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As filed with the Securities and Exchange Commission on October 20, 1999
Registration No. 333-42689
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
POST-EFFECTIVE AMENDMENT
NO. 1 TO REGISTRATION STATEMENT FILED ON FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRECEPT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 7389 75-2487353
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
WILLIAM W. SOLOMON, JR.
PRECEPT BUSINESS SERVICES, INC. PRECEPT BUSINESS SERVICES, INC.
1909 WOODALL RODGERS FRWY. SUITE 500 1909 WOODALL RODGERS FRWY. SUITE 500
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 754-6600 (214) 754-6600
(Address and telephone of registrant's (Address and telephone of registrant's
principal executive offices) principal executive offices)
</TABLE>
COPIES OF COMMUNICATIONS TO:
CHARLES D. MAGUIRE, JR.
JACKSON WALKER L.L.P.
901 MAIN STREET, SUITE 6000
DALLAS, TEXAS 75202-3797
TELEPHONE: (214) 953-6000
TELECOPIER: (214) 953-5822
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: [ ]
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 20, 1999
PROSPECTUS
7,118,181 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A COMMON STOCK
----------------------
This Prospectus relates to our offer and issuance of up to 7,118,181
shares of our Class A Common Stock from time to time in connection with future
business combinations, mergers and/or acquisitions.
- The stock will be issued at the prices and on the terms that
we negotiate with the owners or officers of the businesses we
plan to acquire.
- We will value the shares issued in each acquisition based on
prices reasonably related to market prices of the Class A
Common Stock at the time of the acquisition agreement,
delivery of the shares or otherwise. We have not fixed a
period of time within which the shares may be offered or sold.
- We will pay all of the expenses of this offering. There will
not be any underwriting discounts or commissions in connection
with the issuance of shares in business acquisitions.
- We will provide a prospectus supplement each time we issue
shares in an acquisition. The prospectus supplement will
provide specific information about the terms of that offering
and also may add, update or change information contained in
this Prospectus.
When we issue shares under this Prospectus, we may promise the
recipient that the amount the recipient receives from a later sale of such
shares will not be lower than the valuation (or a specific amount related to
such valuation) we used at the time we originally issued the shares. This
guaranty will be limited in duration and may require us to make up any shortfall
(including any shortfall attributable to brokers' commissions and selling
expenses) in cash or by issuing additional shares under this Prospectus.
Additionally, with our consent, persons who will receive shares under
this Prospectus in connection with acquisitions may use this Prospectus to sell
such shares at a later date. The selling shareholders may offer their shares
through public or private transactions, on or off the Nasdaq 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.
Our Class A Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "PBSI". On October 15, 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 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CLASS A COMMON STOCK OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is _______________, 1999.
The information contained in this Prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities Exchange Commission becomes effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any State where the offer or sale is not permitted.
1
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Where You Can Find More Information.........................................................2
Prospectus Summary..........................................................................3
Risk Factors................................................................................6
Dividend Policy ...........................................................................12
Recent Sales of Unregistered Securities....................................................12
Price Range of Common Stock................................................................12
Selected Consolidated Financial Data.......................................................13
Management's Discussion and Analysis of Financial Condition and Results of Operations......15
Business...................................................................................23
Management.................................................................................30
Certain Relationships and Related Transactions.............................................36
Principal Shareholders and Management Ownership ...........................................38
Description of Securities..................................................................40
Shares Eligible for Future Sale............................................................45
Plan of Distribution.......................................................................46
Legal Matters..............................................................................46
Experts....................................................................................46
Index to Financial Statements.............................................................F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission. You may read and
copy any documents we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should
call 1-800-SEC-0330 for more information on the public reference room.
Additionally, the SEC maintains a Website at http://www.sec.gov where certain
information regarding issuers, including Precept, may be found.
This Prospectus is part of a Registration Statement that we filed with
the SEC. This Prospectus does not contain all the information set forth in the
Registration Statement, such as certain exhibits and schedules. You can get a
copy of the Registration Statement from the SEC at the address listed above or
from its Website.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PRECEPT
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL OR TO OR FROM ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS AND IS NOT COMPLETE. THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, CONTAINED ELSEWHERE IN THIS PROSPECTUS. THE TERM
"PRECEPT" REFERS TO PRECEPT BUSINESS SERVICES, INC. AND ITS WHOLLY OWNED
SUBSIDIARIES. ALL SHARE NUMBERS REFLECT A 1 FOR 7 REVERSE STOCK SPLIT EFFECTED
ON DECEMBER 4, 1998. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADER "RISK FACTORS" ON PAGE 6, BELOW.
THE COMPANY
Precept is an independent distributor offering single source solutions
for automated document management services, inventory control and order
processing via the internet, as well as many other E-commerce services, while
providing top quality custom and stock business products to companies of all
sizes throughout the United States. We also operate various corporate
transportation services companies focusing on chauffeured town car and limousine
services. We were founded in 1988 as a regional business products distributor in
Dallas, Texas, and since that time have grown, both internally and through
acquisitions, to 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, 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 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.
3
<PAGE>
Precept was incorporated under the laws of the State of Texas in May
1993. We previously operated under the name "Precept Investors, Inc." which name
was changed to "Precept Business Services, Inc." on February 6, 1998. We became
a publicly-owned company on March 20, 1998, when we completed the acquisition of
substantially all of the operations of U.S. Transportation Systems, Inc.
("USTS"). Our principal corporate offices are located at 1909 Woodall Rodgers
Frwy, Suite 500, Dallas, Texas 75201, and our telephone number at that address
is (214) 754-6600.
