<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998.
REGISTRATION NO. 333-44211
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
U.S. TRANSPORTATION SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
NEVADA 4111 34-1397328
(State of incorporation) (S.I.C.) (I.R.S. Employer
Identification
No.)
</TABLE>
MICHAEL MARGOLIES, CHAIRMAN OF THE BOARD
U.S. TRANSPORTATION SYSTEMS, INC.
33 WEST MAIN STREET
ELMSFORD, NEW YORK 10523
(914) 345-3339
(Address and telephone of Registrant's principal executive offices,
principal place of business, and agent for service of process)
------------------------
COPIES TO:
ROBERT BRANTL, ESQ.
Bressler, Amery & Ross, P.C.
17 State Street - 34th Floor
New York, New York 10004
Attorney for Issuer
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PUBLIC SALE: As soon as practicable after
the Registration Statement becomes effective.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration 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,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES BEING REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Shares, $.01 par value(1) 1,815,000 shares $3.82(2) $6,933,300(2) $2,045.32
Common Shares, $.01 par value(3) 675,166 shares $3.9375 $2,658,466(4) $ 784.25
Total............. $2,829.50
</TABLE>
(1) Represents shares to be issued by the Registrant upon exercise of its Class
C Common Stock Purchase Warrants.
(2) The proposed price is the exercise price of the Class C Common Stock
Purchase Warrants.
(3) Represents shares to be offered by the Selling Shareholders.
(4) The proposed price is estimated solely for purposes of calculating the
registration fee. Pursuant to Rule 457(c), the registration fee is based on
$3.9375 per share, the closing price of the Common Stock reported on NASDAQ
on January 8, 1998.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Pursuant to Rule 429(a), the prospectus included in this Registration
Statement covers 1,815,000 shares of Common Stock which were covered by the
Registration Statement on Form SB-2 earlier filed by this Registrant (No.
333-4104).
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<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC.
2,490,166 SHARES OF
COMMON STOCK, $.01 PAR VALUE,
---------------------
U.S. Transportation Systems, Inc. ("USTS") is offering hereby 1,815,000
shares of Common Stock, $.01 par value, ("Common Stock") for sale upon the
exercise of the 1,815,000 Class C Common Stock Purchase Warrants (the "Class C
Warrants") currently outstanding. Each Class C Warrant entitles the holder to
purchase one share of USTS Common Stock at an exercise price of $3.82, subject
to adjustment, through August 27, 1999. See: "Description of USTS Securities."
In addition, certain shareholders (the "Selling Shareholders") of USTS
hereby offer 675,166 shares of USTS common stock. The shares are being offered
for the account of the Selling Shareholders, and none of the proceeds of the
offering will be paid to USTS. See "Selling Shareholders and Plan of
Distribution."
The Common Stock of the Company is traded in the over-the-counter market and
is listed on the SmallCap Market of the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") under the Symbol "USTS". On
February 6, 1998, the closing price for the Common Stock, as reported on the
NASDAQ SmallCap Market, was $3.62 1/2. See: "Market Price Data".
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO USTS OR
DISCOUNTS AND SELLING
PRICE TO PUBLIC(1) COMMISSIONS(2) SHAREHOLDER(3)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Shares Offered By USTS
Per Share................................... $3.82 $.19 $3.63
Total....................................... $6,933,300 $346,665 $6,586,635
Shares Offered By Selling Shareholders
Per Share................................... $3.93 3/4 -- $3.93 3/4
Total....................................... $2,658,466 -- $2,658,466
</TABLE>
- ------------------------
(1) The "Price to Public: indicated for Shares Offered By USTS is the exercise
price of the Class C Warrants. The "Price to Public" indicated for Shares
Offered By Selling Shareholders is estimated on the basis of the closing
price for the Common Stock on January 8, 1998. The Selling Shareholders
intend to distribute the shares in transactions in the over-the-counter
market at negotiated prices.
(2) USTS has agreed to pay a commission of five percent to First London
Securities Inc. upon the exercise of Class C Warrants if certain conditions
are met. See "Selling Shareholders and Plan of Distribution."
(3) Before deducting the expenses of this offering, estimated to be $25,000. All
such expenses will be paid by USTS.
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 1998
<PAGE>
AVAILABLE INFORMATION
USTS is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements, information statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements, information statements and other information filed by USTS with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission, at
prescribed rates. Additionally, the Commission maintains a Website that contains
such information regarding USTS. USTS Common Stock is principally traded on
Nasdaq. Reports, proxy statements and other information relating to USTS can be
inspected at the offices of Nasdaq, 1735 K Street, Washington, D.C. 20006.
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 USTS.
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 PROPOSED PLAN OF REORGANIZATION WITH PRECEPT BUSINESS SERVICES, INC.
On November 16, 1997, USTS entered into an Agreement and Plan of
Reorganization ("Plan of Reorganization") with Precept Business Services, Inc.
("Precept") and Precept Acquisition Company L.L.C., a wholly-owned subsidiary of
Precept ("Acquisition"). The Plan of Reorganization provides for the transfer by
USTS to Acquisition of its business and substantially all of its assets, subject
to certain liabilities (the "Transfer") in exchange for 9,612,500 shares
(subject to increase on a share-for-share basis if certain outstanding warrants,
including the Class C Warrants, are exercised prior to the closing of the
Transfer) of Precept Class A Common Stock, to be followed by the distribution of
the Precept Shares to the shareholders of USTS and the liquidation and
dissolution of USTS pursuant to a Plan of Liquidation and Dissolution ("Plan of
Liquidation"). The Plan of Reorganization and the Plan of Liquidation are
referred to herein collectively as the "Transactions."
This prospectus has been prepared on the assumption that the Transfer will
be completed, and, accordingly, contains disclosure regarding Precept.
Completion of the Transfer, however, is subject to a number of conditions,
including approval of the Transfer at a meeting of the shareholders of USTS.
That meeting has been scheduled for March 12, 1998, at which time USTS
Shareholders of record as of February 4, 1998 will be asked to vote upon a
proposal to approve the Transactions. There is no assurance that the Transfer
will be completed. In the event that the Transfer is not completed, either
because it is not approved by the USTS Shareholders or for any other reason,
USTS will continue to carry on the business operations in which it is currently
engaged. See: "The Transactions."
INTRODUCTION TO THE SUMMARY
THE FOLLOWING IS ONLY A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS AND DOES NOT PURPORT TO BE COMPLETE. REFERENCE IS MADE TO,
AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION
CONTAINED ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, THE TERMS
"USTS", "PRECEPT", AND "ACQUISITION" REFER TO SUCH CORPORATIONS, RESPECTIVELY,
AND, EXCEPT WHERE THE CONTEXT OTHERWISE REQUIRES, SUCH ENTITIES AND THEIR
RESPECTIVE PREDECESSORS AND SUBSIDIARIES. ALL INFORMATION CONCERNING USTS
INCLUDED IN THIS PROSPECTUS HAS BEEN FURNISHED BY USTS, AND ALL INFORMATION
CONCERNING PRECEPT AND ACQUISITION INCLUDED IN THIS PROSPECTUS HAS BEEN
FURNISHED BY PRECEPT. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN
THIS SUMMARY HAVE THE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROSPECTUS.
PRECEPT EXPECTS TO EFFECT A 3.154 TO 1 STOCK SPLIT ON THE PRECEPT COMMON STOCK
PRIOR TO THE EFFECTIVE DATE OF THIS PROSPECTUS. THE PRO FORMA SHARE AND PER
SHARE INFORMATION REFLECTS THE PROPOSED STOCK SPLIT. UNLESS OTHERWISE INDICATED,
YEAR END FINANCIAL INFORMATION AND OTHER INFORMATION REFERENCING A PARTICULAR
YEAR WITH RESPECT TO USTS IS AS OF AND FOR THE YEAR ENDED DECEMBER 31, AND WITH
RESPECT TO PRECEPT IS AS OF AND FOR THE YEAR ENDED JUNE 30. USTS IS CONSIDERED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") TO BE A SMALL
BUSINESS ENTERPRISE AND, ACCORDINGLY, THE FINANCIAL INFORMATION CONTAINED HEREIN
REGARDING USTS WAS PREPARED IN ACCORDANCE WITH THE COMMISSION'S SPECIAL RULES
AND REGULATIONS APPLICABLE TO FINANCIAL REPORTING BY SMALL BUSINESS ENTERPRISES.
THE PARTIES
USTS
USTS is currently engaged in the following businesses, which primarily
relate to transportation. USTS' transportation services consist of (i) bus and
other motor vehicle transportation services to customers such as businesses and
municipalities on a contract basis, (ii) chauffeured vehicle services, (iii)
over-the-road package delivery services for common carriers, (iv) five full-load
tractor-trailer businesses, based in Syracuse, New York, Orlando, Florida,
Wisconsin Rapids, Wisconsin, Charleston, South Carolina, and Kansas City,
Missouri, and (v) a rental car brokerage business in Mesa, Arizona. The rental
car brokerage business will not be transferred to Acquisition but will be
retained by USTS and disposed of in the liquidation of USTS subsequent to the
Transfer.
3
<PAGE>
USTS was incorporated under the laws of the State of Nevada in May 1975
under the name Holland Industries, Inc. USTS changed its name to U.S.
Transportation Systems, Inc., in November 1990. The corporate offices and all
operational activities of USTS and its subsidiaries are directed from its
headquarters located at 33 West Main Street, Elmsford, New York, 10523. The
telephone number at that address is (914) 345-3339.
PRECEPT
Precept is a rapidly growing, independent distributor of custom and stock
business products and provider of document management services to businesses of
all sizes throughout the United States. Precept was founded in 1988 as a
regional business products distributor in Dallas, Texas, and since that time has
expanded rapidly both internally and through acquisitions, to 30 locations
throughout the United States. Business products distributed include custom
business forms, commercial printing/graphic arts, electronic forms, custom stock
labels, computer supplies, envelopes and advertising specialty products. Precept
provides comprehensive information solutions for its customers' business
products, inventory control and document management needs. In addition, Precept
provides electronic forms capabilities and integration of its customers
accounting operations to streamline information flow and reduce overall
operating costs. Precept's business strategy is (i) to act as a premier sole
source "corporate outsourcer" providing a broad array of business products to
its customers while reducing overall procurement costs and providing a high
level of customer service and (ii) to continue its expansion through strategic
acquisitions and internal growth. Precept also operates various corporate
transportation services within the Dallas/Fort Worth metropolitan area. Since
inception, Precept's revenues from its core, continuing operations have grown
from $3.8 million in fiscal year 1989 to $77.3 million in fiscal year 1997, a
46% compound annual growth rate.
Following the founding and development of Precept, Precept's goal has been
to acquire or establish centrally managed networks of regional offices and
warehouses in major metropolitan markets throughout the United States. As a
result, Precept has completed 15 acquisitions of these regional business
products distributors since inception. Once a regional office/warehouse is
acquired or established, Precept seeks to leverage its distribution capabilities
by acquiring smaller companies or opening satellite sales offices in the
surrounding areas. Precept also seeks to increase the sales and profitability of
its acquired companies by integrating the Precept business strategy and through
elimination of redundant operating expenses. Going forward, Precept plans to
continue to actively pursue this consolidation strategy within the business
products distribution and document management industries.
Precept believes that the acquisition and operational experience of its
management team provides it with the ability to execute upon the growth
component of its business strategy. Precept, in only its fifth year of
existence, was recognized as the largest independent business products
distributor by a national business products magazine and has retained this
status for five consecutive years. Precept's management team brings vast
experience in the acquisition and integration of businesses, previously with
MTech Corp. ("MTech") (sold to EDS in 1988), Affiliated Computer Services, Inc.,
(NYSE:AFA) ("ACS") and now at Precept. Management believes it can and will
become the "consolidator of choice" in the business products distribution and
document management industries.
The industry in which Precept operates is large, fragmented and, Precept
believes, rapidly consolidating. Precept believes that opportunities exist to
consolidate participants in the industry and that its principal competitors are
direct manufacturers and independent distributors of business products.
Management believes the market for the business products it distributes is in
excess of $20 billion annually with the top 100 independent distributors
representing $1.6 billion annually, or 7.8% of the total market. Over the last
three years, total revenues from the top 100 independent business products
distributors have grown by 16% annually as distributors continue to gain market
share from the direct manufacturers. In 1996, this trend resulted in independent
distributors surpassing direct manufacturers in market share by representing
approximately 55% of the total business products market. Precept believes
independent distributors'
4
<PAGE>
market share will continue to grow in the future as more of its target customers
make the decision to outsource the distribution of their business products and
document management needs.
Precept believes that similar consolidation possibilities exist in the
corporate transportation services industry. Precept management believes the
chauffeured vehicle service industry, in particular, presents an attractive
opportunity for consolidation. In 1996, the chauffeured vehicle service business
accounted for approximately $3.9 billion in revenues to roughly 9,000 companies
throughout the United States. Precept believes that no one company currently
represents more than 2% of the overall market.
Precept was incorporated under the laws of the State of Texas in May 1993.
Precept previously operated under the name "Precept Investors, Inc." which name
was changed to "Precept Business Services, Inc." on February 6, 1998. Precept's
principal corporate offices are located at 1909 Woodall Rodgers Frwy, Suite 500,
Dallas, Texas 75201, and its telephone number at that address is (214) 754-6600.
ACQUISITION
Acquisition is a Nevada limited liability company and wholly-owned
subsidiary of Precept organized on November 14, 1997 for the purpose of entering
into and consummating the Plan of Reorganization and the related transactions.
After completion of the Transfer, Acquisition will carry on the business now
conducted by USTS, other than USTS' rental car brokerage business.
Acquisition's principal corporate offices are located at 1909 Woodall
Rodgers Frwy, Suite 500, Dallas, Texas 75201, and its telephone number at that
address is (214) 754-6600.
THE PLAN OF REORGANIZATION
TRANSFER
At the Closing, USTS will transfer its business and substantially all of its
assets to Acquisition in exchange for 9,612,500 shares (plus one additional
share for each USTS Warrant or option exercised prior to the Transfer) of
Precept Class A Common Stock, and Acquisition will assume certain liabilities
and obligations of USTS. After the closing of the Transfer, there will be
45,612,500 shares of Precept Common Stock outstanding. See "The Plan of
Reorganization--Terms of the Plan of Reorganization."
CONDITIONS TO THE TRANSFER
Consummation of the Transfer is subject to the satisfaction of a number of
conditions, including obtaining requisite shareholder approval. See "The Plan of
Reorganization--Terms of the Plan of Reorganization--Conditions."
TERMINATION OF THE PLAN OF REORGANIZATION
The Plan of Reorganization is subject to termination at the option of either
of the Boards of USTS or Precept if the Transfer is not consummated by January
31, 1998 (the "Termination Date"), and prior to such time upon the occurrence of
certain specified events. Under certain circumstances, Precept or USTS may
become obligated to pay to the other a termination fee of $1 million in the
event the Transfer is not consummated. See "The Plan of Reorganization--Terms of
the Plan of Reorganization--Termination." The Plan of Reorganization has not
been amended to extend the Termination Date and, therefore, may be terminated by
the Board of Directors of either USTS or Precept at any time prior to the
closing of the Transfer.
AMENDMENT TO THE PLAN OF REORGANIZATION AND WAIVER
The Plan of Reorganization may be amended or supplemented at any time by
agreement of USTS and Precept, or any provision of the Plan of Reorganization
may be waived at any time by the Board of Directors of the party which is, or
whose shareholders are, entitled to the benefits thereof, by action taken by
their respective Boards of Directors; provided that, after shareholder approval
is obtained as described
5
<PAGE>
herein, no amendment or waiver may be made which materially adversely affects
the rights of the holders of the USTS Common Stock without further shareholder
approval. Neither USTS nor Precept has any current intention to seek an
amendment to or waiver of any provision of the Plan of Reorganization. See "The
Plan of Reorganization--Terms of the Plan of Reorganization--Other Matters."
REGULATORY APPROVAL
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Transfer may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. USTS and Precept
expect to file notification and report forms under the HSR Act with the FTC and
the Antitrust Division on or about February 12, 1998. Unless early termination
of the HSR Act waiting period is granted or the FTC or the Antitrust Division
request additional information concerning the Transfer, Precept or USTS, Precept
expects that the HSR Act waiting period will expire on or about March 14, 1998.
EFFECT OF THE TRANSACTIONS ON USTS SHAREHOLDERS AND WARRANT HOLDERS
Promptly after the closing of the Transfer, USTS will distribute to its
shareholders of record (both Common and Preferred) all of the Shares it received
except for those which are to be retained as a Contingency Reserve. As a result,
each USTS shareholder on the record date for the distribution will receive
approximately one Share for each share of USTS Common and Preferred Stock held
on that date. Precept has filed a listing application seeking to list the Shares
on Nasdaq. The Shares will be immediately saleable by the shareholders. Shortly
after the Transfer, and no later than one year after the date of the Meeting,
USTS will close its stock record books and will not permit any USTS Common Stock
to be transferred except by will or other legal proceeding. At the same time,
USTS will transfer all of its assets and liabilities to a liquidating trust and
will dissolve and cease to exist. Thereafter, those who were USTS shareholders
when its stock records were closed will retain only an interest in the
liquidating trust. If, after all liabilities assumed by the liquidating trust
have been satisfied, there are any assets remaining in the trust, those assets
will be distributed pro rata to those who were USTS shareholders when its stock
records were closed.
As of the date of the closing (the "Closing Date"), each USTS Class C
Warrant held of record as of such date will automatically be converted into one
Precept Class A Warrant and shall become exercisable for shares of Precept Class
A Common Stock in lieu of the USTS Common Stock previously purchasable upon
exercise. Except for the fact that the Precept Class A Warrants shall be
exercisable for shares of Precept Class A Common Stock, the Precept Class A
Warrants shall have terms and conditions substantially the same as those of the
USTS Class C Warrants. See "Description of Precept Securities--Precept Class A
Warrants." Certificates representing such Precept Class A Warrants will be
distributed promptly after the Closing Date in exchange for and replacement of
current certificates representing outstanding USTS Class C Warrants.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Transactions are intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code (the "Code"). If the Transactions do
so qualify, neither USTS nor the shareholders of USTS will recognize taxable
gain or loss upon the receipt of shares of Precept Class A Common Stock in
connection with the Transfer or the subsequent dissolution of USTS, except with
respect to cash received in lieu of fractional shares and any cash subsequently
received in the liquidation of USTS. See "The Transactions--Certain Material
Federal Income Tax Consequences". The parties to the Plan of Reorganization have
not and do not intend to seek a ruling from the Internal Revenue Service (the
"IRS") as to the federal income tax consequences of the Transactions. Instead,
USTS has obtained the opinion of its legal counsel, Bressler, Amery & Ross, P.C.
("BA&R") as to certain of the expected federal income tax
6
<PAGE>
consequences of the Transactions, a copy of which is attached as an exhibit to
the Registration Statement (the "Tax Opinion").
The Tax Opinion is based on the Code, existing and proposed regulations
thereunder and current administrative rulings and court decisions, all as of the
date of the Tax Opinion and all of which are subject to change, possibly
retroactively. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE
TAX CONSEQUENCES OF THE TRANSFER AND SUBSEQUENT LIQUIDATION AND DISSOLUTION OF
USTS, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS WITH RESPECT TO THEIR OWN PARTICULAR
CIRCUMSTANCES. For a discussion of these and other federal income tax
considerations in connection with the Transfer, see "The Transactions--Certain
Federal Income Tax Consequences."
NO APPRAISAL RIGHTS
Neither holders of USTS Common Stock nor holders of USTS Preferred Stock are
entitled to dissenters' appraisal rights under the Nevada General Corporation
Law, as amended (the "NGCL"), in respect of the Transfer, see "The
Transactions--No Dissenters' Rights of Appraisal."
