<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-90101
PROSPECTUS
------------------------
1,748,384 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A COMMON STOCK
------------------
Certain of our shareholders listed under "Principal and Selling
Shareholders" on pages 42-43, below, are offering and selling up to 1,348,384
shares of our Class A Common Stock under this Prospectus. The selling
shareholders acquired the shares in connection with certain of our recent
acquisitions.
Some or all of the selling shareholders expect to sell their shares. The
selling shareholders may offer their shares through public or private
transactions, on or off the Nasdaq SmallCap 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.
In addition, this Prospectus covers the issuance of up to 400,000 shares,
which we may issue from time to time to satisfy contingent issuance obligations
arising from acquisitions that we have completed over the last two years. The
parties to whom such shares will be issued will be identified in a prospectus
supplement to be filed upon share issuance.
Our Class A Common Stock is quoted on the Nasdaq SmallCap Market under the
symbol "PBSI". On November 8, 1999, the closing sale price of the Class A Common
Stock was $3.88 per share.
------------------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISK. BEFORE YOU INVEST, YOU
SHOULD CONSIDER CAREFULLY THE "RISK FACTORS" ON PAGE 7.
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 November 12, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Where You Can Find More Information......................... 2
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Use of Proceeds............................................. 13
Dividend Policy............................................. 14
Recent Sales of Unregistered Securities..................... 14
Price Range of Common Stock................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 25
Management.................................................. 33
Certain Relationships and Related Transactions.............. 40
Principal and Selling Shareholders.......................... 42
Description of Securities................................... 44
Shares Eligible for Future Sale............................. 49
Plan of Distribution........................................ 49
Legal Matters............................................... 50
Experts..................................................... 50
Index to Financial Statements............................... F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational reporting requirements of the Exchange
Act and in accordance therewith, 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 HEADING "RISK FACTORS" ON PAGE 7, 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 55 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 and 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 "preferred acquiror" in the business products distribution
and document management industries.
The business products industry is large and fragmented. We believe that
opportunities exist to strategically acquire participants in the industry and
that our principal competitors are direct manufacturers and independent
distributors of business products. We also believe that the market for the
business products we distribute is in excess of $20 billion annually with the
top 100 independent distributors
3
<PAGE>
representing $1.6 billion annually, or 8.0% 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.
We believe that similar strategic acquisition possibilities exist in the
corporate transportation services industry. We believe that the chauffeured
vehicle service industry, in particular, presents an attractive opportunity for
strategic acquisitions. 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 products 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, 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, (6) on May 13, 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,
and (7) on September 20, 1999, we acquired the common stock of Computer Forms &
Products, Inc. ("CF&P") a business products distribution company located in
North Carolina. 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.
4
<PAGE>
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.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered................................ 1,748,384 shares
Class A Common Stock outstanding as of November 8, 1999..... 9,161,753 shares
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 7, below.
5
<PAGE>
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, 1999. 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>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations data:
Total revenue............................ $164,099 $122,992 $115,963 $111,304 $93,397
Total operating expenses................. 170,444 119,080 113,361 109,452 90,665
-------- -------- -------- -------- -------
Operating income (loss).................. (6,345) 3,912 2,602 1,852 2,732
Interest and other expense............... 2,565 1,936 618 929 357
Income tax provision (benefit)........... (633) 790 828 16 356
-------- -------- -------- -------- -------
Net income (loss)........................ $ (8,277) $ 1,186 $ 1,156 $ 907 $ 2,019
======== ======== ======== ======== =======
Net income (loss) per share:
Basic.................................. $ (0.98) $ 0.18 $ 0.19 $ 0.15 $ 0.33
Diluted................................ $ (0.98) $ 0.18 $ 0.19 $ 0.15 $ 0.33
Weighted average shares:
Basic.................................. 8,462 6,480 6,089 6,071 6,116
Diluted................................ 8,462 6,599 6,089 6,071 6,116
<CAPTION>
AS OF JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Trade accounts receivable................ $ 19,792 $ 15,595 $ 14,235 $ 15,089 $13,115
Inventory................................ 4,815 5,133 3,225 2,621 3,062
Working capital.......................... 9,648 13,837 13,394 15,288 14,583
Property and equipment, net.............. 11,009 5,751 3,549 2,427 1,961
Intangible assets, net................... 43,368 19,558 5,040 4,774 2,290
Total assets............................. 86,143 56,487 37,292 39,740 31,745
Long-term debt........................... 37,138 20,085 7,821 5,397 1,128
Shareholders' equity..................... 28,928 22,002 16,102 19,059 18,846
</TABLE>
6
<PAGE>
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 past
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 37 businesses. Since the
end of our 1999 fiscal year, we have completed the acquisition of one business
products distributor and one transportation services company. 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 that 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;
7
<PAGE>
- 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;
- 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 37 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 September 1998; however, there can
be no assurance that we will be able to integrate all of the companies acquired
since September 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 acquisition 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
8
<PAGE>
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 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 has not been established by
independent appraisals, but generally has 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.
9
<PAGE>
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 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 October 15, 1999, we had approximately $38.0 million outstanding under the
credit facility at an average annual interest rate of approximately 8.2% and
$2.0 million available.
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 profits
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.
10
<PAGE>
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;
- 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 these
broad market fluctuations continue, this 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 former 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. Doug Deason, President and Chief Operating Officer, has
assumed the role of Acting Chief Executive Officer.
CONTROL BY MANAGEMENT AND SHAREHOLDERS
Our officers and directors beneficially own approximately 41% of the
outstanding shares of the Class A Common Stock and all of the Class B Common
Stock and control approximately 64% 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.
11
<PAGE>
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."
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.
As of November 8, 1999, there were 9,161,753 shares of Class A Common Stock
outstanding. In addition, as of October 7, 1999 we had outstanding warrants and
options to purchase 535,562 shares of Class A Common Stock. The resale of up to
approximately 1,348,384 of the 9,161,753 outstanding shares are registered
pursuant to this registration statement filed with the Securities and Exchange
Commission. 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 holders of approximately 976,000 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 541,342 of those 976,000
shares are registered by this registration statement. 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
This registration statement covers the issuance of 400,000 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
12
<PAGE>
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 may be 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 rendering the removal of the
incumbent management more difficult.
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
The principal market risk (i.e. the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is interest
rates on its debt. At November 8, 1999, we had $38.0 million of debt outstanding
under our revolving line of credit which provides for interest to be charged at
the prime rate or at a LIBOR rate plus a margin of 2.75%. Based on that level of
outstanding revolving line of credit, a 1.0% change in interest rate would
result in a $0.4 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.
The Company does not hold or issue derivative financial instruments for
speculation or trading purposes.
USE OF PROCEEDS
All net proceeds from the sale of 1,348,384 shares of Class A Common Stock
offered by the selling shareholders will go to the selling shareholders.
Accordingly, we will not receive any of the proceeds from the sale of shares of
Class A Common Stock offered by the selling shareholders.
13
<PAGE>
To the extent that we issue shares to satisfy contingent obligations which
may arise from prior acquisitions, we will not receive any cash proceeds.
DIVIDEND POLICY
We have not declared or paid any cash or other dividends on our common stock
and do not expect to pay any cash dividends for the foreseeable future. We
intend to retain earnings to reduce indebtedness and support our growth
strategy. As a holding company, the ability of the Company to pay dividends in
the future is dependent upon the receipt of dividends or other payments from its
principal operating subsidiaries. Any future determination to pay dividends will
be at the discretion of our Board of Directors and will depend upon, among other
factors, our results of operations, financial condition, capital requirements
and contractual restrictions.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal year 1999 and through the first quarter of fiscal 2000, we
issued 1,348,384 shares of unregistered Class A Common Stock and 3,200 shares of
Preferred Stock in connection with the acquisition of four businesses.
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 November
8, 1999, we had approximately 3,500 holders of record of our Class A Common
Stock. The closing sales price of the Class A Common Stock on November 8, 1999
was $3.88 per share. The following table sets forth, for the period indicated,
the high and low sales price of the Class A Common Stock.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1998 HIGH LOW
- ------------------------------- -------- --------
<S> <C> <C>
Quarter ended March 31, 1998 (from March 20, 1998).......... $36.77 $28.89
Quarter ended June 30, 1998................................. 30.64 15.54
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1999
- -------------------------------
<S> <C> <C>
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 ended June 30, 1999................................. 12.44 3.25
<CAPTION>
FISCAL YEAR ENDING JUNE 30, 2000
- --------------------------------
<S> <C> <C>
Quarter ended September 30, 1999............................ 7.88 3.00
Quarter ending December 31, 1999 (through November 8,
1999)..................................................... 4.50 3.31
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Our selected consolidated financial information from continuing operations
as of and for each of the five years in the period ended June 30, 1999 is
presented below. The information as of and for each of the four years in the
period ended June 30, 1999 was derived from the audited consolidated financial
statements of Precept. The consolidated financial information for the year ended
June 30, 1995 was derived from a combination of Precept's audited historical
consolidated financial statements for the year ended June 30, 1995 and the
unaudited historical financial statements for two acquired businesses for a
similar period. 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 through June 30, 1998 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Business products........................ $137,527 $113,536 $109,397 $105,464 $87,392
Transportation services.................. 26,572 9,456 6,566 5,840 6,005
-------- -------- -------- -------- -------
164,099 122,992 115,963 111,304 93,397
Cost of goods sold......................... 108,223 85,281 79,729 75,687 58,994
Sales commissions.......................... 18,740 15,075 14,615 13,786 11,805
Selling, general and administrative
expenses................................. 25,315 16,417 17,229 18,302 18,350
Depreciation and amortization.............. 3,643 1,821 1,788 1,677 1,516
Goodwill write-down and other non-recurring
charges.................................. 14,283 -- -- -- --
Non-recurring acquisition costs............ 240 486 -- -- --
-------- -------- -------- -------- -------
Operating income (loss).................... (6,345) 3,912 2,602 1,852 2,732
Interest and other expense................. 2,565 1,936 618 929 357
-------- -------- -------- -------- -------
Income (loss) before income taxes.......... (8,910) 1,976 1,984 923 2,375
Income tax provision (benefit)............. (633) 790 828 16 356
-------- -------- -------- -------- -------
Net income (loss).......................... $ (8,277) $ 1,186 $ 1,156 $ 907 $ 2,019
======== ======== ======== ======== =======
Diluted net income (loss) per share........ $ (0.98) $ 0.18 $ 0.19 $ 0.15 $ 0.33
Weighted average shares outstanding........ 8,462 6,599 6,089 6,071 6,116
<CAPTION>
JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Trade accounts receivable................ $ 19,792 $ 15,595 $ 14,235 $ 15,089 $13,115
Inventory................................ 4,815 5,133 3,225 2,621 3,062
Working capital.......................... 9,648 13,837 13,394 15,288 14,583
Total assets............................. 86,143 56,487 37,292 39,740 31,745
Long-term debt........................... 37,138 20,085 7,821 5,397 1,128
Shareholders' equity..................... 28,928 22,002 16,102 19,059 18,846
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS" AND UNDER "FORWARD-LOOKING STATEMENTS" BELOW.
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 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 distributor companies 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 16 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 date of this Prospectus, we completed 37
acquisitions: 21 Business Products distribution companies and 16 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 June 30, 1999, we acquired two Transportation Services
companies which provide executive town car and limousine service primarily in
the tri-state New York metropolitan area with annual revenues of $6.8 million.
The aggregate consideration for these transactions amounted to $9.7 million,
paid $3.0 million in cash, $0.2 million in mandatorily redeemable preferred
stock, $3.2 million in assumed debt, and 597,038 shares of Class A Common Stock
with a fair market value of $3.3 million.
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 $1.9 million. The
aggregate consideration for this transaction amounted to $1.4 million, paid
$0.2 million in cash and $1.2 million in seller notes and debt assumed.
16
<PAGE>
In the quarter 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, $2.9 million in
the then current fair market value of 336,000 shares of Class A Common Stock,
and $4.4 million in assumed debt.