RECENT DEVELOPMENTS
In March 1998, we acquired nearly all of the assets of USTS and listed
our Class A Common Stock and warrants to purchase Class A Common Stock on the
Nasdaq SmallCap Market. As part of the acquisition of USTS, we issued 1,373,214
shares of Class A Common Stock to USTS and assumed 259,286 warrants held by
former shareholders of USTS. In April 1998, USTS distributed the shares of Class
A Common Stock to USTS' shareholders.
On June 1, 1998, we sold our 75% interest in the common stock of U.S.
Trucking, Inc., a long-haul trucking business, which we acquired from USTS in
March of the same year. We have also completed the following recent
acquisitions: (1) on April 13, 1998, we acquired all of the issued and
outstanding stock of InfoGraphix, Inc., a Boston-based business product and
service provider and document management service distributor, (2) on June 19,
1998, we acquired all of the issued and outstanding stock of MBF Corporation, a
Louisiana-based provider of printed products, distribution services and
information solutions, (3) on September 4, 1998, we acquired, through a merger,
Creative, 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.
On December 4, 1998, we effected a 1 for 7 reverse stock split of our
Class A Common Stock. Our Class A Common Stock is traded through the Nasdaq
SmallCap Market, and we have applied to have our Class A Common Stock approved
for quotation on the Nasdaq National Market.
THE OFFERING
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<S> <C>
Class A Common Stock offered................................ 7,118,181 shares
Class A Common Stock outstanding as of October 7, 1999...... 8,728,044 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 6, below.
4
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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 (633) 790 828 16 356
----------- ----------- ----------- ----------- -----------
provision(benefit)...........
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
AS OF JUNE 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
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>
- ---------------------
5
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RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE PURCHASING ANY OF THE
SHARES OF CLASS A COMMON STOCK. FURTHER, THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF OUR PLANS, GOALS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. YOU ARE
CAUTIONED THAT, WHILE THE FORWARD-LOOKING STATEMENTS REFLECT OUR GOOD FAITH
BELIEFS, THEY ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND INVOLVE KNOWN AND
UNKNOWN RISKS AND UNCERTAINTIES. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THIS PROSPECTUS. SOME OF THE FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE THE RISK FACTORS DISCUSSED BELOW, AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD SUFFER
AND THE TRADING PRICE OF OUR CLASS A COMMON STOCK MAY DECLINE.
COMPETITION FOR ACQUISITIONS MAY IMPEDE OUR BUSINESS STRATEGY
We believe that the fragmentation of our industries and the 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;
- 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;
6
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- 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 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.
7
<PAGE>
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.
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)
8
<PAGE>
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.
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.
9
<PAGE>
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 32% of the
outstanding shares of the Class A Common Stock and all of the Class B Common
Stock and control approximately 55% of the voting power of such Common Stock. By
virtue of his Class B ownership and proxies with our chief operating officer and
former chief executive officer, Darwin Deason, our majority shareholder,
effectively controls the outcome of matters submitted to a vote of shareholders
and, indirectly, controls all major decisions reached by our Board of Directors
and officers.
A STRIKE BY UNIONIZED EMPLOYEES COULD AFFECT OUR PROFITABILITY
A small number of our employees are members of labor unions. If
unionized employees were to engage in a strike or other work stoppage, or if
other employees were to become unionized, we could experience a disruption of
operations or higher labor costs. This could have a material adverse effect on
operations.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR ABILITY TO
PROVIDE SERVICES
The Year 2000 issue could result in system failures or miscalculations,
causing disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar business activities. For
further information on our efforts to handle the Year 2000 issue, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Issue."
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 October 7, 1999, there were 8,728,044 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 800,000 of the 8,728,044 outstanding shares will
be registered by a future 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 1,055,000 outstanding shares have certain
rights to have shares registered under the Securities Act pursuant to the terms
of agreements between such holders and us. The resale of 620,342 of those
1,055,000 shares will be registered by a future 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.
10
<PAGE>
ADDITIONAL SHARES REGISTERED FOR USE IN FUTURE ACQUISITIONS MAY RESULT IN
DILUTION
This registration statement will cover the issuance of approximately
7.1 million shares of Class A Common Stock from time to time in the future, in
one or more business combination transactions. We anticipate issuing some or all
of such shares in one or more acquisitions in the future. We may also file
additional registration statements in the future covering the issuance of
additional shares for acquisitions or other purposes. The use of shares of Class
A Common Stock for a portion or all of the consideration to be paid in future
acquisitions could result in dilution to the holders of the outstanding Class A
Common Stock.
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION AND BYLAWS AND OTHER
SHAREHOLDER PROTECTION MECHANISMS
Certain provisions of our Articles and Bylaws may delay, defer, or
prevent a tender offer or takeover attempt that a shareholder might consider
being in such shareholder's best interest. This includes attempts that might
result in a premium over the market price for the Class A Common Stock. In this
regard, our Articles provide that the removal of any director or directors, with
or without cause, requires the affirmative vote of at least 80% of the combined
voting stock. This provision would restrict the ability of a party to gain
control of our Board by acquiring a majority of our voting stock, removing
all of the directors and then replacing them with the directors seeking to
benefit such party. Additionally, our Bylaws provide that the number of
directors shall be fixed, from time to time, by resolution of the Board.
Currently, our Board is divided into three classes of directors that are
elected for staggered three-year terms. Thus, in any given year, only a
portion of our directors would be eligible for election, thereby eliminating
the ability of a hostile party to gain control of our Board in a single proxy
contest. This makes any unsolicited takeover attempt (including an attempt
that 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 September 20, 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.