COMPARISON OF SHAREHOLDER RIGHTS
The rights of USTS' shareholders currently are determined by reference to
the NGCL and USTS' Articles of Incorporation and Bylaws. Following the
Liquidating Distribution, the former USTS shareholders will become shareholders
of Precept, and their rights as shareholders will be determined by the Texas
Business Corporation Act, as amended (the "TBCA"), Precept's Amended and
Restated Articles of Incorporation (the "Precept Articles") and Precept's
Bylaws. See "Certain Differences in the Rights of Shareholders of USTS and
Shareholders of Precept."
LISTING OF PRECEPT CLASS A COMMON STOCK; CONTINGENT REVERSE STOCK SPLIT
Precept has applied for approval for listing of the Shares to be issued in
connection with the Transfer on Nasdaq, subject to notice of issuance and
requisite approval of the Transactions by the USTS shareholders. In connection
with Precept's Nasdaq listing application, Precept has indicated that, if
required by Nasdaq, it will effect a reverse stock split as necessary for the
purpose of complying with the applicable, recently revised Nasdaq listing
criteria, including the requirement that the Precept Class A Common Stock trade
at or above $4 per share after the consummation of the Transactions. The
shareholders of Precept have approved an amendment to Precept's Articles of
Incorporation whereby such number of shares of Precept Common Stock between one
and two, consisting only of whole shares and tenths of shares, as shall be
determined by the Precept Board of Directors, shall be converted and
reconstituted into one share of Precept Common Stock in a reverse stock split of
the Precept Common Stock, if determined by the Precept Board of Directors that
such reverse stock split is required to maintain its eligibility to be listed on
Nasdaq. In the event of such a split, the number of Shares issuable to USTS in
the Transactions would be adjusted to reflect the reverse stock split. See "The
Transactions--Reverse Stock Split."
THE PLAN OF LIQUIDATION
The parties to the Plan of Reorganization intend that the transactions
contemplated thereby and in the Plan of Liquidation shall qualify as a tax-free
reorganization within the meaning of Section 368(a) of Code. In order to
qualify, among other things, "substantially all of the properties" of USTS must
be transferred to Acquisition and USTS must be liquidated and dissolved.
Therefore, the Plan of Liquidation and the transactions contemplated therein are
an integral part of the transactions contemplated by the Plan of Reorganization.
7
<PAGE>
LIQUIDATING DISTRIBUTION
As soon as practicable after shareholder approval of the Plan of Liquidation
and consummation of the Transfer, USTS shall file a Certificate of Dissolution
and shall cease all business operations except as such operations relate to the
payment of obligations, distribution of remaining assets to USTS shareholders
and the winding up and dissolution of USTS. USTS shall distribute pro rata to
the USTS shareholders that portion of the Shares remaining after making
provision for the Contingency Reserve. The distribution may be made in a series
of distributions and, while intended to be made in Shares, may be made in cash,
in such manner as the USTS Board may determine. Precept has filed a listing
application seeking to list the Shares so distributed for quotation on Nasdaq.
The Shares will be freely tradeable, unless they are held by persons who are
affiliates of USTS prior to the Transfer or are affiliates of Precept after the
Transfer. USTS expects that the USTS Common Stock will, upon consummation of the
Transfer, cease to trade on Nasdaq. Shortly after the Liquidating Distribution,
USTS will close its stock transfer books and the USTS Common Stock will not be
transferable thereafter except by will or other legal proceeding. The USTS
Common Stock will have no continuing value except for an interest in the
Contingency Shares. See "The Transactions--Plan of Liquidation--Liquidating
Distribution."
LIQUIDATING TRUST
The Contingency Shares and any other assets of USTS remaining after the
Transfer will be deposited into a Liquidating Trust. The Liquidating Trust will
also assume all actual and contingent liabilities of USTS remaining after the
Transfer to Precept, and USTS will promptly dissolve. The Trustee of the
Liquidating Trust, who will initially be Michael Margolies, the present Chairman
of USTS, will be charged with responsibility for using the assets in the Trust
to satisfy the liabilities assumed by the Trust. Once the Trustee has determined
that all liabilities have been satisfied, and in any event no later than three
years after the Transfer, any assets remaining in the Trust will be distributed
to those persons who were shareholders of record of USTS when the Liquidating
Trust was established. The interests in the Liquidating Trust will not be
transferable except by will or other legal proceeding.
MARKETS AND MARKET PRICES
USTS Common Stock is traded on Nasdaq. On November 14, 1997, the last full
trading day prior to the public announcement of the execution of the Plan of
Reorganization, the last sale price for USTS Common Stock was $4.00 and on
, 1998, the last full trading day for which quotations were available
prior to the date of this Prospectus, the last sale price for USTS Common Stock
was .
For information relating to market prices of and dividends on USTS Common
Stock, see "Market Price Data." SHAREHOLDERS ARE URGED TO OBTAIN CURRENT
QUOTATIONS FOR THESE SECURITIES.
Precept is a privately-held corporation. There has never been a market for
the securities of Precept, and no market prices or other comparative price
information is available for the Precept Class A Common Stock. Prior to the
Liquidating Distribution of the Shares to the shareholders of USTS, the Shares
will be listed for trading on Nasdaq.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Prospectus includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, forward-looking statements can be
identified by use of terminology such as "may," "will," "expects," "plans,"
"anticipates," "estimates," "potential," or "continue," or the negative thereof
or other
8
<PAGE>
comparable terminology. Although USTS believes that the expectations reflected
in the forward-looking statements contained herein are reasonable, they can give
no assurance that such expectations or any of the forward-looking statements
will prove to be correct, and actual results could differ materially from those
projected or assumed in the forward-looking statements. Future financial
condition and results, as well as any forward-looking statements, are subject to
inherent risks and uncertainties, some of which are summarized in "Risk Factors"
described herein.
PRECEPT
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents summary historical and pro forma financial
information for Precept. The financial information as of and for the four years
ended June 30, 1997 was derived from audited consolidated financial statements
of Precept. The financial information as of and for the year ended June 30, 1993
was derived from the unaudited divisional financial statements of Precept's
former parent company. The financial information as of and for the three months
ended September 30, 1997 and 1996 was derived from the unaudited consolidated
financial statements of Precept. In the opinion of management of Precept, the
financial information for the year ended June 30, 1993, and for the three months
ended September 30, 1997 and 1996 contains all adjustments, consisting only of
normal recurring accruals, necessary for the fair presentation of the results of
operations for such periods. Precept will be treated as the acquiror in the
Transfer for accounting and financial reporting purposes, and upon completion of
the Transfer, Precept will report the historical financial statements of Precept
as the historical financial statements of combined Precept-USTS.
The summary historical and pro forma financial information should be read in
conjunction with Unaudited Pro Forma Consolidated Financial Information and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Proxy Statement/Prospectus. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the future
operating results or financial position of combined Precept-USTS.
PRECEPT
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED JUNE 30, 30,
------------------------------------------------------------------ ---------
HISTORICAL PRO FORMA HISTORICAL
----------------------------------------------------- ----------- ---------
1993 1994 1995 1996 1997 1997 1996
--------- --------- --------- --------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues........................................ $ 40,459 $ 50,968 $ 59,075 $ 72,432 $ 77,344 $ 111,583 $ 19,813
Income (loss) from continuing operations........ (1,321) 350 617 (266) 532 (4,717) 134
Income (loss) from continuing operations per
share(1)...................................... (0.13) 0.03 0.05 (0.02) 0.05 (0.10) 0.01
Weighted average common outstanding shares(1)... 10,457 11,667 11,625 11,524 11,516 45,937 11,516
FINANCIAL POSITION (AT PERIOD END):
Total assets.................................... 16,510 24,951 25,627 32,691 29,291 50,828 31,835
Working capital................................. 2,523 5,860 7,458 14,476 12,343 8,823 13,078
Long-term obligations........................... 663 707 543 5,260 7,502 13,575 5,307
Shareholders' equity(2)......................... 729 17,537 17,032 16,582 13,305 17,623 16,803
<CAPTION>
PRO FORMA
-----------
1997 1997
--------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues........................................ $ 18,935 $ 26,958
Income (loss) from continuing operations........ 135 (2,570)
Income (loss) from continuing operations per
share(1)...................................... 0.01 (0.06)
Weighted average common outstanding shares(1)... 11,516 45,937
FINANCIAL POSITION (AT PERIOD END):
Total assets.................................... 30,477 52,554
Working capital................................. 12,011 8,976
Long-term obligations........................... 7,955 13,996
Shareholders' equity(2)......................... 13,275 17,594
</TABLE>
- ------------------------------
(1) Weighted average common outstanding shares for the years ended June 30, 1994
and 1993 represent the number of shares outstanding as of June 30, 1994,
plus 1,297,800 shares underlying stock options granted in fiscal 1997 which
have been treated as outstanding for all periods presented, since the actual
weighted average common outstanding shares during those years in which
Precept was a division of a previous consolidated group is not useful. Pro
forma per share and weighted average common outstanding shares reflects a
3.15438 to 1 stock split to be effected prior to the effective date of this
Proxy Statement/Prospectus.
(2) Shareholders' equity as of June 30, 1993 reflects Precept divisional equity
balances under its former parent prior to capital contributions which
occurred with its reorganization on June 30, 1994.
9
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following tables set forth certain historical per share information of
USTS and Precept and combined per share information of USTS and Precept, on an
unaudited pro forma basis after giving effect to the Transactions, and unaudited
pro forma equivalent per share information of USTS. This data should be read in
conjunction with the selected historical consolidated financial information, the
unaudited pro forma consolidated combined financial statements, the USTS
consolidated financial statements and Notes thereto, and the Precept
consolidated financial statements and Notes thereto included elsewhere in this
Proxy Statement/Prospectus. This information is presented for illustrative
purposes only and is not necessarily indicative of the combined results of
operations or financial position that would have occurred if the Transfer had
occurred at the beginning of each period presented or on the dates indicated,
nor is it necessarily indicative of future operating results or the financial
position of Precept after the Transfer. Neither USTS nor Precept has ever
declared or paid cash dividends on its common stock.
COMPARATIVE PER SHARE INFORMATION
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
HISTORICAL USTS
Loss from continuing operations per share............ $ (1.04) $ (0.44)
Book value per share................................. $ 2.50 $ 1.44
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED JUNE THREE MONTHS ENDED
30, 1997 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
HISTORICAL PRECEPT
Income from continuing operations per share.......... $ 0.05 $ 0.01
Book value per share................................. $ 1.17 $ 1.17
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED JUNE THREE MONTHS ENDED
30, 1997 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
USTS AND PRECEPT PRO FORMA COMBINED(1)
Loss from continuing operations per share............ $ (0.10) $ (0.06)
Book value per share................................. $ 0.39 $ 0.39
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED JUNE THREE MONTHS ENDED
30, 1997 SEPTEMBER 30, 1997
----------------- ---------------------
<S> <C> <C>
USTS PRO FORMA EQUIVALENTS(1)
Loss from continuing operations per share............ $ (0.11) $ (0.06)
Book value per share................................. $ 0.42 $ 0.42
</TABLE>
- ------------------------
(1) USTS pro forma equivalents represent the unaudited pro forma combined
earnings per share and book value per share calculated on the basis of a
1.071 exchange ratio (USTS to receive 9,612,500 shares of Precept Class A
Common Stock). Pro forma combined and pro forma equivalent per share
information reflects a 3.15438 to 1 stock split to be effected by Precept
prior to the effective date of this Proxy Statement/Prospectus.
10
<PAGE>
USE OF PROCEEDS
The estimated expenses of this offering are $25,000. Accordingly, USTS will
realize net proceeds from the offering only if more than 6,545 shares are
purchased at $3.82 upon exercise of Class C Warrants, and will realize net
proceeds from $0 (if 6,545 shares are purchased) up to approximately $6,586,635,
if all of the Class C Warrants are exercised.
No specific use for the proceeds of this offering have been determined. The
proceeds will be added to working capital and applied to ongoing operations or
special projects which may arise in the future, such as new contracts and
acquisitions of other transportation companies.
RISK FACTORS
Any person who is considering the purchase of the Shares offered herein
should carefully consider the adverse factors described below. Any one or more
of these factors could have a negative effect on USTS of such impact as to cause
the value of an investment in the Shares to be greatly diminished.
POSSIBLE TERMINATION OF THE PLAN OF REORGANIZATION
The disclosure in this Prospectus has been made on the assumption that the
Transactions (i.e. the Plan of Reorganization with Precept and the Plan of
Liquidation) will occur. Accordingly, a full description of the business,
financial condition, management and other aspects of Precept is included in this
Prospectus.
There is no assurance, however, that the Transactions will occur. Because
the Termination Date has passed without extension, either party may terminate
the Plan of Reorganization at any time prior to closing. In addition, there are
a number of conditions that must be satisfied before the Transfer to Acquisition
can be closed, including approval of the Transactions by the shareholders of
USTS, approval by the N.A.S.D. of the Precept Shares for listing on NASDAQ, the
satisfaction by each party of the undertakings made by it in the Plan of
Reorganization, and the absence of any material adverse change in the operations
or financial condition of either USTS or Precept. If any of those conditions, or
the other conditions to the Closing, is not met, the Transactions will most
likely not occur. See: "Terms of the Plan of Reorganization."
The failure of the Transactions to occur would be likely to have an adverse
effect on USTS. The benefits anticipated from the proposed reorganization would
be lost. In addition, the market price of USTS Common Stock has increased
considerably since the negotiations between USTS and Precept were first publicly
announced; the market price could be expected to fall considerably if the
agreements between USTS and Precept were terminated. Finally, there is a
likelihood that the relationship between USTS and its principal lender, Israel
Discount Bank of New York ("IDB"), would either be terminated or modified to the
detriment of USTS if the Transactions are not completed. Unless a replacement
lending arrangement could be promptly obtained, a termination or significant
change in the relationship between USTS and IDB would seriously impair the
ability of USTS to finance its operations. There is no assurance that a suitable
replacement lending arrangement could be obtained.
Management of USTS has not prepared any definite contingency plan for future
operations of USTS in the event that the Transactions are not completed. Persons
considering an investment in USTS Shares should consider, however, that a
termination of the Plan of Reorganization, for any reason, would be likely to
significantly alter the future prospects of USTS, and could result in a
substan-tial impairment of the value of USTS shares.
INTEGRATION OF THE BUSINESS
The Transfer involves the integration of two companies that have previously
operated independently. As soon as practicable following the Transfer, Precept
intends to integrate certain aspects of the operations of the combined company,
including sales, marketing, finance and administration. There can be no
assurance that Precept will successfully integrate the operations of USTS with
those of Precept. Any delays or unexpected costs incurred in connection with
such integration could have an adverse effect on the
11
<PAGE>
combined company's business, operating results or financial condition.
Furthermore, there can be no assurance that the operations, management and
personnel of the two companies will be compatible or that Precept or Acquisition
will not experience the loss of key personnel.
PRESENT USTS SHAREHOLDERS WILL OWN ONLY 21% OF THE COMBINED ENTITY
After completion of the Transactions, USTS and the USTS shareholders will
own 9,612,500 shares of Precept Class A Common Stock. There will be an aggregate
of 45,612,500 shares of Precept Common Stock outstanding. Accordingly, the
present USTS shareholders will own 21% of the combined entity. In calculating
the percent of total voting power represented by the 9,612,500 shares of Precept
Class A Common Stock to be held by the USTS shareholders after completion of the
Transactions, the voting power of all outstanding shares of Precept Class A
Common Stock, having one vote per share, and all outstanding shares of Precept
Class B Common Stock, having ten votes per share, are aggregated. Accordingly,
while the USTS shareholders will own 21% of the outstanding Precept Common Stock
after completion of the Transactions, such shares will represent in the
aggregate approximately 7.0% of the total voting power of the Precept Common
Stock outstanding, and the USTS shareholders will effectively have no control
over Precept operations or its direction.
CONTINGENCY RESERVE
The amount of shares to be received by USTS shareholders in the Liquidating
Distribution is dependent upon the number of Contingency Shares retained by USTS
(which shares may subsequently be placed by USTS in the Liquidating Trust) to
satisfy contingent liabilities of USTS after consummation of the Transactions.
It is currently estimated that the number of Contingency Shares will be
approximately 600,000, which would result in USTS shareholders receiving
approximately one share of Precept Class A Common Stock for each share of USTS
Common Stock held. Notwithstanding the foregoing, the actual number of
Contingency Shares shall be fixed by the USTS Board of Directors, and there is
no assurance that such number will be 600,000 shares; the Plan of Reorganization
provides that such number shall be no less than 500,000 nor more than 1,000,000.
As a result, USTS shareholders may receive less than one share of Precept Class
A Common Stock for each share of USTS previously held. For example, if the
number of Contingency Shares were 1,000,000 (the maximum), then USTS
shareholders would receive approximately .96 shares of Precept Class A Common
Stock for each share of USTS Common Stock held. Upon consummation of the
Transfer (and prior to the set-aside of the Contingency Shares and the
subsequent Liquidating Distribution), USTS will initially hold approximately
1.071 shares of Precept Class A Common Stock for each share of USTS Common Stock
outstanding.
USE OF CONTINGENCY SHARES AND OTHER ASSETS IN LIQUIDATING TRUST TO SATISFY
CONTINGENT LIABILITIES
The Contingency Shares and any other assets placed in the Liquidating Trust
will be used to satisfy contingent liabilities of USTS remaining after
consummation of the Transactions. Although the USTS Board of Directors will
attempt to estimate the likely amount of such liabilities in determining the
number of Contingency Shares to be retained and placed in the Liquidating Trust,
the amount of such liabilities is presently unknown and there can be no
assurance that any Contingency Shares or any other assets placed in the
Liquidating Trust will remain to be distributed to the USTS shareholders after
payment of all contingent liabilities.
LIQUIDATING DISTRIBUTIONS MAY BE MADE IN CASH; POSSIBLE ADVERSE FEDERAL INCOME
TAX CONSEQUENCES
Not more than one year after the adoption of the Plan of Liquidation and
Dissolution, USTS will make the Liquidating Distribution after providing for the
Contingency Shares. Management of USTS intends, however, to immediately
distribute the Precept Shares, after setting aside the Contingency Shares, upon
consummation of the Transfer. The Liquidating Distribution may be made in a
series of distributions, and while intended to be made in shares, it may be made
in cash, and in such manner as the USTS Board may determine.
12
<PAGE>
USTS shareholders who receive cash for their shares in the Liquidating
Distribution generally will recognize gain or loss in an amount equal to the
difference between the tax basis allocated to the shares and the cash received
in respect thereof. Any such gain will be capital gain if the shares are held as
capital assets.
POSSIBLE DEEMED DISTRIBUTIONS RESULTING FROM LIQUIDATING TRUST; POSSIBLE ADVERSE
FEDERAL INCOME TAX CONSEQUENCES
USTS shareholders' beneficial interest in Liquidating Trust (and their
right, subject to the prior satisfaction of all contingent liabilities of USTS,
to receive a distribution of any assets remaining after the satisfaction of such
liabilities) may be deemed a taxable distribution to the USTS shareholders. As a
result, the USTS shareholders may be required to pay tax on their pro rata share
of the assets contributed to the Liquidating Trust and deemed distributed to the
USTS shareholders. In such event, USTS shareholders would be required to pay
such tax even if they do not actually receive any distributions from the
Liquidating Trust.
DILUTION TO PRESENT USTS SHAREHOLDERS
As of September 30, 1997, the net worth of USTS was a total of $10,115,941,
or $1.44 per share of USTS Common Stock. On the same date, the net worth of
Precept was $13,275,098, or $0.37 per share for each of the 36,000,000 shares of
Precept Common Stock that will be outstanding immediately prior to the Transfer.