In the quarter 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 $2.1 million in assumed debt.
In the quarter ended March 31, 1998, we acquired substantially all of the
assets of 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 four 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, to the owners of the 25% minority interest in U. S.
Trucking 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 quarter 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 quarter 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
Except as noted above, 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 result 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 amortization
expense.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items from continuing operations as a
percentage of revenues for the fiscal years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Business products......................................... 83.8 % 92.3% 94.3%
Transportation services................................... 16.2 % 7.7% 5.7%
----- ----- -----
100.0 % 100.0% 100.0%
Operating expenses:
Cost of goods sold........................................ 65.9 % 69.3% 68.8%
Sale's commissions........................................ 11.4 % 12.3% 12.6%
Selling, general and administrative expenses.............. 15.5 % 13.3% 14.9%
Deprecation and amortization.............................. 2.2 % 1.5% 1.5%
Goodwill write down and other non-recurring charges....... 8.7 % -- --
Non-recurring acquisition costs........................... 0.2 % 0.4% 0.0%
----- ----- -----
Operating income (loss)..................................... (3.9)% 3.2% 2.2%
Interest and other expense:
Interest expense.......................................... 1.6 % 0.9% 0.5%
Other expense, net........................................ (0.1)% 0.7% 0.0%
----- ----- -----
1.5 % 1.6% 0.5%
----- ----- -----
Income (loss) before income tax provision (benefit)......... (5.4)% 1.6% 1.7%
Income tax provision (benefit).............................. (0.4)% 0.6% 0.7%
----- ----- -----
Net income (loss)........................................... (5.0)% 1.0% 1.0%
===== ===== =====
</TABLE>
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
REVENUE for 1999 increased by $41.1 million, or 33.4%, from $123.0 million
in 1998 to $164.1 million in 1999. In 1999, Business Products revenue increased
by $24.0 million or 21.1% and Transportation Services revenue increased by $17.1
million or 181.0%. 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 $26.2 million and internal growth of $3.6 million or
5.6%. The internal growth excludes the effect of the lost revenue from MBF. Of
the total increase in Transportation Services revenue in 1999, $16.5 million was
due to the acquisition of 11 transportation companies in 1999 and 1998.
COST OF GOODS SOLD for 1999 increased by $22.9 million, or 26.9%, from $85.3
million in 1998 to $108.2 million in 1999. Cost of goods sold for Business
Products increased by $12.0 million of which approximately $19.6 million was due
to companies acquired after the beginning of fiscal year 1998. Cost of goods
sold from internal growth decreased by $7.6 million due to the effect in 1999 of
the Company's improved purchasing power and the mix of products sold.
Transportation Services cost of goods sold increased by $11.0 million due
primarily to the 11 transportation companies acquired since the beginning of
1998. As a percentage of revenue, cost of goods sold for 1999 decreased by 3.4%
from 69.3% in 1998 to 65.9% in 1999. This decrease was caused primarily by the
acquisition of business products companies in less price competitive markets, by
the mix of products sold, by improved purchasing power and by the higher
relative effect of the Transportation Services Division.
SALES COMMISSIONS increased by $3.6 million, or 23.8%, in 1999, from $15.1
million in 1998 to $18.7 million in 1999 due primarily to the increased level of
Business Products revenue. Sales commissions for the Business Products division
increased from 13.2% 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
18
<PAGE>
dollar amount of gross profit in 1999. Total commission expense decreased by
0.9% from 12.3% in 1998 to 11.4% in 1999 because the Transportation Services
division contributed a higher proportion of consolidated revenue in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $8.9 million or
54.2% in 1999 from $16.4 million in 1998 to $25.3 million in 1999, which
included increased expenses of $5.2 million from business products and
transportation services companies acquired. As a percentage of revenue, selling,
general and administrative expenses have increased by 2.2% from 13.3% in 1998 to
15.5% in 1999. This percentage increase in selling, general and administrative
expense results primarily from the companies acquired in 1999 and 1998 and the
management and organization infrastructure put in place to control and manage
the Business Products Division.
DEPRECIATION AND AMORTIZATION EXPENSE increased $1.8 million in 1999 from
$1.8 million in 1998 to $3.6 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 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.
We expect that the revenue, earnings, and cash flow generated by the Ford
contract will be replaced during fiscal year 2000 by contributions from other
town car and limousine companies that 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 and Mail/Source, Inc. resigned to join a competitor,
Peregrine, that had been founded and funded by the same individuals. In response
to this departure, we are in litigation with Peregrine and the former officers
of MBF for damages. We continue to pursue this litigation for damages while also
discussing potential financial settlements. During the fourth quarter of 1999,
we entered into financial settlement discussions that were not productive due to
Peregrine's unwillingness to agree to a financial settlement on terms we
considered reasonable. As a result of this departure, we have closed and are in
the process of 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
recorded $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 have wound down
and closed the sales offices and warehouses of MBF, our revenue was negatively
affected by approximately $4.2 million during the fourth quarter of 1999. We
expect that the negative impact from MBF will be at least as significant during
the first three quarters of 2000. In addition, our annual revenues will be
negatively affected by approximately $16 million due to the departure of
19
<PAGE>
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 on 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 $0.8 million based on health claim payment
trends during the third quarter of 1999. Other reserves and liabilities
increased by $1.1 million to address various matters and events that occurred
during the third quarter of 1999.
INTEREST EXPENSE increased by $1.6 million or 130.6% during 1999, from $1.2
million in 1998 to $2.8 million in 1999 principally due to additional debt
incurred by us in 1998 and 1999 to finance our business acquisitions.
INCOME TAX BENEFIT is provided at a 7.1% effective benefit rate in 1999
compared to a 40.0% tax provision rate in 1998. The change in the effective tax
rate for 1999 is due primarily to the non-deductibility of the goodwill
write-down and goodwill amortization expense as well as changes in the valuation
allowance.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS decreased by $9.5 million in
1999, from $1.2 million in 1998 to $(8.3) million in 1999, due to the reasons
described above. Diluted earnings per share decreased $1.09 from $0.11 in 1998
to $(0.98) in 1999. Excluding the goodwill write-down and non-recurring charges
recorded during the third quarter of 1999, diluted net income per share
increased by $0.22 per share to $0.33 per share in 1999. Diluted earnings per
share for 1999 will not equal 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.
20
<PAGE>
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 million 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.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH FLOWS FROM OPERATING ACTIVITIES. During fiscal year 1999, we
generated $13.4 million in cash from operating activities. The increase in cash
flow from operating activities from 1998 to 1999 is due to the increased size of
the Company, improved results from operations and a reduction in working
capital. In fiscal year 1998, the Company used $4.4 million in cash from
operations as compared to $0.7 million generated in 1997. During 1998, increases
in accounts receivable, inventory and other current assets were funded with
borrowings under the Company's revolving line of credit. During fiscal year
1998, the Company increased its net income due to the benefits of companies
acquired in the previous two years and the reduction of the losses from
discontinued operations. During fiscal year 1997, the cash flow generated by
Business Products' and Transportation Services' continuing operations was
largely offset by the cash needs of the discontinued operations of two
subsidiaries, Precept Builders, Inc. ("Builders") and Precept Holdings, Inc.
("Holdings"). The Company used its revolving line of credit to supplement any
cash needs that were not provided by operating activities. During 1997, cash
flow from operations was significantly reduced by the levels of accounts
receivable and costs in excess of billings on uncompleted contracts for one of
its discontinued operations. The working capital of continuing operations was a
relatively constant $13.0 million to $14.0 million during this period.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During fiscal year 1999, we used
$25.7 million of cash for investing activities. We used $24.8 million of cash to
acquire businesses during fiscal year 1999. We also acquired $2.1 million of
equipment and generated $1.1 million from the sale of the net assets of our
discontinued operations. During fiscal year 1998, Precept used $5.5 million in
cash for investing activities as compared to $3.1 million in 1997. In 1998, the
Company used $7.1 million in cash to purchase five businesses, including paying
contingent consideration of $0.1 million and paying direct acquisition costs of
$1.7 million incurred in connection with eight of its business acquisitions.
During 1998, the Company acquired eight businesses, six of which were accounted
for following the purchase method and two of which were accounted for following
the pooling method. In 1998, the Company spent $0.9 million for equipment. In
addition, discontinued operations generated $2.4 million in cash primarily from
the sale of the Company's interest in a ranch and the sale of a condominium.
During 1997, the Company acquired two businesses for $1.1 million and paid $0.1
million for contingent consideration. In addition, the Company
21
<PAGE>
spent $1.9 million to acquire property and equipment, primarily for information
systems equipment, warehouse equipment, town cars and office furniture and
fixtures.
NET CASH FLOWS FROM FINANCING ACTIVITIES. During fiscal year 1999, we
generated $10.1 million of cash by financing activities. We borrowed a net
amount of $15.1 million under the Company's revolving line of credit and used
such amount primarily to finance business acquisitions. During fiscal 1999, we
repaid $1.3 million of long-term debt, we repaid $2.7 million of capitalized
lease obligations and we purchased $1.0 million of treasury stock. In fiscal
year 1998, $9.7 million of cash was generated by financing activities as
compared to $1.7 million of cash generated by financing activities in fiscal
year 1997. During 1998, Precept increased its outstanding revolving line of
credit balance by approximately $8.7 million in order to finance acquisitions.
In addition, the Company financed $0.3 million of its equipment purchases with
capitalized lease obligations and collected $0.8 million in notes receivable
from shareholders for prior stock purchases. During 1997, the Company increased
its revolving line of credit by approximately $1.8 million in order to finance
its acquisitions of property and equipment and its acquisitions of businesses.
The Company also borrowed $0.3 million in long-term debt to finance equipment
purchases. During fiscal year 1997, one of the Company's acquired subsidiaries
distributed dividends of $0.3 million to the subsidiary's former shareholder.
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, we anticipate a use of approximately $1.0 million in cash
principally during fiscal year 2000. During the fourth quarter of fiscal year
1999, we used $0.7 million of cash to settle certain of these non-recurring
charges.
Management believes that the current levels of operations and the cash flow
from such operations and the amount available for borrowing under the existing
revolving line of credit agreement of $2.0 million will be adequate for fiscal
year 2000 to make required payments of principal and interest on our
indebtedness, to fund anticipated capital expenditures of approximately $3.0
million for fiscal year 2000, 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 $40.0
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. At
June 30, 1999, we had borrowed $31.1 million from the banking group and we had
$8.9 million available to borrow under the line of credit agreement. We borrowed
such amounts at an average annualized interest rate of 8.2%.
In order for us to continue to acquire companies in the business products
distribution and the transportation services industries at the same rate as we
have acquired companies since March 1998, we will need to obtain additional
sources of debt or equity capital. As of October 15, 1999, we have borrowed
$38.0 million of the $40.0 million available under the existing line of credit
agreement. Should we not be able to locate additional lenders or equity
partners, we will be required to limit significantly the rate at
22
<PAGE>
which we acquire companies. We do not believe that this current financial
condition will hinder our plans for internal growth during fiscal year 2000.
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 any 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. We believe that our existing management information systems
are year 2000 compliant, except for certain electronic commerce matters, as
described more fully in the next paragraph. 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. Our management had previously identified
two subsidiaries that had key information systems that were not year 2000
compliant. At the first subsidiary, we have integrated their operations and
information needs into Precept's automated distribution information system. For
the second subsidiary, we have made the necessary programming changes to insure
that the operating system will be year 2000 compliant.
We conduct a certain portion of our business operations, in particular sales
orders, purchasing, billing and shipping, using electronic means of
communication outside of 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, 2000. The Company has not yet assessed the effects that
this statement will have on its results of operations, financial position, or
cash flows. We intend to adopt the disclosure requirements of this standard
during our fiscal year ending June 30, 2001.