11
<PAGE>
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 663,229 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 October
15, 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 October 15, 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
FISCAL YEAR ENDED JUNE 30, 1999
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
FISCAL YEAR ENDING JUNE 30, 2000
Quarter ended September 30, 1999........... 7.88 3.00
Quarter ending December 31, 1999........... 4.50 3.31
(through October 15, 1999)
</TABLE>
12
<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
Good will 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
13
<PAGE>
JUNE 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
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>
14
<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.
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.
15
<PAGE>
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.
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%
16
<PAGE>
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 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.
17
<PAGE>
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 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.
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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.
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
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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 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
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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 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.
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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-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.
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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.
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
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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 Computer Forms & Products, Inc. ("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, 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.
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
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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
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.
25
<PAGE>
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.
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:
26
<PAGE>
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 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, 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 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.
27
<PAGE>
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 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.
28
<PAGE>
Department of Transportation; and the Federal Highway Administration, as well
as other state and local authorities. Each of these agencies regulates
various aspects of licensing, permitting and operations of our transportation
services.
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"), currently pending in
the United States District Court for the Southern District of Florida, for
approximately $5.0 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 $9.0 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 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 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.
29
<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, Jr............. 43 Chief Financial Officer, Treasurer 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..................... 46 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 of Precept since 1995. Mr. Deason joined Precept in 1991 and from
1993 through 1995 served as Executive Vice President of an operating
subsidiary of Precept. For the seven years immediately prior to joining 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 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 Sedman 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 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.
30
<PAGE>
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, Inc., which was acquired by Precept in
September 1998. Mr. Bazinet founded Creative in 1984 and has more than 38
years' experience in the printed business products and document management
services industry. Mr. Bazinet attended St. Mary's University in Halifax,
Nova Scotia.
J.D. GRECO has served as a Director of Precept since 1998. He was
previously President of Creative, 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 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.
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<PAGE>
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 8,572 and
4,082 options under the 1998 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 $100,000 (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ Securities -------------------------
Other Annual Restricted Underlying LTIP
Name and Principal Fiscal Compensa- Stock Options/ Payouts All Other
Position Year Salary ($) Bonus ($) tion ($)(1) Awards (2) SARs (#) ($) Compensation ($)
------------------ ---- ---------- --------- ------------ ---------- -------- ------- ---------------
<S> <C> <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 1998 -- -- -- -- -- -- --
President, Chief 1997 -- -- -- -- -- -- --
Financial Officer,
Treasurer and Asst.
Secretary
D. Paul Cabra, 1999 175,000 175,000 -- -- -- -- --
President, Precept 1998 141,783 100,000 -- -- 28,571 -- --
Business Products, Inc 1997 96,000 39,000 -- -- -- -- --
32
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald P. Sorci, 1999 173,750 175,000 -- -- 28,571 -- --
President, Precept 1998 -- -- -- -- -- -- --
Transportation 1997 -- -- -- -- -- -- --
Services, Llc
</TABLE>
-------------------------------
(1) None of the Named Executive Officers received personal benefits,
securities or property in excess of the lesser of $50,000 or 10%
of such individual's reported salary and bonus.
(2) Precept did not grant any restricted stock awards or SARs or
long-term incentive plan payouts to the Named Executive Officers
during the fiscal year ended June 30, 1999.
(3) Mr. Neely previously served Precept for a number of years in the
indicated positions. He resigned in April, 1999.
OPTIONS GRANTED AND EXERCISED DURING 1999 FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
Except as indicated in the following table, Precept did not grant
stock options or stock appreciation rights (SARs) to any of the
Named Executive Officers during fiscal 1999:
<TABLE>
<CAPTION>
OPTION/SAR GRANT TABLE
----------------------
Individual Grants Potential Realizable
----------------- Value at
Assumed Annual Rates of
Stock
Price Appreciation
For Option
Term
-----------------------
Number of Percent of
Securities Total Exercise or
Underlying Options/SARs Base Price Expiration 5% ($) 10% ($)
Options/ Granted to ($/Sh) Date --------- ---------
Name SARs Employees in ----------- ----------
---- Granted (#) Fiscal Year
----------- ------------
<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>
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.
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<PAGE>
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 and 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 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%
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
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
34
<PAGE>
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.
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.
35
<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 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.
36
<PAGE>
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, owns 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.
37
<PAGE>
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth certain information as of the Record
Date with respect to the shares of Class A Common Stock and Class B Common Stock
beneficially owned by (1) shareholders known to us to own more than 5% of the
outstanding shares of such classes; (2) each of our directors and executive
officers; 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>
Class A Common Stock (1) Class B Common Stock (2)
------------------------- ------------------------
Total Number Percent of
Name and Address of Number of Shares Percent of Number of Shares Percent of of Class A and Total
Beneficial Owner (3) ---------------- Class (4) ---------------- Class (4) Class B Shares Voting
-------------------- ---------- ---------- -------------- Power (1)
----------
<S> <C> <C> <C> <C> <C> <C>
Darwin Deason 3,533,669(5)(6) 40.5% 592,142 100% 4,125,811 (6) 64.5%
Douglas R.Deason 729,929 (7) 8.4% 0 0% 729,929 (7) 5.0%
William W. Solomon, 0 0% 0 0% -- 0%
Jr.