Contained within this Proxy Statement/Prospectus are certain pro forma
financial statements, which include a pro forma calculation of the balance sheet
of the combined entities, after taking into effect certain adjustments resulting
from the Transfer. That pro forma balance sheet indicates that the net worth of
the combined entities would be $17,645,098 or $0.39 for each of the 45,612,500
shares of Precept Common Stock that will be outstanding after the Transfer.
Accordingly, based upon that calculation and the assumption that the
Transactions will result in the conversion of each share of USTS Common Stock
into approximately one share of Precept Class A Common Stock, the holder of each
share of USTS Common Stock, which had a book value of $1.44 at September 30,
1997, will receive through the Transactions approximately one share of Precept
Class A Common Stock with a net worth of $0.39.
The holders of USTS Common Stock will, accordingly, experience a dilution in
the book value of their holdings to the extent of $1.05 per share by reason of
the Transactions. The holders of Precept Class A Common Stock will, at the same
time, experience a gain in the book value of their holdings, to the extent of
$0.02 per share, by reason of the Transactions.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS; EXERCISE OF REGISTRATION RIGHTS
After consummation of the Transactions, Precept will have outstanding (i)
Precept Class A Warrants to purchase 1,815,000 shares of Precept Class A Common
Stock except to the extent that USTS Class C Warrants are exercised prior to
consummation of the Transactions, (ii) a warrant held by First London Securities
Incorporated ("First London"), the underwriter of USTS' August 1996 public
offering, exercisable to purchase an aggregate of 340,000 shares of Precept
Class A Common Stock, assuming exercise of the underlying Class C Warrants;
(iii) warrants, issued to Argent Securities, Inc. ("Argent"), the underwriter of
USTS' February 1995 public offering, exercisable to purchase an aggregate of
50,833 shares of Precept Class A Common Stock, and (iv) other options and
warrants held by certain other persons to purchase an aggregate of 289,663
shares of Precept Class A Common Stock. Holders of such options and warrants are
likely to exercise them when, in all likelihood, Precept could obtain additional
capital on terms more favorable than those provided by such options and
warrants. Further, while such options and warrants are outstanding, Precept's
ability to obtain additional equity financing on favorable terms may be
adversely affected. The holders of the warrant issued to First London and the
warrant issued to Argent have certain demand and "piggyback" registration rights
with respect to their securities. Exercise of such rights could involve
substantial expense to Precept.
13
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET FOR PRECEPT COMMON STOCK
Prior to this offering, there has been no public market for the Precept
Class A Common Stock. There can be no assurance that an active trading market
will develop after the Closing of the Transactions or, if developed, that it
will be sustained. There can be no assurance that the market price of the
Precept Class A Common Stock will not decline below its initial listing price.
VOLATILITY OF STOCK PRICE
The market price for USTS Common Stock is and has been volatile. After the
Closing, Precept Class A Common Stock could be subject to the same or additional
significant fluctuations in response to variations in Precept's operating
results and other factors, including among others, investor perceptions of
Precept and the industry in which it operates, and general market conditions.
Consequently, there can be no assurance that the market value of shares of
Precept Class A Common Stock will be maintained subsequent to the Transactions.
The stock market has, from time to time, experienced significant price and
volume fluctuations that may be unrelated to the operating performance of any
particular company. Various factors and events, including future announcements
of new service offerings by Precept or its competitors, developments or disputes
concerning, among other things, regulatory developments in the United States,
and economic and other external factors, as well as fluctuations in Precept's
financial results, could have a significant impact on the market price of
Precept's securities.
VOTING CONTROL
Precept is controlled by Darwin Deason, a Director and the Chairman of the
Executive Committee of the Board, who has voting control over an aggregate of
10,102,997 shares of Precept Class B Common Stock, which have an aggregate of
101,029,970 votes, or approximately 74.0% of the voting power of Precept. In
addition, Mr. Deason has irrevocable proxies to vote 12,737,780 shares of
Precept Class A Common Stock which have an aggregate of 12,737,780 votes,
resulting in Mr. Deason having the right to vote shares reflecting 83.3% of the
total voting power of Precept. Accordingly, Mr. Deason controls virtually all
decisions made with respect to Precept by its shareholders, including decisions
relating to the election of directors. Furthermore, as a result of his control
of the voting stock of Precept, Mr. Deason may, except as otherwise provided by
Texas law, without the concurrence of the remaining shareholders, amend the
Precept Articles, effect or prevent a merger, sale of assets, or other business
acquisition or disposition and otherwise control the outcome of all actions
requiring shareholder approval.
DEPENDENCE ON PRESENT MANAGEMENT
The success of Precept is dependent upon the services of its executive
officers. Precept does not carry key man insurance on these officers. There is
no assurance that Precept would be able to locate and retain qualified persons
to replace any member of management or to expand its current management. In
addition to the foregoing, Precept's operations are located in diverse
geographical locations throughout the United States further taxing the members
of Precept's management team. The prolonged unavailability of any current member
of senior management, whether as a result of death, disability or otherwise,
could have an adverse effect upon the business of Precept. See "Precept
Management."
LACK OF DIVIDENDS
USTS has never paid dividends on USTS Common Stock and Precept does not plan
to pay in the foreseeable future any dividends on Precept Class A Common Stock
or Class B Common Stock. It is currently anticipated that earnings, if any, will
be used to finance the development and expansion of Precept's business.
14
<PAGE>
NASDAQ LISTING APPLICATION; CONTINGENT REVERSE STOCK SPLIT
Precept has applied to the Nasdaq that the Shares to be issued in connection
with the Transfer be approved for listing on Nasdaq, subject to notice of
issuance and approval of the Transactions by USTS' shareholders. In connection
with Precept's Nasdaq listing application, Precept has indicated that, if
required, it will effect a reverse stock split as necessary for the purpose of
complying with the recently revised applicable Nasdaq listing criteria,
including the requirement that the Precept Class A Common Stock trade at or
above $4 per share after the consummation of the Transactions. The shareholders
of Precept have approved an amendment to Precept's Articles whereby such number
of shares of Precept Common Stock between one and two, consisting only of whole
shares and tenths of shares, as shall be determined by the Precept Board of
Directors, shall be converted and reconstituted into one share of Precept Common
Stock in a reverse stock split of the Precept Common Stock, if determined by the
Precept Board of Directors that such reverse stock split is required to either
become listed or to maintain its eligibility to be listed on Nasdaq. The number
of Shares issuable to USTS in the Transactions will be adjusted to reflect the
reverse stock split. There can be no assurance, however, that the price of
Precept Class A Common Stock resulting from the reverse stock split will
increase proportionately with the decrease in the number of shares, or that any
price increase resulting from the reverse stock split can be sustained for any
period of time. Accordingly, subsequent reverse stock splits could be required
in order to comply with the minimum bid requirements for Nasdaq listing.
Additional reverse stock splits could result in Precept failing to meet the
minimum public float requirement. Accordingly, there can be no assurance that
Precept will be capable of complying with all of the listing criteria required
to be complied with to continue as a Nasdaq listed company.
After the consummation of the Transactions, to meet the newly adopted Nasdaq
requirements for the Precept Class A Common Stock to continue to be listed on
the Nasdaq, Precept will have to maintain (a) (i) at least $2 million in net
tangible assets, (ii) $35 million in market capitalization, or (iii) $500,000 in
net income (over two of the last three years); (b) a public float of at least
500,000 shares valued at $1 million or more; (c) a minimum bid price of $1.00;
(d) the Precept Class A Common Stock will have to have at least two active
market makers; and (e) Precept Class A Common Stock will have to be held by at
least 300 holders. There can be no assurance that Precept will be capable of
complying with all of the listing criteria required to be complied with to
continue as a Nasdaq listed company.
INTEGRATION OF ACQUISITIONS
To expand its services and geographic presence, diversify its business mix
and lead the consolidation trend in the business products, document management
and corporate transportation industries, Precept's business strategy includes
growth through acquisitions. No assurance can be given that Precept will be able
to consummate future acquisitions, or if consummated, to successfully integrate
its future acquisitions without substantial costs, delays or other problems. The
costs of such acquisitions and their integration could have an adverse effect on
short-term operating results. Such costs could include severance payments to
employees of such acquired companies, restructuring charges associated with the
acquisitions and other expenses associated with a change of control, as well as
non-recurring acquisition costs including accounting and legal fees, investment
banking fees, recognition of transaction-related obligations and various other
acquisition-related costs. Increased competition for acquisition candidates may
develop, in which event there may be fewer acquisition opportunities available
to Precept as well as higher acquisition costs for the opportunities that are
available. There can be no assurance that Precept will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into Precept without substantial costs, delays, or other
operational or financial problems.
Precept may not be able to execute successfully its consolidation strategy
or anticipate all of the changing demands that successive consolidation
transactions will impose on its management personnel, operational and management
information systems, and financial systems. Customer dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on the reputation of Precept and Precept's sales and marketing initiatives.
There can be no assurance that any businesses
15
<PAGE>
acquired in the future will achieve anticipated revenues and earnings. Moreover,
it is possible that neither management of Precept nor management of any of the
acquired companies will have the necessary skills to manage a company intending
to implement an aggressive acquisition program. Precept may seek to recruit
additional managers to supplement the incumbent management of the acquired
companies but Precept may not have the ability to recruit additional managers
with the skills necessary to enhance the management of the acquired companies.
Further, acquisitions involve a number of special risks, including possible
adverse effects on Precept's operating results, diversion of management's
attention, failure to retain key personnel at an acquired company, risks
associated with unanticipated events or liabilities and amortization of goodwill
or other acquired intangible assets, some or all of which could have a material
adverse effect on Precept's business, financial condition and results of
operations. Any or all of these factors could have a material adverse effect on
Precept's business, financial condition and/or results of operations.
COMPETITION
Precept may encounter intense competition from other consolidators having a
business objective similar to that of Precept. Many of these entities are well
established and have extensive experience in effecting business combinations
directly or through affiliates. Many of these competitors possess greater
financial, personnel and other resources than Precept expects to have and there
can be no assurance that Precept will be able to compete successfully.
Competition with other consolidators to buy a limited number or an identifiable
set of businesses could lead to higher prices being paid for acquired companies.
CONSIDERATION FOR OPERATING COMPANIES MAY EXCEED ASSET VALUE; AMORTIZATION
CHARGES
The purchase prices of Precept's acquisitions will not be established by
independent appraisals, but generally through negotiations between Precept's
management and representatives of such companies. The consideration paid for
each such company will be based primarily on the value of such company as a
going concern and not on the value of the acquired assets. Valuations of these
companies determined solely by appraisals of the acquired assets are likely to
be less than the consideration that is paid for the companies. The future
performance of such companies may not be commensurate with the consideration
paid.
Precept expects to incur significant amortization charges resulting from
consideration paid in excess of the fair value of the net assets of the
companies acquired in business combinations accounted for under the purchase
method of accounting ("goodwill"). Precept will be required to amortize the
goodwill from acquisitions accounted for under the purchase method over a period
of time, with the amount amortized in a particular period constituting an
expense that reduces Precept's net income for that period. The amount amortized,
however, will not give rise to a deduction for tax purposes. A reduction in net
income resulting from amortization charges may have a material and adverse
impact upon the market price of Precept Class A Common Stock.
ADDITIONAL SHARES REGISTERED FOR ISSUANCE IN FUTURE ACQUISITIONS; RISKS RELATED
TO ACQUISITION FINANCING
The Registration Statement also covers the issuance of up to 19,887,500
additional shares of Precept Class A Common Stock from time to time in the
future, in one or more business combination transactions. Precept anticipates
issuing some or all of such shares in one or more acquisitions in the future.
Precept may also file additional registration statements in the future covering
the issuance of additional shares in such acquisitions. The use of shares of
Precept Class A Common Stock for a portion or all of the consideration to be
paid in future acquisitions could result in dilution to the holders of the
outstanding Precept Class A Common Stock.
Precept may also use existing cash resources, incur additional long-term
indebtedness, or use a combination thereof for all or a portion of the
consideration to be paid in future acquisitions. In the event that the Precept
Class A Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Precept Class A Common
Stock as part of the
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consideration for the sale of their businesses, Precept might not be able to
utilize Precept Class A Common Stock as consideration for acquisitions and would
be required to utilize more of its cash resources, if available, in order to
maintain its acquisition program. If Precept does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. While Precept continuously evaluates
opportunities to make strategic acquisitions, it has no present commitment or
agreements with respect to any material acquisitions. There can be no assurance
that such financing will be available if and when needed or on terms acceptable
to Precept. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Among the possible adverse effects of borrowings to consummate acquisitions
for other capital requirements are: (i) if Precept's operating revenues after
acquisitions were to be insufficient to pay debt service, there would be a risk
of default and foreclosure on Precept's assets; (ii) if a loan agreement
contains covenants that require the maintenance of certain financial ratios or
reserves, and any such covenant were breached without a waiver or renegotiation
of the terms of that covenant, then the lender could have the right to
accelerate the payment of the indebtedness even if Precept has made all
principal and interest payments when due; (iii) if the terms of a loan did not
provide for amortization prior to maturity of the full amount borrowed and the
"balloon" payment could not be refinanced at maturity on acceptable terms,
Precept might be required to seek additional financing and, to the extent that
additional financing were not available on acceptable terms, to liquidate its
assets; and (iv) if the interest rate of a loan is variable, Precept would be
subject to interest rate fluctuations which could increase Precept's debt
service obligations. The level of indebtedness that Precept may incur cannot be
predicted and will depend upon these factors and the relevant business
characteristics of the acquisition candidates for which such indebtedness will
be undertaken.
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION AND BYLAWS AND OTHER
STOCKHOLDER PROTECTION MECHANISMS
Certain provisions of the Precept Articles and Bylaws may delay, defer, or
prevent a tender offer or takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including attempts that might result in
a premium over the market price for the Precept Class A Common Stock. In this
regard, the Precept Articles provide that the removal of any director or
directors, with or without cause, requires the affirmative vote of a least 80%
of the combined voting stock of Precept, giving effect to the number of votes
per share attributable to such stock. Such provision would restrict the ability
of a party to gain control of the Precept Board by acquiring a majority of the
Precept voting stock, removing all of the directors and then replacing them with
the directors seeking to benefit such party. Additionally, Precept's Bylaws
provide that the number of directors shall be fixed, from time to time, by
resolution of the Precept Board. Currently, such number of directors of Precept
is divided into three classes that are elected for staggered three-year terms.
Thus, in any given year, only a portion of the Precept directors would be
eligible for election, therefore eliminating the ability of a hostile party to
gain control of the Precept Board in a single proxy contest, making any
unsolicited takeover attempt (including an attempt that a Precept shareholder
might consider in such shareholder's best interest) more expensive and more
difficult. Precept's Bylaws provide for advance notice procedures with respect
to the submission by shareholders of proposals to be acted on at shareholder
meetings and of nominations of candidates for election as directors. The
establishment of such procedures removes any ambiguity with respect to how
matters can be so submitted by shareholders. Further, the Precept Articles
permit the Precept Board to establish by resolution one or more series of
preferred stock ("Precept Preferred Stock") and to establish the powers,
designations, preferences and relative, participating, optional, or other
special rights of each series of Precept Preferred Stock. The Precept Preferred
Stock could be issued on terms that are unfavorable to the holders of Precept
Class A Common Stock or that could make a takeover or change in control of
Precept more difficult. Further, Precept has instituted a shareholder rights
plan, which plan may have the effect of discouraging an unsolicited takeover
proposal. Moreover, Precept is subject to the Texas Business
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Combination Law, which places restrictions on certain business combinations with
certain stockholders that could render more difficult a change in control of
Precept. The Precept Bylaws, together with the provision of the Precept Articles
setting forth that the removal of directors requires the affirmative vote of 80%
of the combined voting stock of Precept, the shareholder rights plan and other
provisions of the Precept Articles and the TBCA, may have the effect of
discouraging a future takeover attempt by a third party that is not approved by
the Precept Board and render the removal of the incumbent management more
difficult. Counterbalancing the effects of such provisions is the positive
effect that these protections contribute to an environment where the interests
of the Precept shareholders and Precept can be addressed in an orderly and
well-informed manner.
RESTRICTIONS ON MARKETMAKING ACTIVITIES DURING OFFERING
First London Securities Corp. ("FLSC"), one of the Selling Shareholders, is
also one of the market makers for the Common Stock and Class C Warrants of USTS.
During the period when FLSC is offering the shares covered by this prospectus
for sale, and for up to nine days prior to that period, FLSC will be barred from
engaging in marketmaking activities with respect the USTS securities. The effect
of this bar could be to reduce the liquidity of USTS securities at certain
times. See "Selling Shareholders and Plan of Distribution."
THE TRANSACTIONS
TERMS OF THE PLAN OF REORGANIZATION
THE TRANSFER. The Plan of Reorganization provides that at the closing (the
"Closing"), USTS shall transfer to Acquisition the business and substantially
all of the assets of USTS (the "Assets"), including all of the operating assets
of USTS, except for (i) its rights arising under the Plan of Reorganization,
(ii) its corporate minute books, stock records, tax and other corporate records,
and (iii) the capital stock of BancPro Transportation, Inc., and (iv) $175,000
in cash to permit USTS to pay its liabilities for certain expenses and costs
incurred in connection with the Plan of Reorganization and the transactions
contemplated therein, including the Plan of Liquidation (collectively, the
"Excluded Assets").
CONSIDERATION. The consideration for the Assets shall be the delivery to
USTS of a total of 9,612,500 shares of Precept Class A Common Stock plus one
share for each USTS warrant or option exercised prior to the Transfer (the
"Shares"). Precept will also issue stock options and warrants to replace the
outstanding options and warrants for USTS Common Stock. In addition, on the date
of Closing (the "Closing Date"), Acquisition shall assume only those certain
liabilities and obligations of USTS specified in the Plan of Reorganization (the
"Assumed Liabilities"), including certain liabilities and obligations arising
under certain USTS contracts (the "Assumed Contracts"), including the
obligations of USTS under its outstanding warrants and stock options, and
certain other liabilities set forth in its closing balance sheet. Acquisition
will not assume (i) any intercompany payable balances owed by USTS or any
subsidiary of USTS to any affiliate of USTS other than a promissory note dated
July 7, 1997 payable by USTS to Michael Margolies in the original principal
amount of $1,039,794 (the principal balance of which was $998,569 at September
30, 1997), (ii) any liabilities with respect to any legal proceedings threatened
or pending against USTS, (iii) any liabilities or obligations arising out of or
relating to any of the Excluded Assets, (iv) the promissory note in the amount
of $1,150,000 payable to the corporation from which USTS purchased BancPro
Transportation, Inc., (v) any liabilities or obligations exceeding an aggregate
amount of $20,000 arising out of or relating to any breach, default, or failure
to perform under any of the Assumed Contracts prior to and including the Closing
Date, (vi) any liabilities arising out of the violation of any environmental
laws, (vii) any liabilities of USTS for unpaid taxes for periods prior to the
Closing Date, or (viii) any other liabilities of USTS other than the Assumed
Liabilities.
CLOSING DATE. The Closing is expected to take place promptly after the
Transactions are approved by the USTS shareholders, subject to the prior
satisfaction of all conditions of Closing.
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REPRESENTATIONS. The Plan of Reorganization contains customary
representations and warranties of the parties, including such matters as their
organization and capitalization; authorization and validity of the Plan of
Reorganization; absence of conflict with charter documents or agreements by
which the parties are bound or laws or judgments applicable to the parties;
governmental approvals and third party consents; filings with the Commission and
the accuracy of the information contained therein; financial statements; the
absence of any material adverse changes; payment of taxes; litigation; employee
plans; and broker's fees. The Plan of Reorganization also contains
representations by USTS and Precept with respect to real and personal property
holdings and the absence of environmental problems at the companies' respective
lease sites.
