corporation
is a single source distributor of printed products, distribution services and
information solutions.
ACQUISITION OF CREATIVE. On September 4, 1998, through a merger of our
wholly-owned subsidiary, we acquired Creative, Inc., a Maine corporation.
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, through a merger of our
wholly-owned subsidiary, we acquired Southern Systems Business Forms & Data
Supply, Inc., a South Carolina corporation. Southern Systems was a Florence,
South Carolina-based provider of printed products, distribution services and
information solutions with yearly revenues of approximately $14 million.
ACQUISITION OF GARDEN STATE. On October 1, 1998, through a merger of
our wholly-owned subsidiary, we acquired Garden State Leasing & Rent-A-Car
Corporation, a New Jersey-based provider of corporate transportation services.
ACQUISITION OF AMBASSADOR. On May 14, 1999, through mergers with our
wholly-owned subsidiary, we acquired Ambassador Limousine Services, Inc. and
Ambassador Transportation Services, Inc., both of which are
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Connecticut corporations. We also acquired the assets of Ambassador Executive
Coaches, L.L.C., a Connecticut limited liability company. The Ambassador
companies provide executive town car and limousine services primarily in the
tri-state New York area.
OTHER ACQUISITIONS. In fiscal 1999, we also acquired two additional
Business Products companies and two additional Transportation Services
companies.
CREDIT AGREEMENT. On March 22, 1999, we entered into a Revolving Line
of Credit Agreement with Bank One, Texas, N.A. which provides us up to $40
million for borrowing to be used for acquisitions, working capital and general
corporate purposes. The amount available under the Credit Agreement is
determined based on a multiple of three times the trailing twelve months pro
forma EBITDA. Two banks, Bank One, Texas, NA and Wells Fargo Bank, NA,
participated in this Credit Agreement, which provides for an increase of $10
million if new lenders join the banking group or existing lenders increase their
levels of commitment. The Credit Agreement includes other customary covenants
and conditions relating to the conduct and operation of Precept's business.
GOODWILL WRITE-DOWNS AND OTHER NON-RECURRING CHARGES. In the third
quarter of fiscal 1999, we recorded goodwill write-down and other non-recurring
charges totaling $14.3 million relating to matters and events which occurred
during that quarter. We wrote-down $7.4 million related to a customer's
nonrenewal of our contract for employee bus shuttle service, $2.6 million
related to the resignation of the management and sales force of MBF, a recently
acquired business, and $4.3 million related to various other transactions.
RESIGNATION OF OFFICER AND DIRECTOR. On April 19, 1999, David Neely,
our former Chairman and Chief Executive Officer, resigned from his position as
an officer and director due to personal and health reasons.
GENERAL
Business products distributed by us include custom business forms,
commercial printing, graphic arts, electronic forms, custom stock labels,
computer supplies, envelopes and advertising specialty products. We provide
comprehensive information solutions for our customers' business products,
inventory control and document management needs. In addition, we provide
electronic forms capabilities and integration of our customers' accounting
operations to streamline information flow and reduce overall operating costs.
Our corporate transportation services companies focus on chauffeured town car
and limousine services. Our business strategy is (1) to act as a premier sole
source "corporate outsourcer" providing a broad array of business products to
our customers while reducing overall procurement costs and providing a high
level of customer service, (2) to continue to expand the transportation
operations, emphasizing executive town car and limousine services, particularly
in the tri-state New York area, the Northeastern United States, and pursue
selected acquisition opportunities focusing on the 30 to 40 largest population
centers in the United States, and (3) to continue our expansion through
strategic acquisitions and internal growth.
Since our founding and development, our 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, we have
completed 21 acquisitions of these regional business products distributors. Once
a regional office/warehouse is acquired or established, we seek to leverage our
distribution capabilities by acquiring smaller companies or opening satellite
sales offices in the surrounding areas. We also seek to increase the sales and
profitability of our acquired companies by integrating our business strategy and
eliminating redundant operating expenses. Going forward, we plan to continue to
actively pursue this consolidation strategy within the business products
distribution and document management industries.
We believe that the acquisition and operational experience of our
management team provides us with the ability to execute the growth components of
our business strategy. In our fifth year of existence, we were recognized as the
largest independent business products distributor by a national business
products magazine and are currently one of the top three independent
distributors in the United States. Our management team brings extensive
experience in the
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acquisition and integration of businesses. Management also believes we are
the "consolidator of choice" in the business products distribution and
document management industries.
The two industries in which we operate are large, fragmented and, we
believe, rapidly consolidating. We believe that opportunities exist to
consolidate participants in both industries. Our 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. We believe independent distributors' market share will continue
to grow in the future as more of their target customers make the decision to
outsource the distribution of their business products and document management
needs.
We believe that similar consolidation possibilities exist in the
corporate transportation services industry. Our management believes that the
chauffeured vehicle service segment of the transportation industry, in
particular, presents an attractive opportunity for consolidation. Based on
industry data, our management understands that in 1998 the chauffeured vehicle
service industry represented approximately $4.0 billion in revenues, consists of
at least 3,000 companies, is highly fragmented and no single company controls
more than 2% of the market.
CONSOLIDATION STRATEGY
BUSINESS PRODUCTS
We believe 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: (1) the fragmented nature of the industry, (2) the lack of
operating and acquisition expertise of target companies, (3) industry
participants' desire for liquidity and/or capital requirements for growth, (4)
industry participants' desire to utilize our existing management information
systems, (5) the pressures of increasing competition, and (6) creation of
operating efficiencies and synergies resulting in economies of scale.
We believe that we possess substantial competitive advantages over
other industry consolidators. We base this belief on management's track record
in previous growth and consolidation efforts at MTech and ACS as well as its
experience in acquiring and integrating businesses at Precept. We believe we can
leverage the experience and expertise of our executive management team to become
the leading consolidator of the business products distribution and document
management industry. Furthermore, we believe that our ability to attract and
acquire companies as a "consolidator of choice" is due to (1) our existing
operations as a nationwide business products distributor and document management
company and (2) our corporate infrastructure and management information systems.
Under our 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.
We seek to achieve operating efficiencies in acquisitions through (1)
the combination of certain general and administrative functions, (2) elimination
of redundant facilities, (3) improved management information systems and (4)
implementation of our preferred vendor and volume purchasing arrangements. We
have, over the years, negotiated certain arrangements with manufacturers that we
believe will enable us 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. We typically obtain non-compete and confidentiality
agreements from selling owners.
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TRANSPORTATION SERVICES
We have identified the corporate and contract transportation services
industry as a second segment that has significant consolidation opportunities.
We intend to pursue a strategy of acquiring businesses that provide chauffeured
services in town car sedans and limousines to corporate customers.
We believe that there are significant advantages in consolidating the
chauffeured vehicle service segment 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 our services. Moreover, we believe we 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.
BUSINESS PRODUCTS
Our business philosophy lies in the provision of services and
distribution, rather than the actual manufacturing of the products we sell. We
believe most manufacturers either sell directly to the end user or through
independent distributors. Because we utilize in excess of 5,000 manufacturers
nationwide that specialize in various products and quantity sizes, our
management believes that we have the ability to be our customers' single source
supplier, and as such, will provide broader manufacturing capability and
enhanced delivery times as compared to direct manufacturers. Our distribution
business involves the design, warehousing and distribution of a broad variety of
business products. Through our document management services, we provide a single
point of contact for the purchase and warehousing of all printed products and
related items a customer may use. Typically, we 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. Our sophisticated management information systems enable
us 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
We believe 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. We attempt to deliver a complete solution
for our 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 us to act as the
customers' business products outsourcer. As a distributor, we believe we can
provide a more effective business products solution because we have the
flexibility to offer the products of many vendors and suppliers and not be
burdened by offering only the products that we manufacture. Furthermore, by
foregoing the extensive capital investment required of a direct manufacturer
(e.g. machinery and equipment), we are well positioned to act immediately as new
technologies present themselves. In addition to multiple product offerings, we
are able to leverage our size and scale to achieve volume purchasing discounts
which can be passed on to customers. Finally, acting as a communications link
between our customers and suppliers allows us to more efficiently inform
suppliers what the end users want while simultaneously making corresponding
suggestions for the suppliers' in-plant operations.
We market our 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 our customization
approach, we can provide through our electronic forms system a single customer
catalog with increased utility as opposed to one catalog for all or many
customers.
To accomplish the above, we have developed the following capabilities:
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DISTRIBUTION AND WAREHOUSING. We do 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,
we have enhanced relationships with our 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 our customers. In
addition, we provide bulk storage (full case and full pallet), pick and pack and
secure storage. Our nationwide warehousing, along with the excess warehouse
space offered to us in conjunction with our manufacturing partners, gives us
location advantages superior to our competitors.
DESIGN. We utilize our 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, we spend significant time with our manufacturing partners
on new product developments on behalf of our customers.
DOCUMENT MANAGEMENT SERVICE. We believe that our innovative management
system streamlines business product ordering and distribution, which simplifies
document monitoring and storage and encourages "Just-in-Time" business product
management. Through our fully integrated on-line Computerized Forms Management
and Inventory Analysis System, our customers are able to monitor on-line
inventory, track orders, and release products for distribution. We 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 us 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. We have a broad customer base and believe that no
single customer accounted for more than 6% of total sales during fiscal years
1998, 1997, and 1996. We rely on a commission only based sales force dedicated
to all of our products and services, thereby ensuring product and service
knowledge focused on our principal customers. We emphasize personal sales and
marketing relationships with the customer by providing a single account
executive responsible for each customer account. Our 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, we utilize 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. We believe that our presence in 65 locations allows our 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, we are
committed to a long-term partnership with our customers. We compensate our sales
force using commissions based on the level of gross profit.
MANAGEMENT INFORMATION SYSTEMS. We believe that our 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. We have 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. We have
performed a review of our hardware and software systems and believe that the
current management information systems owned or leased by us are Year 2000
compliant with the exception of two acquired subsidiaries' information systems.
To the extent that any current means of electronic commerce are found to be
non-compliant with the year 2000, we believe that we will be able to continue to
conduct such commerce through other electronic or manual methods.
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COMPETITION. We believe that our ability to compete successfully in the
business products distribution and document management business is based upon
our ability to offer a complete range of products and services and to achieve
favorable pricing by maintaining a significant volume of business with our
suppliers. Our 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.
TRANSPORTATION SERVICES
We are engaged in the corporate transportation services industry in
Dallas/Fort Worth, Texas; Cincinnati, Ohio and Northern Kentucky; Dearborn,
Michigan; and in the tri-state New York 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 tri-state New York area markets provide services under
the names Precept Transportation of Texas, Garden State Limousine, Westchester
Express, Ambassador Limousine, AAA Guaranteed On Time Limousine and Crown
Limousine using a fleet of town cars, stretch limousines, vans and mini-buses.
In addition, we provide courier and delivery services 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. Our chauffeured vehicle service
operations are located in tri-state New York area and Dallas County, Dallas and
are performed for corporate customers and the general public in the tri-state
New York area and Dallas/Fort Worth metropolitan markets. We operate a fleet of
302 vehicles, most of which are company-owned, consisting of a mixture of town
cars, stretch limousines, vans and mini-buses. The vehicles are used to provide
services for airport shuttles, conventions, social events, business meetings and
leisure travel. We also make 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 500 regular customers are
served by the two fleets and 420 employees, drivers and independent contractors.
There is significant competition in the Dallas/Fort Worth and New York
geographic markets.
COURIER AND DELIVERY SERVICES. 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 113 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 our 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. Our ongoing
operation in Dearborn, Michigan uses a fleet of 5 vehicles and 15 employees to
provide parking lot transportation for Rouge Steel. Our operation in Northern
Kentucky uses 17 vehicles and 49 employees to provide long-term parking shuttle
and downtown shuttle services at the airport and from the airport to downtown
Cincinnati. A smaller portion of each operation's business involves charter bus
service on demand based on the availability of buses.
COMPETITION
We believe that our ability to compete successfully in the business
product distribution and document management business is based upon our ability
to offer a complete range of products and services and achieving favorable
pricing by maintaining a significant volume of business with our suppliers. Our
principal competitors in the business products industry are direct
manufacturers, local and regional independent distributors and divisions of
larger publicly held companies. These competitors include Moore Business Forms,
Reynolds & Reynolds, Standard Register, Wallace and Work Flow Management. In the
transportation services industry, our principal competitors in the
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chauffeured vehicle service segment are Cary Limousine, Music Express, Boston
Coach and Dave L. Limousine. Our primary competitors in the contract
transportation services segment are Coach USA and Laidlaw.
GOVERNMENT REGULATION
We are 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 our transportation services.