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" located elsewhere in 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-
23
<PAGE>
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:
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 2000 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 fiscal 1998, the
losses from discontinued operations consisted principally of the losses from
Holdings, 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. These transactions were all negotiated on an arms' length basis and at
prices believed to represent the fair market value of the assets sold.
24
<PAGE>
BUSINESS
Precept is a business services outsourcing supplier. 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, and provides top quality custom and
stock business products to companies of all sizes throughout the United States.
Precept also operates various corporate transportation services companies
focusing on chauffeured town car and limousine services. The Company is
organized in two divisions: Business Products and Transportation Services.
Precept was founded in 1988 as a regional business products distributor in
Dallas, Texas as a subsidiary of Affiliated Computer Services, Inc. ("ACS") and
has grown significantly 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 U. S. Transportation Systems, Inc. ("USTS"). We presently operate
from approximately 55 locations throughout the United States.
ACQUISITIONS
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
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
changed its name to Transportation Equities Incorporated, became a liquidating
trust and was supposed to be liquidated and dissolved within one year. 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. ("U.S. Trucking"), a long-haul trucking
business, which we had acquired from USTS on March 18, 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. ("InfoGraphix"), 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 ("MBF"), a Louisiana corporation. MBF 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, a Maine corporation. Creative
operates a business providing printed business forms, distribution services and
information solutions to business customers throughout the New England states
and has 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. ("Southern"), a South Carolina corporation. Southern is a Florence,
South Carolina-based provider of printed products, distribution services and
information solutions.
25
<PAGE>
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 ("Garden State"), a New Jersey-based provider of corporate
transportation services.
ACQUISITION OF AMBASSADOR. On May 13, 1999, through mergers with our wholly
owned subsidiary, we acquired Ambassador Limousine Services, Inc. and Ambassador
Transportation Services, Inc., both of which are Connecticut corporations. We
also acquired the assets of Ambassador Executive Coaches, L.L.C., a Connecticut
limited liability company. The entities and businesses acquired are jointly
referred to as Ambassador. The Ambassador companies provide executive town car
and limousine services primarily in the tri-state New York area.
ACQUISITION OF CF&P. On September 20, 1999, we acquired the common stock of
CF&P, a business products distribution company located in North Carolina. CF&P
serves business customers in North Carolina.
OTHER ACQUISITIONS. In fiscal 1999, we also acquired two additional
Business Products companies and two additional Transportation Services
companies.
RECENT DEVELOPMENTS
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, 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
Document management services provided by the Company include the
distribution of 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 and services to our customers while reducing overall
procurement costs and providing a high level of customer service, (2) to
continue to expand our transportation operations, emphasizing executive town car
and limousine services, particularly in the tri-state New York area and the
Northeastern United States, and to pursue selected acquisition opportunities
focusing on the 30 to 40 largest population centers in the United States, and
(3) to continue our expansion in our businesses through strategic acquisitions
and internal growth.
26
<PAGE>
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. We presently plan to continue to
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 we 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. Management also
believes we are the "preferred acquiror" in the business products distribution
and document management industries.
The two industries in which we operate are large and fragmented. We believe
that opportunities exist to strategically acquire 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 that the market for business products is in excess
of $20 billion annually with the top independent distributors representing $1.6
billion annually, or approximately 8.0% of the estimated 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 strategic acquisition 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 strategic acquisitions. Based
on industry data, our management estimates that in 1998 the chauffeured vehicle
service industry represented approximately $4.0 billion in revenues, consisted
of at least 3,000 companies, was highly fragmented and no single company
controlled more than 2% of the market.
ACQUISITION STRATEGY
BUSINESS PRODUCTS
We believe numerous factors exist which create a favorable environment and
significant opportunities for continued strategic acquisitions in 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 competitors. We base this belief on management's track record in
previous growth and strategic acquisition efforts 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
strategic acquiror of the business products distribution and document management
industry. Furthermore, we believe that our ability to attract and acquire
companies as a preferred acquiror 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
27
<PAGE>
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.
Over the years we have 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 paid for acquisitions has typically involved a combination of
cash, common stock, preferred 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, many of whom
remain as managers and employees of the acquired businesses.
TRANSPORTATION SERVICES
We have identified the corporate and contract transportation services
industry as a second segment that has significant strategic acquisition
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 continuing strategic
acquisitions in 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. All 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, therefore, will provide
broader product availability 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 that 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, we will
provide for the design, production, inventorying, 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.
28
<PAGE>
OPERATING STRATEGY
Our operating strategy for Business Products over the next three years
focuses primarily on the following objectives:
- Continue integration efforts related to acquired businesses.
- Increase product development and awareness among our sales force.
- Improve product pricing and availability with our vendors.
- Continue to grow revenue aggressively with business customers while
improving profitability.
- Continue information systems enhancements and improvements.
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 stop 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 providing 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 inform
suppliers more efficiently 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 customer-specific catalog with
increased utility as opposed to one catalog for all or many customers.
To accomplish the above, we have developed the following capabilities:
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 a significant amount of 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
29
<PAGE>
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 no single customer
accounted for more than 10% of total sales during fiscal years 1999, 1998, and
1997. We rely primarily 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 47 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 with commissions
based primarily on the level of gross profit.
MANAGEMENT INFORMATION SYSTEM. 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.
A major development during fiscal 1999 within the Business Products
Divisions involved the introduction of PRECEPTONLINE-TM-, a fully integrated
Internet based electronic forms and order management system. A number of key
clients, including Nieman-Marcus, Bristol Hotels and ACS, are already using this
system. We believe it will play a key role in Precept's future success.
PRECEPTONLINE-TM- was 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 our current management information systems are Year 2000 compliant. 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.
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, New Jersey and Connecticut 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, tri-state New York and
Cincinnati/Northern Kentucky markets provide services under
30
<PAGE>
the names Precept Transportation Services of Texas, Garden State Limousine,
Westchester Express, Ambassador Limousine, AAA Guaranteed On Time Limousine,
Crown Limousine and Adams-Barr 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
located in the tri-state New York area, Dallas/Fort Worth and
Cincinnati/Northern Kentucky markets are performed for corporate customers and
the general public in those metropolitan markets. We operate a fleet of
approximately 300 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 750 to
1000 regular Fortune 2000 and mid-size business customers are served by the
three fleets and 500 employees, drivers and independent contractors. There is
significant competition in the Dallas/Fort Worth, New York and Cincinnati
geographic markets.
COURIER AND DELIVERY SERVICES. Courier and delivery services are 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 approximately 90 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 a number of 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 18 vehicles and 50 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 to achieve 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. Competitors include Moore Business Forms, Reynolds & Reynolds,
Standard Register, Wallace, Workflow Management and Global DocuGraphix. In the
transportation services industry, our principal competitors in the chauffeured
vehicle service segment are Carey Limousine, Music Express, Boston Coach and
Davel Limousine. Our primary competitors in the contract transportation services
segment are Coach USA and Laidlaw Transportation.
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, New Jersey, Dallas and Cincinnati; the U.S. Department
of Transportation; and the Federal Highway Administration, as well as
31
<PAGE>
other state and local authorities. Each of these agencies regulates various
aspects of licensing, permitting and operations of our transportation services.
EMPLOYEES
As of August 31, 1999, we had 870 full-time employees, of whom 261 are
engaged in sales, sales support and warehouse activities, 522 directly provide
or support transportation services and 87 are administrative, information
systems and management employees. Two of our transportation livery services
businesses employ 55 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") in the United States
District Court for the Southern District of Florida, for approximately $5.0
million in past due invoices. Alden denied that it received any products and
refused to pay us on that basis. Alden and its affiliate, John Alden Systems
Corp. 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
sought approximately $9.0 million in damages. During the third quarter of fiscal
year 1999, the Company learned that an insurance company for Alden paid $5.0
million to Alden for damages. Also during the quarter, John Alden Insurance
dismissed its litigation claims against the individuals involved in this matter.
Precept, Alden and certain other parties to the litigation and an insurance
carrier agreed to a settlement whereby all claims have been dismissed and
Precept has received $0.2 million.
MBF AND PEREGRINE LITIGATION. On February 16, 1999, substantially all of
the sales force, management and employees of MBF and Mail/Source, Inc. joined
Peregrine Corporation ("Peregrine"), a competitor that was founded and funded by
these same individuals. During the third quarter of fiscal year 1999, Precept
sued Peregrine and seven former officers of MBF for damages. This lawsuit was
filed in the Judicial District, Ouachita Parish, Division C, State of Louisiana.
The Company and Peregrine entered into negotiations to settle this litigation;
however, a settlement that was satisfactory to the Company and Peregrine was not
reached. We have resumed the litigation efforts against Peregrine and the seven
former officers of MBF and we intend to aggressively pursue a satisfactory
resolution in our favor.
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.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our directors
and officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Darwin Deason........ 59 Director and Chairman of the Executive Committee of the Board
Douglas R. Deason.... 37 President, Chief Operating Officer and Director
William W. Solomon, Executive Vice President, Chief Financial Officer,
Jr. ............... 43 Treasurer, Assistant Secretary and Director
D. Paul Cabra........ 54 President, Precept Business Products, Inc.
Ronald P. Sorci...... 49 President, Precept Transportation Services, L.L.C.
J. Livingston
Kosberg............ 62 Director
Sheldon I. Stein..... 46 Director
Robert Bazinet....... 58 Director
J.D. Greco........... 57 Director
Peter Trembath....... 47 Senior Vice President and General Counsel and Secretary
</TABLE>
DARWIN DEASON has served as a Director since our formation in 1988 and since
April, 1999 has served as Chairman of the Board of Directors. Mr. Deason also
serves as Chairman of the Executive Committee of the Board of Directors.
Mr. Deason is also currently the Chairman of the Board and Chief Executive
Officer of Affiliated Computer Systems, Inc. ("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. Mr. Deason joined Precept in 1991 and from 1993 through 1995 served
as Executive Vice President of an operating subsidiary of Precept. For the seven
years immediately prior to joining 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. has served as Executive Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary of Precept since June 1998.
Prior to that, Mr. Solomon served as Vice President, Corporate Controller and
Assistant Secretary of American Pad & Paper Company, a publicly traded company,
from September 1996 to June 1998. From 1992 to 1996, Mr. Solomon was a Senior
Manager with BDO Seidman LLP and Price Waterhouse LLP. From 1990 to 1992,
Mr. Solomon was Chief Financial Officer and Controller at Eagle Hardware &
Garden, a publicly traded home improvement retail company. From 1978 through
1990, Mr. Solomon was an employee of Ernst & Young LLP.
D. PAUL CABRA 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 for Precept
from August 1997, as the Senior Vice President of Sales for Precept's Central,
South and Eastern regions from 1993 to August 1997, and as Branch Manager from
June 1991 to 1993. He was the Chief Executive Officer and sole shareholder of
CABCO Business Forms, Inc., a business products distributor, which was acquired
by Precept in 1991. Mr. Cabra has over 18 years experience in the business
products industry.
RONALD P. SORCI 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
33
<PAGE>
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.
J. LIVINGSTON KOSBERG has served as Chairman of the Board of U.S. Physical
Therapy, Inc. ("U.S. Physical Therapy") 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 Career Staff 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 is a Senior Managing Director and oversees the U.S.
Regional Investment Banking Operations of Bear Stearns & Co., Inc. 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, Fresh America Corp., Home Interiors &
Gifts, Inc., The Men's Wearhouse, Inc. and Tandycrafts, Inc. He is also a
Trustee of the Greenhill School in Dallas and a Fellow of Brandeis University.
ROBERT BAZINET has served as one of our Directors since 1998. He was
previously President of Creative, 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 a Director of Precept since 1998. He was previously
President of MBF, 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.