D. Paul Cabra 148,481 1.7% 0 0% 148,481 1.0%
Ronald L. Sorci 2,786 * 0 0% 2,786 *
J. Livingston Kosberg 162,215 (8) 1.9% 0 0% 162,215 (8) 1.1%
Sheldon I. Stein 0 0% 0 0% -- 0%
Robert N. Bazinet 103,537 1.2% 0 0% 103,537 *
J. D. Greco 519,213 5.9% 0 0% 519,213 3.5%
Peter H. Trembath 4,200 * 0 0% 4,200 *
All Directors and
Officers as a Group 4,325,620 (6) 49.6% (6) 592,142 100% 4,917,762 (6) 69.9% (6)
Beneficial Owners of
more that 5% of
Precept Common Stock
First Nationwide Bank 469,466 5.4% 0 0% 469,466 3.2%
David L. Neely (9) 735,788 8.4% 0 0% 735,788 5.0%
</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.
(2) Each share of Class B Common Stock is convertible into Class A
Common Stock on a share-for-share basis at any time.
38
<PAGE>
(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 8,728,044 shares of Class A Common Stock and 592,142 shares
of Class B Common Stock outstanding at October 7, 1999.
(5) Does not include 592,142 shares of Class B Common Stock. Each share
of Class B Common Stock is convertible into Class A Common Stock on a
share-for-share basis at any time. Mr. Deason owns all of the issued
and outstanding shares of Class B Common Stock.
(6) 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.
(7) 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.
(8) Held by the J. Livingston Kosberg trust of which Mr. Kosberg is the
sole trustee.
(9) Mr. Neely served the Company as its Chairman and Chief Executive
Officer for a number of years. He resigned his positions in April,
1999.
39
<PAGE>
DESCRIPTION OF SECURITIES
Our total authorized capital stock consists of 100,000,000 shares of
Class A Common Stock, 10,500,000 shares of Class B Common Stock, par value
$.01 per share and 3,000,000 shares of Preferred Stock, par value $1.00 per
share. As of October 7, 1999, there were 8,728,044 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 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
40
<PAGE>
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.
41
<PAGE>
RIGHTS AGREEMENT; RIGHTS TO PURCHASE SHARES OF CLASS A COMMON STOCK
On February 2, 1998 our Board of Directors declared a dividend of
one common share purchase right (a "Right") for each outstanding share of
Common Stock. The dividend was made on February 9, 1998 (a "Record Date") to
the shareholders of record at the close of business on that date. Each Right
entitles the registered holder to purchase from us one share of Class A
Common Stock, at a price of $350.00 (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated as of February 9, 1998 (the "Rights Agreement") between
Precept and Continental Stock Transfer & Trust Company, as Rights Agent (the
"Rights Agent").
Until the earlier to occur of (1) ten Business Days following a
public announcement that a person or group of affiliated or associated
persons has acquired, or obtained the right to acquire, beneficial ownership
of 15% or more of the outstanding Class A Common Stock (an "Acquiring
Person") or (2) ten Business Days following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of such outstanding Class A Common Stock (the earlier of
such dates being the "Distribution Date"), the Rights will be evidenced, with
respect to any of the certificates for Common Stock outstanding as of the
Record Date, by such certificates for the Common Stock with a copy of a
Summary of Rights attached to the certificate. Additional Rights will be
issued in respect of all shares of Common Stock that are issued after the
Record Date but prior to the earlier of the Distribution Date or the
Expiration Date, including the Shares issued in the Transfer.
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
certificates issued after the Record Date upon transfer or new issuance of
Common Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration
of the Rights), the surrender for transfer of any certificates for Common
Stock outstanding even without such notation or a copy of a Summary of Rights
being attached to such Certificate, will also constitute the transfer of the
Rights associated with the Common Stock represented by such certificate. As
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights (the "Right Certificates") will be mailed to holders of
record of the Common Stock as of the close of business on the Distribution
Date and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on February 9, 2008, (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the Rights are earlier
redeemed by Precept, in each case, as described below.
The Purchase Price payable and the number of shares of Class A
Common Stock or other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (1) in
the event of a stock dividend on, or a subdivision, combination, or
reclassification of, the Class A Common Stock, (2) upon the grant to holders
of the Class A Common Stock of certain rights or warrants to subscribe for or
purchase Class A Common Stock at a price or securities convertible into Class
A Common Stock with a conversion price less than the then current market
price of the Class A Common Stock; (3) upon the distribution to holders of
the Class A Common Stock of evidences of indebtedness or assets or of
subscription rights or warrants (other than those referred to above); or (4)
upon any of the foregoing happens with respect to the Class B Common Stock.
In the event that any person or entity becomes an Acquiring Person
(the beneficial owner of 15% or more of the Class A Common Stock), provision
will be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will then be void), will have the right
to receive upon exercise that number of shares of Class A Common Stock having
a market value of two times the applicable exercise price of the Right.
The Rights Agreement excludes from the definition of Acquiring
Person, Persons who certify to us that they inadvertently acquired in excess
of 14.9% of the outstanding Class A Common Stock and thereafter divest such
excess Class A Common Stock or who acquire 15% or more of the Class A Common
Stock in a Permitted Transaction. A "Permitted Transaction" is a stock
acquisition or tender or exchange offer pursuant to a definitive agreement
which 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.
42
<PAGE>
In the event that we are acquired in a merger or other business
combination transaction, or 50% or more of its consolidated assets or earning
power are sold, proper provisions will be made so that each holder of a Right
will have the right to receive, upon the exercise of the Right at the then
applicable exercise price, that number of shares of common stock of the
acquiring company that at the time of such transaction will have a market
value of two times the applicable exercise price of the Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Class A Common Stock will be
issued and, in lieu of such fractional shares, an adjustment in cash will be
made based on the market price of the Class A Common Stock on the last
trading day prior to the date of exercise.