PROPERTIES
Our 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 July 2001. We operate our business products
division from 66 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. We also own 137,000 square feet of office and warehouse
space. In addition, we ship products from approximately 25 warehouse locations
in the United States. Our 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. We generally own the equipment,
furniture and fixtures in such locations.
In the transportation division, we operate from approximately 200,000
square feet of leased office, garage, and parking lot space from seven locations
in the states of New York, New Jersey, Connecticut, Texas, Michigan and
Kentucky. We own and lease our transportation equipment that consists
principally of town cars, limousines, vans, mini buses and buses.
We maintain satisfactory relations with our landlords. We consider our
current office and warehouse space to be adequate to serve our existing business
operations. We expect to replace our transportation equipment on a recurring
basis at the end of the equipment's useful life.
EMPLOYEES
As of May 15, 1999, we had 1,142 full-time employees, of which 414 are
engaged in sales, sales support and warehouse activities, 619 directly provide
or support transportation services and 71 are administrative, information
systems and management employees. Two of our transportation livery services
businesses employ 69 people participating in collective bargaining agreements.
These agreements expire in August 2000 and July 2001. We believe that our
relations with our employees and unions are satisfactory.
LEGAL PROCEEDINGS
JOHN ALDEN LIFE INSURANCE CO. On January 25, 1996, we 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 $450,000 in past due invoices. Alden has denied that
it received any products and has refused to pay us on that basis. Alden and its
affiliate, John Alden Systems Corp. have asserted a counterclaim against us
alleging that one of our employees participated with an Alden employee in a plan
to falsify sales to Alden. Alden is seeking approximately $9 million in damages.
We intend to pursue the claims asserted in this collection action, believe that
we have meritorious defenses to the above allegations and plan to vigorously
defend against them.
During the third quarter of fiscal year 1999, the Company learned that
an insurance company for John Alden Insurance paid $5 million to John Alden for
damages. Also during the quarter, John Alden Insurance dismissed its litigation
claims against the individuals involved in this matter. Precept and John Alden
Insurance discussed settlement
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of the litigation. John Alden Insurance has offered to drop its claims
against Precept in exchange for Precept dropping its claims against John
Alden Insurance. Precept is currently reviewing that offer. If the offer is
accepted, Precept may be able to recover some amounts from its insurance
carrier and certain individuals involved in this matter.
MBF AND PEREGRINE LITIGATION. On February 16, 1999, substantially all
of the sales force, management and employees of MBF Corporation and Mail/Source,
Inc. joined Peregrine Corporation, a competitor which was founded and funded by
these same individuals. During the third quarter of fiscal year 1999, Precept
sued Peregrine Corporation and seven former officers of MBF Corporation for
damages. This lawsuit was filed in the Judicial District, Ouachita Parish,
Division C, State of Louisiana. The Company and Peregrine are currently
negotiating a settlement to this litigation. In the event that Precept and
Peregrine cannot come to a settlement satisfactory to Precept, the Company
intends to vigorously pursue this litigation for damages.
OTHER MATTERS. In addition to the foregoing, we are subject to certain
other legal proceedings, claims, and disputes which arise in the ordinary course
of business. While we have no reason to believe that any pending claims are
material, there can be no assurance that such claims, if adversely determined,
will not have a material adverse effect on our business, financial condition
results or operations or liquidity.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our
directors and officers.
<TABLE>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Darwin Deason............................... 57 Director and Chairman of the Executive Committee of the
Board
Douglas R. Deason........................... 35 President, Chief Operating Officer and Director
William W. Solomon, Jr...................... 42 Chief Financial Officer and Director
D. Paul Cabra............................... 52 President, Precept Business Products, Inc.
Ronald P. Sorci............................. 48 President, Precept Transportation Services, L.L.C.
J. Livingston Kosberg....................... 62 Director
Sheldon I. Stein............................ 45 Director
Robert Bazinet.............................. 58 Director
J.D. Greco.................................. 57 Director
</TABLE>
DARWIN DEASON has served as one of our Directors since our formation in
1988 and is currently Chairman of the Executive Committee. Mr. Deason is also
currently the Chairman of the Board and Chief Executive Officer of ACS. Prior to
the formation of ACS, Mr. Deason spent 20 years with MTech, a data processing
subsidiary of MCorp, a bank holding corporation based in Dallas, Texas
("MCorp)", serving as MTech's Chief Executive Officer and Chairman of the Board
from 1978 until April 1988, and served on the board of various subsidiaries of
MTech and MCorp. Prior to that, Mr. Deason was employed in the data processing
department of Gulf Oil in Tulsa, Oklahoma. Darwin Deason is the father of
Douglas R. Deason.
DOUGLAS R. DEASON has served as our President and Chief Operating
Officer since 1995 and as a Director since 1998. Mr. Deason joined us in 1991
and from 1993 through 1995 served as Executive Vice President of one of our
operating subsidiaries. For the seven years immediately prior to joining us, Mr.
Deason was a senior commercial real estate broker with the Dallas branch of New
York based Cushman and Wakefield. Douglas R. Deason is the son of Darwin Deason.
WILLIAM W. SOLOMON, JR. joined Precept in June 1998, after serving as
Vice President, Controller, and Acting Chief Financial Officer at American Pad &
Paper Company, a publicly-traded company, from September 1996 until June 1998.
He has been a Director of Precept since 1998. From 1992 until 1996, he was a
Senior Manager with BDO Seidman LLP and Price Waterhouse LLP. Mr. Solomon was
Chief Financial Officer and Controller at Eagle Hardware & Garden, a publicly
traded home improvement retail company, during the period of 1990-1992. From
1978 through 1990, he was an employee of Ernst & Young LLP.
D. PAUL CABRA has served as President of Precept Business Products,
Inc., the Business Products subsidiary of Precept, since July 1, 1998. Prior
thereto, Mr. Cabra served as Executive Vice President of Sales and Operations
from August 1997, as the Senior Vice President of Sales for our Central, South
and Eastern regions from 1993 to August 1997, and as Branch Manager from June
1991 to 1993. He was the Chief Executive Officer and sole shareholder of CABCO
Business Forms, Inc., a business products distributor, which we acquired in
1991. Mr. Cabra has over 18 years experience in the business products industry.
RONALD P. SORCI has served as President of Precept Transportation
Services, LLC, the Transportation Services subsidiary of Precept, since March
1998. Prior to this position, Mr. Sorci served as President and Treasurer (Chief
Financial Officer) of USTS since August 1997. From July 1996 until his election
as President of USTS, Mr. Sorci was the Controller of USTS. Prior to joining
USTS, Mr. Sorci was President and owner of RPS Executive Limousines, Ltd., a
luxury town car and limousine service.
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J. LIVINGSTON KOSBERG has served as one of our Directors since 1998. He
has been Chairman of the Board of U.S. Physical Therapy, Inc. since April 1992
and as the Chief Executive Officer of that Company from April 1992 to August
1995. From September 1991 to June 1995, Mr. Kosberg also served as Chairman of
the Board and was employed by CareerStaff Unlimited, Inc., which is a national
provider of temporary rehabilitation therapist staffing. Prior to April 1992,
Mr. Kosberg was primarily engaged in managing personal investments through a
variety of ventures and entities, including National Rehab Associates, Inc., the
predecessor of U.S. Physical Therapy. Mr. Kosberg was Chairman of the Board from
April 1990 to April 1992, and a member of the Board from May 1993 to March 1994,
of BioMedical Waste Systems, Inc., a medical waste treatment company.
SHELDON I. STEIN has served as one of our Directors since 1998. He
is a Senior Managing Director and ovesees Bear Stearns' U.S. Regional
Investment Banking Offices. Mr. Stein received a Bachelors degree Magna Cum
Laude from Brandeis University where he was a member of Phi Beta Kappa and a
J. D. from Harvard Law School. He is a director of CellStar Corporation, Home
Interiors & Gifts, Inc., Fresh America Corp., The Men's Wearhouse, Inc. and
Tandycrafts, Inc. He is also a Trustee of the Greenhill School in Dallas and
a Trustee of Brandeis University.
ROBERT BAZINET has served as one of our Directors since 1998. He was
previously President of Creative, Inc., which was acquired by Precept in
September 1998. Mr. Bazinet founded Creative in 1984 and has more than 38 years'
experience in the printed business products and document management services
industry. Mr. Bazinet attended St. Mary's University in Halifax, Nova Scotia.
J.D. GRECO has served as one of our Directors since 1998. He was
previously President of MBF Corporation, which was acquired by Precept in 1998.
Mr. Greco's career in printed business products and document management services
began when he joined Moore Business Forms in 1969. He received a BA degree in
Marketing from Northeast Louisiana University in 1969.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors meets on a regularly scheduled basis to review
significant developments affecting us and to act on matters requiring Board
approval. It also holds special meetings when an important matter requires Board
action between scheduled meetings. The Board of Directors met one time and acted
one time by written consent during the fiscal year ended June 30, 1998.
The Board of Directors has three standing committees, the Audit
Committee, the Compensation Committee and the Executive Committee, and the full
Board of Directors acts to nominate persons to serve on the Board. The functions
of the committees, their current members and the number of meetings held during
the fiscal year ended June 30, 1998 are described below.
The functions performed by the Audit Committee include: recommending to
the Board of Directors selection of our independent auditors for the ensuing
year; reviewing with the independent auditors and management the scope and
results of the audit; reviewing the independence of the independent auditors;
reviewing the independent auditors' written recommendations and corresponding
actions by management; and meeting with management and the independent auditors
to review the effectiveness of our system of internal controls. The committee
currently is composed of Robert Bazinet and Sheldon Stein. The committee did not
meet during the 1998 fiscal year, but met on September 23, 1998 to discuss and
act on matters relating to the 1998 fiscal year.
The Compensation Committee administers our 1998 Stock Incentive Plan
and reviews other matters regarding the compensation of our employees. The
committee currently is composed of Darwin Deason and J. Livingston Kosberg. The
committee did not meet during the 1998 fiscal year, but met on September 23,
1998 to discuss and act on matters relating to fiscal 1998 compensation matters.
The function of the Executive Committee is to direct and manage our
business and affairs in the intervals between meetings of the Board of
Directors. The Executive Committee is empowered to act in lieu of the Board on
any
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matter except that for which the Board has specifically reserved authority
for itself and except for those matters specifically reserved for the full Board
pursuant to the Texas Business Corporation Act. The Executive Committee is
currently comprised of Darwin Deason (Chairman), Douglas R. Deason and J.
Livingston Kosberg. The Executive Committee acted by written consent one time
and met one time during the 1998 fiscal year.
During the fiscal year ended June 30, 1998, each director attended more
than 75% of the meetings of the Board of Directors and respective committees on
which he served.
DIRECTORS' COMPENSATION
Our directors are not paid any cash compensation for serving on the
Board of Directors, although we may in the future decide to pay directors' fees.
Nonemployee directors receive automatic option grants. Directors are reimbursed
for their travel expenses in connection with meetings.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid during each of our last three fiscal years to our Chief
Executive Officer and each of our other executive officers serving at the end of
fiscal year ended June 30, 1998 whose salary and bonus exceeded $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
--------------------------- ---- ------ ------------ ------------
<S> <C> <C> <C> <C>
David L. Neely, 1998 $241,500 $362,250 --
Former Chairman and Chief Executive 1997 $241,500 $279,700 --
Officer............................ 1996 $230,000 $345,000 --
Douglas R. Deason, 1998 $210,000 $210,000 --
President and Chief Operating 1997 $210,000 $162,310 --
Officer............................ 1996 $200,000 $200,000 --
Glenn R. Smith,
Former Executive Vice 1998 $104,832 $ 50,000 --
President--Business Products and 1997 $104,832 $ 25,800 --
Transportation Groups.............. 1996 $ 97,853 $ 67,500 --
1998 $141,783 $100,000 --
D. Paul Cabra, 1997 $ 96,000 $ 39,100 --
President--Business Products Group. 1996 $ 96,000 $ 69,000 --
Layne A. Deutscher 1998 $120,000 -- --
Former Senior Vice President and 1997 $ 15,000 -- --
General Counsel.................... 1996 -- -- --
</TABLE>
- -------------------------------
(1) None of the Named Executive Officers received personal benefits,
securities or property in excess of the lesser of $50,000 or 10% of
such individual's reported salary and bonus.
(2) We did not grant any restricted stock awards or SARs or long-term
incentive plan payouts to the Named Executive Officers during the
fiscal year ended June 30, 1998.
OPTIONS GRANTED AND EXERCISED DURING 1998 FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
No options were granted to or exercised by any of the named executive
officers in fiscal year 1998. None of the named executive officers currently
hold any options to purchase our securities.