CONDUCT OF PRECEPT'S BUSINESS PRIOR TO TRANSFER. Pursuant to the Plan of
Reorganization, Precept has agreed that, among other things, during the period
from the date of the Plan of Reorganization until the Closing Date, unless
otherwise agreed in writing by USTS: (a) to the extent reasonably practicable,
the business of Precept shall be conducted only in the ordinary course of
business and consistent with past practices, and Precept shall use its
commercially reasonable efforts to maintain and preserve its business
organization, assets, prospects, employees and advantageous business
relationships; (b) Precept will, and will cause its subsidiaries to, conduct its
and their business in the ordinary course, consistent with past practice,
between the date of the Plan of Reorganization and the Closing; and (c) Precept
will not, and will not permit its subsidiaries to (i) declare, pay or make any
dividends or distributions on its capital stock; (ii) enter into any agreement
(oral or written) with its directors, officers, or salaried employees (except
for employees in the ordinary course of business); (iii) increase the
compensation of its directors, officers, or employees (except for employees in
the ordinary course of business); (iv) make capital expenditures (or enter into
commitments to make capital expenditures) in excess of $100,000 (either
individually or in the aggregate); (v) issue any capital stock or any securities
or other instruments convertible, exercisable or exchangeable for shares of its
capital stock; (vi) incur indebtedness or other liabilities other than in the
ordinary course of business and consistent with past practice; (vii) redeem any
capital stock or pay any principal of any indebtedness to any director,
executive officer or shareholder; (viii) enter into any agreement or arrangement
to sell any assets or any of its capital stock or merge with any entity, except
for sales of assets in the ordinary course of business; or (ix) enter into any
agreement or arrangement to purchase any securities or assets of any entity or
to merge or otherwise combine with any entity.
CONDUCT OF USTS' BUSINESS PRIOR TO TRANSFER. USTS has agreed that, among
other things, during the period from the date of the Plan of Reorganization
until the Closing Date, except in connection with the transactions contemplated
by the Plan of Reorganization and except as Precept shall otherwise agree in
writing: (a) To the extent reasonably practicable, the business of USTS shall be
conducted only in the ordinary course of business and consistent with past
practices, and USTS shall use its commercially reasonable efforts to maintain
and preserve its business organization, assets, prospects, employees and
advantageous business relationships; (b) USTS will, and will cause its
subsidiaries to, conduct its business in the ordinary course, consistent with
past practice; and (c) USTS will not, and will not permit its subsidiaries to,
(i) declare, pay or make any dividends or distributions on its capital stock;
(ii) enter into any agreement (oral or written) with its directors, officers, or
salaried employees (except for employees in the ordinary course of business);
(iii) increase the compensation of its directors, officers, or employees (except
for employees in the ordinary course of business); (iv) make capital
expenditures (or enter into commitments to make capital expenditures) in excess
of $100,000 (either individually or in the aggregate); (v) issue any capital
stock or any securities or other instruments convertible, exercisable or
exchangeable for shares of its capital stock; (vi) incur indebtedness or other
liabilities other than in the ordinary course of business and consistent with
past practice; (vii) redeem any capital stock or pay any principal of any
indebtedness to any director, executive officer or stockholder; (viii) enter
into any agreement or arrangement to sell any assets or any of its capital stock
or merge with any entity, except for sales of assets in the ordinary course of
business; or (ix) enter into any agreement or arrangement to purchase any
securities or assets of any entity or to merge or otherwise combine with any
entity.
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CONDITIONS TO THE OBLIGATIONS OF EACH PARTY TO EFFECT TRANSFER. Pursuant to
the Plan of Reorganization, the respective obligations of the parties to effect
the Transfer will be subject to the fulfillment at or prior to the Closing Date
of the conditions that, among other things, (i) the Plan of Reorganization shall
have been approved and adopted by the requisite vote of the shareholders of USTS
required by applicable law; (ii) any applicable waiting period or extension
thereof under the HSR Act relating to the Transfer shall have expired or been
terminated; (iii) no judgment, injunction, order, decree or ruling issued by a
court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, nor any statute, rule, regulation or
executive order promulgated or enacted by any governmental authority shall be in
effect that would make the acquisition or holding by USTS of the Shares illegal,
or otherwise prohibit the consummation of the Transfer; (iv) the Shares shall
have been approved for listing on Nasdaq subject to official notice of issuance
by Precept; and (v) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required to permit the execution, delivery and performance of
the Plan of Reorganization shall have been obtained or made, except for filings
in connection with the Transfer and any other documents required to be filed
after the Closing Date, and except where the failure to have obtained or made
any such consent, authorization, order, approvals, filing or registration would
not have a material adverse effect on Precept.
ADDITIONAL CONDITIONS TO THE OBLIGATION OF ACQUISITION AND PRECEPT. The
obligation of Acquisition and Precept to effect the Transfer is also subject to
the fulfillment at or prior to the Closing Date of certain additional
conditions, (unless waived), including, without limitation, (i) USTS shall in
all material respects have performed each obligation to be performed by it under
the Plan of Reorganization on or prior to the Closing Date, (ii) the
representations and warranties of USTS in the Plan of Reorganization shall be
true and correct in all material respects when made and at the Closing Date with
the same force and effect as though made at such time, (iii) there shall have
been no material adverse change in the condition (financial or otherwise),
operations, assets, liabilities or prospects of USTS since June 30, 1997, (iv)
USTS shall have delivered to Acquisition all necessary consents, authorizations
and approvals required by the Plan of Reorganization, and (v) USTS shall have
furnished to Acquisition at least three (3) business days prior to Closing a
preliminary balance sheet of USTS as of the Closing Date, prepared in accordance
with GAAP.
ADDITIONAL CONDITIONS TO THE OBLIGATION OF USTS. The obligation of USTS to
effect the Transfer is also subject to the fulfillment at or prior to the
Closing Date of certain additional conditions, (unless waived), including,
without limitation, (i) Acquisition and Precept shall in all material respects
have performed each obligation to be performed by it under the Plan of
Reorganization on or prior to the Closing Date, (ii) the representations and
warranties of Acquisition and Precept in the Plan of Reorganization shall be
true and correct in all material respects when made and at the Closing Date with
the same force and effect as though made at such time, (iii) there shall have
been no material adverse change in the condition (financial or otherwise),
operations, assets, liabilities or prospects of Precept since June 30, 1997,
(iv) Precept shall have entered into the Registration Rights Agreement with
Michael Margolies, (v) Precept shall have entered into Employment Agreements
with Michael Margolies and Ron Sorci; and (vi) Precept shall either pay all of
USTS' outstanding obligations under that certain Loan and Security Agreement,
dated October 7, 1996 by and between USTS and Israel Discount Bank of New York
("IDB") (approximately $4,269,000 unpaid principal amount at January 31, 1998)
or provide IDB with an irrevocable standby letter of credit from a financial
institution reasonably satisfactory to IDB for the full amount of the
obligations plus ninety (90) days interest on the principal amount of the loan.
MUTUAL INDEMNIFICATION. USTS shall indemnify and hold Precept, Acquisition,
the Liquidating Trust, and their respective officers, directors, shareholders,
affiliates, employees and agents ("Precept Indemnitees") harmless from certain
liabilities, including, without limitation, any and all damages, losses, claims
and certain other liabilities directly or indirectly resulting from or arising
out of any breach or inaccuracy in any representation or warranty of USTS in the
Plan of Reorganization, any breach or non-performance by USTS of any provision
of the Plan or Reorganization, any violation or non-compliance with any
environmental law, any contracts, agreements, or other obligation of USTS other
than the Assumed Liabilities, and from all of the Excluded Liabilities. Such
indemnification (i) shall be paid out of, and is limited to, the
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Shares held in the Contingency Reserve, (ii) except for claims by any Precept
Indemnitees, or any USTS Subsidiaries relating to or arising out of the William
Orr litigation (see "Business of USTS--Litigation"), USTS is only required to
satisfy claims for indemnification by Precept Indemnitees no earlier than the
date of the one year anniversary of the Closing Date, and after all other
pending claims against USTS (or the Liquidating Trust) have been disposed of,
and (iii) USTS (or the Liquidating Trust) shall only be required to indemnify
Precept Indemnitees for claims made on or before the two year anniversary of the
Closing Date. In addition, Precept and Acquisition shall indemnify and hold USTS
and the Liquidating Trust and their respective officers, directors,
shareholders, trustees, Affiliates, employees and agents harmless from any and
all damages, losses, claims and certain other liabilities relating to, resulting
from or arising out of any breach or inaccuracy of any representation or
warranty of Precept contained in the Plan of Reorganization.
TERMINATION. The Plan of Reorganization may be terminated at any time prior
to the Closing Date:
- by agreement of the Boards of Directors of USTS and Precept;
- by either Board if the other party has made an untrue representation in
the Agreement or has breached a covenant in the Agreement and is unable to
cure the problem within five days after being notified of it;
- by either Board if the Closing Date has not occurred by January 31, 1998,
except not by a party which was responsible for the delay;
- by either Board if a court enjoins the Transfer;
- by either Board if the closing price of USTS Common Stock falls below
$1.65 for more than ten consecutive trading days; or
- by the USTS Board if USTS receives a proposal from a third party to
acquire USTS or its assets and the USTS Board determines that the proposal
is more advantageous to the shareholders of USTS than the Transactions
would be.
TERMINATION FEE. If the Plan of Reorganization is terminated because (i)
USTS shall have entered into, or shall have publicly announced its intention to
enter into, an agreement or an agreement in principle with respect to any tender
or exchange offer, merger, consolidation, or other business combination which
the USTS Board has determined is more favorable to USTS' shareholders than the
transactions contemplated by the Plan of Reorganization, or the USTS Board shall
have withdrawn or materially modified in any manner adverse to Precept the USTS
Board's approval or recommendation of the Transfer, (ii) any person or group
shall have become the beneficial owner of a majority of the USTS Common Stock,
or (iii) the failure to consummate the Transfer by January 31, 1998 as a result
of USTS' breach or failure to perform in any material respect any of its
covenants or agreements under the Plan of Reorganization, then USTS will be
required to pay Precept a termination fee of $1,000,000 (the "Termination Fee").
Similarly, if (i) any person or group shall have become the beneficial owner of
a majority of the Precept Class A Common Stock, or (ii) the failure to
consummate the Transfer by January 31, 1998 as a result of Precept's breach or
failure to perform in any material respect any of its covenants or agreements
under the Plan of Reorganization, then Precept will be required to pay USTS a
termination fee of $1,000,000.
AMENDMENT; OTHER MATTERS. The Plan of Reorganization may be amended by USTS
and Precept at any time before the Closing Date; provided, however, that after
approval by the shareholders of USTS, no amendment may be made that changes the
form or reduces the amount of consideration to be paid to the shareholders or
that in any other way materially adversely affects the rights of such
shareholders (other than a termination of the Plan of Reorganization in
accordance with the provisions thereof) without the further approval of such
shareholders.
POST CLOSING OBLIGATIONS. On or immediately after the Closing Date, USTS
will amend its Articles of Incorporation to change its corporate name to
Transportation Equities, Inc. As promptly as practicable after the Closing Date,
but in no event later than 45 days after the Closing Date, USTS will deliver to
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Acquisition the Final Closing Balance Sheet which shall update the Preliminary
Closing Balance Sheet. To the extent that Acquisition disputes any items or
amounts reflected on the Final Closing Balance Sheet which, in the aggregate,
exceed $900,000, Acquisition shall notify USTS in writing within 15 days after
Acquisition receives the Final Closing Balance Sheet. If Acquisition and USTS
are unable to reach a resolution of such dispute within 15 days after the
receipt by USTS of Acquisition's written notice of dispute, Acquisition and USTS
shall submit the items remaining in dispute for resolution to an independent
accounting firm, which shall act as arbitrator and shall determine and report to
the parties upon such remaining disputed items with respect to the differences
which are in excess of $900,000, and such report shall be final, binding and
conclusive on the parties. The fees of the independent accounting firm in
connection with such determination shall be shared equally by Acquisition and
USTS.
Within ten (10) business days after the Closing Date, Precept shall cause
Acquisition to repay all principal and accrued and unpaid interest due on the
Margolies Note unless, prior to such date, Margolies and Acquisition have
restructured the Margolies Note on terms and conditions acceptable to each of
Margolies and Precept.
TERMS OF THE PLAN OF LIQUIDATION
EFFECTIVE DATE. The Plan of Liquidation shall be effective on the date (the
"Effective Date") on which it is adopted by the affirmative vote of the holders
of a majority of the USTS shareholders at the Meeting, subject to consummation
of the Transfer.
CESSATION OF BUSINESS; DISSOLUTION. After the Effective Date, the USTS
shall not engage in any business activities except for the purposes of (i)
prosecuting or defending lawsuits to which the USTS is a party, (ii) disposing
of and conveying its property, discharging its liabilities and winding up its
business and affairs, and (iii) making the Liquidation Distribution. BancPro
Transportation, Inc. ("BancPro"), a subsidiary of USTS, will continue to carry
on business activities as necessary to preserve its business pending disposition
by USTS of that asset. However, within one year after the Effective Time, USTS
will either dispose of BancPro or liquidate it. As soon as practicable after the
Effective Date, USTS shall file a Certificate of Dissolution with the Nevada
Secretary of State.
CONTINGENCY RESERVE. USTS shall make proper provision for the payment of
all known or ascertainable liabilities of USTS, including all amounts estimated
by the USTS Board to be necessary, appropriate or desirable for the payment of
estimated expenses, taxes and contingent liabilities (including expenses of
dissolution, liquidation and termination of existence) by setting aside a
portion of the Shares received by USTS in the Transfer (not less than 500,000
Shares nor more than 1,000,000 Shares), cash or other property of USTS (the
"Contingency Reserve").
LIQUIDATING DISTRIBUTION. As soon as practicable after the Effective Date,
USTS shall distribute pro rata to the USTS shareholders that portion of the
Shares remaining after making provision for the Contingency Reserve. The
distribution may be made in a series of distributions and, while intended to be
made in Shares, may be made in cash, in such manner as the USTS Board may
determine. USTS will establish a liquidating trust to receive all remaining
assets for the benefit of the USTS shareholders, subject to the payment of
expenses, taxes and contingent liabilities of USTS. The Liquidating Distribution
shall be in complete redemption and cancellation of all outstanding USTS Common
Stock.
AMENDMENTS. Notwithstanding the adoption of the Plan of Liquidation by the
USTS shareholders, the USTS Board may modify or amend the Plan of Liquidation at
any time and, prior to the filing of a Certificate of Dissolution with the
Secretary of State of Nevada, may abandon the Plan, in each case with no further
action by the USTS stockholders to the extent permitted by applicable law.
LIQUIDATING TRUST. Under a Liquidating Trust Agreement between USTS and
Michael Margolies, as liquidating trustee, the Contingency Reserve will be held
by the liquidating trust subject to the satisfaction of any liabilities or
obligations of USTS for up to three years, after which any remaining assets will
be distributed on a pro rata basis to the stockholders of USTS. The liquidating
trustee shall have the power, among other things, to pay from the trust corpus
unpaid claims, liabilities, debts and obligations of the
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trust, contingencies, and the expenses of administering the trust, to sell,
transfer, assign, borrow against, pledge, hypothecate or deal in any other
manner with any of the trust corpus, in such manner as the trustee may deem
advisable for any purpose. The trust shall distribute at least annually to the
USTS shareholders its net income plus all net proceeds from the sale of any
assets, except that the trust may retain an amount of net income or net proceeds
reasonably necessary to maintain the value of the trust corpus or to meet claims
and contingent liabilities. If, at any time, the trustee determines that all
claims, debts, liabilities, and obligations of the trust have been paid or
discharged and that the remaining assets of the trust may be conveniently
distributed in kind, the trustee shall distribute the trust corpus to the
beneficiaries of record on the close of business on such record date as the
trustee may determine. After the end of each fiscal year of the trust, the
trustee shall submit a written report to the beneficiaries showing the assets
and liabilities of the trust, any changes in the trust corpus which have not
been previously reported, and any action taken by the trustee in the performance
of his duties under the Liquidating Trust Agreement.
EFFECT OF THE TRANSACTIONS ON USTS SHAREHOLDERS
Promptly after the Closing Date, USTS will distribute to its shareholders of
record (both Common and Preferred) all of the Shares it received except for
those which are to be retained as a Contingency Reserve. As a result, each USTS
shareholder on the record date for the distribution will receive approximately
one Share for each USTS share held on that date. It is expected that the Shares
received will be listed on Nasdaq and be immediately saleable by the
shareholders. Because the Transfer has been structured as a tax-free
reorganization, the distribution of Shares to the USTS Shareholders will not
result in any tax liability for the USTS shareholders.
Those who are shareholders of USTS after the Transfer will remain USTS
shareholders, as well as Precept shareholders, unless they sell their shares.
Shortly after the Transfer, however, and no later than one year after the date
of the Shareholders Meeting, USTS will close its stock record books and will not
permit any USTS Common Stock to be transferred except by will or other legal
proceeding. At the same time, USTS will transfer all of its assets and
liabilities to the Liquidating Trust and will dissolve and cease to exist.
Thereafter, those who were USTS shareholders when its stock records were closed
will retain only an interest in the Liquidating Trust. If, after all liabilities
assumed by the Trust have been satisfied, there are assets left in the
Liquidating Trust, those assets will be distributed pro rata to those who were
USTS shareholders when its stock records were closed.
REVERSE STOCK SPLIT
In connection with Precept's Nasdaq listing application, Precept has
indicated to the Nasdaq that it intends to effect a reverse stock split if
necessary for the purpose of complying with the applicable Nasdaq listing
criteria, including the requirement that the Precept Class A Common Stock trade
at or above $4 per share after the consummation of the Transactions. On February
6, 1998, the shareholders of Precept approved an amendment to Precept's Articles
of Incorporation whereby such number of shares of Precept Common Stock between
one and two, consisting only of whole shares and tenths of shares (the "Split
Ratio"), as shall be determined by the Precept Board of Directors, shall be
converted and reconstituted into one share of Precept Common Stock in a reverse
stock split of the Precept Common Stock (the "Reverse Stock Split") if the Board
of Directors determines that the Reverse Stock Split is required to become
listed or to remain listed on the Nasdaq. No fractional shares will be issued in
the Reverse Stock Split and an amount of cash equal to the fair market value of
any fractional shares resulting from the Reverse Stock Split (as determined by
the Board of Directors of Precept) will be paid to holders thereof in lieu of
such fractional shares. The number of Shares issuable to USTS in the Transaction
will be adjusted to reflect the Reverse Stock Split. The Reverse Stock Split
will become effective upon the filing of Amended and Restated Articles of
Incorporation of Precept with the Secretary of State of the State of Texas on
any date selected by the Board of Directors. To the extent that, in the
discretion of the Precept Board of Directors, the Reverse Stock Split is not
required to obtain or maintain listing on the Nasdaq, the Precept Board of
Directors may determine the Split Ratio to be equal to one, and no change to
Precept's
23
<PAGE>
Articles need be made as a result thereof. The number of shares of Precept
Common Stock outstanding at the Closing Date will be 45,612,500, and such number
could potentially be changed by the Reverse Stock Split.