After a person becomes an Acquiring Person, our Board of Directors
may exchange the Rights, other than those Rights owned by the Acquiring
Person, in whole or in part, at an exchange ratio of one share of Class A
Common Stock per Right, subject to adjustment. However, the Board of
Directors cannot conduct an exchange at any time after any Person, together
with its Affiliates and Associates, becomes the Beneficial Owner of 50% or
more of the outstanding Class A Common Stock.
At any time prior to any Person becoming an Acquiring Person, a
Requisite Majority may redeem the Rights in whole, but not in part, at a
price of $0.01 per Right (the "Redemption Price"). In addition, the Board of
Directors may extend or reduce the period during which the Rights are
redeemable, so long as the Rights are redeemable at the time of such
extension or reduction. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders
of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors
without the consent of the holders of the Rights, including an amendment to
extend the Final Expiration Date, except that from and after the Distribution
Date no such amendment may adversely affect the economic interests of the
holders of the Rights.
Until a Right is exercised, the holder of the Right, as such, will
have no rights as a shareholder of Precept, including, without limitation,
the right to vote, or to receive dividends.
REGISTRATION RIGHTS
Holders of approximately 1,055,000 shares of Class A Common Stock
have certain rights to have such shares registered under the Securities Act
pursuant to the terms of agreements between such holders and us.
Specifically, such holders have the one-time right to demand that we use our
best efforts to register all their shares of Class A Common Stock.
Additionally, if at any time we propose to register our securities under the
Securities Act (other than on a Form S-4 or Form S-8), we must notify the
holders of such proposed offering, and, upon their request we must use our
best efforts to register all shares of Class A Common Stock owned by the
holders. In such instances, we are responsible for the expenses related to
the registration of such shares.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our Articles of Incorporation provide that to the fullest extent
permitted by applicable law, a director will not be liable to us or our
shareholders for monetary damages for an act or omission in the director's
capacity as a director.
The TBCA permits the indemnification of directors, employees,
officers and agents of Texas corporations. Our Articles and Bylaws provide
that we shall indemnify any person to the fullest extent permitted by law.
Under the TBCA, an officer or director may be indemnified if he acted in good
faith and reasonably believed that his conduct (1) 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
43
<PAGE>
the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. This provision in the
Articles does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Texas law. This provision
also does not affect a director's responsibilities under any other laws, such
as the federal securities laws or state or federal environmental laws.
TRADING MARKET, TRANSFER AGENT AND REGISTRAR
Our Class A Common Stock is traded on the Nasdaq SmallCap Market
under the symbol "PBSI." The transfer agent and registrar for the Class A
Common Stock is Continental Stock Transfer and Trust Company.
TEXAS ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS
Certain provisions of our Articles and Bylaws may delay, defer, or
prevent a tender offer or takeover attempt that a shareholder might consider
being in such shareholder's best interest. This includes attempts that might
result in a premium over the market price for the Class A Common Stock. In
this regard, our Articles provide that the removal of any director or
directors, with or without cause, requires the affirmative vote of at least
80% of the combined voting stock. This provision would restrict the ability
of a party to gain control of our Board by acquiring a majority of our voting
stock, removing all of the directors and then replacing them with the
directors seeking to benefit such party. Additionally, our Bylaws provide
that the number of directors shall be fixed, from time to time, by resolution
of the Board. Currently, our Board is divided into three classes of directors
that are elected for staggered three-year terms. Thus, in any given year,
only a portion of our directors would be eligible for election, thereby
eliminating the ability of a hostile party to gain control of our Board in a
single proxy contest. This makes any unsolicited takeover attempt (including
an attempt that is in our shareholders' best interest) more expensive and
more difficult. Our Bylaws provide for advance notice procedures with respect
to the submission by shareholders of proposals to be acted on at shareholder
meetings and of nominations of candidates for election as directors. The
establishment of such procedures removes any ambiguity with respect to how
matters can be so submitted by shareholders. Further, our Articles permit the
Board to establish by resolution one or more series of preferred stock and to
establish the powers, designations, preferences and relative, participating,
optional, or other special rights of each series of preferred stock. The
preferred stock could be issued on terms that are unfavorable to the holders
of Class A Common Stock or that could make a takeover or change in control
more difficult. Further, we have instituted a shareholder rights plan, which
plan may have the effect of discouraging an unsolicited takeover proposal.
Moreover, we are subject to the Texas Business Combination Law, which places
restrictions on certain business combinations with certain shareholders that
could render a change in control more difficult. The Articles and Bylaws,
together with the provision of shareholder rights plan and Texas law, may
have the effect of discouraging a future takeover attempt by a third party
that is not approved by the Board and render the removal of the incumbent
management more difficult.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Class A Common Stock by shareholders pursuant to
Rule 144 under the Securities Act could have an adverse effect on the market
price of our securities.
As of October 7, 1999, 8,728,044 shares of Class A Common Stock
and 592,142 shares of Class B Common Stock were outstanding. In addition, as
of October 7, 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 1,055,000
outstanding shares have certain rights to have shares registered under the
Securities Act pursuant to the terms of agreements between such holders and
us. The resale of 620,342 of those 1,055,000 shares will be registered by 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.
45
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus covers up to 7,118,181 of Class A Common Stock that
we may issue to the owners of assets, businesses or securities we acquire in
the future. The consideration offered by us in such acquisitions in addition
to the shares of Class A Common Stock offered by this Prospectus may include
such cash, debt or other securities (which may be convertible into shares of
Class A Common Stock covered by this Prospectus), or assumption by us of
liabilities of the business being acquired, or a combination thereof. We
expect to determine the terms of any acquisitions by direct negotiations with
the person from whom the assets, businesses or securities are acquired. The
securities issued in each acquisition will be valued at prices reasonably
related to market prices, either when an agreement for the acquisition is
entered into, or when we deliver the securities. We will not pay any
underwriting discounts or commissions, but we may pay finder's fees in
connection with certain acquisitions.