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REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
Our executive compensation program is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee is responsible
for administering our 1998 Stock Incentive Plan and approving compensation plans
for our senior executives, including recommending to the Board of Directors
policies and plans concerning salaries, bonuses and other compensation for all
executive officers. During fiscal year 1998, the Committee was composed of two
independent, nonemployee directors, and one director who is an officer and
employee. The Committee is committed to a strong, positive link between
business, performance and strategic goals, and compensation and benefit
programs.
EXECUTIVE COMPENSATION. The objective of our executive compensation
program is to attract and retain qualified, motivated executives and to closely
align their financial interests with both the short and long-term interests of
our shareholders. The executive compensation program is intended to provide our
executive officers with overall levels of compensation that are competitive
within the business services industry, as well as within a broader spectrum of
companies of size and complexity.
The three principal components of our executive compensation program
are base salary, annual incentive bonus opportunities, and stock options.
BASE SALARIES. Each executive officer's base salary is reviewed
annually and is subject to adjustment on the basis of individual, corporate, and
business unit performance, as well as competitive and inflationary
considerations.
INCENTIVE BONUS. Incentive bonus payments for executive officers other
than the Chief Executive Officer and Chief Operating Officer are made at the end
of each fiscal year based upon the achievement of consolidated financial
criteria, business unit financial criteria, and the attainment of individual
goals, all of which are established informally by the Board of Directors.
Compensation for the Chief Executive Officer and Chief Operating Officer
consisted of a base salary and bonus compensation. Bonus compensation of such
officers was substantially dependent on the achievement of three targeted
financial measures: consolidated revenues, consolidated earnings before
interest, taxes and depreciation, and consolidated pre-tax earnings. During
fiscal year 1998, we achieved 100% of such measures. For fiscal year 1998,
executive officers were eligible to receive maximum bonuses of between 50% and
150% of salary provided certain financial goals were met.
1998 STOCK INCENTIVE PLAN
In order to provide greater flexibility for incentive based
compensation, our Board of Directors and shareholders adopted the 1998 Stock
Incentive Plan (the "1998 Plan") in February of 1998. The 1998 Plan is
administered by the Compensation Committee, which determines the individuals
eligible to receive awards under the 1998 Plan, the types and number of awards
to be granted, the terms and conditions of such awards (including, for example,
with respect to options, the exercise price, exercise date, any restrictions on
exercise), and prescribes the forms of award agreements. Employees (including
employee directors) of and consultants to us and any parent or subsidiary of us
as well as outside directors are eligible to receive awards under the 1998 Plan.
The 1998 Plan permits the grant of nonstatutory stock options, "stock purchase
rights", stock appreciation rights, deferred stock, dividend equivalents and
awards of restricted stock. The 1998 Plan also permits the grant of Incentive
Stock Options to employees. The maximum aggregate number of shares of Class A
Common Stock available for issuance under the 1998 Plan is currently 857,143. In
fiscal 1998, we granted an aggregate of 14,286 stock options to our directors
under the 1998 Plan.
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OTHER EMPLOYEE BENEFIT PLANS
We have a contributory retirement and savings plan which covers
eligible employees and meets the requirements of Section 401(k) of the Internal
Revenue Code. The plan also allows us to make a discretionary contribution as
determined by our Board of Directors. We have made no contributions to date.
EMPLOYMENT AGREEMENTS
We have no employment agreements with the Named Executive Officers. We
do not anticipate any other contractual compensation arrangements with any such
officers.
Submitted by the Compensation Committee of the Board of Directors:
Darwin Deason
J. Livingston Kosberg
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, the members of the Compensation Committee were
primarily responsible for determining executive compensation and matters
relating to stock options, although certain of such matters were discussed by
the full Board of Directors. A director, Darwin Deason, and a former director,
David L. Neely, participated in such discussions as members of the Compensation
Committee. David Neely, our former Chief Executive Officer, was also an
executive officer of a number of our subsidiaries, but received no separate
compensation for acting in such capacity.
We believe that the transactions described below under "Certain
Relationships and Related Transactions" are beneficial to us and are on terms as
favorable to us as could be obtained from unaffiliated third parties. Such
transactions are expected to be continued in the future, with review of and the
approval required by the independent members of the Board of Directors.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with our spinoff from our former parent company, ACS, in
1994, we entered into a Reciprocal Services Agreement (the "Services Agreement")
with ACS, effective June 30, 1994, pursuant to which we sell business products
and provides package delivery services to ACS. The Services Agreement was
amended on May 1, 1998 to extend the term as set forth below. We received
approximately $5,400,000 and $4,300,000 from ACS in fiscal 1997 and fiscal 1998,
respectively. In addition to the foregoing, ACS provided data processing
services to us pursuant to the Services Agreement. We incurred expenses of
$416,179 and approximately $300,000 to ACS in fiscal 1997 and fiscal 1998,
respectively, for these services. Pricing for ACS services provided to us was no
less than ACS' direct costs attributable to such services. We discontinued the
purchase of these services from ACS on June 30, 1998. The Services Agreement
contains the agreements of ACS and Precept to use reasonable efforts to
recommend the services of the other company to their customers and prospects.
The Services Agreement, which had an initial term of one year, was extended
through April 30, 2005, and thereafter automatically renews for additional
consecutive one-year periods. The Services Agreement may be terminated by ACS or
Precept upon 180 days' written notice given prior to June 30 of any year during
the term of the Services Agreement. Mr. Darwin Deason, one of our directors and
Chairman of the Executive Committee, is Chairman and Chief Executive Officer of
ACS.
During fiscal 1996, we loaned each of David L. Neely, our former
Chairman and Chief Executive Officer and Douglas R. Deason, our President, Chief
Operating Officer and a Director, $379,988, the proceeds of which were used
solely to acquire shares of Class A Common Stock from shareholders. The loans
were evidenced by notes which become due upon the earlier of (1) June 8, 2005,
(2) upon the sale or transfer of the shares of Class A Common Stock purchased
with the proceeds or (3) upon termination of the employment of the maker of the
particular note prior to June 8, 2000. Each of the notes were secured by the
shares of Class A Common Stock purchased with the proceeds of each loan.
Interest accrued at the 90-day U.S. Treasury Bill Rate as stated on June 8 of
each year. In lieu of cash payment, annually on June 8, interest was added to
the then outstanding principal amount of the note. The notes were paid in full
during fiscal 1998.
On January 2, 1997, in connection with the exercise of options granted
on the same date pursuant to our 1996 Stock Option Plan, we made loans to
Messrs. Neely, Doug Deason, Smith, Cabra and Walker evidenced by non-interest
bearing demand promissory notes payable as consideration for such exercise in
the amounts of $42,230; $42,230; $20,600; $30,900 and $20,600, respectively.
These notes were repaid in October 1997.
In an effort to focus on its core business, we consummated the
following transactions in connection with the discontinuation of the business,
real estate construction and investments, respectively, of Precept Builders,
Inc. ("Builders") and Precept Holdings, Inc. ("Holdings"), two of our
subsidiaries that performed real estate and related construction activities.
During fiscal year 1998, we decreased our ownership percentage in
Builders as the result of a private placement of common stock by Builders, which
offering was directed solely to (a) the shareholders of Builders (other than
Precept), (b) our existing shareholders and (c) any of their affiliates or
assignees. Darwin Deason, one of our Directors and the Chairman of the Executive
Committee acquired the full amount of the private placement, the other offerees
having waived their right to purchase their pro rata portion of the shares in
the offering. Our percentage ownership in Builders decreased from 90.5% to 1.8%
of the total outstanding stock of Builders, and Darwin Deason holds
approximately 98% of the total outstanding stock of Builders. By participating
in the offering by Builders, Darwin Deason also agreed (1) to guarantee, if
required, existing and future performance bonds securing Builders' construction
projects, and (2) to provide to the companies issuing the performance bonds
letters of credit up to $7 million securing Builders obligations. These
guarantees were previously provided by us, Darwin Deason and certain of our
affiliates.
During fiscal year 1998, we disposed of the majority of the assets of
Holdings in order to focus on core operations, including:
Ranch property located in Bells, Texas (the "Bells Property") owned by
Holdings was sold to D3 Holdings, Inc., ("D3 Holdings"), a corporation
controlled by Darwin Deason, one of our Directors and Chairman of the Executive
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Committee, Douglas Deason, our President and Chief Operating Officer and David
Neely, our former Chairman and Chief Executive Officer, for $1,200,000 in cash.
It is estimated that the purchase price paid to Holdings for the Bells Property,
together with the terms and structure of the purchase was approximately equal to
the estimated fair market value of the Bells Property at the time of the sale.
We have subsequently entered into a five year lease for a more limited use of
the Bells Property with variable monthly rental payments, the amount of which
currently is approximately $10,000 per month.
In 1992, Holdings purchased a building in Dallas for development into
condominiums for sale or lease. In April 1994, Darwin Deason leased a one-floor
condominium in the building as his residence under an 18-month lease (which was
subsequently modified). The lease contained an obligation of Mr. Deason to
purchase the condominium for the estimated fair market value of the condominium.
During the lease term and prior to the sale of the condominium, Mr. Deason
received a waiver of lease payments, the benefit of which was approximately
$9,400 per month. In September 1998, one full-floor condominium and one
half-floor condominium were sold to Darwin Deason for approximately $1.6 million
in cash, which is the estimated fair market value for the condominiums.
During September 1998, Darwin Deason purchased from Holdings (1)
certain real estate located at 72-191 Highway 111, Palm Desert, California (the
"Palm Desert Property") for $1,025,125 in cash and (2) a 49% interest in CCC&D
Corp., (which represents all of our interest in such entity), a privately held
company operating a restaurant on the Palm Desert Property for $90,000 in cash.
Darwin Deason, one of our directors and the Chairman of the Executive
Committee, has entered into proxy agreements with David L. Neely, our former
Chief Executive Officer and Chairman of the Board, and Douglas Deason, our
President and Chief Operating Officer (and Darwin Deason's son), whereby Darwin
Deason controls the votes that may be cast with shares of Class A Common Stock
owned by them. Such agreement continues until the majority shareholder's death
or his disability, whichever event occurs first.
Darwin Deason, Precept and ACS, along with two other investors, are the
stockholders of DDH Aviation, Inc. ("DDH"), a startup corporate airplane
brokerage firm organized in late 1997. On a fully diluted basis, Mr. Deason owns
over one-third of the equity interests in DDH. We invested $99,900 and own
approximately 3% of the equity interests in DDH. Darwin Deason is the Chairman
of the Board and Douglas Deason is a director of the five-member board of
directors of DDH. We have access to the aircraft of DDH.
In fiscal year 1998, we entered into a separation agreement and general
release agreement with USTS' former chairman, Michael Margolies, that provided
for the resignation of Michael Margolies from our board of directors in exchange
for monthly payments of $21,075 through March 2001. In July 1998, we sold the
owned and leased buses of one of our subsidiaries to Michael Margolies in
exchange for a reduction of $593,000 in our note payable to Mr. Margolies.
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PRINCIPAL AND SELLING SHAREHOLDERS
Certain of the shares offered hereby are owned by and offered for the
accounts of Stephen A. DiMarco, AAA Guaranteed On-Time Service, L.L.C., FineLine
Business Forms, L.L.C. and GBL Graphics, Inc. We will not receive any of the
proceeds from the sale of such shares. The selling shareholders received their
shares of Class A Common Stock in connection with our acquisitions of the
Ambassador companies, AAA Guaranteed On-Time Service, L.L.C. , FineLine Business
Forms, L.L.C. and GBL Graphics, Inc.
The following table sets forth certain information as of the Record
Date with respect to the shares of Class A Common Stock and Class B Common Stock
beneficially owned by (1) shareholders known to us to own more than 5% of the
outstanding shares of such classes, (2) each of our directors and executive
officers, (3) all of our executive officers and directors as a group and (4)
each selling shareholder. The persons named in the table have sole voting and
investment power with respect to all shares of Common Stock owned by them,
unless otherwise noted.
<TABLE>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(2)
--------------------- ---------------------
NAME AND ADDRESS SHARES
OF BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Darwin Deason............................. 4,125,811(4)(5) -- 4,125,811(4)(5)
Douglas R. Deason......................... 729,929(6) 8.0% -- 729,929(6) 8.0%
William W. Solomon, Jr.................... --(7) -- -- --(7) --
D. Paul Cabra............................. 148,481(8) 1.6% -- 148,481(8) 1.6%
Ron Sorci................................. 2,786(9) 0 -- 2,786(9) *
J. Livingston Kosberg..................... 162,215(10) 1.9% -- 162,215(10) 1.9%
Sheldon I. Stein.......................... --(11) -- -- --(11) --
Robert Bazinet............................ 171,384 2.0% -- 171,384 2.0%
Joseph D. Greco........................... 519,213 6.6% -- 519,213 6.6%
All directors and executive
officers as a group..................... 5,859,819 68.5% -- 5,859,819 68.5%
Beneficial owners of more than 5% of
Precept Common Stock:
First Nationwide Bank................... 469,466 6.0% -- 469,466 6.0%
David L. Neely.......................... 735,788 9.4% 735,788 9.4%
--
Selling shareholders:
Stephen A. DiMarco...................... 620,342 7.2% 620,342 -- --
AAA Guaranteed On-Time Service, L.L.C... 55,696 * 55,696 -- --
FineLine Business Forms, L.L.C.......... 19,048 * 19,048 -- --
GBL Graphics, Inc....................... 56,667 * 56,667 -- --
</TABLE>
- --------
* Less than 1%
(1) The address of each director and officer is in care of us at 1909
Woodall Rodgers Freeway, Suite 500, Dallas, Texas 75201.