The USTS shareholders, by approving the Transactions, are approving the
receipt by USTS of the Shares in the Transfer subject to the effects, if any, of
the Reverse Stock Split. Consummation of the Reverse Stock Split would, in and
of itself, not result in a change in the relative equity position or voting
power of the holders of Precept Class A Common Stock. As a result, however, of
the fact that the Reverse Stock Split would likely reduce the number of issued
and outstanding shares of Precept Class A Common Stock without changing the par
value of such stock, the Reverse Stock Split would result in a decrease in
Precept's stated capital. The Precept Board of Directors believes that the
Reverse Stock Split would have the effect of increasing the market price per
share of Precept Class A Common Stock. However, there can be no assurances that
any such increase would occur, that such increase would be proportionate to the
reduction in the number of shares of Precept Class A Common Stock, or that any
such increase would be sustained for a prolonged period of time. The Reverse
Stock Split could result in a decrease in the trading volume of Precept Class A
Common Stock due to the decrease in the number of outstanding shares. There can
be no assurance that Precept would, as a result of the Reverse Stock Split,
continue to meet the maintenance listing requirements of Nasdaq.
24
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The acquisition of USTS ("USTS Acquisition") will be accounted for by the
purchase method of accounting and, accordingly, the purchase price of $4.4
million plus approximately $1.7 million of fees and expenses has been allocated
on a preliminary basis to the assets acquired and liabilities assumed based upon
their estimated fair value at the closing date of the USTS Acquisition. Precept
is not aware of any information that would have a material effect on the final
purchase price allocation. The excess of purchase price over the estimated fair
values has been preliminarily recognized as goodwill, which will be amortized
over 20 years.
The Unaudited Pro Forma Consolidated Statement of Operations does not
purport to represent what Precept's results of operations actually would have
been if the events described above had occurred as of the date indicated or what
results will be for any future periods. The Unaudited Pro Forma Consolidated
Financial Information is based upon assumptions that Precept believes are
reasonable.
The following Unaudited Pro Forma Consolidated Balance Sheet as of September
30, 1997 gives effect to the USTS Acquisition as though it had occurred on that
date. The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended June 30, 1997 (which combines USTS' financial information for the
six-months ended December 31, 1996 and six-months ended June 30, 1997) and for
the three months ended September 30, 1997, gives effect to the USTS Acquisition
as though it had occurred on July 1, 1996. The Unaudited Pro Forma Statement of
Operations for the year ended June 30, 1997 also gives effect to the USTS
acquisition of Gulf Northern and Mencor as if they had occurred on July 1, 1996.
The Unaudited Pro Forma Consolidated Financial Information should be read in
conjunction with the Consolidated Financial Statements of Precept and USTS and
the Notes thereto included elsewhere in this Proxy Statement/Prospectus.
25
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
<S> <C> <C> <C> <C> <C> <C>
B
A BLACK & WHITE PRO FORMA
PRECEPT USTS BANCPRO CAB COMPANY ADJUSTMENTS FOOTNOTE
------------ ------------ ------------ -------------- ------------- ---------
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,704,676 $ 905,242 $ 81,945 $ (59,294) $ (175,000) D
Cash--restricted............................ -- 232,879 -- -- --
Accounts receivable, net of allowance....... 10,119,761 8,014,234 (2,822,543) (209,878) -- D
Accounts receivable from affiliates......... 524,174 -- -- -- --
Notes and other receivables................. 520,812 609,063 -- (94,478) -- D
Inventory................................... 2,828,884 393,943 -- (1,420) (37,722) D
Net investment in sale type leases.......... -- 937,233 -- -- (937,233) C
Assets held for sale........................ -- -- -- -- 748,333 C
Income taxes refundable..................... 215,830 -- -- -- --
Deferred income taxes....................... 1,090,886 -- -- -- --
Net assets of discontinued operations....... 3,622,019 -- -- -- --
Prepaid and other........................... 630,042 836,795 -- (11,988) (178,620) C
Prepaid and other........................... -- -- -- -- (128,190) D
------------ ------------ ------------ -------------- -------------
Total current assets.......................... 21,257,084 11,929,389 (2,740,598) (377,058) (708,432)
Property, plant and equipment, net............ 1,803,387 9,899,504 (10,972) (46,532) (200,000) D
Intangible assets, net........................ 5,474,760 2,847,728 (391,998) -- (2,455,730) D
USTS acquisition goodwill..................... -- -- -- -- 2,856,261 E
Net investment in sales type leases........... -- 1,148,986 -- -- (1,148,986) C
Notes receivable.............................. -- 239,432 -- -- --
Deferred income taxes......................... 615,019 -- -- -- --
Net assets of business transferred under
contractual arrangement..................... -- 500,000 -- -- --
Other assets.................................. 1,326,288 1,146,483 -- (1,000) (409,034) D
------------ ------------ ------------ -------------- -------------
Total assets.................................. $ 30,476,538 $ 27,711,522 $ (3,143,568) $ (424,590) $ (2,065,921)
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
LIABILITIES
Current liabilities:
Current portion of long term debt and
capitalized lease......................... $ 230,970 $ -- $ -- $ -- $ --
Cash overdraft.............................. -- 13,679 -- -- --
Note payable and line of credit............. -- 7,898,433 (947,006) -- --
Due to related party........................ -- 181,257 -- -- --
Accounts payable and accrued expenses....... 9,015,110 2,881,687 (352,974) (27,739) 1,490,966 D
------------ ------------ ------------ -------------- -------------
Total current liabilities..................... 9,246,080 10,975,056 (1,299,980) (27,739) 1,490,966
Due to related party.......................... -- 817,312 -- -- --
Long term obligations......................... 7,955,360 5,223,088 -- -- --
------------ ------------ ------------ -------------- -------------
Total liabilities............................. 17,201,440 17,015,456 (1,299,980) (27,739) 1,490,966
Minority Interest in Subsidiary............... -- 580,125 -- -- --
Shareholder's equity:
Preferred stock............................. -- 1,800,000 -- -- (1,800,000) D
Common stock................................ 115,644 70,207 -- -- 270,274 D
Additional paid in capital.................. 17,676,797 29,964,698 -- -- (25,986,564) D
Stock subscription receivable............... -- (25,785) -- -- 25,785 D
Deferred compensation....................... -- (456,697) -- -- 456,697 D
Accumulated deficit......................... (3,505,036) (21,236,482) (1,843,588) (396,851) 23,476,921 D
------------ ------------ ------------ -------------- -------------
14,287,405 10,115,941 (1,843,588) (396,851) (3,556,887)
Treasury stock.............................. (191,271) -- -- -- --
Shareholder notes........................... (821,036) -- -- -- --
------------ ------------ ------------ -------------- -------------
Total shareholders' equity.................... 13,275,098 10,115,941 (1,843,588) (396,851) (3,556,887)
------------ ------------ ------------ -------------- -------------
Total liabilities & shareholders' equity...... $ 30,476,538 $ 27,711,522 $ (3,143,568) $ (424,590) $ (2,065,921)
------------ ------------ ------------ -------------- -------------
------------ ------------ ------------ -------------- -------------
<CAPTION>
<S> <C>
PRO FORMA
CONSOLIDATED
-------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 2,457,569
Cash--restricted............................ 232,879
Accounts receivable, net of allowance....... 15,101,574
Accounts receivable from affiliates......... 524,174
Notes and other receivables................. 1,035,397
Inventory................................... 3,183,685
Net investment in sale type leases.......... --
Assets held for sale........................ 748,333
Income taxes refundable..................... 215,830
Deferred income taxes....................... 1,090,886
Net assets of discontinued operations....... 3,622,019
Prepaid and other........................... 1,148,039
Prepaid and other........................... --
-------------
Total current assets.......................... 29,360,385
Property, plant and equipment, net............ 11,445,387
Intangible assets, net........................ 5,474,760
USTS acquisition goodwill..................... 2,856,261
Net investment in sales type leases........... --
Notes receivable.............................. 239,432
Deferred income taxes......................... 615,019
Net assets of business transferred under
contractual arrangement..................... 500,000
Other assets.................................. 2,062,737
-------------
Total assets.................................. $52,553,981
-------------
-------------
LIABILITIES
Current liabilities:
Current portion of long term debt and
capitalized lease......................... $ 230,970
Cash overdraft.............................. 13,679
Note payable and line of credit............. 6,951,427
Due to related party........................ 181,257
Accounts payable and accrued expenses....... 13,007,050
-------------
Total current liabilities..................... 20,384,383
Due to related party.......................... 817,312
Long term obligations......................... 13,178,448
-------------
Total liabilities............................. 34,380,143
Minority Interest in Subsidiary............... 580,125
Shareholder's equity:
Preferred stock............................. --
Common stock................................ 456,125
Additional paid in capital.................. 21,654,931
Stock subscription receivable............... --
Deferred compensation....................... --
Accumulated deficit......................... (3,505,036)
-------------
18,606,020
Treasury stock.............................. (191,271)
Shareholder notes........................... (821,036)
-------------
Total shareholders' equity.................... 17,593,713
-------------
Total liabilities & shareholders' equity...... $52,553,981
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated balance sheet.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Pro forma adjustments are made to exclude the BancPro assets and
liabilities included in the USTS historical financial statements as of September
30, 1997, which are not a part of the Transfer.
(B) Pro forma adjustments are made to exclude the Black & White Cab Company
assets and liabilities included in the USTS historical financial statements as
of September 30, 1997, which are not a part of the Transfer (Black & White Cab
Company was sold by USTS subsequent to September 30, 1997).
(C) Pro forma adjustments are made to record Net Investment in Sales Type
Leases, including related accrued interest, at their liquidation value plus
estimated future cash flows prior to disposal of these leases and to record this
investment as Assets Held for Sale as Precept intends to cease operating in this
line of business. The following is a detail of these adjustments:
<TABLE>
<S> <C> <C>
USTS Acquisition Goodwill................... $ 1,516,506
Assets Held for Sale--Current............... 748,333
Net Investment in Sales Type
Leases--Current......................... 937,233
Net Investment in Sales Type Leases--Non
Current................................. 1,148,986
Prepaid and Other......................... 178,620
</TABLE>
(D) Pro forma adjustments are made to record the issuance of 9,612,500
shares of Precept Class A Common Stock, valued at $0.42 per share, the issuance
of warrants and options, and the estimated transaction costs in connection with
the Transfer. Pro forma adjustments are also made to allocate the purchase price
to the fair value of the remainder of those assets acquired and the liabilities
assumed in the Transfer. Finally, pro forma adjustments are made to eliminate
the equity structure of USTS as a result of the Transfer. The following is a
detail of these adjustments:
<TABLE>
<S> <C> <C>
Preferred Stock............................. $ 1,800,000(a)
Additional Paid in Capital.................. 25,986,564(a)(b)(c)
USTS Acquisition Goodwill................... 1,339,755
Cash and Cash Equivalents................. 175,000(d)
Inventory................................. 37,722(e)
Prepaid and Other......................... 128,190(f)
Property, Plant and Equipment, Net........ 200,000(g)
Intangible Assets, Net.................... 2,455,730(h)
Other Assets.............................. 409,034(i)
Accounts Payable and Accrued Expenses..... 1,490,966(i)(j)
Common Stock.............................. 270,274(a)(b)(c)
Subscription Stock Receivable............. 25,785(a)
Deferred Compensation..................... 456,697(a)
Accumulated Deficit....................... 23,476,921(a)
</TABLE>
The following is a detail of these adjustments:
(a) To eliminate historical USTS shareholders' equity accounts, after
reductions for BancPro and Black & White Cab Company.
27
<PAGE>
(b) To record estimated purchase price, as follows:
<TABLE>
<S> <C> <C> <C>
9,612,500 shares of Precept's Class A Common Stock, valued at $0.42
per share(1)...................................................... $4,037,250
1,815,000 Class C warrants(2)....................................... 157,000
Other warrants and options(2)....................................... 124,365
---------
$4,318,615
---------
---------
Allocated within equity as follows:
Common Stock........................... $ 96,125
Paid in Capital........................ 4,222,490
---------
$4,318,615
---------
---------
</TABLE>
(1) The determination of the valuation of Precept Class A Common Stock at
$0.42 per share is based upon a valuation analysis, which included a
comparable company analysis and a discounted cash flow analysis.
(2) All warrants and options were valued utilizing an option pricing
model. Other warrants and options include 482,500 warrants and 94,996
options, all of which are vested, and have an average value of
approximately $0.21.
(c) To reclassify $244,356 from additional paid in capital to common stock
as a result of an approximate 3.154 to 1 stock split on the Precept
Common Stock expected to occur prior to the effective date of the Proxy
Statement/Prospectus.
(d) To exclude cash to be retained by USTS of $175,000.
(e) To write down inventory to estimated fair market value.
(f) To eliminate prepaid expenses related to prepaid consulting services
which will not be utilized by the combined company. Thus, the amount
recorded has no future value.
(g) To record property, plant, and equipment at fair market value.
(h) To eliminate USTS historical intangible assets of $2,455,730, after
reduction for BancPro.
(i) To record estimated transaction fees and expenses of $1,700,000. Of this
amount, $409,034, representing transaction costs incurred, is reflected
at September 30, 1997 as other assets.
(j) To record estimated severance and other costs (total of $200,000)
relating to the closing of USTS corporate offices expected to occur
shortly following the closing of the Transactions.
(E) Pro forma adjustments are made to record goodwill equal to the excess of
the purchase price over the fair values assigned to assets acquired and
liabilities assumed by Precept (total of items (C) and (D) above). Goodwill is
to be amortized over twenty years, which is consistent with prior estimated
lives used by the two companies.
28
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
A
HISTORICAL BLACK &
-------------------------- A WHITE CAB PRO FORMA PRO FORMA
PRECEPT USTS BANCPRO COMPANY ADJUSTMENTS FOOTNOTE CONSOLIDATED
------------ ------------ ---------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Business products................. $ 17,296,931 $ -- $ -- $ -- $ -- $17,296,931
Transportation.................... 1,638,547 8,742,778 (635,070) (85,598) -- 9,660,657
------------ ------------ ---------- ----------- ----------- ------------
Total revenues.................. 18,935,478 8,742,778 (635,070) (85,598) -- 26,957,588
EXPENSES:
Cost of goods and services sold... 11,797,855 -- -- -- -- 11,797,855
Selling, general and
administrative.................. 6,538,777 10,738,639 (472,472) (76,973) 16,727,971
Depreciation and amortization..... 245,277 654,471 (14,942) (1,969) (257,959) B 624,878
------------ ------------ ---------- ----------- ----------- ------------
Total expenses.................. 18,581,909 11,393,110 (487,414) (78,942) (257,959) 29,150,704
Operating income (loss)............. 353,569 (2,650,332) (147,656) (6,656) 257,959 (2,193,116)
Other income (expenses):
Interest expense.................. (125,359) (340,815) -- -- -- (466,174)
Interest income................... -- 51,517 -- -- -- 51,517
Other............................. -- 172,497 -- -- -- 172,497
------------ ------------ ---------- ----------- ----------- ------------
Total other expenses............ (125,359) (116,801) -- -- -- (242,160)
Income (loss) from continuing
operations before income taxes.... 228,210 (2,767,133) (147,656) (6,656) 257,959 (2,435,276)
Income tax provision................ 93,102 -- (59,062) (2,662) 103,184 C 134,562
------------ ------------ ---------- ----------- ----------- ------------
Net income (loss) from continuing
operations........................ $ 135,108 $ (2,767,133) $ (88,594) $ (3,994) $ 154,775 $(2,569,838)
------------ ------------ ---------- ----------- ----------- ------------
------------ ------------ ---------- ----------- ----------- ------------
Net income (loss) from continuing
operations per share.............. $ 0.01 $ (0.06)
------------ ------------
------------ ------------
Weighted average common outstanding
shares............................ 11,515,687 45,937,402
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
operations.
29
<PAGE>
PRECEPT
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- A
GULF BLACK &
NORTHERN/ A WHITE CAB A PRO FORMA
PRECEPT USTS MENCOR BANCPRO COMPANY ATAB ADJUSTMENTS
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Business products................. $70,778,087 $ -- $ -- $ -- $ -- $ -- $ --
Transportation.................... 6,565,838 29,930,630 8,732,843 (1,917,875) (284,628) (2,222,112) --
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total revenues.................. 77,343,925 29,930,630 8,732,843 (1,917,875) (284,628) (2,222,112) --
EXPENSES:
Cost of goods and services sold... 50,157,418 20,261,902 6,804,625 (1,221,376) -- (838,784) --
Selling, general and
administrative.................. 24,350,230 11,601,558 1,194,857 (231,733) (404,675) (829,312) --
Depreciation and amortization..... 1,498,473 1,982,274 619,396 (39,551) (5,413) (65,671) (972,582)
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total expenses.................. 76,006,121 33,845,734 8,618,878 (1,492,660) (410,088) (1,733,767) (972,582)
Operating income (loss)............. 1,337,804 (3,915,104) 113,965 (425,215) 125,460 (488,345) 972,582
Other income (expenses):
Interest expense.................. (425,314) (903,458) (313,931) -- (1,406) -- --
Interest income................... -- 579,089 70,013 -- -- -- --
Other............................. -- (280,418) (16,905) -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total other expenses............ (425,314) (604,787) (260,823) -- (1,406) -- --
Income (loss) from continuing
operations before income taxes.... 912,490 (4,519,891) (146,858) (425,215) (124,054) (488,345) 972,582
Income tax provision (benefit)...... 380,884 750,000 (58,743) (170,086) 49,622 (195,338) 389,033
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net income (loss) from continuing
operations........................ $ 531,606 $(5,269,891) $ (88,115) $ (255,129) $ 74,432 $ (293,007) $ 583,549
----------- ----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net income (loss) from continuing
operations per share.............. $ 0.05
-----------
-----------
Weighted average common outstanding
shares............................ 11,515,687
-----------
-----------
<CAPTION>
PRO FORMA
FOOTNOTE CONSOLIDATED
------------- -------------
<S> <C> <C>
REVENUES:
Business products................. $70,778,087
Transportation.................... 40,804,696
-------------
Total revenues.................. 111,582,783
EXPENSES:
Cost of goods and services sold... 75,163,785
Selling, general and
administrative.................. 35,680,925
Depreciation and amortization..... B 3,016,926
-------------
Total expenses.................. 113,861,636
Operating income (loss)............. (2,278,853)
Other income (expenses):
Interest expense.................. (1,644,109)
Interest income................... 649,102
Other............................. (297,323)
-------------
Total other expenses............ (1,292,330)
Income (loss) from continuing
operations before income taxes.... (3,571,183)
Income tax provision (benefit)...... C 1,145,372
-------------
Net income (loss) from continuing
operations........................ $(4,716,555)
-------------
-------------
Net income (loss) from continuing
operations per share.............. $ (0.10)
-------------
-------------
Weighted average common outstanding
shares............................ 45,937,402
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
operations.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(A) Pro forma adjustments are made to remove the operations of BancPro, ATAB and
Black & White Cab Company from the historical statement of operations of
USTS. These operations were not acquired as part of the Transfer.
(B) Pro forma adjustment to reflect the change in depreciation and amortization
expense as a result of the Transfer is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------- -------------
<S> <C> <C>
Historical depreciation and amortization expense recorded
by USTS, after reductions for BancPro, ATAB and Black &
White Cab Company....................................... $ (637,560) $ (1,871,638)
Historical depreciation and amortization expense recorded
by Gulf Northern and Mencor prior to their acquisition
by USTS................................................. -- (619,346)
Depreciation expense relating to the fair value of
property, plant and equipment from the Transfer to be
amortized over periods ranging from 1 to 15 years(a).... 343,897 1,375,590
Amortization expense related to goodwill resulting from
the Transfer, to be amortized over 20 years............. 35,704 142,812
---------- -------------
Pro forma adjustment to depreciation and amortization..... $ (257,959) $ (972,582)
---------- -------------
---------- -------------
(a) Property, plant and equipment to be acquired (with
applicable estimated average remaining useful lives)
include highway coaches (8 years), school buses,
tractor-trailers and other revenue equipment (4 years)
and other depreciable assets (7 years).
</TABLE>
(C) Pro forma adjustment to income taxes is to apply the effective income tax
rate (40%) to net adjustments made to Income (loss) from continuing
operations.