PETER H. TREMBATH, has served as Senior Vice President, General Counsel and
Secretary of Precept since July 1999. From November, 1993 to December, 1998,
Mr. Trembath served as Vice President, Secretary and General Counsel of Benson
Eyecare Corporation and then its successor, Lumen Technologies, Inc. (f/k/a BEC
Group, Inc.), both of which were publicly held corporations. He also served from
March, 1997 to December, 1998 as Vice President, Secretary and General Counsel
of Bolle, Inc., which was spun off publicly by Lumen Technologies in March of
1997. From January, 1999 through June, 1999, Mr. Trembath was engaged in the
private practice of law and acted as an independent consultant. Prior to
November, 1993, Mr. Trembath served for a number of years as Vice President,
Secretary and General Counsel of BMC Industries, Inc., a publicly held
corporation. Mr. Trembath received his B.A. (with highest honors and high
distinction), M.A., and J.D. (cum laude) degrees from the University of
Michigan.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Board of
Directors. The Board meets periodically on a scheduled basis to review
significant developments affecting the Company and to act on matters requiring
Board approval. It may from time to time also hold special meetings or act by
unanimous written consent in lieu of a meeting when an important matter requires
Board action. The Board of Directors met one time and acted four times by
written consent during the fiscal year ended June 30, 1999.
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
34
<PAGE>
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, 1999 are
described below.
The functions performed by the Audit Committee include: recommending to the
Board of Directors selection of the Company's independent accountants for the
ensuing year; reviewing with the independent accountants and management the
scope and results of the audit; reviewing the independence of the independent
accountants; reviewing the independent accountants' written recommendations and
corresponding actions by management; and meeting with management and the
independent auditors to review the effectiveness of the Company's system of
internal controls. The committee currently is composed of Robert N. Bazinet and
J. Livingston Kosberg. The committee met one time during the 1999 fiscal year.
The Compensation Committee administers the Company's 1996 Stock Option Plan
and 1998 Stock Incentive Plan and reviews other matters regarding the
compensation of employees of the Company. The committee currently is composed of
Darwin Deason, J. Livingston Kosberg and Sheldon I. Stein. The committee met one
time during the 1999 fiscal year.
The function of the Executive Committee is to direct and manage the business
and affairs of the Company in the intervals between meetings of the Board of
Directors. The Executive Committee is empowered to act in lieu of the Board on
any matter except that for which the Board has specifically reserved authority
to itself and except for those matters specifically reserved to the full Board
pursuant to the Texas Business Corporation Act (the "TBCA"). The Executive
Committee currently comprises Darwin Deason (Chairman), J. Livingston Kosberg,
and Douglas R. Deason. The Executive Committee acted by written consent seven
times and did not meet during the 1999 fiscal year.
During fiscal year ended June 30, 1999, each director attended more than 75%
of the meetings of the Board of Directors and respective committees on which he
served.
DIRECTORS' COMPENSATION
Precept's directors, other than Darwin Deason, are not paid any cash
compensation for serving on the Board of Directors of Precept, although Precept
may in the future decide to pay directors' fees. Directors are reimbursed for
their travel expenses in connection with meetings. However, Messrs. Stein and
Kosberg have received grants, respectively, of 17,143 and 7,146 options under
the 1998 Stock Incentive Plan, in consideration of consulting services provided
to Precept and unrelated to their services as directors. For further information
regarding remuneration paid to Darwin Deason, see, "Certain Relationships and
Related Transactions", below.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to our Chief Executive
Officer and each of the Company's other executive officers serving at the end of
fiscal year ended June 30, 1999 whose salary and bonus exceeded $100,000
(collectively, the "Named Executive Officers").
35
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------- --------------------------------------- --------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP
FISCAL COMPENSATION AWARDS OPTIONS/ PAYOUTS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) (2) SARS (#) ($)
- ------------------------------ -------- ---------- --------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
David L. Neely................ 1999 300,000 -- -- -- -- --
Chairman and Chief 1998 241,500 362,250 -- -- -- --
Executive Officer (3) 1997 241,500 279,700 -- -- -- --
Douglas R. Deason............. 1999 250,000 250,000 -- -- -- --
President and Chief 1998 210,000 210,000 -- -- -- --
Operating Officer 1997 210,000 162,310 -- -- -- --
William W. Solomon, Jr.,...... 1999 140,000 105,000 -- -- 10,714 --
Executive Vice President, 1998 -- -- -- -- -- --
Chief Financial Officer, 1997 -- -- -- -- -- --
Treasurer and Asst.
Secretary
D. Paul Cabra, President,..... 1999 175,000 175,000 -- -- -- --
Precept Business Products, 1998 141,783 100,000 -- -- 28,571 --
Inc 1997 96,000 39,000 -- -- -- --
Ronald P. Sorci, President,... 1999 173,750 175,000 -- -- 28,571 --
Precept Transportation 1998 -- -- -- -- -- --
Services, LLC 1997 -- -- -- -- -- --
<CAPTION>
PAYOUTS
----------------
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION ($)
- ------------------------------ ----------------
<S> <C>
David L. Neely................ --
Chairman and Chief --
Executive Officer (3) --
Douglas R. Deason............. --
President and Chief --
Operating Officer --
William W. Solomon, Jr.,...... --
Executive Vice President, --
Chief Financial Officer, --
Treasurer and Asst.
Secretary
D. Paul Cabra, President,..... --
Precept Business Products, --
Inc --
Ronald P. Sorci, President,... --
Precept Transportation --
Services, LLC --
</TABLE>
- ------------------------
(1) None of the Named Executive Officers received personal benefits, securities
or property in excess of the lesser of $50,000 or 10% of such individual's
reported salary and bonus.
(2) Precept did not grant any restricted stock awards or SARs or long-term
incentive plan payouts to the Named Executive Officers during the fiscal
year ended June 30, 1999.
(3) Mr. Neely previously served Precept for a number of years in the indicated
positions. He resigned in April, 1999.
OPTIONS GRANTED AND EXERCISED DURING 1999 FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Except as indicated in the following table, Precept did not grant stock
options or stock appreciation rights (SARs) to any of the Named Executive
Officers during fiscal 1999:
OPTION/SAR GRANT TABLE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK PRICE APPRECIATION
SECURITIES OPTIONS/SARS FOR OPTION TERM
UNDERLYING GRANTED TO EXERCISE OR ------------------------------------------
OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION
NAME SARS GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ---------------- ---------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David L. Neely............. -0- -- -- -- -- --
Douglas R. Deason.......... -0- -- -- -- -- --
William W. Solomon, Jr..... 10,714 1.8% $14.88 Sept., 2003 $ 44,057 $ 97,331
D. Paul Cabra.............. 28,571 4.7% $14.88 Sept., 2003 $230,676 $259,551
Ronald P. Sorci............ 28,571 4.7% $14.88 Sept., 2003 $230,676 $259,551
</TABLE>
36
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Company's 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. The Committee members presently include
Darwin Deason, Sheldon I. Stein and J. Livingston Kosberg. Mr. Deason has
received remuneration from the Company during fiscal 1999 for his services as
Chairman of the Board, while Messrs. Stein and Kosberg are both independent
non-employee directors. See, "Executive Compensation and Other
Information--Directors' Compensation" and "Certain Relationships and Related
Transactions". During fiscal 1999, David L. Neely, the Company's former Chief
Executive Officer, was also a member of the Committee until his resignation in
April, 1999. 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 the Precept executive compensation
program is to attract and retain qualified, motivated executives and to closely
align their financial interests with both the short and long-term interests of
the Precept shareholders. The executive compensation program is intended to
provide 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 similar size and complexity.
The three principal components of the Precept executive compensation program
are base salary, annual incentive bonus opportunities, and stock options.
BASE SALARIES. Each executive officer's base salary is reviewed annually
and is subject to adjustment on the basis of individual, corporate, and business
unit performance, as well as competitive and inflationary considerations.
INCENTIVE BONUS. Incentive bonus payments for executive officers other than
the Chief Executive Officer and Chief Operating Officer are made at the end of
each fiscal year based upon the achievement of consolidated financial criteria
and business unit financial criteria, all of which are established informally by
the Board of Directors of Precept. Compensation for the Chief Executive Officer
and Chief Operating Officer of Precept consisted of a base salary and bonus
compensation. Bonus compensation 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 1999, Precept achieved 100% of such
measures. For fiscal year 1999, executive officers were eligible to receive
maximum bonuses of between 50% and 100% of salary provided certain financial
goals were met.
1998 STOCK INCENTIVE PLAN
In order to provide greater flexibility for incentive based compensation,
the Board of Directors and shareholders of Precept 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 Precept and any parent or subsidiary
of Precept as well as outside directors of Precept 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
37
<PAGE>
available for issuance under the 1998 Plan is currently 857,143. In fiscal 1999,
the Company granted an aggregate of 105,509 stock options to its officers an
directors under the 1998 Plan.
Precept's shareholders, at the next Annual Meeting of Shareholders, will be
asked to approve an amendment to increase the total number of shares of Class A
Common Stock that may be awarded to participants under the 1998 Plan by 800,000
shares, to a total of 1,657,413 shares. In connection with such amendment, the
1998 Plan would be amended to increase from 12.5% to 19.0% the total number of
shares of Class A Common Stock outstanding from time to time that (a) remain
available for issuance under the 1998 Plan, (b) are subject to existing grants
under the 1998 Plan, or (c) are subject to previously existing options under the
Company's prior 1996 Stock Option Plan (the "1996 Plan"). Precept is seeking
shareholder approval of the amended 1998 Plan in order to comply with the
requirements of Section 422 and Section 162(m) of the Internal Revenue Code (the
"Code") in order for compensation paid under the 1998 Plan to be deductible by
Precept irrespective of the $1.0 million limit in such Section. Shareholder
approval is also required by the Nasdaq Stock Market in order for shares of
Class A Common Stock issued to directors and officers under the 1998 Plan to be
listed for trading thereunder. In addition, the amended 1998 Plan includes
certain amendments, for which shareholder approval is not required and will not
be sought, to provide the Board of Directors greater flexibility in its
administration of the 1998 Plan, including granting the plan administrator
discretionary authority to determine whether and how existing options should be
adjusted in the event of major acquisitions, divestitures, mergers, changes of
control or other significant corporate events. These administrative amendments
will be effected whether or not the increase in shares reserved for issuance
under the 1998 Plan is approved by Precept's shareholders and will apply only to
option grants made after the effective date of the amendment.
Precept's management and Board of Directors believe that the proposed
increase in the number of shares available for grant under the 1998 Plan is
necessary in order to provide a sufficient number of shares of Class A Common
Stock to incentivize current employees and new employees who may be joining
Precept, as well as to assist in the negotiation of potential future
acquisitions. Precept believes that key employees should have a stock interest
in Precept, thereby tying their financial interest to Precept's performance, and
that the proposed increase in the number of shares available for issuance under
the 1998 Plan will provide a useful vehicle for rewarding performance and
thereby tying employees' compensation to the Company's performance.
Prior to the proposed amendment of the 1998 Plan, there are 857,413 shares
of Class A Common Stock reserved for issuance under the plan. Of this number, as
of the Record Date, approximately 365,000 shares of Class A Common Stock
remained available for issuance under the 1998 Plan.
OTHER EMPLOYEE BENEFIT PLANS
Precept has a contributory retirement and savings plan which covers eligible
employees and meets the requirements of Section 401(k) of the Internal Revenue
Code. The plan also allows us to make a discretionary contribution by Precept as
determined by our Precept's Board of Directors. There have been no contributions
made by Precept to date.
EMPLOYMENT AGREEMENTS
As a general rule, Precept does not enter into written employment agreements
with its executive officers. In connection with the acquisition of substantially
all of the assets of USTS, the Company entered into an employment agreement,
dated March 19, 1998, with Mr. Sorci. The agreement provides for an initial
employment term of five years, annual base salary (set initially at $170,000)
and an annual bonus based on the Company achieving Board-approved financial
goals.
38
<PAGE>
Submitted by the Compensation Committee
of the Board of Directors:
Darwin Deason
J. Livingston Kosberg
Sheldon I. Stein
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1999, 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. David L. Neely, who was an executive officer of the Company as well
as a director, participated in such discussions as a member of the Compensation
Committee until his resignation in April, 1999. See, also, "Executive
Compensation and Other Information--Report of the Compensation Committee of the
Board of Directors on Executive Compensation". The Company believes that the
transactions described above are beneficial to the Company and are on terms as
favorable to the Company 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.