(2) Assumes the sale of all shares held by the selling shareholders listed
herein and no other sales of Class A Common Stock.
(3) Based on 8,557,045 shares of Class A Common Stock outstanding at May
15, 1999.
(4) Includes 592,142 shares of Class B Common Stock. Each share of Class B
Common Stock is convertible into Class A Common Stock on a
share-for-share basis at any time. Mr. Deason owns all of the issued
and outstanding shares of Class B Common Stock.
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(5) Includes 1,740,428 shares of Class A Common Stock for which David
Neely, Douglas Deason, Paul Cabra and Glenn R. Smith have granted Mr.
Deason proxies to vote and an additional 349,957 shares of Class A
Common Stock for which Mr. Deason holds proxies from various other
shareholders of the Company.
(6) Includes 90,125 shares of Class A Common Stock owned by a trust for the
benefit of Douglas Deason's children and for which Darwin Deason serves
as Trustee. Darwin Deason and Douglas Deason disclaim beneficial
ownership of such shares.
(7) Does not include options to purchase 10,714 shares of Class A Common
Stock, which options have not vested and are not currently exercisable.
(8) Does not include options to purchase 28,571 shares of Class A Common
Stock, which options have not vested and are not currently exercisable.
(9) Does not include options to purchase 28,571 shares of Class A Common
Stock, which options have not vested and are not currently exercisable.
(10) Held by the J. Livingston Kosberg trust of which Mr. Kosberg is the
sole trustee. Does not include options to purchase 7,146 shares of
Class A Common Stock, which options have not vested and are not
currently exercisable.
(11) Does not include options to purchase 17,142 shares of Class A Common
Stock, which options have not vested and are not currently exercisable.
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DESCRIPTION OF SECURITIES
Our total authorized capital stock consists of 100,000,000 shares of
Class A Common Stock, 10,500,000 shares of Class B Common Stock, par value $.01
per share and 3,000,000 shares of Preferred Stock, par value $1.00 per share. As
of May 15, 1999, there were 8,557,045 shares of Class A Common Stock held by
approximately 3,000 shareholders of record, 592,142 shares of Class B Common
Stock held by 1 shareholder of record and no shares of Preferred Stock
outstanding. We effected a 1 for 7 reverse stock split on December 4, 1998. The
following descriptions of the capital stock are qualified in all respects by
reference to our Articles of Incorporation and Bylaws.
As provided in our Articles of Incorporation, no shareholder is
entitled to preemptive rights or cumulative voting rights. Our board of
directors also has the authority to fix or alter the powers, designations,
preferences and relative, participating, optional or other special rights of all
classes of our capital stock; provided, however, that the board of directors may
not amend the terms of Class A Common Stock to provide greater powers,
preferences and rights than provided in our Articles of Incorporation.
CLASS A COMMON STOCK
Each holder of Class A Common Stock is entitled to one vote for each
share held of record on all matters submitted to the shareholders as a single
class with the holders of Class B Common Stock. The Class A Common Stock does
not have any conversion rights and is not subject to redemption. After dividends
have been declared and set aside for payment or paid on any series of Preferred
Stock, each holder of Class A Common Stock and Precept Class B Common Stock is
entitled to receive and to share equally in, when, as and if declared by the
board of directors, dividends per share, out of the funds legally available
therefore, in such amounts as the board of directors may from time to time fix
and determine. Upon liquidation, dissolution or winding up of our affairs,
whether voluntary of involuntary, after there has been paid or set apart for the
holders of any series of Preferred Stock having a preference over the Class A
Common Stock or Class B Common Stock, the holders of Class A Common Stock and
Class B Common Stock are entitled to receive and to share equally in all of our
assets available for distribution to the shareholders. All outstanding shares of
Class A Common Stock are fully paid and nonassessable. The shares of Class A
Common Stock trade together with certain stock purchase rights pursuant to that
certain Rights Agreement described more fully below. See "Rights Agreement;
Rights to Purchase Shares of Class A Common Stock," below.
CLASS B COMMON STOCK
Each holder of Class B Common Stock is entitled to ten votes for each
share held of record on all matters submitted to the shareholders as a single
class with the holders of Class A Common Stock. Each share of Class B Common
Stock is convertible at any time at the option of and without cost to the holder
of Class B Common Stock into one fully paid and nonassessable share of Class A
Common Stock by surrendering the certificate of Class B Common Stock. In the
case of a consolidation or merger of Precept as a result of which the holders of
Class A Common Stock are entitled to receive cash, stock or other securities or
property with respect to an exchange of the Class A Common Stock, each holder of
Class B Common Stock shall have the right to convert such share into the kind
and amount of cash, shares of stock or other securities or property receivable
by each holder of Class A Common Stock. No holder of Class B Common Stock may
transfer such share whether by sale, assignment, gift, bequest, appointment or
otherwise except to certain permitted transferees, and upon death of such holder
of Class B Common Stock, the Class B Common Stock shall automatically be
converted into Class A Common Stock. All outstanding shares of Class B Common
Stock are fully paid and nonassessable and are not subject to redemption.
No person or entity holding shares of Class B Common Stock (a "Class B
Holder") may transfer such shares, whether by sale, assignment, gift, bequest,
appointment or otherwise, except to a Permitted Transferee (as hereinafter
defined). In the case of a Class B Holder who is a natural person and the
beneficial owner of shares of Class B Common Stock to be transferred, a
Permitted Transferee consists of (1) such Class B Holder's spouse; provided,
however, that upon divorce any Class B Common Stock held by such spouse shall
automatically be converted into Class A Common Stock, (2) any lineal descendant
of any great-grandparent of such Class B Holder, including adopted
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children, and such descendant's spouse (such descendants and their spouses,
together with such Class B Holder's spouse, are referred to as "family
members"), (3) the trustee of a trust for the sole benefit of such Class B
Holder or any of such Class B Holder's family members, (4) any charitable
organization established by such Class B Holder or any of such Class B
Holder's family members and (5) any partnership made up exclusively of such
Class B Holder and any of such Class B Holder's family members or any
corporation wholly-owned by such Class B Holder and any of such Class B
Holder's family members; provided that, if there is any change in the
partners of such partnership or in the shareholders of such corporation that
would cause such partnership or corporation no longer to be a Permitted
Transferee, any Class B Common Stock held by such partnership or corporation
shall automatically be converted into Class A Common Stock. In the case of a
Class B Holder that is a partnership or corporation, a Permitted Transferee
consists of (1) such partnership's partners or such corporation's
stockholders, as the case may be, (2) any transferor to such partnership or
corporation of shares of Class B Common Stock after the record date of the
initial distribution of Class B Common Stock and (3) successors by merger or
consolidation. In the case of a Class B Holder that is an irrevocable trust
on the record date of the distribution of Class B Common Stock, a Permitted
Transferee consists of (1) certain successor trustees of such trust, (2) any
person to whom or for whose benefit principal or income may be distributed
under the terms of such trust or any person to whom such trust may be
obligated to make future transfers, provided such obligation exists prior to
the date such trust becomes a holder of Class B Common Stock and (3) any
family member of the creator of such trust. In the case of a Class B Holder
that is any trust other than an irrevocable trust on the date of the
distribution of Class B Common Stock, a Permitted Transferee consists of (1)
certain successor trustees of such trust and (2) the person who established
such trust and such person's Permitted Transferees. Upon the death or
permanent incapacity of any Class B Holder, such holder's Class B Common
Stock shall automatically be converted into Class A Common Stock. All shares
of Class B Common Stock will automatically convert into shares of Class A
Common Stock on the ninetieth day after the death of Darwin Deason or upon
the conversion by the Deason International Trust of all Class B Common Stock
beneficially owned by Mr. Deason into shares of Class A Common Stock.
Shares of Class B Common Stock are freely transferable among Permitted
Transferees, but any other transfer of Class B Common Stock will result in its
automatic conversion into Class A Common Stock. The restriction on transfers of
shares of Class B Common Stock to other than a Permitted Transferee may preclude
or delay a change in control of Precept.
PREFERRED STOCK
The Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors,
without further action by shareholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion rights, redemption rights and sinking fund
provisions. The issuance of any such Preferred Stock could adversely effect the
rights of the holders of Class A Common Stock and Class B Common Stock and,
therefore, reduce the value of the Class A Common Stock and Class B Common
Stock. The ability of the Board of Directors to issue Preferred Stock could
discourage, delay or prevent a takeover of Precept.
CLASS A WARRANTS
The Class A Warrants are listed for trading on the Nasdaq SmallCap
Market. Each Class A Warrant allows the holder to purchase one share of Class A
Common Stock at a price of $26.74 per share at any time prior to the expiration
date of August 26, 1999. We may redeem the Class A Warrants at a price of $.07
per Class A Warrant if the closing bid price for the Class A Common Stock equals
or exceeds $36.10 for at least ten consecutive trading days. As of May 15, 1999,
we had 302,382 issued and outstanding Class A Warrants.
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<PAGE>
RIGHTS AGREEMENT; RIGHTS TO PURCHASE SHARES OF CLASS A COMMON STOCK
On February 2, 1998 our Board of Directors declared a dividend of one
common share purchase right (a "Right") for each outstanding share of Common
Stock. The dividend was made on February 9, 1998 (a "Record Date") to the
shareholders of record at the close of business on that date. Each Right
entitles the registered holder to purchase from us one share of Class A Common
Stock, at a price of $350.00 (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement dated as
of February 9, 1998 (the "Rights Agreement") between Precept and Continental
Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent").
Until the earlier to occur of (1) ten Business Days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Class A Common Stock (an "Acquiring Person") or (2) ten
Business Days following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer, the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of such
outstanding Class A Common Stock (the earlier of such dates being the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
certificates for Common Stock outstanding as of the Record Date, by such
certificates for the Common Stock with a copy of a Summary of Rights attached to
the certificate. Additional Rights will be issued in respect of all shares of
Common Stock that are issued after the Record Date but prior to the earlier of
the Distribution Date or the Expiration Date, including the Shares issued in the
Transfer.
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
certificates issued after the Record Date upon transfer or new issuance of
Common Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Stock
outstanding even without such notation or a copy of a Summary of Rights being
attached to such Certificate, will also constitute the transfer of the Rights
associated with the Common Stock represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights (the "Right Certificates") will be mailed to holders of record of the
Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on February 9, 2008, (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed by
Precept, in each case, as described below.
The Purchase Price payable and the number of shares of Class A Common
Stock or other securities or property issuable upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (1) in the event of
a stock dividend on, or a subdivision, combination, or reclassification of, the
Class A Common Stock, (2) upon the grant to holders of the Class A Common Stock
of certain rights or warrants to subscribe for or purchase Class A Common Stock
at a price or securities convertible into Class A Common Stock with a conversion
price less than the then current market price of the Class A Common Stock; (3)
upon the distribution to holders of the Class A Common Stock of evidences of
indebtedness or assets or of subscription rights or warrants (other than those
referred to above); or (4) upon any of the foregoing happens with respect to the
Class B Common Stock.
In the event that any person or entity becomes an Acquiring Person (the
beneficial owner of 15% or more of the Class A Common Stock), provision will be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will then be void), will have the right to receive upon
exercise that number of shares of Class A Common Stock having a market value of
two times the applicable exercise price of the Right.
The Rights Agreement excludes from the definition of Acquiring Person,
Persons who certify to us that they inadvertently acquired in excess of 14.9% of
the outstanding Class A Common Stock and thereafter divest such excess Class A
Common Stock or who acquire 15% or more of the Class A Common Stock in a
Permitted Transaction. A "Permitted Transaction" is a stock acquisition or
tender or exchange offer pursuant to a definitive agreement which
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<PAGE>
would result in a person beneficially owning 15% or more of the Class A
Common Stock and which has been approved by the Board of Directors (including
a majority of the Directors not in association with an Acquiring Person)
prior to the execution of the agreement or the public announcement of the
offer.