31
<PAGE>
USTS BUSINESS
USTS is currently engaged in the following business areas, which primarily
relate to transportation. USTS' transportation services consist of (i) bus and
other motor vehicle transportation services to customers such as businesses and
municipalities on a contract basis, (ii) chauffeured vehicle services, (iii)
over-the-road package delivery services for common carriers, (iv) five full-load
tractor-trailer operations (operated as one division), based in Syracuse, New
York, Orlando, Florida, Wisconsin Rapids, Wisconsin, Charleston, South Carolina,
and Kansas City, Missouri, and (v) a car rental brokerage firm in Mesa, Arizona.
Until recently, USTS was also engaged in certain custom equipment
manufacturing operations, manufacturing electrical harnesses for transportation
vehicles, taxi services, and ticket brokerage. However, during 1997, USTS
streamlined its operations by eliminating a number of businesses that were not
contributing to profitability and by consolidating its tractor trailer
operations and its package delivery services under the control of a 75% owned
subsidiary, US Trucking, Inc. The result of this process on the corporate
structure of USTS is shown in the chart below:
USTS SUBSIDIARIES
<TABLE>
<S> <C>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
OWNED 100% BY USTS OWNED 100% BY USTS
Jetport, Inc. Jetport, Inc.
Shortway River Rouge, Inc. Shortway River Rouge, Inc.
Transportation Systems Corp. Transportation Systems Corp.
d/b/a Westchester Express d/b/a Westchester Express
BancPro Transportation, Inc. BancPro Transportation, Inc.
Bus Properties, Inc. Bus Properties, Inc.
Jay & Jay Transportation, Inc.
OWNED 75% BY USTS Translynx Express, Inc.
US Trucking, Inc. Black & White Cab Company, Inc.
(taxi cab services)
OWNED 100% BY US TRUCKING, INC. Priority Express Service, Inc.
Jay & Jay Transportation, Inc. (package delivery)
Translynx Express, Inc. Advance Technologies For American
Mencor, Inc. Business, Inc.
Gulf Northern Transportation, (electrical harness manufacturing)
Inc. Downtown Theatre Ticket Agency,
Priority Express Service, Inc. Inc.
Avanti Delivery Services, Inc. (entertainment ticket brokerage)
Avanti Delivery Services, Inc.
</TABLE>
TRANSPORTATION SERVICES
CONTRACT TRANSPORTATION SERVICES
This segment of USTS' business consists of supplying buses, vans or
customized vehicles to customers pursuant to written contracts or purchase
orders which are generally awarded on a competitive bid basis. Customers include
governmental agencies and private industry.
During the past 15 years, USTS has developed an infrastructure to support
its contract transportation activities. This infrastructure consists of major
garage facilities, repair shops, contiguous parking areas and computerized
dispatch and communications capacity, all staffed by an experienced group of
maintenance, operational and administrative personnel. While such support
structures exist in all locations in which USTS operates, its most extensive
hubs are centered in the areas of Dearborn, Michigan, Wisconsin
32
<PAGE>
Rapids, Wisconsin, Kansas City, Missouri, Cincinnati, Ohio and Syracuse, New
York. In all of its locations, USTS has established sources for operational
supplies and repair parts, with around-the-clock dispatching, maintenance and
road service.
Most of the transportation contracts which USTS seeks to obtain are awarded
on a competitive bid basis. Typically, a municipality, public authority or
private corporation sets forth the specifications for its transportation
requirements, and USTS and its competitors submit bids specifying prices for the
services and other terms requested in the solicitation of bids. The contract is
then awarded on the basis of price, financial reliability of the bidder, and
other considerations.
Upon the award of a competitive bid contract or in cases where USTS obtains
a contract by private negotiation, upon the signing of the contract, in an area
where USTS does not have an existing facility, USTS may have to make significant
capital expenditures to establish the facility (including garage, tools, and
related costs) and obtain the equipment (generally buses and spare parts)
necessary to carry out USTS' obligations under the contract. The major portion
of these expenditures are properly capitalized and depreciated over the term of
the contract, thereby avoiding a substantial up-front charge against the profits
from the contract.
USTS' largest transportation contract is with the Ford Motor Company. Under
this contract, USTS has operated an internal bus transportation system for 18
years for over 20,000 employees at Ford's River Rouge plant in Dearborn,
Michigan. Under the terms of the contract, Ford pays USTS a monthly fee for the
bus transportation service, which service operates 24 hours a day, 365 days a
year. The contract expires on June 30, 1998. Revenues from this contract
provided approximately 7% of USTS' gross revenue in the first nine months of
1997, 12% of USTS' gross revenue in 1996 and 17% of USTS' gross revenue in 1995.
Other contract transportation services offered by USTS include an
arrangement with the City of Cincinnati, Ohio, to provide transportation between
the airport (located in Boone County, Kentucky) and various city locations. For
the past 15 years, USTS has had this arrangement with the City of Cincinnati
which gives USTS the exclusive right to perform this service. The contract
requires USTS to charge a "fair rate" to passengers. USTS also runs a shuttle
service for long-term parking facilities at the airport under a separate
contract with the City of Cincinnati. USTS provides around-the-clock shuttle
service between the various terminals and parking lots, and is paid by the City
on an hourly basis. The terms of USTS' contracts with the City of Cincinnati
continue through August 2000.
PACKAGE DELIVERY SERVICES
In recent years USTS acquired the business of Armstrong Freight Service,
Falcon Freight, Krogel, U&M Express and Eagle Air Express, and consolidated
these operations into its Armstrong division ("Armstrong"). These acquisitions
allowed USTS to participate in the growing package delivery industry without
making the capital investment required to establish a package delivery carrier.
The primary business of Armstrong is ground delivery of packages under contracts
from other common carriers. USTS believes that these carriers utilize Armstrong
to improve their operating efficiencies. In October 1997, USTS sold the
Armstrong Division to U. S. Trucking, Inc., a 75%-owned subsidiary of USTS
("USTI"), for a promissory note and the assumption of debt in the amount of
approximately $1,300,000.
TRACTOR-TRAILER OPERATIONS
In 1996, USTS expanded into tractor-trailer operations. USTS, through USTI,
(i) operates a full-load tractor-trailer business through its wholly-owned
subsidiaries, Gulf Northern Transport, Inc. ("Gulf Northern") and Jay and Jay
Transportation, Inc. ("Jay and Jay") from a base in Charleston, South Carolina
with major facilities in Wisconsin Rapids, Wisconsin, Kansas City, Missouri, and
Syracuse, New York, (ii) owns Trans Lynx Express, which provides containerized
air cargo tractor-trailer delivery services under contract from overnight
couriers, and (iii) owns Mencor, Inc. ("Mencor"), a tractor-trailer
transportation
33
<PAGE>
logistics company. In 1996, the tractor-trailer operations accounted for
approximately 18.7% of USTS' revenue and for the first nine months in 1997
accounted for approximately 15.3% of USTS' revenue.
CHAUFFEURED VEHICLE SERVICES
USTS' chauffeured vehicle service operations are located in Westchester
County, New York and are performed for the general public by Transportation
Systems Corp., a wholly-owned subsidiary. Transportation Systems Corp. maintains
a fleet of 45 vehicles, a mixture of town cars, vans and stretch limousines, all
of which are driver-owned or driver-leased. Transportation Systems Corp.
accounted for approximately 13% and 9% of USTS' revenues from continuing
operations in 1996 and for the first nine months of 1997, respectively.
RENTAL CAR BROKERAGE
In September 1996, USTS acquired BancPro-Transportation, Inc., which
operates a car rental brokerage business from headquarters in Mesa, Arizona and
services customers located primarily in Phoenix, Arizona and Las Vegas, Nevada.
EQUIPMENT
USTS owns and maintains a fleet of 458 vehicles. To maintain its fleet, USTS
operates a number of vehicle repair centers staffed by mechanics and trained
servicemen.
GOVERNMENT REGULATION
USTS is subject to regulation by various agencies including the New York
State Department of Transportation, the Port Authority of New York and New
Jersey, the U.S. Department of Transportation and the Federal Highway
Administration, as well as other state and local authorities. Each of these
agencies regulates various aspects of licensing, permitting and operations of
USTS' trucking, package delivery and bus services.
EMPLOYEES
USTS and its subsidiaries employ 431 people. Approximately 175 of these
employees perform office and administrative functions. USTS has contracts with
two unions; however, less than 17% of USTS' employees belong to a union. USTS
believes its present relations with its unions and other employees are good.
PROPERTIES
The real property owned by USTS is as follows: (1) a parcel of 4.25 acres at
One Keeshin Drive, Toledo, Ohio; (2) a parcel of 9.627 acres at 2305 Pyka Road,
Sealy, Texas, from which a discontinued business conducted its operations; and
(3) three parcels in Savannah, New York from which Jay and Jay Transportation
operates.
The real property owned by USTS is subject to the following mortgages: (1)
the Savannah property is mortgaged to Savannah Bank, N.A. to secure a debt
requiring annual payments of $22,545, which has a term of 70 months remaining;
and (2) the Toledo property is mortgaged to Mid-American Bank & Trust Co. to
secure a debt of approximately $58,000 due in ten months. USTS is in default
with respect to its payment obligations on the Savannah property, and Savannah
Bank, N.A. has commenced foreclosure proceedings.
34
<PAGE>
The table below sets forth and identifies the properties leased by USTS,
through USTI, for an annual rental of $50,000 or more. USTS believes that these
facilities are adequate for its operations as presently structured.
<TABLE>
<CAPTION>
TERM AND
ANNUAL
COMPANY LESSOR PREMISES RENTAL
- --------------------------- ---------------------------------- -------------------------- -------------------
<S> <C> <C> <C>
USTI....................... Ensign Properties 6022 Benjamin Month to Month
Tampa, FL $67,089
USTI....................... South Orlando Industrial, L.P. 8870 Bossy Creek Road 11/1/96 to 10/31/01
Orlando, FL $197,254
USTI....................... D. Pixler & Seebrite Insurance 810 25th Ave. No. 1/1/97 to 1/1/02
Wisconsin Rapids, WI $72,000
</TABLE>
LEGAL PROCEEDINGS
GULF NORTHERN TRANSPORT INC.
On January 30, 1997, USTI, acquired 100% of the capital stock of Gulf
Northern and 100% of the capital stock of Mencor. In exchange for the stock of
these corporations USTS issued 25% of the capital stock of USTI, 37,500 shares
of the USTS Common Stock, $295,000 in cash, and an indemnity of Gulf Northern's
secured debt in the amount of $4,520,883. USTI acquired Gulf Northern from
Logistics Management, L.L.C., a Kentucky limited liability company
("Logistics"), in a transaction in which Logistics represented to USTS that it
had acquired ownership of Gulf Northern, free of liens or claims, from
Mid-America Transporters Group, Inc. ("MATG").
On April 16, 1997, United Acquisition II Corporation ("UACQ"), which is the
subject of a bankruptcy petition in the United States Bankruptcy Court for the
Southern District of New York (White Plains Division), commenced an adversary
proceeding in that Court against USTS, its Chairman and other corporate and
individual defendants. UACQ alleges that it acquired ownership of MATG through
certain agreements prior to the transfer of Gulf Northern to Logistics, and that
Gulf Northern was acquired by Logistics from MATG without the consent of UACQ.
UACQ further alleges that the defendants conspired to deprive UACQ of its
interest in Gulf Northern. The complaint seeks declaratory relief, the avoidance
of the alleged fraudulent transfer of Gulf Northern, damages for fraud, and the
imposition of a constructive trust. The defendants in this action allege that
the agreements pursuant to which UACQ claims ownership of MATG were rescinded
and revoked pursuant to the applicable laws.
An agreement settling the action has been negotiated and executed. On
December 16, 1997 the Bankruptcy Court granted its approval of the settlement
and the consummation of the settlement is expected to take place in January,
1998. See Note 5 to the Notes to USTS Consolidated Financial Statements for the
Nine Months Ended September 30, 1996 and 1997.
KAC, INC.
In March 1997, USTS sold Automated Solutions, Inc. ("ASI") to KAC, Inc., for
consideration of $100,000 cash; a 10.5% interest bearing note of approximately
$5,200,000 with monthly payments of approximately $80,000, the unpaid principal
fully due on April 1, 1999; and a deferred payment of $685,000 also due April 1,
1999. In September 1997, USTS declared the notes in default due to non-payment.
USTS commenced a foreclosure action against KAC, Inc. in the Superior Court of
Arizona, seeking foreclosure on the capital stock of ASI, all of which is
pledged as security for the notes. USTS also commenced an action in that court
against the owners of KAC, Inc., who had personally guaranteed the note.
35
<PAGE>
AUTOMATED SOLUTIONS, INC.
In 1995, USTS purchased all of the outstanding shares of Automated
Solutions, Inc. ("ASI") from three members of ASI's management in exchange for
300,000 shares of USTS Common Stock. In March 1997, USTS commenced a lawsuit now
pending in the United States District Court for the District of Arizona against
the three former owners of ASI alleging that they made fraudulent
misrepresentations to USTS in connection with the sale of ASI to USTS. USTS
alleges damages of $4,469,000 plus the 300,000 shares of USTS Common Stock
issued for ASI. The three former owners have counterclaimed, alleging that they
are entitled to receive 166,667 shares of USTS Common Stock under a Contingent
Stock Grant Program adopted when USTS acquired ASI.
WILLIAM ORR
In June 1996, USTS acquired certain trucking assets from Jackson & Johnson,
Inc. and agreed to certain other contractual arrangements with William Orr, the
principal of Jackson & Johnson. In April 1997, Mr. Orr and Jackson & Johnson
commenced legal action against USTS, its subsidiary Jay & Jay Transportation,
Inc. and Michael Margolies, USTS' Chairman. The action alleges that USTS
breached an agreement to pay $160,000 for certain trucks purchased from Jackson
& Johnson, breached an employment agreement with William Orr pursuant to which
he would be paid $90,000 a year for three years, and breached a restrictive
covenant agreement pursuant to which Mr. Orr was to receive certain percentages
(from 3/4% to 2%) of the gross revenues of Jay & Jay Transportation and other
trucking operations subsequently acquired by USTS. USTS has denied the
allegations, and alleged that in connection with the sale of the Jackson &
Johnson assets, Mr. Orr failed to disclose certain liabilities which exceeded in
magnitude the amounts which USTS had agreed to pay Mr. Orr. In addition, USTS
has paid for various items relating to Jackson & Johnson which exceed $160,000
and believes that such items will serve as an offset to the $160,000 purchase
price.
ACCIDENT CLAIMS
USTS is subject to claims from accidents involving USTS' transportation
vehicles. Generally, USTS' liability insurance covers each of these claims. USTS
is responsible, however, for the amount of the deductibles from insurance
coverage as to these claims. At December 31, 1996, the total amount of the
deductibles for which USTS was responsible in connection with pending claims was
approximately $67,000. USTS has recorded a liability of $55,000, which USTS
believes is a reasonable estimate of the loss it will incur in connection with
settlement of these claims, based on the advice of USTS' insurance carriers as
to the likelihood that an adverse result will occur.
OTHER
USTS is party to various matters in litigation. Management believes that
USTS' insurance coverage is adequate with respect to the alleged claims made in
the pending litigation.
36
<PAGE>
USTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of USTS and related Notes included elsewhere
in this Proxy Statement/Prospectus. All references in this Proxy
Statement/Prospectus to numbers of shares have been adjusted to take into effect
a one-for-six reverse split of the USTS Common Stock which was effected on
August 27, 1996.
OVERVIEW
The business of USTS has undergone significant changes resulting from the
acquisitions of certain businesses and the dispositions or discontinuation of
certain other businesses. As a result, comparison of USTS operations from year
to year is difficult. The results of operations for each year includes a
separate item for the results of discontinued operations. In addition, the
overall effect of these many major transactions on the USTS balance sheets and
the continuing operations is often significant, thus reducing the relevance of
USTS' past performance to a prediction of the results to be expected in the
future.
USTS was previously engaged in the contract transportation, charter bus
services, and entertainment ticket brokerage businesses. Charter bus services,
which had in the late 1980's represented over 50% of USTS' revenues, were
discontinued at the end of 1993. The ticket brokerage business, which in most
years produced approximately 10% of USTS revenues, was discontinued at the end
of 1996 and sold in January of 1997.
At the same time that these traditional businesses of USTS were being
discontinued, USTS became involved in a variety of other transportation-related
businesses. In 1994, USTS acquired American Trade-A-Bus of Texas, Inc. ("ATAB"),
which manufactured wire harnesses for military equipment. The ATAB business
produced 13% of USTS revenues in 1996, but has since ceased operations. In 1995,
USTS became involved in short-haul package delivery when it acquired the
business of Armstrong which produced 28% of 1996 revenues. In the same year,
USTS acquired ASI, which manufactures equipment for automobile airbags. ASI was
discontinued at the end of 1996 and sold in March of 1997. In June 1996, USTS
began acquiring tractor-trailer operations, and that business now represents
approximately 50% of USTS' revenues. The tractor-trailer acquisitions were (i)
Jay and Jay, acquired in June 1996, (ii) Mencor, acquired in January 1997 and
(iii) Gulf Northern, acquired in January 1997. USTS acquired BancPro in
September 1996 and it produced 7% of USTS' revenues for the first nine months of
1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30,
1996
USTS' revenues increased 94.5% from $13,065,678 in the first nine months of
1996 to $25,417,444 in the first nine months of 1997. The increase was
attributable primarily to the acquisition of the tractor-trailer operations by
USTI, the greater portion of which were acquired in January 1997, and the
acquisition of BancPro in September 1996. As a result of these tractor-trailer
acquisitions, the USTS' tractor-trailer operations had revenues of $12,837,190
during the first nine months of 1997, as compared to $1,855,956 in the first
nine months of 1996. During the first nine months of 1997, BancPro had revenues
of $1,872,050, compared to revenues of $157,612 recorded in the comparable
period of 1996.
Revenue increases from USTS' other operations were offset, in part, by the
elimination of revenue from ATAB. During the first nine months of 1996, ATAB
produced revenues totaling $2,528,477. All of the ATAB revenues were generated
from sales to Stewart & Stephenson, Inc., ATAB's only customer. Early in 1997,
Stewart & Stephenson terminated its contract with ATAB. As a result, ATAB
generated only $815,675 in revenue during the first nine months of 1997. ATAB
ceased operating in July 1997.
37
<PAGE>
USTS realized a loss from continuing operations during the first nine months
of 1997 totaling $3,021,704, compared to income from continuing operations of
$236,756 during the comparable period of 1996. The primary reasons for the
losses during the current period were:
ACQUISITIONS. Operating expenses increased over 100%, from $8,651,788
to $17,328,872. The increase was attributable in large part to the
additional expenses of the new business, as the operating expenses of USTI
totaled $9,621,723 during the first nine months of 1997 and the operating
expenses of BancPro were $1,173,693 in the same period. Included in these
expenses were administrative expenses and other inefficiencies relating to
overhead expense disproportionate to the business base and high equipment
financing costs that USTS management believes will be eliminated by the
integration of the new trucking businesses under the USTI umbrella, as well
as non-recurring expenses caused by that integration. In addition, within
the past year USTS became involved in litigation relating to its
acquisitions of Jay & Jay, Gulf Northern and BancPro. See: "USTS Business--
Legal Proceedings." As a result, during the nine months ended September 30,
1997, USTS incurred legal expenses in connection with litigation totaling
$328,253.