39
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the spinoff of Precept from its former parent company,
ACS, in 1994, Precept entered into a Reciprocal Services Agreement (the
"Services Agreement") with ACS, effective June 30, 1994, pursuant to which
Precept sells business products and provides package delivery services to ACS.
The Services Agreement was amended on May 1, 1998 to extend the term as set
forth below. Precept received approximately $5,400,000 and $4,300,000 from ACS
in fiscal 1999 and fiscal 1998, respectively. In addition to the foregoing, ACS
provided data processing services to Precept pursuant to the Services Agreement.
Precept incurred expenses of approximately $300,000 to ACS in each of fiscal
1999 and fiscal 1998 for these services. Pricing for ACS services provided to
Precept was no less than ACS' direct costs attributable to such services.
Precept 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, a director and Chairman of the Executive Committee of Precept, is
Chairman and Chief Executive Officer of ACS.
During fiscal 1996, Precept loaned each of David L. Neely, Chairman and
Chief Executive Officer and Douglas R. Deason, President, Chief Operating
Officer and a Director, $379,988, the proceeds of which were used solely to
acquire shares of Precept Class A Common Stock from shareholders. The loans were
evidenced by notes which become due upon the earlier of (i) June 8, 2005,
(ii) upon the sale or transfer of the shares of Precept Class A Common Stock
purchased with the proceeds or (iii) upon termination of the employment of the
maker of the particular note prior to June 8, 2000. Each of the notes was
secured by the shares of Precept 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.
In an effort to focus on its core business, Precept consummated the
following transactions in connection with the discontinuation of the business,
real estate construction and investments, respectively, of Precept Builders, Inc
("Builders") and Precept Holdings, Inc. ("Holdings"), two subsidiaries of the
Company that performed real estate and related construction activities.
During fiscal year 1998, Precept decreased its ownership percentage in
Builders as the result of a private placement of common stock by Builders, which
offering was directed solely to (a) the other shareholders of Builders other
than Precept, (b) the existing shareholders of Precept and (c) any of their
affiliates or assignees. Darwin Deason, a Director and the Chairman of the
Executive Committee of Precept, acquired the full amount of the private
placement, the other offerees having waived their right to purchase their pro
rata portion of the shares in the offering. Precept's percentage ownership in
Builders decreased from 90.5% to 1.8% of the total outstanding stock of
Builders, and Darwin Deason holds approximately 98% of the total outstanding
stock of Builders. By participating in the offering by Builders, Darwin Deason
also agreed (i) to guarantee, if required, existing and future performance bonds
securing Builders' construction projects, and (ii) to provide to the companies
issuing the performance bonds letters of credit up to $7 million securing
Builders obligations. These guarantees were previously provided by Precept,
Darwin Deason and certain of Precept's affiliates.
During fiscal year 1998, the Company disposed of the majority of the assets
of Holdings in order to effect its focus on core operations.
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, a former Director and prior Chairman of Precept's
Executive Committee, Douglas Deason, Precept's President and Chief Operating
40
<PAGE>
Officer and David Neely, Chairman and the Chief Executive Officer of Precept,
for $1,200,000 in cash. It is estimated that the purchase price paid to Holdings
for the Bells Property, together with the terms and structure of the purchase
was approximately equal to the estimated fair market value of the Bells Property
at the time of the sale. Precept 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 was approximately $10,000 per month. Effective August 1,
1999, this lease was terminated and all expenses were assumed by Darwin Deason.
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 (i) certain
real estate located at 72-191 Highway 111, Palm Desert, California (the "Palm
Desert Property") for $1,025,125 in cash and (ii) a 49% interest in CCC&D Corp.,
(which represents all of Precept's interest in such entity), a privately held
company operating a restaurant on the Palm Desert Property for $90,000 in cash.
Darwin Deason, a director and the Chairman of the Executive Committee of
Precept, has entered into proxy agreements with David L. Neely, former Chief
Executive Officer of the Company, and Douglas Deason, President and Chief
Operating Officer of the Company (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 and Precept, which invested
$99,900, owned approximately a 3% equity interest. Darwin Deason is the Chairman
of the Board and Douglas Deason is a director of the five-member board of
directors of DDH. Effective July 1, 1999, Precept divested its interest in DDH
for a cash payment equal to its initial investment plus accrued interest.
In fiscal year 1998, Precept entered into a separation agreement and general
release agreement with USTS's former chairman, Michael Margolies, which provided
for the resignation of Michael Margolies from Precept's board of directors in
exchange for monthly payments of $21,075 through March 2000. In July 1998,
Precept sold the owned and leased buses of one of its subsidiaries to Michael
Margolies in exchange for a reduction of $593,000 in Precept's note payable to
Mr. Margolies.
In fiscal years 1999 and 1998, the Company purchased goods and services
amounting to $1.4 million and $1.1 million, respectively, at prices which
management considered to be arms' length fair market values, from supplier
companies which were owned by family members of the Company's Chairman, its
former chief executive officer and its current chief operating officer.
During fiscal year 1999, the Company paid its current Chairman $158,041 in
fees for his services performed as Chairman of the Executive Committee and of
the Board of Directors.
The Company has entered into a separation agreement with David L. Neely, its
former Chairman and Chief Executive Officer, who resigned in April, 1999,
pursuant to which the Company agreed to continue Mr. Neely's salary for a one
year period following the termination of his employment. Mr. Neely has agreed
not to compete with the Company for a five year period.
41
<PAGE>
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., GBL Graphics, Inc., John J. Rose, West Worldwide
Industries, Robert Bazinet and Edward Curtis. 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., GBL Graphics, Inc., Garden State Leasing & Rent-A-Car, Inc. and
Creative.
The following table sets forth certain information as of November 8, 1999
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; and, (3) all of our executive officers and directors as a group. 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>
<CAPTION>
SHARES BENEFICIALLY OWNED
CLASS A COMMON CLASS B COMMON PRIOR TO THE OFFERING
STOCK (1) STOCK (2) ---------------------------------
---------------------- ---------------------- TOTAL NUMBER OF PERCENT OF
NAME AND ADDRESS OF NUMBER PERCENT OF NUMBER PERCENT OF CLASS A AND CLASS TOTAL VOTING SHARES
BENEFICIAL OWNER (3) OF SHARES CLASS (4) OF SHARES CLASS (4) B SHARES POWER (1) OFFERED
- -------------------------- --------- ---------- --------- ---------- ------------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Darwin Deason............. 2,943,783(5) 32.1% 592,142 100% 3,535,925(5) 58.8% --
Douglas R.Deason.......... 729,929(6) 8% -- -- 729,929(6) 4.8% --
William W. Solomon, Jr.... -- -- -- -- -- -- --
D. Paul Cabra............. 148,481 1.6% -- -- 148,481 * --
Ronald L. Sorci........... 2,786 * -- -- 2,786 * --
J. Livingston Kosberg..... 162,215(7) 1.8% -- -- 162,215(7) 1.0% --
Sheldon I. Stein.......... -- -- -- -- -- -- --
Robert N. Bazinet......... 541,295 5.9% -- -- 541,295 * 437,758
J. D. Greco............... 519,213 5.7% -- -- 519,213 3.4% --
Peter H. Trembath......... 4,200 * -- -- 4,200 * --
All Directors and Officers
as a Group.............. 3,735,734(5) 40.8%(5) 592,142 100% 4,327,876(5) 64.0%(5) --
BENEFICIAL OWNERS OF MORE THAN 5% OF PRECEPT COMMON STOCK
First Nationwide Bank..... 469,466 5.1% 0 0% 469,466 3.1% --
David L. Neely(9)......... 735,788 8.0% 0 0% 735,788 4.9% --
Selling shareholders:
Stephen A. DiMarco........ 541,342 5.9% -- -- 541,342 -- 541,342
AAA Guaranteed
On Time Service, L.L.C.. 55,696 * -- -- 55,696 -- 55,696
FineLine Business
Forms, L.L.C............ 19,048 * -- -- 19,048 -- 19,048
GBL Graphics, Inc......... 56,667 * -- -- 56,667 -- 56,667
Robert Bazinet............ 541,295 5.9% -- -- 541,295 3.6% 437,758
John J. Rose.............. 318,674 3.5% -- -- 318,674 2.1% 169,188
Edward Curtis............. 78,004 * -- -- 78,004 * 66,785
West Worldwide
Industries.............. 1,900 * -- -- 1,900 * 1,900
<CAPTION>
SHARES BENEFICIALLY
OWNED
AFTER THE OFFERING
-----------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER (3) SHARES CLASS (4)
- -------------------------- ---------- ----------
<S> <C> <C>
Darwin Deason............. 3,535,925(5) 58.8%
Douglas R.Deason.......... 729,929(6) 4.8%
William W. Solomon, Jr.... -- --
D. Paul Cabra............. 148,481 *
Ronald L. Sorci........... 2,786 *
J. Livingston Kosberg..... 162,215(7) 1.0%
Sheldon I. Stein.......... -- --
Robert N. Bazinet......... 103,537 *
J. D. Greco............... 519,213 3.4%
Peter H. Trembath......... 4,200 *
All Directors and Officers
as a Group.............. 3,890,118(5) 61.1%(5)
BENEFICIAL OWNERS OF
MORE THAN 5% OF
PRECEPT COMMON STOCK
First Nationwide Bank..... 469,466 3.1%
David L. Neely(9)......... 735,788 4.9%
Selling shareholders:
Stephen A. DiMarco........ -- --
AAA Guaranteed
On Time Service, L.L.C.. -- --
FineLine Business
Forms, L.L.C............ -- --
GBL Graphics, Inc......... -- --
Robert Bazinet............ 103,537 --
John J. Rose.............. 149,486 --
Edward Curtis............. 11,219 --
West Worldwide
Industries.............. -- --
</TABLE>
- ------------------------
* Less than 1%
(1) The information set forth for Class A Common Stock does not include the
shares of Class B Common Stock of such holder which are convertible, at any
time and from time to time, into shares of Class A Common Stock on a
share-for-share basis. However, the information set forth in the columns
labeled "Percent of Total Voting Power" assumes that the holder of Class B
Common Stock is entitled to ten votes for each such share held in his or her
name. The information set forth in this table does not include options to
purchase shares of Class A Common Stock, which options are not exercisable
within sixty days of the date hereof.
42
<PAGE>
(2) Each share of Class B Common Stock is convertible into Class A Common Stock
on a share-for-share basis at any time.
(3) The address of each director and officer is in care of us at 1909 Woodall
Rodgers Freeway, Suite 500, Dallas, Texas 75201.
(4) Based on 9,161,753 shares of Class A Common Stock and 592,142 shares of
Class B Common Stock outstanding at November 8, 1999.
(5) Includes 2,090,385 shares of Class A Common Stock for which Mr. Deason has
been granted proxies to vote, including the shares of Class A Common Stock
held by Douglas R. Deason, C. Paul Cabra and David L. Neely and reflected in
the above table. The share totals and percentages of class and total voting
power shown for All Directors and Officers of the Company in the above have
been adjusted to avoid double counting any shares subject to any such
proxies granted by current officers or directors of the Company.
(6) Includes 90,125 shares of Class A Common Stock owned by a trust for the
benefit of Douglas R. Deason's children and for which Darwin Deason serves
as Trustee. Darwin Deason and Douglas R. Deason disclaim beneficial
ownership of such shares.
(7) Held by the J. Livingston Kosberg Trust of which Mr. Kosberg is the sole
trustee.
(8) Mr. Neely served the Company as its Chairman and Chief Executive Officer for
a number of years. He resigned his positions in April, 1999.