In the event that we are acquired in a merger or other business
combination transaction, or 50% or more of its consolidated assets or earning
power are sold, proper provisions will be made so that each holder of a Right
will have the right to receive, upon the exercise of the Right at the then
applicable exercise price, that number of shares of common stock of the
acquiring company that at the time of such transaction will have a market value
of two times the applicable exercise price of the Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Class A Common Stock will be issued
and, in lieu of such fractional shares, an adjustment in cash will be made based
on the market price of the Class A Common Stock on the last trading day prior to
the date of exercise.
After a person becomes an Acquiring Person, our Board of Directors may
exchange the Rights, other than those Rights owned by the Acquiring Person, in
whole or in part, at an exchange ratio of one share of Class A Common Stock per
Right, subject to adjustment. However, the Board of Directors cannot conduct an
exchange at any time after any Person, together with its Affiliates and
Associates, becomes the Beneficial Owner of 50% or more of the outstanding Class
A Common Stock.
At any time prior to any Person becoming an Acquiring Person, a
Requisite Majority may redeem the Rights in whole, but not in part, at a price
of $0.01 per Right (the "Redemption Price"). In addition, the Board of Directors
may extend or reduce the period during which the Rights are redeemable, so long
as the Rights are redeemable at the time of such extension or reduction.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Board of Directors
without the consent of the holders of the Rights, including an amendment to
extend the Final Expiration Date, except that from and after the Distribution
Date no such amendment may adversely affect the economic interests of the
holders of the Rights.
Until a Right is exercised, the holder of the Right, as such, will have
no rights as a shareholder of Precept, including, without limitation, the right
to vote, or to receive dividends.
REGISTRATION RIGHTS
Holders of approximately 1,055,000 shares of Class A Common Stock have
certain rights to have such shares registered under the Securities Act pursuant
to the terms of agreements between such holders and us. Specifically, such
holders have the one-time right to demand that we use our best efforts to
register all their shares of Class A Common Stock. Additionally, if at any time
we propose to register our securities under the Securities Act (other than on a
Form S-4 or Form S-8), we must notify the holders of such proposed offering,
and, upon their request we must use our best efforts to register all shares of
Class A Common Stock owned by the holders. In such instances, we are responsible
for the expenses related to the registration of such shares.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our Articles of Incorporation provide that to the fullest extent
permitted by applicable law, a director will not be liable to us or our
shareholders for monetary damages for an act or omission in the director's
capacity as a director.
The TBCA permits the indemnification of directors, employees, officers
and agents of Texas corporations. Our Articles and Bylaws provide that we shall
indemnify any person to the fullest extent permitted by law. Under the TBCA, an
officer or director may be indemnified if he acted in good faith and reasonably
believed that his conduct (1)
45
<PAGE>
was in our best interests and if he acted in his official capacity or (2) was
not opposed to our best interests in all other cases. In addition, the
indemnitee may not have reasonable cause to believe that his conduct was
unlawful in the case of a criminal proceeding. In any case, the indemnitee
may not have been found liable to us for improperly receiving a personal
benefit or for willful or intentional misconduct in the performance of his
duty to us. We (1) must indemnify an officer or director for reasonable
expenses if he is successful, (2) may indemnify an officer or director for
such reasonable expenses unless he was found liable for willful or
intentional misconduct in the performance of his duty to us and (3) may
advance reasonable defense expenses if the officer or director undertakes to
reimburse us if he is later found not to satisfy the standard for
indemnification expenses. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. This provision in the
Articles does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Texas law. This provision
also does not affect a director's responsibilities under any other laws, such
as the federal securities laws or state or federal environmental laws.
TRADING MARKET, TRANSFER AGENT AND REGISTRAR
Our Class A Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "PBSI." The transfer agent and registrar for the Class A Common Stock
is Continental Stock Transfer and Trust Company.
TEXAS ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS
Certain provisions of our 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. This includes attempts that might
result in a premium over the market price for the Class A Common Stock. In this
regard, our 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. This provision would restrict the ability of a party to gain
control of our Board by acquiring a majority of our voting stock, removing all
of the directors and then replacing them with the directors seeking to benefit
such party. Additionally, our Bylaws provide that the number of directors shall
be fixed, from time to time, by resolution of the Board. Currently, our Board is
divided into three classes of directors that are elected for staggered
three-year terms. Thus, in any given year, only a portion of our directors would
be eligible for election, thereby eliminating the ability of a hostile party to
gain control of our Board in a single proxy contest. This makes any unsolicited
takeover attempt (including an attempt that is in our shareholders' best
interest) more expensive and more difficult. Our 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, our Articles permit the Board to establish by resolution one or more
series of preferred stock and to establish the powers, designations, preferences
and relative, participating, optional, or other special rights of each series of
preferred stock. The preferred stock could be issued on terms that are
unfavorable to the holders of Class A Common Stock or that could make a takeover
or change in control more difficult. Further, we have instituted a shareholder
rights plan, which plan may have the effect of discouraging an unsolicited
takeover proposal. Moreover, we are subject to the Texas Business Combination
Law, which places restrictions on certain business combinations with certain
shareholders that could render a change in control more difficult. The Articles
and Bylaws, together with the provision of shareholder rights plan and Texas
law, may have the effect of discouraging a future takeover attempt by a third
party that is not approved by the Board and render the removal of the incumbent
management more difficult.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Class A Common Stock by shareholders pursuant to Rule
144 under the Securities Act could have an adverse effect on the market price of
our securities.
As of May 15, 1999, 8,557,045 shares of Class A Common Stock and
592,142 shares of Class B Common Stock were outstanding. In addition, as of May
15, 1999, we had outstanding warrants and options to purchase 846,987 shares of
Class A Common Stock. The resale of up to 751,753 of the 8,557,045 shares
outstanding will be registered by the Registration Statement of which this
Prospectus is a part. We believe that the remaining shares outstanding are
freely transferable without restriction or further registration under the
Securities Act, except for any shares held by our "affiliates," as defined in
Rule 144 under the Securities Act. In general, under Rule 144, subject to the
satisfaction of certain other conditions, an affiliate is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class, or if
the Class A Common Stock is quoted on the Nasdaq, the average weekly trading
volume during the four calendar weeks preceding the sale. The holders of
approximately 1,055,000 outstanding shares have certain rights to have shares
registered under the Securities Act pursuant to the terms of agreements between
such holders and us. The resale of 620,342 of those 1,055,000 shares will be
registered by the Registration Statement of which this Prospectus is a part. We
believe that the remaining shares are freely tradeable, subject in certain cases
to the restrictions of Rule 144. In addition, we have filed a registration
statement on Form S-8 to register a total of 903,557 shares of Class A Common
Stock, which is all shares reserved for issuance under our 1998 Stock Incentive
Plan, as well as shares underlying certain options granted under a prior stock
option plan.
No assurance can be made as to the effect, if any, that sales of shares
of Class A Common Stock or the availability of such shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of Class A Common Stock may be sold in the public
market may adversely affect prevailing market prices for the Class A Common
Stock and could impair our ability to raise capital in the future through the
sale of equity securities.
47
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus covers up to 6,366,428 of Class A Common Stock that we
may issue to the owners of assets, businesses or securities we acquire in the
future. The consideration offered by us in such acquisitions in addition to the
shares of Class A Common Stock offered by this Prospectus may include such cash,
debt or other securities (which may be convertible into shares of Class A Common
Stock covered by this Prospectus), or assumption by us of liabilities of the
business being acquired, or a combination thereof. We expect to determine the
terms of any acquisitions by direct negotiations with the person from whom the
assets, businesses or securities are acquired. The securities issued in each
acquisition will be valued at prices reasonably related to market prices, either
when an agreement for the acquisition is entered into, or when we deliver the
securities. We will not pay any underwriting discounts or commissions, but we
may pay finder's fees in connection with certain acquisitions.
Additionally, we are registering up to 751,753 shares of Class A Common
Stock held by the selling shareholders listed under "Principal and Selling
Shareholders" on page 40. For purposes of this discussion regarding the plan of
distribution, "selling shareholders" includes donees and pledgees selling share
received from a named selling shareholder after the date of this prospectus, as
well as selling shareholders who may wish to sell shares that they receive from
us in future acquisitions, who may use this Prospectus with our prior written
consent. We may limit our consent to a specified time period and subject to
certain limitations and conditions, which may vary by agreement. We will provide
the information identifying any people reselling securities acquired under this
prospectus in a supplement to this prospectus as may then be required by the
Securities Act and the rules of the SEC.
We will not receive any of the proceeds from the resale of the
securities by selling shareholders. The selling shareholders may resell all or a
portion of the securities beneficially owned by them on any exchange or market
on which the purchased securities are listed or quoted, on terms to be
determined at the times of such sales. The selling shareholders also may make
private sales directly or through a broker. Alternatively, any of the selling
shareholders may offer securities purchased under this Prospectus through
underwriters, dealers or agents, who may receive compensation in the form of
underwriting discounts, commissions or concessions from the selling
shareholders. The SEC may consider such selling shareholder or any person who
receives fees to be an "underwriter," in which case any profit on the resale of
the securities purchased by them could deemed to be underwriting commissions or
discounts under the Securities Act.
If required at the time that a particular offer of shares is made, a
supplement to this Prospectus will be delivered that describes any material
arrangements for the distribution of shares and the terms of the offering,
including the names of any underwriters, brokers, dealers or agents and any
discounts, commissions or concessions and other items constituting compensation
from the selling shareholder.
Selling shareholders may also offer and sell shares of Class A Common
Stock covered by this Prospectus under exemptions from the registration
requirements of the Securities Act, including sales which meet the requirements
of Rule 145(d) under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Class A
Common Stock to be offered hereby will be passed upon by Jackson Walker L.L.P.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at June 30, 1998 and 1997, and for each of the three years
in the period ended June 30, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
48
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C>
Condensed consolidated balance sheets as of March 31, 1999 and June 30, 1998............ F - 2
Condensed consolidated statements of operations for the nine-month periods
ended March 31, 1999 and 1998......................................... F - 3
Condensed consolidated statements of cash flows for the nine-month periods
ended March 31, 1999 and 1998......................................... F - 4
Condensed consolidated statements of changes in shareholders' equity for the
nine-month periods ended March 31, 1999 and 1998...................... F - 5
Notes to condensed consolidated financial statements.................................... F - 6
Report of independent auditors.......................................................... F - 14
Consolidated balance sheets as of June 30, 1998 and 1997 ............................... F - 15
Consolidated statements of operations for the years ended June 30, 1998, 1997, and 1996. F - 16
Consolidated statements of cash flows for the years ended June 30, 1998, 1997, and 1996. F - 17
Consolidated statements of changes in shareholders' equity for the three years
ended June 30, 1998................................................... F - 18
Notes to consolidated financial statements.............................................. F - 19
AMBASSADOR LIMOUSINE SERVICES, INC.
AMBASSADOR TRANSPORTATION SERVICES, INC.
AMBASSADOR EXECUTIVE COACHES, LLC
Report of independent auditors..........................................................
Combined balance sheet as of March 31, 1999 ............................................
Combined statement of income and changes in retained earnings for the year ended
March 31, 1999........................................................
Combined statement of cash flows for the year ended March 31, 1999......................
Notes to combined financial statements..................................................
GARDEN STATE LEASING & RENT A CAR, INC.
Report of independent auditors..........................................................
Balance sheet as of September 30, 1998..................................................
Statement of income and changes in retained earnings for the nine months ended
September 30, 1998....................................................
Statement of cash flows for the nine months ended September 30, 1998....................
Notes to financial statements...........................................................
SOUTHERN SYSTEMS BUSINESS FORMS AND DATA SUPPLIES, INC.
Report of independent auditors..........................................................
Balance sheet as of September 30, 1998.................................................
Statement of income and changes in retained earnings for the eleven months ended
September 30, 1998....................................................
Statement of cash flows for the eleven months ended September 30, 1998..................
Notes to financial statements...........................................................