ARMSTRONG. During the first nine months of 1996, Armstrong reported a
loss from operations totaling $289,808. During the first nine months of
1997, the loss from operations increased to $574,938. Armstrong undertook
one major contract midway through 1996, which proved to be unprofitable, as
management's original assessment of its profit potential proved to be
incorrect. The contract was for a large volume of work for a group of new
customers acquired from a defunct competitor, and the prices charged to
these new customers were at a substantial discount from Armstrong's regular
pricing schedule. Management believed that the volume of work would
compensate for the effect of the reduced prices, but was wrong. Accordingly,
the contract was not renewed on its expiration date. Management does not
believe that its arrangements with its other customers (who number over 200)
will lead to similar outcomes, as all of these arrangements involve
substantially higher prices.
Armstrong experienced problems with respect to collection of certain
receivables, which was a major factor in USTS' decision to increase its bad
debt reserve by $400,000. The collection problem stemmed largely from the
doubling of Armstrong's sales by the addition of the contract discussed in
the preceding paragraph. Armstrong's computer processing systems and
bookkeeping staff proved incapable of adequately handling this sudden
increase in volume, which led to problems in accounting for and enforcing
collections. Recently, control of Armstrong has been transferred to USTI,
which has the staff, the expertise, and the sophisticated computer systems
necessary to reduce such collection problems to a minimum.
ATAB. During the first nine months of 1996, ATAB generated income from
operations totaling $1,187,709. In the first nine months of 1997, ATAB was
responsible for a loss from operations totaling $34,932, due to the
termination of the Stewart & Stephenson contract.
COSTS ATTRIBUTABLE TO NEGOTIATIONS WITH PRECEPT. The process of
negotiating the Agreement with Precept commenced in January, 1997. During
the period that led up to the execution of the Agreement on November 16,
1997, USTS incurred administrative costs totaling approximately $350,000 in
connection with those negotiations, including legal and accounting costs, as
well as fees paid to consultants who advised USTS regarding the
negotiations.
USTS' discontinued operations produced a loss during the first nine months
of 1997 of $4,699,207, compared to income of $590,590 in the comparable period
of 1996. The discontinued operations affecting 1997 results were ASI, which was
sold in March of 1997, the ticket brokerage business, which was sold in January
of 1997, and ATAB, which ceased operating in July of 1997. The income recognized
during 1996 was principally a result of income generated by ATAB of $1,187,709
during the first nine months of 1996. The primary reason for the loss in 1997
was a write-down of the value of the promissory notes which USTS
38
<PAGE>
received for the sale of ASI. These notes were written-down as a result of a
default by KAC, Inc., which purchased ASI from USTS. In September 1997, USTS
commenced legal action against KAC, Inc. and its owners, based on the default.
Accordingly, management of USTS determined that it was appropriate to write-down
the notes by $4,517,331 to $500,000. See: "USTS Business--Legal
Proceedings--KAC, Inc."
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
USTS' acquisitions had a positive effect on revenue in 1996, resulting in an
increase from $13,670,321 in 1995 to $21,509,751 in 1996. The greater part of
the increase was attributable to the acquisition of Jay & Jay and BancPro, and
the growth of Armstrong, which was acquired in July 1995. These three operations
produced $8,811,558 in revenue in 1996, compared to $1,114,842 from Armstrong
alone for half of 1995.
The operations which were discontinued at the end of 1996, ASI and the
ticket brokerage business, generated a loss of $2,668,216. While that loss could
be accounted for as a "loss from discontinued operations," these operations had
a significant effect on results of continuing operations as well. The debt
incurred by USTS so that it could advance approximately $5,000,000 to fund the
operations of ASI continued to accrue interest, resulting in an 82% increase in
total interest and bridge loan expense in 1996 from $339,042 to $617,029.
An additional negative impact of the expansion strategy was felt when it was
determined that ATAB would lose its business relationship with Stewart &
Stephenson. Although ATAB itself generated $873,163 in income during 1996, the
loss of the Stewart & Stephenson business in 1997 made it appropriate that a
write-off of $782,410 in the value of certain ATAB equipment be made at year-end
1996.
USTS realized a $4,206,232 reduction in income from operations, despite the
increase in revenues described above. Income from continuing operations fell
$5,187,477, and USTS realized a net loss of $6,694,451 in fiscal 1996 compared
to net income of 1,123,918 in fiscal 1995.
In order to fund its expansion plans, USTS engaged in a bridge financing in
April of 1996 ("Bridge Notes") and a public offering in August of 1996. In the
bridge financing, USTS issued an aggregate of $1,200,000 principal amount of
Bridge Notes. USTS received net proceeds of $982,000, after deducting the
placement agent's discount and expense allowance and other expenses of the
offering. Upon repayment of the Bridge Notes, USTS recognized a charge to
operations of $441,038, including interest and the difference between the
discounted proceeds of the Bridge Notes and the principal repaid. All of that
amount is included in "Interest Expense."
Finally, the plan to expand USTS into a multi-faceted entity led to
increased corporate overhead expense, expenses relating to senior management and
salaried employees and consulting fees. USTS also incurred $1,562,500 in
compensation expense resulting from the accounting treatment for certain equity
incentives built into the Chairman's new long-term employment contract and
$680,000 in expense resulting from the conversion of Series C Preferred Stock
held by members of the Margolies family into Series M Preferred Stock. See Note
9 in Notes to USTS Consolidated Financial Statements for an explanation of the
accounting treatment of these events.
For the above reasons, a pre-tax loss from continuing operations totaling
$3,276,235 was reported for 1996 compared to income from continuing operations
of $797,242 in 1995. In 1996, USTS increased its deferred tax valuation
allowance by $750,000, eliminating the deferred tax asset in that amount which
had been recorded in prior years. The deferred tax asset had represented
management's estimate of the future value of USTS' net operating loss
carryforwards ("NOL's"). Based upon the substantial losses incurred in 1996 and
the elimination of revenues from ATAB, management determined that the
realization of value from its NOL's was no longer sufficiently certain to
warrant carrying a deferred tax asset. See Note 6 in the Notes to USTS
Consolidated Financial Statements. With the increase in the deferred tax
valuation allowance, the loss from continuing operations totalled $4,026,235.
When losses totaling $2,668,216 from
39
<PAGE>
the operations of the discontinued operations were added in, USTS had recorded a
net loss for 1996 of $6,694,451.
USTS incurred substantial losses in the fourth quarter of 1996, a net loss
of $7,521,797 in the fourth quarter versus net income of $827,346 realized for
the nine months ended September 30, 1996. This loss was attributable primarily
to the substantial losses in the segments which USTS's management decided to
discontinue, which contributed materially to such decision to discontinue.
Fourth quarter losses were also attributable to certain factors impacting
continuing operations. See "Fourth Quarter Loss," below.
FOURTH QUARTER LOSS
USTS incurred a loss of $6,694,451 for the year ended December 31, 1996, as
compared to net income of $827,346 reported by USTS for the nine months ended
September 30, 1996, as shown in the table below.
U.S. TRANSPORTATION SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE THREE
MONTHS MONTHS YEAR
ENDING ENDING ENDED
09-30-96 12-31-96 12-31-96
---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Revenue............................................... $15,403,166 $6,106,585 $21,509,751
Operating Expenses.................................... 13,420,885 10,905,162 24,326,047
---------- ---------- ----------
Operating Income/(Loss)............................... 1,982,281 (4,798,577) (2,816,296)
Other Income/(Expense)................................ (557,814) 97,875 (459,939)
---------- ---------- ----------
Income/(Loss) from Continuing Operations Before Income
Taxes............................................... 1,424,467 (4,700,702) (3,276,235)
Income Tax Expense.................................... 0 750,000 750,000
---------- ---------- ----------
Income/(Loss) from Continuing Operations.............. 1,424,467 (5,450,702) (4,026,235)
Losses from Discontinued Operations................... (597,121) (2,071,095) (2,668,216)
---------- ---------- ----------
Net Income/(Loss)..................................... $ 827,346 $(7,521,797) $(6,694,451)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Substantial losses were incurred by the discontinued segments, a fact which
contributed to management's decision to discontinue such segments: ASI incurred
an operating loss of $1,565,927 in the fourth quarter, primarily due to a
substantial downturn in business and the discontinued entertainment segment
incurred a fourth quarter loss of $308,325, primarily related to a continuing
erosion of profit margins. Additionally, at December 31, 1996, USTS recorded
$196,843 for estimated losses by ASI during the
40
<PAGE>
phase-out period. The fourth quarter loss is also attributable to a number of
factors impacting continuing operations, as listed below.
<TABLE>
<S> <C>
Loss on settlement of Mountain View receivable.................. $ 215,500
Write-off of notes and other receivables due to a year-end
assessment of the associated collectibility................... 339,969
Expense related to valuation differential resulting from change
in features of preferred stock held by USTS's Chairman or by
persons or entities related to the Chairman................... 680,000
Expense related to obligations to issue 1,000,000 common shares
in regards to a long-term employment agreement entered into
with USTS's Chairman.......................................... 1,562,500
Expense of consulting fees...................................... 594,659
Increase in corporate wages, resulting from management staff
being increased in line with USTS's strategic growth plan..... 200,000
Operating loss incurred at ATAB, resulting from work with
substantially lower profit margins............................ 171,052
Write-off of certain assets as a result of management
determination of a permanent impairment in the ATAB's future
profitability................................................. 782,410
Losses incurred by USTS's trucking divisions:
Write-down of previously capitalized expenses, determined at
year-end to possess no tangible future benefit; and......... 161,800
Costs incurred establishing a more profitable routing
structure................................................... 320,000
Increase in deferred tax valuation allowance, resulting in a
write-off of previously recorded deferred tax asset........... 750,000
---------
Total........................................................... $5,777,890
---------
---------
</TABLE>
As most of the factors impacting upon fourth quarter operations are
non-recurring items, USTS anticipates improvement in results from continuing
operations in 1997 as compared to the fourth quarter of 1996. However, while
USTS adjusts to its new focus and recent large acquisitions, income will be
limited. The loss of ATAB's aforementioned contract with Stewart and Stevenson,
alone, represents a loss of approximately $900,000 in net income for 1996 prior
to certain asset realization adjustments noted above, and none of USTS's recent
acquisitions is expected to generate an equivalent amount of income in 1997.
At December 31, 1996, for United States federal income tax purposes, USTS
had consolidated net operating loss ("NOL") carryforwards of approximately
$12,100,000 due to expire commencing in 2002. USTS also had tax credit
carryforwards of approximately $470,000 due to expire commencing in 1997. The
availability of these NOL and tax credit carryforwards to reduce or offset
future taxable income and tax liability of USTS is subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
Because the substantial portion of the tax credits expire in the next five
years, and as USTS is required to first utilize its NOL carryforward to offset
future earnings, USTS does not anticipate realizing any material benefit from
its tax credits. Further, USTS's ability to utilize the NOL carryforward is
restricted upon the occurrence of an "ownership change" within the meaning of
section 382 of the Code. Although the determination of whether an ownership
change has occurred is subject to factual and legal uncertainties, USTS believes
that an ownership change has occurred as a result of various stock transactions
in which it engaged during 1996. As a result of the ownership change, USTS will
generally be permitted to utilize NOL carryforwards (available on the date of
such change) in any year thereafter to reduce its income to the extent that the
amount of such income does not exceed the product of (the "Section 382 Limit")
(i) the fair market value of USTS's outstanding equity at the time of the
ownership change and (ii) a long-term tax-exempt rate published by the Internal
Revenue Service. USTS's use of its
41
<PAGE>
accumulated NOL will be thereby limited to approximately $605,000 per year. As a
result, USTS believes that it may not utilize its full NOL carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Despite the large losses recorded in 1996 and 1997, USTS' working capital
remains positive. This situation results primarily from USTS' utilization of the
proceeds of equity financing to reduce equipment debt, resulting in
significantly lower outstanding principal balances due to third party creditors.
This form of debt previously represented the majority of USTS' current liability
position.
In August 1996, USTS completed a public offering of 1,815,000 Units of
securities, each "Unit" consisting of one share of USTS Common Stock and one
USTS Common Stock Purchase Warrant. The net proceeds obtained by USTS from the
offering totaled $5,013,056. In addition, early in 1996 convertible debentures
issued by USTS in the principal amount of $3,150,000 and convertible preferred
stock issued for net proceeds of $256,728 were converted into a total of 842,556
shares of USTS Common Stock, further increasing USTS' liquidity.
In October 1996, USTS refinanced its line of credit by entering into a three
year agreement with Israel Discount Bank. The agreement was modified in October
1997. The new agreement, as modified, has a maximum borrowing balance of
$3,000,000 secured by accounts receivable and sales-type leases receivable, and
an additional maximum borrowing balance of $1,500,000 secured by equipment. The
borrowings are further secured by property belonging to Michael Margolies,
Chairman of USTS. The interest rate on the new agreement is 1 1/2 percent over
prime. The agreement terminates on September 1, 1999.
USTS' decision to discontinue the operations of ASI and the entertainment
division near the end of 1996 should have a positive effect on cash flow for the
future. During 1996, USTS' continuing operations provided $718,628 in net cash
to USTS. The discontinued operations used a total of $3,561,579 in cash during
1996 and used $1,278,470 during the first nine months of 1997. The sale of both
ASI and the ticket brokerage division in early 1997 have lessened that burden on
cash flow. USTS' continuing operations used $216,875 in cash during the first
nine months of 1997.
In March 1997, USTS sold ASI and received $100,000 in cash, secured notes of
$5,160,868 and a deferred payment of $685,000 due April 1, 1999. The note, which
accrues interest, is paid at the rate of approximately $80,000 per month for a
two year period with a balloon payment of the unpaid principal on April 1, 1999.
In September, however, USTS declared the note to be in default and commenced
litigation to foreclose on the collateral, which is the capital stock of ASI.
Due to this situation, the book value of the notes has been reduced to $500,000.
It is impossible to determine at this time what effect the foreclosure action
will have on the liquidity of USTS.
USTS has no significant commitments at this time which would require that it
expend capital and believes its current facilities and capital equipment are
adequate for USTS as currently structured. The aforementioned refinancing of
USTS' line of credit significantly increased USTS' credit availability and,
combined with the proceeds of the recent public and private offerings of
securities, have sustained USTS' working capital balance despite the losses from
operations. USTS believes that this capital is sufficient to fund USTS'
operations for the coming year.
42
<PAGE>
USTS EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid by USTS to the following persons for services rendered in all capacities to
USTS during each of the fiscal years ended December 31, 1996, 1995 and 1994: (1)
USTS' Chief Executive Officer, and (2) each of the other executive officers
whose total salary and bonus for the fiscal year ended December 31, 1996
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(A) (D)
NAME AND (B) (C) RESTRICTED (E)
PRINCIPAL POSITION YEAR SALARY STOCK AWARD(1) OTHER
------------------ --------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Michael Margolies ......................... 1996 $ 230,000 $ 600,000 $ 2,292,500(2)
Chairman of the Board, Chief Executive 1995 $ 230,000 $ 50,000
Officer 1994 $ 230,000 $ 50,000
Terry A. Watkins .......................... 1996 $ 112,000
Chief Financial Officer(3)
</TABLE>
- ------------------------
(1) Represents the market value of shares granted under the Restricted Stock
Grant Program. Aggregate Restricted Stock Grants were 183,333 shares at
December 31, 1996, with a value on that date of $297,916. None of the stock
grants vest prior to August 31, 1998. They then vest in 25% increments until
August 31, 2001. No dividends are to be paid with respect to unvested
shares. On January , 1998, Michael Margolies held 133,333 shares subject
to the Program, with a market value of $ .
(2) A change in the features of the preferred stock resulted in additional
compensation of $680,000 plus the required issuance of USTS Common Stock
pursuant to the terms of Michael Margolies' long term Employment Agreement
resulted in additional compensation of $1,562,500. Included in above
compensation is a $50,000 premium for life insurance which is paid by USTS
on behalf of Michael Margolies.
(3) Mr. Watkins terminated his employment with USTS in July, 1997.
EMPLOYMENT AGREEMENTS
Michael Margolies, Chairman of USTS, has an employment agreement with USTS
dated November 18, 1996. Pursuant to the Agreement, Mr. Margolies will serve as
Chief Executive Officer through December 31, 2007. USTS will pay him a salary of
$250,000 per annum plus annual increases at least equal to the CPI. USTS will
also pay him a bonus equal to eight percent of USTS' pre-tax income. At the time
of the Agreement, USTS awarded Mr. Margolies the right to receive one million
shares of USTS Common Stock, which he exercised in February, 1997, when the
market price of the USTS Common Stock was $1.5625 per share. The Agreement
further provides that in the event of a change in control of USTS, USTS must (i)
repurchase all shares of capital stock owned by Mr. Margolies or members of his
family, (ii) pay Mr. Margolies ten times his last annual salary, (iii) issue to
Mr. Margolies 25% of the USTS Common Stock, and (iv) repay all loans by the
Margolies family to USTS. The Transfer does not constitute a "change in control"
within the meaning of these provisions.
REMUNERATION OF DIRECTORS
Each of the Directors of USTS received cash compensation of $500 per month
for their services from January through July of 1997. They are also reimbursed
for out-of-pocket expenses incurred on USTS' behalf. In addition, in October
1997, USTS issued 10,000 shares of USTS Common Stock to each of the four outside
directors in compensation for their services.
43
<PAGE>
EMPLOYEE STOCK AND STOCK OPTION PLAN
In September 1996, USTS established the U.S. Transportation Systems, Inc.
Employee Stock and Stock Option Plan. On October 16, 1996, USTS registered
2,000,000 shares of its common stock pursuant to a Form S-8 filing with the
Securities and Exchange Commission. The USTS Common Stock is reserved for
issuance to USTS' employees, directors, officers, or in consideration for bona
fide services provided to USTS by consultants or advisors. USTS' Board has sole
discretion in determining when to issue such shares. As of February 4, 1998,
USTS had issued 590,167 shares of USTS Common Stock so registered under such
Form S-8 filing. USTS had no commitment at February 4, 1998 to issue any
additional shares.
RESTRICTED STOCK GRANT PROGRAMS
On January 18, 1994, the Board of Directors of USTS adopted a Restricted
Stock Grant Program (the "Program") pursuant to which 183,333 shares of USTS
Common Stock were reserved for issuance. The Program provided that if USTS
recorded more than $12,000,000 in sales during the twelve months ending on June
30, 1994, the shares would be issued to each of USTS' three officers (the
"Grantees") who remained employed by USTS on that date. Those conditions were
satisfied, and the shares were issued as follows:
Michael Margolies--133,333 shares
Jay Owen Margolies--40,667 shares
Terry A. Watkins--9,333 shares
The terms of the Program were amended in April 1995. Under the amended
terms, the shares issued under the Program are subject to the following
restrictions:
After each of the fiscal years from 1996 through 1998, one-fifth of the
shares granted (36,666 associated with each year) are subject to forfeiture, as
follows:
- 12,222 will be forfeited if USTS' sales in that year are less than
$15,000,000.
- 12,222 will be forfeited if USTS' income from continuing operations before
income tax fails to exceed an "income standard." The "income standards"
will be: 1996--$990,000; 1997--$1,089,000; and 1998--$1,197,900.
- 12,222 will be forfeited if USTS' earnings per share fail to exceed an
"earnings standard." The "earnings standards" (based on 1,222,198 shares
of USTS Common Stock outstanding) will be: 1996--$.78; 1997--$.84; and
1998--$.96. For 1996 the earnings per share standards refer to income
after taxes; for 1997 and 1998, the earnings per share standards refer to
income before taxes.
If any shares are subject to forfeiture in any one year due to failure to
meet the standards set forth above, but the average of that year and the other
three years would exceed the standard in that year, then the shares will not be
forfeited.