43
<PAGE>
DESCRIPTION OF SECURITIES
Our total authorized capital stock consists of 100,000,000 shares of
Class A Common Stock, par value $.01 per share, 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 November 8, 1999, there were 9,161,753
outstanding shares of Class A Common Stock held by approximately 3,000
shareholders of record, 592,142 outstanding shares of Class B Common Stock held
by one shareholder of record and 3,200 outstanding shares of Preferred Stock
held by five shareholders of record. 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
44
<PAGE>
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 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.
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
45
<PAGE>
"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
46
<PAGE>
offer pursuant to a definitive agreement which 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 976,000 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.
47
<PAGE>
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) 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
48
<PAGE>
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.
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 November 8, 1999, 9,161,753 shares of Class A Common Stock and 592,142
shares of Class B Common Stock were outstanding. In addition, as of November 8,
1999 we had outstanding warrants and options to purchase 535,562 shares of
Class A Common Stock. 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 976,000 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 672,753 of those 976,000 shares are being
registered by a Registration Statement on Form S-1 which will be filed by the
Company on or about the date of this Prospectus. 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.
PLAN OF DISTRIBUTION
This Prospectus covers up to 1,348,384 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 shares received from
a named shareholder after the date of this Prospectus.
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 time
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
be 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
49
<PAGE>
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 144
under the Securities Act.
In addition, this Prospectus also covers up to 400,000 shares which may be
issued from time to time to satisfy our contingent issuance obligations arising
from acquisition agreements for the last two years. We will not receive any of
the proceeds from the issuance of the securities to those individuals with whom
Precept has entered into such acquisition agreements.
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, 1999 and 1998, and for each of the three years
in the period ended June 30, 1999, 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.
50
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at June 30, 1999 and 1998....... F-3
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997.............................. F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997.............................. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the three year period ended June 30, 1999............. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, 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, 1999, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 10, 1999
F-2
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ -- $ 2,291,303
Trade accounts receivable, net of $722,000 and $404,000
allowance for doubtful accounts, respectively........... 19,791,669 15,595,234
Accounts receivable from affiliates....................... 1,053,712 1,186,908
Other accounts receivable................................. 1,544,920 1,609,529
Inventory................................................. 4,815,228 5,133,484
Other current assets...................................... 785,246 805,151
Income taxes refundable................................... 936,548 --
Deferred income taxes..................................... 797,666 499,264
Net assets of discontinued operations..................... -- 1,115,125
----------- -----------
Total current assets.................................. 29,724,989 28,235,998
Property and equipment, net................................. 11,009,195 5,751,487
Intangible assets, net...................................... 43,368,313 19,558,050
Deferred income taxes....................................... 1,009,849 1,102,372
Other assets................................................ 1,030,293 1,838,697
----------- -----------
Total assets.......................................... $86,142,639 $56,486,604
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 8,421,736 $ 5,844,671
Accrued expenses.......................................... 5,611,748 5,189,268
Accrued compensation...................................... 2,124,776 1,943,964
Current portion of long-term debt......................... 3,918,733 1,421,477
----------- -----------
Total current liabilities............................. 20,076,993 14,399,380
Long-term debt.............................................. 37,138,018 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 8,876,680 and 6,870,126 issued
shares in 1999 and 1998, respectively................... 88,766 68,701
Class B Common Stock, $0.01 par value; 10,500,000
authorized shares and 592,142 issued shares............. 5,921 5,921
Additional paid-in-capital................................ 39,717,113 23,515,022
Retained earnings (accumulated deficit)................... (9,673,097) (1,395,905)
----------- -----------
30,138,703 22,193,739
Class A treasury stock--148,636 and 68,406 shares,
respectively............................................ (1,211,075) (191,271)
----------- -----------
Total shareholders' equity............................ 28,927,628 22,002,468
----------- -----------
Total liabilities and shareholders' equity........ $86,142,639 $56,486,604
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Business products................................ $137,526,600 $113,536,213 $109,396,670
Transportation services.......................... 26,571,927 9,455,575 6,565,838
------------ ------------ ------------
164,098,527 122,991,788 115,962,508
Costs and expenses:
Cost of goods sold............................... 108,222,951 85,281,274 79,729,325
Sales commissions................................ 18,739,556 15,074,985 14,615,160
Selling, general and administrative.............. 25,314,724 16,416,142 17,228,760
Depreciation and amortization.................... 3,643,332 1,820,935 1,787,624
Goodwill write-down and other non-recurring
charges........................................ 14,283,000 -- --
Non-recurring acquisition costs.................. 239,788 485,555 --
------------ ------------ ------------
170,443,351 119,078,891 113,360,869
------------ ------------ ------------
Operating income (loss)............................ (6,344,824) 3,912,897 2,601,639
Interest and other expense:
Interest expense................................. 2,755,979 1,195,086 621,961
Other expense (income)........................... (191,009) 741,454 (4,211)
------------ ------------ ------------
2,564,970 1,936,540 617,750
------------ ------------ ------------
Income (loss) from continuing operations before
income taxes..................................... (8,909,794) 1,976,357 1,983,889
Income tax provision (benefit)..................... (632,602) 790,544 828,098
------------ ------------ ------------
Income (loss) from continuing operations........... (8,277,192) 1,185,813 1,155,791
------------ ------------ ------------
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)
------------ ------------ ------------
Loss from discontinued operations................ -- (467,392) (3,839,082)
------------ ------------ ------------
Net income (loss).................................. $ (8,277,192) $ 718,421 $ (2,683,291)
============ ============ ============
Basic net income (loss) per share:
Income from continuing operations................ $ (0.98) $ 0.18 $ 0.19
Loss from discontinued operations................ -- (0.07) (0.63)
------------ ------------ ------------
Net income (loss)................................ $ (0.98) $ 0.11 $ (0.44)
============ ============ ============
Basic weighted average shares outstanding........ 8,462,017 6,480,325 6,089,047
Diluted weighted average shares outstanding...... 8,462,017 6,598,657 6,089,047
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (8,277,192) $ 718,421 $ (2,683,291)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 3,643,332 1,820,935 1,787,624
Write off of property and equipment, net.......... -- -- 408,245
Goodwill write-down and other non-recurring
charges......................................... 14,283,000 -- 150,477
Loss from disposal of discontinued operations..... -- -- 497,971
Deferred income taxes............................. -- 104,269 (160,728)
Changes in operating assets and liabilities, net
of
effects from acquisitions:
Trade accounts receivable....................... (100,935) (483,981) 9,261,454
Accounts receivable from affiliates............. 133,196 (683,337) --
Inventory....................................... 1,702,514 (1,902,976) (575,567)
Cost in excess of billings on uncompleted
contracts,
subcontracts payable and retainage............ -- -- (4,923,077)
Other current assets............................ 172,120 (1,871,935) (554,898)
Income taxes refundable......................... (936,548) 277,766 (277,766)
Trade accounts payable.......................... 113,671 (822,560) 281,101
Accrued compensation............................ 180,812 293,839 (132,523)
Other assets and liabilities, net............... 2,454,669 (1,838,876) (2,376,369)
------------ ----------- ------------
Net cash provided by (used in) operating
activities...................................... 13,368,639 (4,388,435) 702,653
------------ ----------- ------------
Cash flows provided by (used in) investing activities:
Acquisitions of businesses, including earnout
payments.......................................... (24,776,169) (7,086,000) (1,185,575)
Acquisition of property and equipment, net.......... (2,081,197) (857,713) (1,882,096)
Sale of assets of discontinued operations........... 1,115,125 2,445,121 --
------------ ----------- ------------
Net cash used in investing activities............. (25,742,241) (5,498,592) (3,067,671)
------------ ----------- ------------
Cash flows provided by (used in) financing activities:
Payments on long-term debt and other long-term
liabilities....................................... (1,316,282) (41,000) 286,237
Issuance of common stock............................ -- -- 30,900
Capital contributions (dividend to shareholder),
net............................................... -- -- (307,000)
Purchase of treasury stock.......................... (999,201) -- --
Issuance (payments) of capital lease obligations.... (2,736,740) 257,972 (82,642)
Repayment of shareholder notes...................... -- 821,036 --
Borrowings on revolving line of credit, net......... 15,134,522 8,708,120 1,786,181
------------ ----------- ------------
Net cash provided by financing activities......... 10,082,299 9,746,128 1,713,676
------------ ----------- ------------
Net decrease in cash and cash equivalents............. (2,291,303) (140,899) (651,342)
Cash and cash equivalents at beginning of year........ 2,291,303 2,432,202 3,083,544
------------ ----------- ------------
Cash and cash equivalents at end of year.............. $ -- $ 2,291,303 $ 2,432,202
============ =========== ============
Supplemental disclosure:
Cash paid for:
Interest.......................................... $ 2,744,883 $ 1,195,086 $ 621,961
Income taxes...................................... $ 367,241 $ 790,543 $ 828,098
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<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,
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
Acquisition of
subsidiaries........ 19,116 -- 15,799,698 -- -- 15,818,814
Exercise of stock
Options............. 476 -- 20,127 -- (20,603) --
Repurchase of Class A
common Shares....... -- -- -- -- (999,201) (999,201)
Cash payment for
Fractional shares
in reverse split.... -- -- 26,803 -- -- 26,803
Conversion of seller
Notes............... 473 -- 355,463 -- -- 355,936
Net loss.............. -- -- -- (8,277,192) -- (8,277,192)
------- ------- ----------- ------------ ----------- -----------
Balance, June 30,
1999.................. $88,766 $ 5,921 $39,717,113 $ (9,673,097) $(1,211,075) $28,927,628
======= ======= =========== ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Precept Business Services, Inc. and its subsidiaries ("Precept" or the
"Company") engage in business products distribution management and services and
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, New Jersey,
Connecticut, Kentucky, Ohio and Michigan.
PUBLICLY TRADED COMPANY
In March 1998, Precept completed its acquisition of substantially all of the
assets 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. Precept's Class A Common
Stock trades under the NASDAQ symbol "PBSI."
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, when earned, provided by the
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company, debt assumed by the Company and direct acquisition costs. The aggregate
acquisition cost is allocated to the net assets and liabilities of the business
acquired based on the fair values of net assets and liabilities. Any amount not
specifically allocated to an identified asset and liability is considered to be
goodwill. The 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 $722,000, $404,000 and $599,000 as
of June 30, 1999, 1998 and 1997. The net change in the allowance for doubtful
accounts was charged to operations. No customer accounted for more than 10% of
the Company's revenue in 1999, 1998 or 1997.
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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 cash flow analysis of the underlying assets. As more fully
described in Note 15, during the third quarter of 1999, the Company recognized a
permanent impairment in value for goodwill and certain other long-lived assets.
Based upon its most recent assessment, the Company does not believe an
impairment of long-lived assets exists at June 30, 1999.
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 20 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.
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
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value per share of the share at the
date of grant. Because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The Company believes that the alternative
fair value accounting for employee stock options requires the use of option
valuation models that were not developed for use in valuing employee stock
options.
NET INCOME PER SHARE
Net income per share is calculated 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 comprises the dilutive
effect of the outstanding common stock options and common stock which would be
issued upon the conversion of certain notes payable. However, the Company's
warrants and a certain portion of the Company's convertible notes payable were
not included in the computation of diluted net income (loss) per share as they
would not have been exercised. Diluted net loss per share is not presented for
fiscal year 1999 since the Company incurred a net loss from continuing
operations.
The weighted average number of outstanding common shares is calculated based
on the historical timing of the common stock transactions, except that the
historical number of shares have been retroactively restated for any shares
issued in connection with businesses acquired as pooling of interests
transactions. In addition, the Company's 3.15438 for 1 stock split in March 1998
and 1 for 7 reverse stock split in December 1998 have been retroactively
reflected in the Company's historical financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of Precept's financial instruments approximate the fair
values of such instruments due either to the short-term nature of the
instruments, the variable interest rate associated with the instruments, or the
conversion features of the instruments. The Company's financial instruments
include, but are not limited to, cash and cash equivalents, accounts receivable,
notes receivable, accounts payable, and long-term debt.