</TABLE>
F-1
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, June 30,
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 510,476 $ 2,291,303
Trade accounts receivable, net of $1,395,000 and $404,000
allowance for doubtful accounts, respectively..................... 20,463,506 15,595,234
Accounts receivable from affiliates................................... 1,022,825 1,186,908
Other accounts receivable............................................. 1,265,718 1,609,529
Inventory............................................................. 5,597,938 5,133,484
Other current assets.................................................. 2,216,922 805,151
Deferred income taxes 1,531,986 499,264
Net assets of discontinued operations................................. - 1,115,125
------------- -------------
Total current assets.............................................. 32,609,371 28,235,998
Property and equipment, net.............................................. 7,530,651 5,751,487
Intangible assets, net................................................... 38,785,022 19,558,050
Deferred income taxes.................................................... 1,101,681 1,102,372
Other assets............................................................. 850,509 1,838,697
------------- -------------
Total assets.................................................. $ 80,877,234 $ 56,486,604
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................................ $ 12,225,246 $ 5,844,671
Accrued compensation 1,373,983 1,943,964
Other accounts payable and accrued expenses........................... 9,838,414 5,189,268
Current portion of long-term debt..................................... 2,892,392 1,421,477
------------- -------------
Total current liabilities......................................... 26,330,035 14,399,380
Long-term debt........................................................... 29,676,880 20,084,756
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 8,029,642 and 6,870,126 issued shares, respectively........... 80,296 68,701
Class B common stock, $0.01 par value; 10,500,000 authorized shares
and 592,142 shares outstanding.................................... 5,921 5,921
Additional paid-in capital............................................ 36,450,733 23,515,022
Retained earnings (accumulated deficit)............................... (10,455,556) (1,395,905)
------------- -------------
26,081,394 22,193,739
Class A treasury stock - 148,636 shares............................... (1,211,075) (191,271)
------------- -------------
Total shareholders' equity........................................ 24,870,319 22,002,468
------------- -------------
Total liabilities and shareholders' equity.................... $ 80,877,234 $ 56,486,604
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
March 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
Revenue:
Business products $ 103,873,555 $ 80,516,847
Transportation services.................................................. 17,991,729 5,663,059
------------- -------------
121,865,284 86,179,906
Costs and expenses:
Cost of goods sold....................................................... 80,484,287 56,741,177
Sales commissions 14,090,459 10,534,447
Selling, general and administrative...................................... 19,102,466 15,615,314
Depreciation and amortization............................................ 2,460,114 1,264,487
Goodwill write-down and other non-recurring charges...................... 14,283,000 -
Non-recurring acquisition costs.......................................... 180,000 485,555
------------- -------------
130,600,326 84,640,980
------------- -------------
Operating income (loss)..................................................... (8,735,042) 1,538,926
Interest expense............................................................ 1,856,595 542,830
------------- -------------
Income (loss) from continuing operations before income taxes................ (10,591,637) 996,096
Income tax provision (benefit).............................................. (1,531,986) 398,438
-------------- -------------
Income (loss) from continuing operations.................................... (9,059,651) 597,658
Loss from discontinued operations, net of applicable income taxes........... - (467,392)
-------------- -------------
Net income (loss)........................................................... $ (9,059,651) $ 130,266
-------------- -------------
-------------- -------------
Basic net income per share:
Income (loss) from continuing operations................................. $ (1.10) $ 0.09
Loss from discontinued operations........................................ - (0.07)
-------------- -------------
Net income (loss)........................................................ $ (1.10) $ 0.02
-------------- -------------
-------------- -------------
Weighted average shares outstanding................................... 8,207,717 6,391,557
Diluted net income per share:
Income (loss) from continuing operations................................. $ (1.10) $ 0.09
Loss from discontinued operations........................................ - (0.07)
-------------- -------------
Net income (loss)........................................................ $ (1.10) $ 0.02
-------------- -------------
-------------- -------------
Weighted average shares outstanding...................................... 8,207,717 6,436,760
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-3
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
March 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ (9,059,651) $ 130,266
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 2,460,114 1,264,487
Deferred income taxes............................................... 1,032,722 499,264
Goodwill write-down and other non-recurring charges................. 14,283,000 -
Non-recurring acquisition costs..................................... 180,000 485,555
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable....................................... (1,790,787) (1,987,788)
Accounts receivable from affiliates............................. 164,083 (260,153)
Other accounts receivable....................................... 343,811 (407,718)
Inventory....................................................... (223,196) (2,821,872)
Other current assets............................................ (718,779) (540,791)
Income taxes refundable......................................... - (234,079)
Net assets of discontinued operations........................... - 1,719,497
Trade accounts payable.......................................... 4,018,501 1,353,727
Accrued compensation............................................ (1,943,964) (238,559)
Other assets and liabilities, net............................... (124,550) 4,423,317
------------- -------------
Net cash provided by operating activities........................... 8,621,304 3,385,153
------------- -------------
Cash flows provided by (used in) investing activities:
Acquisitions of businesses, including earnout payments.................. (16,128,345) (7,086,000)
Sale of net assets of discontinued operations........................... 1,115,125 -
Acquisition of property and equipment, net.............................. (229,479) (857,713)
-------------- --------------
Net cash used in investing activities............................... (15,242,699) (7,943,713)
-------------- --------------
Cash flows provided by (used in) financing activities:
Repayment of shareholder notes receivable............................... - 208,060
Payments on long-term debt.............................................. (1,049,878) (227,305)
Payments of capital lease obligations................................... (2,644,076) (74,193)
Borrowings on revolving line of credit, net of repayments............... 8,534,522 4,408,120
------------- -------------
Net cash provided by financing activities........................... 4,840,568 4,314,682
------------- -------------
Decrease in cash and cash equivalents...................................... (1,780,827) (243,878)
Cash and cash equivalents at beginning of period........................... 2,291,303 1,675,824
------------- -------------
Cash and cash equivalents at end of period................................. $ 510,476 $ 1,431,946
------------- -------------
------------- -------------
Cash paid for:
Interest................................................................ $ 1,420,467 $ 657,631
Income taxes............................................................ $ 212,544 $ 676,341
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-4
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED 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, 1998.......... $ 68,701 $ 5,921 $23,515,022 $ (1,395,905) $ (191,271) $ 22,002,468
Issuance of shares to
acquire businesses........... 10,646 - 12,533,319 - - 12,543,965
Conversion of notes and
exercise of stock options 949 - 402,392 - (20,603) 382,738
Stock re-purchase............... - - - - (999,201) (999,201)
Net income...................... - - - (9,059,651) - (9,059,651)
-------- -------- ------------ ------------- ----------- ------------
Balance, March 31, 1999......... $ 80,296 $ 5,921 $ 36,450,733 $ (10,455,556) $(1,211,075) $ 24,870,319
-------- -------- ------------ ------------- ----------- ------------
-------- -------- ------------ ------------- ----------- ------------
Balance, June 30, 1997.......... $ 46,458 $ 14,433 $ 17,803,121 $ (750,062) $(1,012,307) $ 16,101,643
Issuance of shares to
acquire businesses........... 13,732 - 4,265,243 - - 4,278,975
Repayment of shareholder
notes receivable............. - - - - 208,060 208,060
Net income...................... - - - 130,266 - 130,266
-------- -------- ------------ ------------- ----------- ------------
Balance, March 31, 1998......... $ 60,190 $ 14,433 $22,068,364 $ (619,796) $ (804,247) $ 20,718,944
-------- -------- ------------ ------------- ----------- ------------
-------- -------- ------------ ------------- ----------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-5
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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 small-
to large-sized corporate customers. Precept operates from offices throughout the
United States. The transportation services are provided from locations in the
tri-state New York metropolitan area and in the states of Texas, Michigan,
Kentucky and Ohio.
PUBLICLY TRADED COMPANY
Precept's Class A common stock trades under the NASDAQ symbol "PBSI"
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.
PRO FORMA INFORMATION
The pro forma information included in these financial statements and
notes is unaudited.
FISCAL YEAR END AND QUARTERLY REPORTING PERIODS
The Company maintains a June 30 fiscal year end and ends its quarterly
reporting periods on September 30, December 31, and March 31, respectively. For
purposes of the Company's current report on Form 10-Q, references to 1999 and
1998 are meant to be the nine-month reporting periods ended March 31, 1999 and
1998, respectively.
REVERSE STOCK SPLIT
On November 11, 1998, the shareholders of the Company approved a one
for seven reverse stock split that became effective December 4, 1998. All
financial and share information presented in this report has been restated to
give effect to this reverse stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are consistent with the accounting policies
described in the Company's notes to consolidated financial statements included
in the Company's Annual Report to Shareholders and Form 10-K for the fiscal year
ended June 30, 1998.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements are unaudited. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. These interim
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ended June 30, 1998. The interim
financial statements include all adjustments, consisting only of normal
recurring adjustments and certain other adjustments in the third quarter of
1999, necessary for a fair presentation of the Company's financial position, its
results of operations and its cash flows. Operating
F-6
<PAGE>
results for any particular interim period are not necessarily indicative of
the operating results for a full fiscal year.
The financial information as of June 30, 1998 is derived from the
Company's audited financial statements.
COMPREHENSIVE INCOME
The Company adopted the new accounting standard on comprehensive income
in the first quarter of fiscal year 1999, which requires companies to disclose
comprehensive income separately from net income from operations. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-ownership sources. It includes all
changes in equity during a period, except those resulting from investments by
owners and distributions to owners. Comprehensive income (loss) is equal to net
earnings as presented in the consolidated statements of operations for the nine
months ended March 31, 1999 and 1998.
3. ACQUISITIONS
In the quarter ended March 31, 1999, the Company acquired one corporate
transportation services company which provides executive town car and limousine
service primarily in the tri-state New York metropolitan area with annual
revenues of $2.0 million. This acquisition was accounted for using the purchase
method of accounting. For this purchase acquisition, the aggregate acquisition
cost was allocated to the net assets acquired based on the fair market value of
such net assets. The operating results of this company have been included in the
Company's historical results of operations for all periods following the
acquisition. The aggregate acquisition cost for this purchased business amounted
to $1.3 million, paid $0.2 million in cash, funded by working capital and the
Company's line of credit and $1.1 million in seller notes and debt assumed.
During the second quarter of fiscal year 1999, the Company acquired one
corporate transportation services company located in North Arlington, New
Jersey, which provides executive limousine and town car service to the tri-state
New York metropolitan area with annual revenues of $14.0 million. This
acquisition was accounted for using the purchase method of accounting. For this
purchase acquisition, the aggregate acquisition cost was allocated to the net
assets acquired based on the fair market value of such net assets. The operating
results of this company have been included in the Company's historical results
of operations for all periods following the acquisition. The aggregate
acquisition cost for this purchased business amounted to $9.0 million and
consisted of $3.4 million in cash, funded by working capital and the Company's
revolving line of credit, 0.3 million shares of Class A common stock with an
aggregate fair market value of $3.0 million, and $2.6 million in assumed debt
and transaction costs.
During the first quarter of fiscal year 1999, Precept acquired four
business products distribution companies with combined annual revenues of $34.3
million. These acquisitions were accounted for using the purchase method of
accounting. For each of these purchase acquisitions, the aggregate acquisition
cost was allocated to the net assets acquired based on the fair market 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
amounted to $18.0 million and consisted of $5.7 million in cash, funded by
working capital and the Company's revolving line of credit, 0.7 million shares
of Class A common stock with an aggregate fair market value of $9.6 million, and
$2.7 million in seller notes and assumed debt.
In the third quarter of fiscal year 1998, the Company acquired U.S.
Transportation Systems, Inc. ("USTS"), a publicly traded company in the
transportation services industry. On March 18, 1998, Precept issued 1,373,214
shares of its Class A common stock and 259,286 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
four of the operating businesses of USTS that provided chauffeured limousine,
livery and long-haul trucking services based in New York, Michigan, Ohio,
F-7
<PAGE>
Northern Kentucky and the Carolinas. In the fourth quarter of 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 of USTS has been allocated as follows:
$12.8 million to goodwill, $0.9 million to accounts receivable, $6.4 million to
long-term debt, $3.7 million to accounts payable and accrued liabilities and
$0.8 million to other assets.
In the second quarter of fiscal year 1998, the Company completed the
acquisition of two business products companies located in Tempe, Arizona and
Austin, Texas and one corporate transportation service company located in
Dallas, Texas. These acquisitions were accounted for using the purchase method
of accounting. Total annual revenues for the two business products companies
amounted to $3.5 million. These companies were acquired with seller notes and
assumed debt of $1.3 million. The purchase of these two business products
companies has been allocated as follows: $30,498 to equipment and $1.3 million
to goodwill. The transportation company's annual revenues totaled $3.4 million.
This acquisition was paid for with a seller note of $0.4 million and assumed
debt of $0.2 million and was allocated as follows: $0.2 million to vehicles and
other assets and $0.4 million to goodwill.
During the first quarter of fiscal year 1998, the Company completed the
purchase of two business products distributors for a total of $0.5 million. 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 combined annual revenues for these two companies
were $0.6 million.
In the fourth quarter of fiscal year 1998, the Company issued 0.9
million 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 Inc. and MBF Corporation. 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
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>
Nine months ended
March 31, 1998
-----------------
<S> <C>
Revenue:
Company (excluding InfoGraphix and MBF)................................. $ 57,051,797
InfoGraphix............................................................. 16,570,903
MBF..................................................................... 12,557,206
------------
Company................................................................. $ 86,179,906
------------
------------
Net income (loss):
Company (excluding InfoGraphix and MBF)................................. $ 206,494
InfoGraphix............................................................. 24,114
MBF..................................................................... 367,050
------------
Company................................................................. $ 597,658
------------
------------
</TABLE>
F-8
<PAGE>
The following table summarizes the consideration for the purchase
acquisitions completed and the fair value of the assets acquired.