If required at the time that a particular offer of shares is made, a
supplement to this Prospectus will be delivered that describes any material
arrangements for the distribution of shares and the terms of the offering,
including the names of any underwriters, brokers, dealers or agents and any
discounts, commissions or concessions and other items constituting
compensation from the selling shareholder.
Selling shareholders may also offer and sell shares of Class A
Common Stock covered by this Prospectus under exemptions from the
registration requirements of the Securities Act, including sales which meet
the requirements of Rule 145(d) under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Class A
Common Stock to be offered hereby will be passed upon by Jackson Walker L.L.P.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our
consolidated financial statements at June 30, 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.
46
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
<S> <C>
Report of Independent Auditors............................................................... F-1
Consolidated Balance Sheets at June 30, 1999 and 1998........................................ F-2
Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997....... F-3
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997....... F-4
Consolidated Statements of Changes in Shareholders' Equity for the three year period
ended June 30, 1999..................................................................... F-5
Notes to Consolidated Financial Statements................................................... F-6
</TABLE>
<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-1
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------------------
1999 1998
------------- -------------
ASSETS
<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-2
<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-3
<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-4
<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-5
<PAGE>
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
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
F-6
<PAGE>
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.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The cost of property and
equipment held under capital leases, primarily transportation equipment, is
equal to the lower of the net present value of the minimum lease payments or the
fair value of the leased property at the inception of the lease. Depreciation of
property and equipment and amortization of capitalized leasehold rights are
computed using the straight-line method over the estimated useful lives of the
assets. Significant repairs or betterments, which extend the useful life of an
asset, are capitalized and depreciated over the assets' remaining useful lives.
F-7
<PAGE>
LONG-LIVED ASSETS
It is the Company's policy to periodically review the fair market value
of its business operations and assess the operating performance and cash flows
of its business operations. If based on such assessment, the Company identifies
situations which indicate potential impairment or negative cash flow conditions,
then the Company will evaluate the net carrying value of its long-lived assets,
including goodwill and intangible assets, through an assessment of the estimated
future cash flows related to such assets. In the event that assets are found to
be carried at amounts which are in excess of estimated undiscounted net future
cash flows, the assets will be adjusted for impairment to a level commensurate
with a discounted 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
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.
F-8
<PAGE>
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.
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
F-9
<PAGE>
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.
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
F-10
<PAGE>
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,
----------------------------------------------
Purchase consideration: 1999 1998 1997
------------- ------------- -----------
<S> <C> <C> <C>
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
============= ============= ===========
Year Ended June 30,
----------------------------------------------
Allocation of fair value of net assets acquired: 1999 1998 1997
------------- ------------- -----------
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>
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>
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.
F-11
<PAGE>
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>
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-12
<PAGE>
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. 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
F-13
<PAGE>
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.
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.
F-14
<PAGE>
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.
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.
F-15
<PAGE>
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 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.
F-16
<PAGE>
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>
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.
F-17
<PAGE>
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.
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>
F-18
<PAGE>
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.
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
============= =============
Year Ended June 30,
------------------------------
1998 1997
------------- -------------
Revenue ..................................................... $ 127,279 $ 82,661,862
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.
F-19
<PAGE>
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.
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.
F-20
<PAGE>
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.
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
F-21
<PAGE>
$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.
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-22
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT MADE IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY PRECEPT. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE COMMON STOCK
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PRECEPT SINCE SUCH
DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Where You Can Find More Information...................................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Dividend Policy.......................................................... 12
Price Range of Common Stock.............................................. 12
Selected Consolidated Financial Data..................................... 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 15
Business................................................................. 23
Management............................................................... 30
Certain Relationships and Related Transactions........................... 36
Principal and Selling Shareholders....................................... 38
Description of Securities................................................ 40
Shares Eligible for Future Sale.......................................... 45
Plan of Distribution..................................................... 46
Legal Matters............................................................ 46
Experts.................................................................. 46
Index to Financial Statements............................................ F-1
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
7,118,181 SHARES
PRECEPT BUSINESS SERVICES, INC.
CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
October ____, 1999
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Texas Business Corporation Act (the "TBCA"), a Texas
corporation may in general indemnify a director or officer who was, is or is
threatened to be made a named defendant or respondent in a proceeding by
virtue of his position in the corporation if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation and, in the case of criminal proceedings, had no
reasonable cause to believe his conduct was unlawful. Further, a Texas
corporation may indemnify a director or officer in an action brought by or in
the right of the corporation only if such director or officer was not found
liable to the corporation, unless or only to the extent that a court finds
him to be fairly and reasonably entitled to indemnity for such expenses as
the court deems proper, within statutory limits.
The Registrant's Restated Articles of Incorporation, as amended, provide
that each person who (i) is or was a director, officer, employee or agent of
Registrant or (ii) is or was serving at the request of Registrant as a
director, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, or other enterprise or employee benefit plan
(including the heirs, executors, administrators or estate of such person)
shall be indemnified by the Registrant to the fullest extent that a
corporation is required or permitted to grant indemnification to such person
under the TBCA. Reasonable expenses incurred by a director, officer, employee
or agent of the Registrant, who was, is or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Registrant, in advance of the final disposition of the proceeding, to the
maximum extent permitted under the TBCA.