EXPENSE ALLOCATION TO DISCONTINUED AND CONTINUING OPERATIONS
The Company allocates interest expense on its borrowings to discontinued and
continuing operations proportionately based on net assets of each of the
respective components. Interest expense allocated to discontinued operations was
$150,278 in 1997. General corporate administrative expenses have not been
allocated to discontinued operations.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications, none of which affect net income, have been made
to the 1997 consolidated financial statements in order to conform to the 1999
and 1998 presentation.
3. ACQUISITIONS
During fiscal year 1999, Precept acquired four business products
distribution companies and five transportation service companies. All the
acquisitions were accounted for using the purchase method of accounting. For
these purchase acquisitions, the aggregate acquisition cost 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 amounted to $40.7 million and
consisted of $12.4 million in cash, funded by working capital and the Company's
revolver line of credit, $12.3 million in seller notes and assumed debt,
$0.2 million in mandatorily redeemable preferred stock and $15.8 million in
Class A Common Stock. Four of the acquisitions completed during fiscal year 1999
include provisions for contingent purchase consideration in the event that the
companies acquired exceed certain earnings hurdles during the three years
following acquisition. Such contingent consideration is generally to be paid
with shares of Class A Common Stock. In addition, five of the acquisitions
completed during fiscal year 1999 provide for additional shares of Class A
Common Stock to be issued in the event that the Class A shares used to acquire
the businesses are sold below a certain share price level. During fiscal year
1999, approximately 250,000 shares of Class A Common Stock were deemed to be
issued for such share price protection. During fiscal year 1999, the Company
paid $0.1 million for contingent purchase consideration in connection with its
business acquisitions.
During fiscal year 1998, Precept acquired five business products
distribution companies and four 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 revolving 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. ("U. S. Trucking") 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 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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
In fiscal year 1998, the Company issued 877,791 shares of its Class A Common
Stock with an aggregate fair market value at the respective dates of issuance 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, for
the years ended June 30, 1998 and 1997, 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
------------ ------------
<S> <C> <C>
Revenues:
Company (excluding InfoGraphix and MBF)................... $ 85,290,642 $ 77,343,925
InfoGraphix............................................... 18,487,919 20,626,814
MBF....................................................... 19,213,227 17,991,769
------------ ------------
Company................................................... $122,991,788 $115,962,508
============ ============
Net income (loss):
Company (excluding InfoGraphix and MBF)................... $ 658,890 $ 531,606
InfoGraphix............................................... 331,825 388,205
MBF....................................................... 195,098 235,980
------------ ------------
Company................................................... $ 1,185,813 $ 1,155,791
============ ============
</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.
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,
------------------------------------
1999 1998 1997
----------- ----------- --------
<S> <C> <C> <C>
Purchase consideration:
Cash paid.............................................. $12,391,000 $ 5,735,000 $908,000
Amounts due sellers of acquired businesses............. 2,060,000 1,168,000 --
Common stock and warrants issued....................... 15,816,000 4,318,000 --
Liabilities assumed.................................... 9,908,000 3,911,000 --
Other.................................................. 527,000 60,000 --
----------- ----------- --------
Fair value of net assets acquired........................ $40,702,000 $15,192,000 $908,000
=========== =========== ========
Allocation of fair value of net assets acquired:
Goodwill and intangible assets......................... $32,898,000 $15,154,000 $274,000
Accounts receivable.................................... 4,096,000 878,000 400,000
Property and equipment................................. 5,948,000 2,441,000 --
Inventory and other assets and liabilities, net........ (2,240,000) (3,281,000) 234,000
----------- ----------- --------
$40,702,000 $15,192,000 $908,000
=========== =========== ========
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
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, except that the goodwill write-down and non-recurring charges
recorded in the third quarter of 1999 are excluded. 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,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues............................. $180,621,000 $185,453,318 $187,948,668
Income before income taxes................. $ 7,655,000 $ 8,399,263 $ 10,073,734
Net income................................. $ 3,980,000 $ 5,039,558 $ 5,872,987
Basic and diluted net income per share..... $ 0.43 $ 0.54 $ 0.63
</TABLE>
During the first quarter of fiscal year 2000, Precept has acquired one
business products distribution company and one transportation company. Aggregate
consideration for these transactions amounted to $5.4 million, paid
$1.1 million in cash, $3.1 million in redemption value of mandatorily
convertible preferred stock and $1.2 million in debt assumed. Assets with a
preliminary aggregate fair value of $5.4 million were acquired with a
preliminary allocation as follows: $3.9 million to goodwill and intangible
assets, $1.2 million to accounts receivable, $0.9 million to inventory,
$0.3 million to property and equipment and $0.9 million (net) to other
liabilities.
If these acquisitions had been completed at the beginning of fiscal year
1999, the pro forma results of continuing operations would have been as follows:
total revenue--$191.2 million; income before income taxes--$8.2 million; net
income--$4.3 million and diluted net income per share--$0.46. This pro forma
financial information includes adjustments for amortization, interest and income
taxes.
The pro forma financial information for the year ended June 30, 1999 would
have been as follows if the goodwill write-down and non-recurring charges were
included in the pro forma financial information.
<TABLE>
<CAPTION>
ACQUISITIONS ACQUISITIONS
THROUGH THROUGH
JUNE 30, 1999 SEPTEMBER 20, 1999
------------- ------------------
<S> <C> <C>
Total revenues........................................ $180,621,000 $191,205,000
Loss before income taxes.............................. $ (6,628,000) $ (6,105,000)
Net loss.............................................. $ (6,898,000) $ (6,626,000)
Diluted net loss per share............................ $ (0.74) $ (0.71)
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
ESTIMATED LIVES 1999 1998
--------------- ---------- ----------
<S> <C> <C> <C>
Land.......................................... $ 150,000 $ 350,000
Buildings..................................... 15 to 40 years 1,411,021 1,731,926
Leasehold improvements........................ 1 to 10 years 1,140,867 455,118
Equipment and vehicles........................ 3 to 5 years 15,383,941 7,020,965
Capitalized leasehold rights.................. 3 to 5 years 1,368,557 1,353,279
---------- ----------
19,454,386 10,911,288
Accumulated depreciation and amortization..... 8,445,191 5,159,801
---------- ----------
$11,009,195 $5,751,487
========== ==========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Goodwill................................................... $47,380,903 $24,141,769
Other...................................................... 569,579 569,579
----------- -----------
47,950,482 24,711,348
Accumulated amortization................................... 4,582,169 5,153,298
----------- -----------
$43,368,313 $19,558,050
=========== ===========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revolving line of credit................................... $31,100,000 $15,965,478
Note payable and long-term liability to shareholder........ 246,587 813,803
Convertible notes payable to sellers....................... 3,285,195 2,114,435
Mortgage and equipment notes payable....................... 4,330,840 317,813
Capitalized lease obligations.............................. 1,405,848 960,261
Other...................................................... 688,281 1,334,443
----------- -----------
41,056,751 21,506,233
Less current portion due within one year................... 3,918,733 1,421,477
----------- -----------
Long-term debt............................................. $37,138,018 $20,084,756
=========== ===========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
REVOLVING LINE OF CREDIT
The Company's revolving line of credit with its banks has $40.0 million
available for borrowing by the Company for working capital and acquisition
needs. At the Company's option, the line of credit bears interest at prime, 8.5%
at June 30, 1999, 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, 1999, the margin
was 2.75%. The amount available under the revolving line of credit is determined
based on a multiple of three times the trailing twelve months pro forma EBITDA.
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, participate in
this revolving line of credit. 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 the Company's
business. Specifically, each quarter, the Company is 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 requires approval from the banking group. At June 30, 1999, the Company
had borrowed $31,100,000 from the banking group and had $8,900,000 available to
borrow under the line of credit agreement. The Company borrowed such amounts at
an average interest rate of 8.2%. The revolving line of credit also includes
restrictions as to 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 March 31, 2002.
LONG-TERM LIABILITY TO SHAREHOLDER
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
6.0% to 8.25% and require annual payments ranging from $0.1 million to $0.2
million through August 2003. The notes may be converted at the sellers'
respective 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 7.0% to 12.0% and
require annual payments up to $0.3 million over the terms of the notes. Land,
building and equipment with a net book value of approximately $8.5 million at
June 30, 1999 are pledged as collateral for the notes.
CAPITALIZED LEASE OBLIGATIONS
Future minimum lease payments under the capital leases are as follows:
$0.8 million in 2000, $0.5 million in 2001 and $0.1 million in 2002. Such
amounts exclude payments for interest of $0.1 million.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Capitalized leasehold rights with a net book value of $0.5 million at June 30,
1999 are pledged as collateral under the lease agreements.
DEBT REPAYMENT
Future annual payments of principal on all long term debt for the five years
ended June 30, 2004 are as follows: $4.0 million in 2000; $3.5 million in 2001;
$0.9 million in 2002; $0.6 million in 2003 and $0.1 million in 2004.
OTHER
Included in other long-term debt and other long-term liabilities is one
series of mandatorily redeemable convertible preferred stock with a redemption
value of $0.2 million. This preferred stock is redeemable monthly, has a
dividend rate of 6.0% and is convertible at the holder's option into Class A
Common Stock at $30.00 per share. This preferred stock will be fully redeemed in
April 2004. Also included in other long-term debt is a note payable for a
stadium luxury suite.
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,
---------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Current............................................. $ (632,602) $686,275 $ 988,826
Deferred............................................ -- 104,269 (160,728)
---------- -------- ---------
$ (632,602) $790,544 $ 828,098
========== ======== =========
</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,
------------------------------------
1999 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
Statutory income tax expense (benefit) at
statutory rate.................................. $ (3,029,330) $ 671,961 $ 674,522
State income tax expense, less federal benefit.... (470,437) 98,864 119,033
Expenses treated differently for book and tax
reporting purposes, primarily goodwill
amortization.................................... 2,669,675 221,217 233,589
Other--primarily difference between income taxes
on S and C corporations for an acquired
subsidiary...................................... 197,490 (201,498) (199,046)
------------ --------- ---------
Income tax provision (benefit).................... $ (632,602) $ 790,544 $ 828,098
============ ========= =========
</TABLE>
One of the Company's acquired subsidiaries was an S corporation, an entity
that 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 and ($2,916,880), and the Company's
diluted net income (loss) per share would have been $0.14 and ($0.48),
respectively, for each of the years in the two-year period ended June 30, 1998.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Temporary tax differences affected and categorized by financial statement
line item are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Valuation reserves........................................ $ 922,526 $ 124,187
Asset book/tax basis difference........................... 1,009,848 1,276,302
Accrued liabilities....................................... 512,413 838,419
---------- ----------
2,444,787 2,238,908
Valuation allowance....................................... (637,272) (637,272)
---------- ----------
Total deferred tax assets............................. $1,807,515 $1,601,636
========== ==========
</TABLE>
The Company has a tax net operating loss of approximately $1.6 million
generated in fiscal year 1999 that is expected to be carried back to fiscal year
1998 or utilized in fiscal year 2000.
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 1999, 1998 and 1997. 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 aggregate contributions of
$30,264, $67,069 and $35,147 in 1999, 1998 and 1997, respectively.
9. SHAREHOLDERS' EQUITY
STOCK SPLIT
In November 1998, the Company's shareholders approved a 1 for 7 reverse
stock split that was effected in December 1998. In March 1998, the Company's
board of directors approved a 3.15438 for 1 stock split for the Class A and
Class B Common Stock. The financial statements of the Company have been
retroactively restated to reflect 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 Chairman and director of the Company and
an affiliated company, Affiliated Computer Services, ("ACS"). The shares of
Class B Common Stock are convertible into Class A Common Stock at a one for one
conversion ratio at the option of the Class B shareholder. The shares of
Class B Common Stock have the right to ten votes per share for any matter to be
voted on by the Company's shareholders.