<TABLE>
<CAPTION>
Nine months ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Purchase consideration:
Cash paid..................................................... $ 9,386,000 $ 5,735,000
Amounts due sellers of acquired businesses.................... 2,060,000 1,168,000
Stock and warrants issued..................................... 12,544,000 4,318,000
Liabilities assumed........................................... 4,122,000 3,911,000
Other......................................................... 234,000 60,000
------------- -------------
Fair value of assets acquired...................................... $ 28,346,000 $ 15,192,000
------------- -------------
------------- -------------
<CAPTION>
Nine months ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Allocation of fair value of assets acquired:
Goodwill and intangible assets................................ $ 24,272,000 $ 15,154,000
Accounts receivable........................................... 3,939,000 878,000
Inventory and other, net...................................... 135,000 (840,000)
------------- --------------
$ 28,346,000 $ 15,192,000
------------- --------------
------------- --------------
</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 period presented. Pro forma adjustments reflect additional
amortization expense since the excess of acquisition cost over the fair value of
the assets acquired is amortized for a full period. Pro forma adjustments also
reflect additional interest expense due to the related debt being outstanding
for a full period. The income tax effect of the pro forma adjustments has also
been reflected. These pro forma results are presented for comparative purposes
only and do not purport to be indicative of what would have occurred had the
businesses actually been acquired as of those dates or of results which may
occur in the future. The pro forma results of operations presented below exclude
goodwill write-down and other non-recurring charges that were recorded during
the third quarter of 1999.
<TABLE>
<CAPTION>
Nine months ended
March 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Total revenues................................................... $ 133,089,011 $ 136,249,285
Income before income taxes ...................................... $ 5,192,710 $ 6,675,203
Net income....................................................... $ 2,700,209 $ 3,540,224
Diluted net income per share..................................... $ 0.32 $ 0.58
</TABLE>
If the goodwill write-down and other non-recurring charges had been
included in the pro forma results for the nine-month period ended March 31,
1999, income (loss) before income taxes would have been ($9,270,290), net loss
would have been ($8,372,551), and diluted net loss per share would have been
($1.00).
Since March 31, 1999, Precept has acquired two corporate transportation
services companies which provide executive town car and limousine service
primarily in the tri-state New York metropolitan area with annual revenues of
$6.7 million. The aggregate consideration for these transactions amounted to
$9.1 million, paid $2.2 million in cash, $4.4 million in common stock, $0.2
million in preferred stock and approximately $2.3 million in debt assumed.
Assets with a preliminary aggregate fair value of $9.1 million were acquired,
with a preliminary allocation as follows: $7.1 million to goodwill and
intangible assets, $2.0 million to property, plant, and equipment, $0.3 million
to accounts receivable, and $0.3 million (net) to other liabilities.
F-9
<PAGE>
The operational results of these acquisitions are not considered to be
significant enough to significantly affect the pro forma results presented
above; therefore, the pro forma effects of these acquisitions on the Company's
pro forma operating results have not been separately disclosed.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, June 30,
Estimated Lives 1999 1998
--------------- ------------- -------------
<S> <C> <C> <C>
Land $ 411,000 $ 411,000
Buildings 15 to 40 years 1,778,854 1,670,926
Leasehold improvements 1 to 10 years 769,951 455,118
Equipment and vehicles 3 to 5 years 10,441,723 7,020,965
Capitalized leasehold rights 3 to 5 years 1,243,147 1,353,279
------------- -------------
14,644,675 10,911,288
Accumulated depreciation and amortization.................... 7,183,059 5,159,801
------------- -------------
$ 7,530,651 $ 5,751,487
------------- -------------
------------- -------------
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Goodwill.......................................................... $ 43,619,517 $ 23,955,689
Non-compete agreements............................................ 755,659 755,659
------------- -------------
44,375,176 24,711,348
Accumulated amortization.......................................... 5,590,154 5,153,298
------------- -------------
$ 38,785,022 $ 19,558,050
------------- -------------
------------- -------------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Revolving line of credit.......................................... $ 24,500,000 $ 15,965,478
Note payable and long-term liability to shareholder............... 357,823 813,803
Convertible notes payable to sellers.............................. 3,359,599 2,114,435
Capitalized lease obligations and other notes payable............. 4,351,850 2,612,517
------------- -------------
32,569,272 21,506,233
Less current portion due within one year.......................... 2,892,392 1,421,477
------------- -------------
Long-term debt.................................................... $ 29,676,880 $ 20,084,756
------------- -------------
------------- -------------
</TABLE>
REVOLVING LINE OF CREDIT
On March 20, 1999, the Company completed a $40 million revolving line
of credit with its two banks for borrowing to finance working capital and
acquisition needs. The line of credit bears interest at prime (7.75% at March
31, 1999) plus 1.75% 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 March 31, 1999, the
margin rate was 2.75%. The revolving line of credit includes restrictions on the
level of interest coverage, debt to EBITDA coverage, net worth levels,
dividends, and capital expenditures. The line of credit is secured by
substantially all of the assets of the Company. The revolving line of credit is
due and payable on March 31, 2001. The amount of the line of credit which is
available is determined by a ratio of three times the trailing twelve months pro
forma EBITDA. The pro forma EBITDA gives effect to the acquisitions made by the
Company which are not
F-10
<PAGE>
included in the historical results of the Company with certain adjustments
for compensation and non-recurring expenses. The amount available is adjusted
concurrent with each acquisition.
Two banks, Bank One, Texas, NA and Wells Fargo Bank, NA, participated
in this Credit Agreement. The Credit Agreement provides for an increase of $10
million if new lenders join the banking group or existing lenders increase their
levels of commitment.
The Credit Agreement includes other customary covenants and conditions
relating to the conduct and operation of Precept's business. Specifically, each
quarter, Precept will be subject to a 3:1 EBITDA to interest coverage ratio, to
minimum net worth levels, and to limits on capital expenditures. In addition,
acquisitions of companies with a purchase price greater than $7.5 million
individually and $25 million on an aggregate annual basis will require approval
from the banking group.
7. SEGMENT INFORMATION
The table below presents certain segment information from continuing
operations for the nine-month periods ended March 31, 1999 and 1998. For the
first nine months in 1999 and 1998, intersegment sales included in operating
income below were not significant for the business products segment and amounted
to $292,376 and $333,758 for the transportation services segment.
<TABLE>
<CAPTION>
Nine months ended
March 31,
----------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Operating income:
Business products................................................. $ 7,108,767 $ 5,834,012
Transportation services........................................... 3,317,253 (35,382)
Other............................................................. (19,161,062) (4,259,704)
------------- -------------
Total operating income........................................ (8,735,042) 1,538,926
Interest expense....................................................... 1,856,595 542,830
------------- -------------
Income before income taxes............................................. $(10,591,637) $ 996,096
------------- -------------
------------- -------------
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Identifiable assets:
Business products................................................. $ 50,663,836 $ 39,173,092
Transportation services........................................... 24,435,805 15,944,523
Other............................................................. 5,777,593 1,368,989
------------- -------------
Total identifiable assets..................................... $ 80,877,234 $ 56,486,604
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
8. WEIGHTED AVERAGE SHARES OUTSTANDING
The following table provides information regarding the basic weighted
average shares outstanding for the nine-month periods ended March 31, 1999 and
1998. Diluted weighted average shares are not presented due to their
anti-dilutive impact for the nine-month period ended March 31, 1999 and due to
the immaterial impact on earnings per share for the nine-month period ended
March 31, 1998.
<TABLE>
<CAPTION>
Nine months ended
March 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Basic and diluted weighted average shares outstanding:
Common shares, Class A and Class B, outstanding at the beginning
of the period............................................ 7,393,919 6,232,854
Common shares repurchased.................................... (79,000) -
Common shares issued upon exercise of options................ 45,415 -
Common shares issued upon conversion of note receivable...... 47,250 -
Common shares used to acquire businesses during the period... 1,064,615 1,230,357
--------- ---------
Common shares, Class A and Class B, outstanding at the end of
the period............................................... 8,473,148 7,463,211
--------- ---------
--------- ---------
Weighted average number of common shares outstanding during the
period based on the number of days outstanding .......... 8,207,717 6,391,557
--------- ---------
--------- ---------
</TABLE>
9. GOODWILL WRITE-DOWN AND OTHER NON-RECURRING CHARGES
In the third quarter of fiscal year 1999, Precept recorded goodwill
write-down and other non-recurring charges totaling $14.3 million relating to
matters and events which occurred during the third quarter of fiscal year 1999.
The significant components are described below.
GOODWILL
Precept received formal notification from Ford Motor Company that the
contract for employee bus shuttle service would not be renewed after June 30,
1999. As a result, Precept evaluated the undiscounted cash flows that will be
generated by the remaining operations at its Dearborn, Michigan location. The
Company determined that the cash flows were less than the carrying amount of the
net book value of the intangible assets for this location. As a result, the
Company wrote off the amount, $7.4 million, by which the net book value of the
intangible assets exceeded the discounted cash flows expected to be generated by
the operations in Dearborn. In addition, as part of the Company's periodic
assessment of the appropriateness of the carrying value of its long-lived
assets, the Company also wrote-off the net book value of the intangible assets
associated with one of its branch offices.
MBF
On February 16, 1999, substantially all of the management, sales force
and employees of MBF Corporation ("MBF") and Mail/Source, Inc. resigned from the
Company to join a competitor, Peregrine Corporation ("Peregrine") that had been
founded and funded by the same individuals. In response to this departure,
Precept has sued Peregrine and the former legal officers of MBF for damages.
Precept continues to pursue its litigation for damages while also discussing
potential financial settlements. As a result of this departure, Precept is in
the process of closing and selling its sales offices and warehouses, collecting
outstanding accounts receivable, selling inventories and settling its remaining
trade, lease, tax and other obligations. As part of this effort, Precept has
identified $2.6 million of asset write-downs and other charges expected to be
incurred in connection with winding down the operations of MBF. These charges
F-12
<PAGE>
include expected losses on the sale of inventories and of land and buildings,
expected losses on the collection of accounts receivable, remaining lease
obligations, litigation costs, termination costs, and other liabilities.
OTHER
During the third quarter of 1999, Precept recorded $4.3 million of
non-recurring charges. These included an investment of $0.5 million in the
preferred stock of an entertainment company which was written down to zero value
to reflect management's estimate of the recoverability of its investment due to
financial difficulties and financial restructuring of the entertainment company.
As part of the ongoing litigation with John Alden Insurance Company, Precept
adjusted the value of its trade receivable by $0.5 million to reflect the
expected settlement of the litigation. The Company also wrote down the value of
certain notes receivable by $0.5 million to their expected net realizable value.
Inventory and trade accounts receivable valuation reserves were increased by
$0.9 million. The Company increased its health claim reserve by $0.3 million
based on health claim payment trends during the third quarter of 1999. Other
reserves and liabilities increased by $1.6 million to address various matters
and evens which occurred during the third quarter of 1999.
F-13
<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.
Dallas, Texas ERNST & YOUNG LLP
September 23, 1998, except Note 15,
as to which the date is June 9, 1999
F-14
<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 6,870,126 and 4,645,769 issued shares in 1998 and 1997,
respectively.................................................... 68,701 46,458
Class B common stock, $0.01 par value; 10,500,000 authorized shares
and 592,143 and 1,443,285 issued shares in 1998 and 1997,
respectively.................................................... 5,921 14,433
Additional paid-in-capital.......................................... 23,515,022 17,803,121
Retained earnings (accumulated deficit)............................. (1,395,905) (750,062)
---------------- ----------------
22,193,739 17,113,950
Class A treasury stock - 68,406 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.