Additionally, Registrant's Restated Articles of Incorporation, as
amended, eliminate in certain circumstances the monetary liability of
directors of Registrant for an act or omission in the director's capacity as
a director. This provision does not eliminate or limit the liability for (i)
a breach of a director's duty of loyalty to Registrant or its shareholders;
(ii) an act or omission not in good faith or that involves intentional
misconduct or a knowing violation of the law; (iii) a transaction from which
the director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office; (iv)
an act or omission for which the liability of the director is expressly
provided for by statute; or (v) an act related to an unlawful stock
repurchase or payment of a dividend.
The above discussion of the Registrant's Restated Articles of
Incorporation, as amended, and Bylaws and of the TBCA is not intended to be
exhaustive and is qualified in its entirety by the Restated Articles of
Incorporation, as amended, and Bylaws and the TBCA.
The Registrant carries directors' and officers' liability insurance
which insures Registrant's directors and officers against liability for any
"wrongful act" arising out of their position, and which is not reimbursable
under the Registrant's Bylaws or which, if reimbursable, Registrant has not
paid or is unable to pay. These provisions of the policy pertaining to
officers and directors are also subject to several exclusions, including
losses covered under other forms of insurance, losses occasioned by
violations of governmental regulations and ordinances, losses for which
insurance would be against public policy and others recited therein.
The Registrant has entered into an Indemnification Agreement with each
of its directors to provide indemnification for expenses incurred by such
director, by reason of the fact that he is a director, in connection with
certain lawsuits or proceedings. To be eligible for such indemnification, the
director must have acted in good faith in a manner he reasonably believed to
be in or not opposed to the best interests of the Registrant, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Additionally, the Registrant has agreed to
indemnify each director against any amount which such director is legally
obligated to pay relating to or arising out of any claim against such
director because of any act, failure to act or neglect or breach of duty,
including any actual or alleged error, misstatement or misleading statement,
which such director commits, suffers, permits or acquiesces in while acting
in his capacity as a director or officer of the Registrant, or, at the
II-1
<PAGE>
request of the Registrant, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Reorganization dated as of November
16, 1997 by and among U.S. Transportation Systems, Inc.,
Precept Investors, Inc., and Precept Acquisition Company,
L.L.C. (1)
2.2 USTS Plan of Liquidation and Dissolution (1)
2.3 Stock Purchase Agreement by and among Precept Business Products,
Inc., Precept Business Services, Inc., InfoGraphix, Inc. and
James Gorin (3)
2.4 Stock Purchase Agreement dated as of June 13, 1998 by and among
the Company, Precept Business Products, Inc., MBF Corporation,
and J.D. Greco (4)
2.5 Agreement and Plan of Merger dated as of September 1, 1998 by and
among the Company, Creative Acquisition Corp., Creative, Edward
Curtis and Robert Bazinet (5)
2.6 Agreement and Plan of Merger dated as of August 26, 1998 by and
among the Company, Precept Acquisition Corp., Southern Systems
Business Forms & Data Supplies, Inc., a South Carolina
corporation ("Southern") and each of the shareholders of Southern
(6)
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Form of Precept Class A Common Stock Certificate (1)
4.2 Form of Rights Agreement between Precept and Continental Stock
Transfer & Trust Co. (1)
4.3 Form of Irrevocable Proxy granted to Darwin Deason by various
Precept Investors shareholders (1)
5.1 Opinion of Jackson Walker L.L.P. (1)
10.1 Form of Registration Rights Agreement by and among Precept
Investors, Inc., Michael Margolies, and The Margolies Family
Trust (1)
10.2 Form of Employment Agreement by and between Precept Investors,
Inc. and Ron Sorci (1)
10.3 Reciprocal Services Agreement (as amended), dated June 30, 1994,
between Precept and ACS (1)
10.4 First Amendment to Reciprocal Services Agreement, dated May 1,
1998, between Precept and ACS (7)
10.5 Precept 1996 Stock Option Plan (1)
10.6 Form of Directors Indemnification Agreement (1)
10.7 Credit Agreement dated March 22, 1999 among Precept Business
Services, Inc. and Bank One, Texas, N.A. as agent and First
Chicago Capital Markets, Inc. as Arranger (7)
10.8 Precept 1998 Stock Incentive Plan (1)
10.9 Separation Agreement and General Release, dated July 20, 1998,
by and among Precept Business Services, Inc. and Michael
Margolies (7)
II-2
<PAGE>
EXHIBIT DESCRIPTION
21 Precept Subsidiaries (8)
23.1 Consent of Ernst & Young LLP (8)
23.2 Consent of Jackson Walker L.L.P. (1)
27.1 Financial Data Schedule (9)
(1) Previously filed as an exhibit to the Company's registration statement on
Form S-4 (file no. 333-42689) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended December 31, 1997.
(3) Previously filed as an exhibit to the Company's Form 8-K dated April 28,
1998.
(4) Previously filed as an exhibit to the Company's Form 8-K dated July 6,
1998.
(5) Previously filed as an exhibit to the Company's Form 8-K filed September
18, 1998.
(6) Previously filed as an exhibit to the Company's Form 8-K filed September
25, 1998.
(7) Previously filed as an exhibit to the Company's Form 8-K filed on April 13,
1999.
(8) Filed herewith.
(9) Previously filed as an exhibit to the Company's Form 10-K for the fiscal
year ended June 30, 1999.