WARRANTS
Warrants to purchase 259,286 shares of common stock were issued by Precept
to replace USTS warrants previously outstanding. Each warrant allowed the holder
to purchase one share of the Company's Class A Common Stock at a price of $26.74
per share. The warrants expired on August 26, 1999.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
1998 STOCK INCENTIVE PLAN
In February 1998, the Company adopted its 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 for options
granted under the 1998 Plan is determined by the Company's Compensation
Committee. The term of the options is at the discretion of the administrator,
but not to exceed ten years. The following table presents the activity in the
1998 Stock Incentive Plan since its inception.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Beginning balance........................................... 14,286 --
Stock options granted....................................... 600,613 14,286
Stock options terminated or cancelled....................... (114,579) --
--------- ------
Ending balance.............................................. 500,320 14,286
========= ======
</TABLE>
Options granted under the 1998 Plan are exercisable at the market price at
date of grant and, subject to employment, expire ten years from the date of
grant, are not transferable other than on death, and are generally exercisable
in full after five years. At June 30, 1999, 383 options were exercisable. The
weighted-average exercise price for the outstanding stock options at June 30,
1999 is approximately $14.88.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999, the first year in which any significant
number of options were granted: risk free interest rate of 6.0%, no dividends,
volatility factor of 1.2 and weighted average life of the option equal to 5
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a realistic single
measure of the fair value of its employee stock options. The weighted average
fair value of the stock options granted during the year amounted to $3.8
million.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period of five years.
The Company's pro forma net loss and net loss per share for 1999 would be as
follows: net loss of $8.4 million; basic and diluted net loss per share of
$(0.99).
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. 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
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
options were all exercised by June 30, 1999. 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 purchase 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, 1999, no Rights have been exercised.
CAPITAL TRANSACTIONS WITH SHAREHOLDER OF ACQUIRED SUBSIDIARY
In 1997, 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.
CLASS A SHARES RESERVED FOR FUTURE ISSUANCE
As of June 30, 1999, the Company had reserved approximately 16,500,000
shares of Class A Common Stock for future issuance for acquisitions of
businesses, exercise of stock options, exercise of warrants, conversion of notes
payable, conversion of stock rights and conversion of Class B Common Stock.
10. WEIGHTED AVERAGE SHARES OUTSTANDING
The following table provides information to reconcile the basic and diluted
weighted-average shares outstanding for the years ended June 30, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average shares outstanding:
Common shares, Class A and Class B, outstanding at the
beginning of the period................................. 7,393,862 6,089,047 5,550,633
Common shares repurchased................................. (79,000) -- --
Common shares issued upon exercise of options............. 45,415 -- 538,414
Common shares issued upon conversion of note receivable... 47,258 -- --
Common shares used to acquire businesses during the
period.................................................. 1,912,651 1,304,815 --
--------- --------- ---------
Common shares, Class A and Class B, outstanding at the end
of the period........................................... 9,320,186 7,393,862 6,089,047
========= ========= =========
Weighted average number of common shares outstanding
during the period based on the number of days
outstanding............................................. 8,462,017 6,480,325 6,089,047
========= ========= =========
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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 $2.4 million in
2000, $2.3 million in 2001, $1.2 million in 2002, $1.1 million in 2003, $0.9
million in 2004 and $1.7 million thereafter. Total rent expense amounted to $3.1
million, $2.6 million and $2.9 million in 1999, 1998 and 1997, respectively.
LITIGATION
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 $0.5 million 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 sought approximately $9 million in damages.
During the third quarter of fiscal year 1999, the Company learned that an
insurance company for Alden paid $5 million to Alden for damages. Also during
the quarter, John Alden Insurance dismissed its litigation claims against the
individuals involved in this matter. Precept, Alden and certain other parties to
the litigation and an insurance carrier agreed to a settlement whereby all
claims will be dismissed and Precept will receive $0.2 million.
MBF AND PEREGRINE LITIGATION. On February 16, 1999, substantially all of
the sales force, management and employees of MBF and Mail/Source, Inc. joined
Peregrine Corporation ("Peregrine"), a competitor that was founded and funded by
these same individuals. During the third quarter of fiscal year 1999, Precept
sued Peregrine 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 entered into negotiations to settle this
litigation; however, a settlement that was satisfactory to the Company and
Peregrine was not reached. The Company resumed the litigation efforts against
Peregrine and the seven former officers of MBF Corporation.
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 of operations or liquidity.
12. SEGMENT INFORMATION
The Company operates principally in the business products and transportation
industry segments. Operations in the business products segment involves
arranging for the manufacture, storage and distribution of business forms,
computer supplies, advertising information and other related business products
for mid- to large- sized corporate customers. Operations in the transportation
segment primarily 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 $16,773,
$20,075 and $25,028 for the business products segment and $396,789, $177,723 and
$220,363 in the transportation services segment for the years ended June 30,
1999, 1998 and 1997, respectively.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
In computing operating income (loss), none of the following items have been
added or deducted: general corporate expenses (these expenses were included in
the computation of Corporate and Other operating income (loss)), interest
expense, income taxes and loss from discontinued operations. Depreciation
expense and capital expenditures for each fiscal year by segment are shown
below. Identifiable assets by industry segment are those assets that are used in
the Company's operations in each industry. Corporate assets are principally
certain investments and net assets of discontinued operations.
Segment data as of and for each of the three years ended June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating income (loss):
Business products................................... $ 1,139,863 $ 3,893,954 $ 2,428,637
Transportation...................................... (2,479,290) 315,572 (116,271)
Other and corporate................................. (5,005,397) (296,629) 289,273
----------- ----------- -----------
Total operating income (loss)..................... $(6,344,824) $ 3,912,897 $ 2,601,639
=========== =========== ===========
Depreciation and amortization:
Business products................................... $ 1,326,842 $ 1,387,548 $ 1,336,099
Transportation...................................... 2,174,192 412,194 414,717
Other and corporate................................. 142,298 21,192 36,808
----------- ----------- -----------
Total depreciation and amortization............... $ 3,643,332 $ 1,820,934 $ 1,787,624
=========== =========== ===========
Capital expenditures:
Business products................................... $ 475,998 $ 184,495 $ 1,804,146
Transportation...................................... 1,605,199 673,218 77,950
Other and corporate................................. -- -- --
----------- ----------- -----------
Total capital expenditures........................ $ 2,081,197 $ 857,713 $ 1,882,096
=========== =========== ===========
Identifiable assets:
Business products................................... $47,619,610 $37,978,428 $31,034,819
Transportation...................................... 36,411,638 15,944,523 1,247,953
Other and corporate................................. 2,111,391 2,563,653 5,008,774
----------- ----------- -----------
Total identifiable assets......................... $86,142,639 $56,486,604 $37,291,546
=========== =========== ===========
</TABLE>
13. DISCONTINUED OPERATIONS
In February 1997, the Company decided to reduce its investment in Precept
Builders, Inc. ("Builders") and to sell the majority of the assets of Precept
Holdings, Inc. ("Holdings"), the two subsidiaries that performed real estate and
related construction activities.
The Company owned 810 shares of Builders' common stock, making it an 81%
shareholder of Builders. Effective March 31, 1997, the Company obtained
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.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. DISCONTINUED OPERATIONS (CONTINUED)
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
restaurant investment were sold to the majority shareholder of the Company
during fiscal year 1998 and the first quarter of fiscal year 1999. The sales
prices were equal to the carrying value of the assets at June 30, 1997 and the
assets were sold for cash. The ranch was also sold for cash during fiscal year
1998 to a company owned by the majority shareholder, the chief executive officer
and the chief operating officer of Precept.
Following is a summary of the net assets and results of operations of the
two entities, which have been reported as discontinued operations for all
periods presented in the consolidated balance sheets and the consolidated
statements of operations. The net assets of the discontinued operations as of
June 30, 1998 and 1997, exclude amounts related to Builders, as described above.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
--------- -----------
<S> <C> <C>
Accounts receivable and unbilled work....................... $ -- $ --
Other current assets........................................ -- --
Land, property and equipment, net........................... -- 1,115,125
--------- -----------
Total assets.............................................. -- 1,115,125
Accounts payable and other accrued expenses................. -- --
Non-current liabilities..................................... -- --
--------- -----------
Net assets of discontinued operations..................... $ -- $ 1,115,125
========= ===========
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1998 1997
--------- -----------
Revenue. $ 127,279 $82,661,862
<S> <C> <C>
Costs and expenses.......................................... 940,806 86,002,973
Loss from disposal.......................................... -- (497,971)
--------- -----------
Loss before income taxes.................................... (813,527) (3,839,082)
Income tax benefit.......................................... (346,135) --
--------- -----------
Net loss from discontinued operations....................... $(467,392) $(3,839,082)
========= ===========
</TABLE>
A federal net operating loss ("NOL") carryforward of $2.9 million was
generated by discontinued operations during fiscal 1998 and 1997. A deferred tax
asset of $1.4 million attributable to discontinued operations applicable to this
NOL has 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.
14. TRANSACTIONS WITH AFFILIATES AND SHAREHOLDERS
SPIN-OFF FROM ACS
On June 30, 1994, the Company's common stock was distributed in a tax-free
spin-off on a pro rata basis to the shareholders of the Company's former parent,
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.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. TRANSACTIONS WITH AFFILIATES AND SHAREHOLDERS (CONTINUED)
SERVICES AGREEMENT WITH ACS
Under terms of the Services Agreement, Precept sells business forms and
supplies and provides courier and administrative services at prices that result
in an average gross margin that must be comparable to the average gross margin
realized by the Company from its other significant customers. Revenues for
services provided to ACS under this agreement were $5.4 million, $4.3 million
and $5.4 million in 1999, 1998 and 1997, respectively. Amounts due from ACS were
$0.9 million and $1.1 million at June 30, 1999 and 1998, 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, $0.3 million and $0.4 million from ACS for
these services in 1999, 1998 and 1997, respectively.
TRANSACTIONS WITH VENDORS OWNED BY RELATED PARTIES
During fiscal year 1999, 1998 and 1997, the Company purchased goods and
services amounting to $1.4 million, $1.1 million and $1.1 million, respectively,
at prices which management considered to be arms-length fair market values, from
companies which were owned by family members of certain key shareholders and
members of executive management.
LOANS TO CERTAIN EXECUTIVES
During the fiscal year ended June 30, 1996, the Company lent 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, Holdings 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 was a party to a five-year lease for a limited use of a ranch that
is owned by a company controlled by the Company's majority shareholder, its
former chief executive officer and its chief operating officer. This ranch was
previously owned by Holdings and was sold in November 1997 for $1,200,000.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. TRANSACTIONS WITH AFFILIATES AND SHAREHOLDERS (CONTINUED)
Precept was liable for variable monthly lease payments of approximately $10,000
during the lease term. In August 1999, the lease was terminated.
PROXIES
The majority shareholder has received the proxies of the former 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.
15. 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.
MBF
On February 16, 1999, substantially all of the management, sales force and
employees of MBF and Mail/Source, Inc. resigned from the Company to join a
competitor, 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 recorded $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.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. GOODWILL WRITE-DOWN AND OTHER NON-RECURRING CHARGES (CONTINUED)
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 $0.8 million
based on health claim payment trends during the third quarter of 1999. Other
reserves and liabilities increased by $1.1 million to address various matters
and events that occurred during the third quarter of 1999.
During the fourth quarter of 1999, the Company used $0.7 million of cash to
satisfy certain liabilities and reserves described above.
F-25
<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.......................... 7
Use of Proceeds....................... 13
Dividend Policy....................... 14
Recent Sales of Unregistered
Securities.......................... 14
Price Range of Common Stock........... 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 25
Management............................ 33
Certain Relationships and Related
Transactions........................ 40
Principal and Selling Shareholders.... 42
Description of Securities............. 44
Shares Eligible for Future Sale....... 49
Plan of Distribution.................. 49
Legal Matters......................... 50
Experts............................... 50
Index to Financial Statements......... F-1
</TABLE>
1,748,384 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
NOVEMBER 12, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