F-15
<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....................... $ 0.18 $ 0.19 $ 0.15
Loss from discontinued operations....................... (0.07) (0.63) (0.01)
-------------- -------------- --------------
Net income (loss)....................................... $ 0.11 $ (0.44) $ 0.14
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding..................... 6,480,325 6,089,047 6,070,714
Diluted net income (loss) per share:
Income from continuing operations....................... $ 0.18 $ 0.19 $ 0.15
Loss from discontinued operations....................... (0.07) (0.63) (0.01)
-------------- -------------- --------------
Net income (loss)....................................... $ 0.11 $ (0.44) $ 0.14
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding..................... 6,598,657 6,089,047 6,070,714
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<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
F-17
<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.........$ 33,856 $ 21,649 $16,954,547 $ 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 7,217 (7,217) - - - -
Net income.................. - - - 842,627 - 842,627
-------- -------- ----------- ------------- ---------- ------------
Balance, June 30, 1996......... 41,073 14,432 17,569,547 2,238,229 (804,247) 19,059,034
Exercise of stock
options................. 5,384 - 233,576 - - 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......... 46,457 14,432 17,803,123 (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......... 13,733 4,347,635 - - 4,361,368
Conversion of Class B
to Class A common
stock................... 8,511 (8,511) - - - -
Net income.................. - - - 718,421 - 718,421
-------- -------- ----------- ------------- ---------- ------------
Balance, June 30, 1998.........$ 68,701 $ 5,921 $23,515,022 $ (1,395,905) $ (191,271) $ 22,002,468
-------- -------- ----------- ------------- ---------- ------------
-------- -------- ----------- ------------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<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
1,373,214 shares of its Class A common stock to USTS and 259,286 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
F-19
<PAGE>
specifically allocated to an identified asset and liability is considered to be
goodwill. The 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.
F-20
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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 for diluted net income (loss) per share is comprised of
the dilutive effect of the outstanding common stock
F-21
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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.
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 1,373,214
shares of its Class A common stock and 259,286 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.
F-22
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
In fiscal year 1998, the Company issued 877,791 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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-23
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
Allocation of fair value of net assets acquired: 1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
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, 757,143 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>
F-24
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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.
F-25
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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 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>
F-26
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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, 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
$0.14, ($0.48), and $0.08, respectively, for each of the years in the three year
period ended June 30, 1998.
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 AND REVERSE 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. In November 1998, the
Company's board of directors approved a 1 for 7 reverse stock split for the
Class A and Class B common stock, which was effective December 4, 1998. The
financial statements of the Company have been retroactively restated to reflect
these stock splits.
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.
F-27
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
WARRANTS
Warrants to purchase 259,286 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
$26.74 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 $36.10 for at least ten consecutive
days.
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 857,143 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 14,286 shares of
Class A common stock at the fair market value of $27.13 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 585,813 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, 538,408 options were granted
with immediate vesting, and exercised for one share each of common stock at an
exercise price of $0.441 per share. In April 1997, 46,414 options were granted,
with immediate vesting, and an exercise price of $0.441 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 $350.00, 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 corporation, 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.
F-28
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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.
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.
F-29
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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
-------------- ------------- --------------
-------------- ------------- --------------
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.
F-30
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
<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>
<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 $2.80 per share,
F-31
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
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 43,778 and 24,628
shares for $122,406 and $68,863, respectively, which is classified as a
reduction of shareholders' equity.
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 851,142 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.
F-32
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 1998, 1997 and 1996
14. SUBSEQUENT EVENTS
ACQUISITIONS
As discussed more fully in Note 3, Precept has completed four
acquisitions of businesses since June 30, 1998.
15. REVERSE STOCK SPLIT
On December 4, 1998, the Company effected a 1 for 7 reverse stock
split for its common stock, warrants, and stock options, as approved by the
shareholders at the November 11, 1998 annual shareholders meeting. All share
and per share information has been restated to reflect the 1 for 7 reverse
split.
F-33
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT MADE IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY PRECEPT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE COMMON STOCK OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF PRECEPT SINCE SUCH DATE.
- ---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information 2
Prospectus Summary....................... 3
Risk Factors............................. 6
Dividend Policy.......................... 13
Price Range of Common Stock.............. 13
Selected Consolidated Financial Data..... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 16
Business................................. 25
Management............................... 33
Certain Relationships and Related
Transactions............................ 38
Principal and Selling Shareholders....... 40
Description of Securities................ 42
Shares Eligible for Future Sale.......... 47
Plan of Distribution..................... 48
Legal Matters............................ 48
Experts.................................. 48
Index to Financial Statements............ F-1
</TABLE>
7,118,181 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
June ____, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Texas Business Corporation Act (the "TBCA"), a Texas corporation
may in general indemnify a director or officer who was, is or is threatened to
be made a named defendant or respondent in a proceeding by virtue of his
position in the corporation if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, in the case of criminal proceedings, had no reasonable cause to
believe his conduct was unlawful. Further, a Texas corporation may indemnify a
director or officer in an action brought by or in the right of the corporation
only if such director or officer was not found liable to the corporation, unless
or only to the extent that a court finds him to be fairly and reasonably
entitled to indemnity for such expenses as the court deems proper, within
statutory limits.
The Registrant's Restated Articles of Incorporation, as amended, provide
that each person who (i) is or was a director, officer, employee or agent of
Registrant or (ii) is or was serving at the request of Registrant as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, or other enterprise or employee benefit plan (including
the heirs, executors, administrators or estate of such person) shall be
indemnified by the Registrant to the fullest extent that a corporation is
required or permitted to grant indemnification to such person under the TBCA.
Reasonable expenses incurred by a director, officer, employee or agent of the
Registrant, who was, is or is threatened to be made a named defendant or
respondent in a proceeding shall be paid or reimbursed by the Registrant, in
advance of the final disposition of the proceeding, to the maximum extent
permitted under the TBCA.
Additionally, Registrant's Restated Articles of Incorporation, as amended,
eliminate in certain circumstances the monetary liability of directors of
Registrant for an act or omission in the director's capacity as a director. This
provision does not eliminate or limit the liability for (i) a breach of a
director's duty of loyalty to Registrant or its shareholders; (ii) an act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of the law; (iii) a transaction from which the director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; (iv) an act or omission for which the
liability of the director is expressly provided for by statute; or (v) an act
related to an unlawful stock repurchase or payment of a dividend.
The above discussion of the Registrant's Restated Articles of
Incorporation, as amended, and Bylaws and of the TBCA is not intended to be
exhaustive and is qualified in its entirety by the Restated Articles of
Incorporation, as amended, and Bylaws and the TBCA.
The Registrant carries directors' and officers' liability insurance which
insures Registrant's directors and officers against liability for any "wrongful
act" arising out of their position, and which is not reimbursable under the
Registrant's Bylaws or which, if reimbursable, Registrant has not paid or is
unable to pay. These provisions of the policy pertaining to officers and
directors are also subject to several exclusions, including losses covered under
other forms of insurance, losses occasioned by violations of governmental
regulations and ordinances, losses for which insurance would be against public
policy and others recited therein.
The Registrant has entered into an Indemnification Agreement with each of
its directors to provide indemnification for expenses incurred by such director,
by reason of the fact that he is a director, in connection with certain lawsuits
or proceedings. To be eligible for such indemnification, the director must have
acted in good faith in a manner he reasonably believed to be in or not opposed
to the best interests of the Registrant, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Additionally, the Registrant has agreed to indemnify each director against any
amount which such director is legally obligated to pay relating to or arising
out of any claim against such director because of any act, failure to act or
neglect or breach
II-1
<PAGE>
of duty, including any actual or alleged error, misstatement or misleading
statement, which such director commits, suffers, permits or acquiesces in
while acting in his capacity as a director or officer of the Registrant, or,
at the request of the Registrant, as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<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)
2.7 Revolving Line of Credit Agreement dated March 22, 1999(7)
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Warrant Agent Agreement(1)
3.4 Form of Precept Class A Warrant Certificate(1)
3.5 Form of Precept Class A Common Stock Certificate(1)
3.6 Form of Rights Agreement between Precept and Continental Stock
Transfer & Trust Co.(1)
3.7 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)
II-2
<PAGE>
10.7 Precept 1998 Stock Incentive Plan(1)
10.8 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)
10.9 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)
10.10 Separation Agreement and General Release, dated July 20, 1998,
by and among Precept Business Services, Inc. and Michael
Margolies(7)
21 Precept Subsidiaries(8)
23.1 Consent of Ernst & Young LLP(8)
27.1 Financial Data Schedule(9)
</TABLE>
- -------------------
(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) Previously filed as an exhibit to the Company's Form 8-K filed on
April 13, 1999.
(8) Filed herewith.
(9) Previously filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended March 31, 1999.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act
of 1933;
(ii) to reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and
(iii) to include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
Notwithstanding the foregoing, any increase
or decrease in volume of securities offered
(if the total dollar value of securities
offered would not exceed that which was
registered) and any deviation from the low
or high end of the estimated maximum
offering range may be
II-3
<PAGE>
reflected in the form of prospectus filed
with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes
in volume and price represent no more
than a 20% change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table
in the effective registration statement;
(2) that, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) to remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other Items of the applicable form.
(d) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of
the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, in the City of Dallas, State of Texas, on June 15, 1999.
PRECEPT BUSINESS SERVICES, INC.
By: /s/ Douglas R. Deason
------------------------------
Douglas R. Deason
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Douglas R. Deason and William W. Solomon,
Jr. his true and lawful attorneys-in-fact, each acting alone, with full powers
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes, each acting alone, may lawfully do
or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, the
registration statement was signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Darwin Deason Director and Chairman of the Executive June 15, 1999
- -------------------------------- Committee of the Board
Darwin Deason
/s/ Douglas R. Deason President, Chief Operating Officer and June 15, 1999
- -------------------------------- Director (Principal Executive Officer)
Douglas R. Deason
/s/ William W. Solomon, Jr. Chief Financial Officer and Director June 15, 1999
- -------------------------------- (Principal Financial and Accounting Officer)
William W. Solomon, Jr.
/s/ J. Livingston Kosberg Director June 15, 1999
- --------------------------------
J. Livingston Kosberg
/s/ Sheldon I. Stein Director June 15, 1999
- --------------------------------
Sheldon I. Stein
/s/ Robert Bazinet Director June 15, 1999
- --------------------------------
Robert Bazinet
/s/ J. D. Greco Director June 15, 1999
- --------------------------------
J. D. Greco
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<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)
2.7 Revolving Line of Credit Agreement dated March 22, 1999(7)
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Warrant Agent Agreement(1)
3.4 Form of Precept Class A Warrant Certificate(1)
3.5 Form of Precept Class A Common Stock Certificate(1)
3.6 Form of Rights Agreement between Precept and Continental Stock
Transfer & Trust Co.(1)
3.7 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 1998 Stock Incentive Plan(1)
10.8 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)
<PAGE>
EXHIBIT DESCRIPTION
10.9 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)
10.10 Separation Agreement and General Release, dated July 20, 1998,
by and among Precept Business Services, Inc. and Michael
Margolies(7)
21 Precept Subsidiaries(8)
23.1 Consent of Ernst & Young LLP(8)
27.1 Financial Data Schedule(9)
</TABLE>
- -------------------
(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) Previously filed as an exhibit to the Company's Form 8-K filed on
April 13, 1999.
(8) Filed herewith.
(9) Previously filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended March 31, 1999.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PRECEPT BUSINESS SERVICES, INC.
Precept Business Products, Inc.
Precept Holdings, Inc.
Precept Transportation Services, LLC
Wingtip Couriers, Inc.
Relay Couriers, Inc.
Precept Transportation Services of Texas, Inc.
Transportation Systems Corporation
Shortway River Rouge, Inc.
Jetport, Inc.
Infographix, Inc.
MBF Corporation
Creative Acquisition Corporation
Precept Acquisition Corporation
Garden State Acquisition Corporation
Precept Transportation of New England, Inc.
Precept Financial Group, Inc.
Precept Property Management, Inc.
ACS Municipal Brokers, Inc.
ACS Capital, Inc.
Mail/Source, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 23, 1998, except for Note 15, as to which the
date is June 9, 1999, in the Post-Effective Amendment No. 1 to the Registration
Statement (Form S-4 No. 333-42689) and related Prospectus of Precept Business
Services, Inc. for the Registration of 7,118,181 shares of its common stock.
/s/ Ernst & Young
Dallas, Texas
June 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 510,476
<SECURITIES> 0
<RECEIVABLES> 22,752,049<F1>
<ALLOWANCES> 1,395,000
<INVENTORY> 5,597,938
<CURRENT-ASSETS> 32,609,371
<PP&E> 7,530,651
<DEPRECIATION> 6,090,974
<TOTAL-ASSETS> 80,877,234
<CURRENT-LIABILITIES> 26,330,035
<BONDS> 0
0
0
<COMMON> 86,217
<OTHER-SE> 24,784,102<F2>
<TOTAL-LIABILITY-AND-EQUITY> 80,877,234
<SALES> 121,865,284
<TOTAL-REVENUES> 121,865,284
<CGS> 80,484,287
<TOTAL-COSTS> 130,600,326
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,856,595
<INCOME-PRETAX> (10,591,637)
<INCOME-TAX> (1,531,986)
<INCOME-CONTINUING> (9,059,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,059,651)
<EPS-BASIC> (1.10)
<EPS-DILUTED> (1.10)
<FN>
<F1>Amount represents net accounts receivable.
<F2>Amount includes additional paid-in capital, retained earnings, and treasury
stock.
</FN>
</TABLE>