(b) Financial Statement Schedules: Not Applicable
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if
the total dollar value of securities offered
would not exceed that which was registered) and
any deviation from the low or high end of the
estimated maximum offering range may be
reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
represent no more than a 20% change in the
maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in
the effective registration statement;
(2) that, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
II-3
<PAGE>
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933,
each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other Items of the applicable form.
(d) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of
the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, in the City of Dallas, State of Texas, on October 20, 1999.
PRECEPT BUSINESS SERVICES, INC.
By: /s/ Douglas R. Deason
--------------------------------------
Douglas R. Deason
(Principal Executive Officer)
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, the
registration statement was signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Darwin Deason * Director and Chairman of the Executive October 20, 1999
- -----------------
Darwin Deason Committee of the Board October 20, 1999
/s/ Douglas R. Deason * President, Chief Operating Officer and October 20, 1999
- --------------------- Director (Principal Executive Officer)
Douglas R. Deason
/s/ William W. Solomon, Jr. Chief Financial Officer, Treasurer and October 20, 1999
- --------------------------- Director (Principal Financial and
William W. Solomon, Jr. Accounting Officer)
/s/ J. Livingston Kosberg * Director October 20, 1999
- -------------------------
J. Livingston Kosberg
/s/ Sheldon I. Stein * Director October 20, 1999
- --------------------
Sheldon I. Stein
/s/ Robert Bazinet * Director October 20, 1999
- ------------------
Robert Bazinet
/s/ J. D. Greco * Director October 20, 1999
- ---------------
J. D. Greco
</TABLE>
* By: /s/ William W. Solomon, Jr.
---------------------------
as attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Reorganization dated as of November
16, 1997 by and among U.S. Transportation Systems, Inc.,
Precept Investors, Inc., and Precept Acquisition Company,
L.L.C.(1)
2.2 USTS Plan of Liquidation and Dissolution (1)
2.3 Stock Purchase Agreement by and among Precept Business Products,
Inc., Precept Business Services, Inc., InfoGraphix, Inc. and
James Gorin (3)
2.4 Stock Purchase Agreement dated as of June 13, 1998 by and among
the Company, Precept Business Products, Inc., MBF Corporation,
and J.D. Greco (4)
2.5 Agreement and Plan of Merger dated as of September 1, 1998 by and
among the Company, Creative Acquisition Corp., Creative, Edward
Curtis and Robert Bazinet (5)
2.6 Agreement and Plan of Merger dated as of August 26, 1998 by and
among the Company, Precept Acquisition Corp., Southern Systems
Business Forms & Data Supplies, Inc., a South Carolina
corporation ("Southern") and each of the shareholders of Southern
(6)
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Form of Precept Class A Common Stock Certificate (1)
4.2 Form of Rights Agreement between Precept and Continental Stock
Transfer & Trust Co. (1)
4.3 Form of Irrevocable Proxy granted to Darwin Deason by various
Precept Investors shareholders (1)
5.1 Opinion of Jackson Walker L.L.P. (1)
10.1 Form of Registration Rights Agreement by and among Precept
Investors, Inc., Michael Margolies, and The Margolies Family
Trust (1)
10.2 Form of Employment Agreement by and between Precept Investors,
Inc. and Ron Sorci (1)
10.3 Reciprocal Services Agreement (as amended), dated June 30, 1994,
between Precept and ACS (1)
10.4 First Amendment to Reciprocal Services Agreement, dated May 1,
1998, between Precept and ACS (7)
10.5 Precept 1996 Stock Option Plan (1)
10.6 Form of Directors Indemnification Agreement (1)
10.7 Credit Agreement dated March 22, 1999 among Precept Business
Services, Inc. and Bank One, Texas, N.A. as agent and First
Chicago Capital Markets, Inc. as Arranger (7)
10.8 Precept 1998 Stock Incentive Plan (1)
10.9 Separation Agreement and General Release, dated July 20, 1998, by
and among Precept Business Services, Inc. and Michael Margolies
(7)
21 Precept Subsidiaries (8)
23.1 Consent of Ernst & Young LLP (8)
23.2 Consent of Jackson Walker L.L.P. (1)
27.1 Financial Data Schedule (9)
<PAGE>
(1) Previously filed as an exhibit to the Company's registration statement on
Form S-4 (file no. 333-42689) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended December 31, 1997.
(3) Previously filed as an exhibit to the Company's Form 8-K dated April 28,
1998.
(4) Previously filed as an exhibit to the Company's Form 8-K dated July 6,
1998.
(5) Previously filed as an exhibit to the Company's Form 8-K filed September
18, 1998.
(6) Previously filed as an exhibit to the Company's Form 8-K filed September
25, 1998.
(7) Previously filed as an exhibit to the Company's Form 8-K filed on April 13,
1999.
(8) Filed herewith.
(9) Previously filed as an exhibit to the Company's Form 10-K for the fiscal
year ended June 30, 1999.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PRECEPT BUSINESS SERVICES, INC.
Precept Business Products, Inc.
Precept Holdings, Inc.
Precept Transportation Services, LLC
Wingtip Couriers, Inc.
Precept Transportation Services of Texas, Inc.
Transportation Systems Corporation
Shortway River Rouge, Inc.
Jetport, Inc.
InfoGraphix, Inc.
Creative Acquisition Corporation
Precept Acquisition Corporation
Garden State Acquisition Corporation
Precept Transportation of New England, Inc.
Computer Forms & Products, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 10, 1999, in the Post-Effective
Amendment No. 1 to the Registration Statement filed on Form S-4 and related
Prospectus of Precept Business Services, Inc. for the Registration of
7,118,181 shares of its common stock.
Ernst & Young, L.L.P.
- ----------------------
Dallas, Texas
October 18, 1999