All shares held by a grantee shall be forfeited if his employment by USTS
terminates prior to the date the restrictions lapse. Further, the shares are
restricted from transfer, provided that with respect to 25% of the number of
shares granted under the Program, such shares will become unrestricted stock on
August 15, 1998. The restriction will lapse with respect to each additional 25%
of such number of shares on August 15 of each successive year. The restriction
will also lapse as to all shares granted to a grantee on the first to occur of
(i) the termination of that grantee's employment with USTS by reason of
disability, (ii) the grantee's death, (iii) termination of the grantee's
employment by USTS without good reason, or (iv) a change of control of USTS.
During any tax year in which a Grantee realizes taxable income by reason of
the lapse of the restrictions on the shares granted under the Program, USTS will
pay to such Grantee a "Gross-Up Bonus" in cash equal to the aggregate of (i) the
additional federal, state and local income taxes incurred by Grantee as a result
of realization of such taxable income, and (ii) the federal, state and local
income tax
44
<PAGE>
incurred by the Grantee as a result of the Gross-Up Bonus. In no event will the
Gross-Up Bonus exceed the aggregate of (i) the amount of the tax deduction for
which USTS receives a benefit for the tax year of USTS beginning during the tax
year of the Grantee in which the Grantee realizes taxable income by virtue of
the lapse of the restrictions referred to above, and (ii) the amount of the tax
deduction for which USTS receives a benefit for such tax year of USTS by virtue
of the Gross-Up Bonus.
There is no requirement under law for USTS' Board of Directors to obtain
shareholder approval of the Program. Accordingly, the Board did not seek such
approval. The failure to obtain shareholder approval will adversely affect USTS
only if in any year the total compensation paid by USTS to any of its officers
(including taxable "compensation" occurring by reason of the lapse of
restrictions on shares granted under the Programs) exceed $1,000,000. In that
case, USTS would not be able to take a deduction on its tax return for the
excess compensation by reason of its failure to obtain shareholder approval of
the Program. The Board of Directors decided, however, that the likelihood of
total compensation to any officer exceeding $1,000,000 is sufficiently small
that it did not warrant obtaining shareholder approval for the Program.
MARKET PRICE DATA
USTS COMMON STOCK
USTS Common Stock is quoted on the Nasdaq under the symbol USTS. On November
14, 1997, the last full trading day prior to the public announcement of the
signing of the Plan of Reorganization, the last sale price per share of USTS
Common Stock as quoted on the Nasdaq was $4.00. On February 6, 1998, the last
full trading day for which quotations were available prior to the date of this
Proxy Statement/ Prospectus, the last sale price per share of USTS Common Stock
as quoted on the Nasdaq was $3.625. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT
QUOTATIONS FOR USTS SHARES.
The following table sets forth high and low bid information for the USTS
Common Stock as quoted on the Nasdaq under the symbol "USTS". The prices for
periods before August 27, 1996 take into account the one-for-six reverse stock
split on August 27, 1996.
<TABLE>
<CAPTION>
QUARTER ENDING HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1997
December 31............................................................... $ 4.50 $ 2.75
September 30.............................................................. $ 5.00 $ 3.38
June 30................................................................... $ 4.44 $ 2.00
March 31.................................................................. $ 5.38 $ 1.50
1996
December 31............................................................... $ 2.44 $ 1.16
September 30.............................................................. $ 7.69 $ 2.06
June 30................................................................... $ 10.13 $ 4.31
March 31.................................................................. $ 6.00 $ 3.00
1995
December 31............................................................... $ 9.38 $ 5.06
September 30.............................................................. $ 11.81 $ 4.88
June 30................................................................... $ 6.75 $ 2.81
March 31.................................................................. $ 6.94 $ 3.56
</TABLE>
The foregoing quotations represent prices between dealers and do not include
retail mark-up, mark-down, or commissions, and may not necessarily represent
actual transactions.
As of January 23, 1998, the Company had 3,317 USTS Common Stock shareholders
of record.
45
<PAGE>
DESCRIPTION OF USTS SECURITIES
The total authorized capital stock of USTS consists of 50,000,000 shares of
USTS Common Stock and 10,000,000 shares of USTS Preferred Stock. As of February
4, 1998, there were 8,979,187 shares of USTS Common Stock held by 3,317
shareholders of record and 105,000 shares of USTS Preferred Stock held by 2
shareholders of record. The following descriptions of the capital stock are
qualified in all respects by reference to the Articles of Incorporation, as
amended (the "Articles of Incorporation"), and Bylaws of USTS (the "USTS
Bylaws"), copies of which are filed as Exhibits to the Registration Statement of
which this Prospectus is a part.
USTS COMMON STOCK
The holders of outstanding shares of USTS Common Stock are entitled to share
ratably on a share-for-share basis with respect to any dividends when, as and if
declared by the board of directors out of funds legally available therefore.
Each holder of USTS Common Stock is entitled to one vote for each share held of
record and is not entitled to cumulative voting rights. The USTS Common Stock is
not entitled to conversion or preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding up of USTS, and subject to
the prior rights of holders of USTS Preferred Stock, the holders of USTS Common
Stock are entitled to receive pro rata all of the net assets of USTS available
for distribution to its shareholders. All outstanding shares of USTS Common
Stock are fully paid and nonassessable. The transfer agent and registrar for the
USTS Common Stock is Continental Stock Transfer & Trust Company.
USTS PREFERRED STOCK
The USTS Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the board of directors,
without further action by shareholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion rights, redemption rights and sinking fund
provisions. USTS does not have any current plans to issue any preferred stock.
The only USTS Preferred Stock currently outstanding is the Series E through
Series L Preferred Stock, all of which is owned by two shareholders:
Consolidated Financial Management, Inc. ("CFM") and Tim Balch. CFM sold
BancPro-Transportation, Inc. ("BancPro") to USTS in 1996 and received the USTS
Preferred Stock as a consulting fee. Mr. Balch is the President of BancPro.
The Series E through Series L Preferred Stock is non-voting (except as
required by law) and non-dividend-bearing. Upon liquidation, each of the 105,000
outstanding shares of the Series E through Series L Preferred Stock will be
treated as equal to one share of USTS Common Stock. USTS Preferred Stock is
convertible into a maximum of 787,500 shares of USTS Common Stock (less if at
the time of conversion the market price of the USTS Common Stock exceeds $9.00),
if in any 12 month period prior to August 31, 2001 BancPro's revenues exceed the
thresholds set forth below:
<TABLE>
<CAPTION>
CUMULATIVE
BANCPRO SHARES OF COMMON
REVENUES STOCK ISSUABLE
- ------------- -----------------
<S> <C>
$ 2,500,000 50,000
4,000,000 112,500
6,000,000 193,750
8,500,000 287,500
11,000,000 393,750
14,000,000 512,500
18,000,000 643,750
22,000,000 787,500
</TABLE>
46
<PAGE>
The Plan of Liquidation being voted on by the USTS shareholders provides
that in distributing the Shares and other net assets of USTS, the 105,000
outstanding shares of Series E through Series L Preferred Stock will be added to
the outstanding USTS Common Stock and treated equally share-for-share.
USTS CLASS C WARRANTS
There are currently outstanding 1,815,000 USTS Class C Common Stock Purchase
Warrants. The USTS Class C Warrants are listed for trading on the Nasdaq. Each
USTS Class C Warrant allows the holder to purchase one share of USTS' Common
Stock at a price of $3.82 per share. The USTS Class C Warrants expire on August
27, 1999. USTS may redeem the USTS Class C Warrants at a price of $.01 per USTS
Class C Warrant if the closing bid price for USTS Common Stock equals or exceeds
$5.157 for at least ten consecutive trading days.
The Plan of Reorganization provides that if any of the USTS Class C Warrants
are exercised prior to the Closing Date for the Transfer, one additional share
of Precept Class A Common Stock will be delivered to USTS for every USTS Common
Stock issued upon exercise of the USTS Class C Warrants. At the Closing of the
Transfer, Precept will issue to the holders of any USTS Class C Warrants then
outstanding a replacement warrant, which will allow the holder to purchase one
share of Precept Class A Common Stock on the same terms as governed the purchase
of one USTS Common Stock under the USTS Class C Warrant.
47
<PAGE>
OFFICERS AND DIRECTORS OF USTS
The following table sets forth certain information regarding the officers
and directors of USTS as of February 9, 1998:
<TABLE>
<CAPTION>
NAME POSITION
- -------------------------------------------------- -----------------------------------------
<S> <C>
Michael Margolies................................. Chairman of the Board and Chief Executive
Officer
Ronald P. Sorci................................... President and Treasurer
Jay Owen Margolies................................ Director
K. Thomas Wegerbauer.............................. Director
Stanley Chason.................................... Director
Robert I. Blackman................................ Director
</TABLE>
Directors hold office until the annual meeting of USTS' shareholders and the
election and qualification of their successors. Officers hold office, subject to
removal at any time by the Board, until the meeting of directors immediately
following the annual meeting of shareholders and until their successors are
appointed and qualified.
MICHAEL MARGOLIES, age 69, has been a director of USTS since 1975. He has
been the Chairman of the Board and Chief Executive Officer of USTS since 1978.
Mr. Margolies is the father of Jay Owen Margolies, the past President and one of
USTS' Directors.
RONALD P. SORCI, age 47, has served as President and Treasurer (Chief
Financial Officer) of USTS since August, 1997. From July 10, 1996 until his
election to the Presidency, Mr. Sorci was the Controller of USTS. Prior to
joining USTS, Mr. Sorci was President and owner of RPS Executive Limousines
Ltd., a luxury town car and limousine service.
JAY OWEN MARGOLIES, age 46, has been a director of USTS since 1979. He is
currently employed as Senior Advisor by USTS on a part-time basis, advising USTS
regarding operations management. From 1988 until June 1995 he was the President
and Chief Operating Officer of USTS. Jay Owen Margolies is the son of Michael
Margolies, USTS' Chief Executive Officer.
K. THOMAS WEGERBAUER, age 59, has been a director of USTS since 1976. He
served as the President and Chief Operating Officer of USTS from 1976 to 1987.
He now serves as a consultant to USTS on a part-time basis, primarily advising
USTS regarding contract bidding and labor relations.
STANLEY CHASON, age 69, has been a director of USTS since July 1996. From
1962 until his retirement in 1984, Mr. Chason held various positions with Gelco
Corporation ("Gelco"), a company listed on the New York Stock Exchange which is
engaged in all aspects of vehicle leasing. His last position with Gelco was as
Executive Vice President and a member of the Board of Directors. Mr. Chason was
also Chairman and Chief Executive Officer of the Fleet and Management Services
Division of Gelco.
ROBERT I. BLACKMAN, age 69, has been a director of USTS since July 1996. For
more than the past five years, Mr. Blackman has been the President and Chief
Executive Officer of the Best of Brooklyn Properties, Inc., a private real
estate investment firm.
48
<PAGE>
USTS SECURITY OWNERSHIP
The following table sets forth certain information, with respect to the
beneficial ownership of USTS Common Stock, as of February 4, 1998, by (i) all
persons who are known by USTS to be beneficial owners of 5% or more of such
stock, (ii) each director of USTS, (iii) certain executive officers and (iv) all
executive officers and directors of USTS as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares. No effect has been given to shares reserved for issuance under
outstanding stock options except where otherwise indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED TOTAL
- ------------------------------------------------------ ----------------- -------------
<S> <C> <C>
OFFICERS AND DIRECTORS:
Michael Margolies(1).................................. 2,690,116(2)(3) 30.0%
Jay Owen Margolies(1)................................. 296,054(2) 3.3%
K. Thomas Wegerbauer.................................. 11,000 0.1%
Stanley Chason........................................ 18,749 0.2%
Robert Blackman....................................... 10,000 0.1%
All officers and directors as a group (5 persons)..... 3,040,919(2) 33.9%
OTHER 5% SHAREHOLDERS:
Margolies Family Trust(4)............................. 855,000 9.5%
</TABLE>
- ------------------------
(1) Michael Margolies and Jay Owen Margolies are father and son. Each, however,
specifically disclaims any present ownership interest in the securities of
USTS owned by the other.
(2) Includes shares of USTS Common Stock issued pursuant to the Restricted Stock
Grant Program as follows: Michael Margolies--133,333 shares, Jay Owen
Margolies--40,666 shares. See: "Management--Restricted Stock Grant
Programs."
(3) Includes 855,000 shares held by the Margolies Family Trust.
(4) The trustee of the Margolies Family Trust is Elaine Margolies, wife of
Michael Margolies. The beneficiaries of the Margolies Family Trust are Mrs.
Margolies and children of Michael Margolies.
49
<PAGE>
USTS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Throughout the life of USTS, Michael Margolies and members of his family
have provided loans to finance USTS' operations when needed. In 1994, the
outstanding balance of these loans, $707,676 at that time, was consolidated into
a promissory note bearing interest at 15% per annum. Since that time additional
amounts have been added to the note, as USTS has borrowed from the Margolies
family. On April 12, 1996, USTS purchased two buses from a corporation
controlled by Michael Margolies for the sum of $240,000. The $240,000 is
included in the balance due Mr. Margolies in the amount of $1,105,114 as of
December 31, 1996. On July 7, 1997 a replacement note was issued in the
principal amount of $1,039,794. At October 1, 1997, USTS had a balance due on
the note of $998,569.
On December 26, 1994, USTS entered into an agreement to purchase all of the
outstanding capital stock of Camelot Consultants, Inc. ("Camelot") from the
Margolies family. The principal assets of Camelot were buses leased to USTS and
to third parties and certain real estate used by USTS at that time. Independent
appraisals of the net assets of Camelot valued Camelot at between $1,800,000 and
$1,900,000. USTS acquired Camelot in order to take advantage of Camelot's stream
of lease revenues and to eliminate rental payments to Camelot, the combination
of which increased USTS' cash flow by approximately $300,000 annually. The
purchase of Camelot by USTS was completed on December 31, 1994, at which time
USTS issued 180,000 shares of its Series C Preferred Stock in payment for
Camelot. The Series C Preferred Stock paid a dividend of 10.65% per annum and
had a liquidation preference of $10 per share. Each share of Series C Preferred
Stock had voting rights equal to 3.33 shares of USTS Common Stock.
On November 18, 1996, USTS and the holders of the USTS Series C Preferred
Stock agreed to exchange the USTS Series C Preferred Stock for an equal number
of shares of USTS Series M Preferred Stock. The terms of each share of the USTS
Series M Preferred Stock are that it had no dividend rights, no voting rights, a
liquidation preference of $10 per share, and was convertible into 9.5 shares of
USTS Common Stock. USTS entered into an eleven year employment agreement,
starting January 1, 1997, with Michael Margolies, which agreement, among other
things, grants Mr. Margolies an issuance of 1,000,000 shares of USTS Common
Stock. This issuance took place in February 1997. The 1,000,000 shares on
November 18, 1996 had a market value of $1,562,000 and USTS expensed this amount
to its consolidated statement of operations for the year ended December 31,
1996.
The Plan of Reorganization provides that the obligation of Precept and
Acquisition to effect the Transfer is subject to the exchange and conversion of
the USTS Series M Preferred Stock into 1,710,000 shares of USTS Common Stock at
or prior to the Closing Date. Accordingly, the USTS Series M Preferred Stock was
converted into 1,710,000 shares of USTS Common Stock on February 2, 1998.
USTS believes that the terms of all of the transactions discussed in this
section were no less favorable to USTS than those which could have been obtained
from non-affiliated parties.
50
<PAGE>
PRECEPT
SELECTED CONSOLIDATED
FINANCIAL INFORMATION
The following table presents selected consolidated financial information as
of and for the four years ended June 30, 1997, which information was derived
from audited consolidated financial statements of Precept. The consolidated
financial information as of and for the year ended June 30, 1993 was derived
from the unaudited divisional financial statements of Precept's former parent
company. The financial information for the three months ended September 30, 1997
and 1996 was derived from the unaudited consolidated financial statements of
Precept. In the opinion of management of Precept, the financial information for
the year ended June 30, 1993 and for the three months ended September 30, 1997
and 1996 contains all adjustments, consisting only of normal recurring accruals,
necessary for the fair presentation of the results of operations for such
periods. The selected financial information should be read in conjunction with
the consolidated Financial Statements and Notes thereto, included in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------------- --------------------
HISTORICAL HISTORICAL
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues.............................. $ 40,459 $ 50,968 $ 59,075 $ 72,432 $ 77,344 $ 19,813 $ 18,935
Income (loss) from continuing
operations.......................... (1,321) 350 617 (266) 532 134 135
Income (loss) from continuing
operations per share................ (0.13) 0.03 0.05 (0.02) 0.05 0.01 0.01
Weighted average shares(1)............ 10,457 11,667 11,625 11,524 11,516 11,516 11,516
FINANCIAL POSITION (AT PERIOD END):
Total assets.......................... 16,510 24,951 25,627 32,691 29,291 31,835 30,477
Working capital....................... 2,523 5,860 7,458 14,476 12,343 13,078 12,011
Long-term obligations................. 663 707 543 5,260 7,502 5,307 7,955
Shareholders' equity(2)............... 729 17,537 17,032 16,582 13,305 16,803 13,275
</TABLE>
- ------------------------
(1) Weighted average shares for the years ended June 30, 1994 and 1993 represent
the number of shares outstanding as of June 30, 1994, plus 1,297,800 shares
underlying stock options granted in fiscal 1997 which have been treated as
outstanding for all periods presented, since the actual weighted average
shares during those years which Precept was a division of a previous
consolidated group is not useful.
(2) Shareholders' equity as of June 30, 1993 reflects Precept divisional equity
balances under its former parent prior to capital contributions which
occurred with its reorganization on June 30, 1994.
51
<PAGE>
BUSINESS OF PRECEPT
GENERAL
Precept is a rapidly growing, independent distributor of custom and stock
business products and provider of document management services to businesses of
all sizes throughout the United States. Precept was founded in 1988 as a
regional business products distributor in Dallas, Texas, and since that time has
expanded rapidly both internally and through acquisitions, to 30 locations
throughout the United States. Business products distributed include custom
business forms, commercial printing/graphic arts, electronic forms, custom stock
labels, computer supplies, envelopes and advertising specialty products. Precept
provides comprehensive information solutions for its customers' business
products, inventory control and document management needs. In addition, Precept
provides electronic forms capabilities and integration of its customers
accounting operations to streamline information flow and reduce overall
operating costs. Precept's business strategy is (i) to act as a premier sole
source "corporate outsourcer" providing a broad array of business products to
its customers while reducing overall procurement costs and providing a high
level of customer service and (ii) to continue its expansion through strategic
acquisitions and internal growth. Precept also operates various corporate
transportation services within the Dallas/Fort Worth metropolitan area. Since
inception, Precept's revenues from its core, continuing operations have grown
from $3.8 million in fiscal year 1989 to $77.3 million in fiscal year 1997, a
46% compound annual growth rate.
Following the founding and development of Precept, Precept's goal has been
to acquire or establish centrally managed networks of regional offices and
warehouses in major metropolitan markets throughout the United States. As a
result, Precept has completed 15 acquisitions of these regional business
products distributors. Once a regional office/warehouse is acquired or
established, Precept seeks to leverage its distribution capabilities by
acquiring smaller companies or opening satellite sales offices in the
surrounding areas. Precept also seeks to increase the sales and profitability of
its acquired companies by integrating the Precept business strategy and through
elimination of redundant operating expenses. Going forward, Precept plans to
continue to actively pursue this consolidation strategy within the business
products distribution and document management industries.
Precept believes that the acquisition and operational experience of its
management team provides it with the ability to execute upon the growth
component of its business strategy. Precept, in only its fifth year of
existence, was recognized as the largest independent business products
distributor by a national business products magazine and has retained this
status for five consecutive years. Precept's management team brings vast
experience in the acquisition and integration of businesses, previously with
MTech (sold to EDS in 1988), ACS (NYSE:AFA), and now at Precept. Management also
believes it can and will become the "consolidator of choice" in the business
products distribution and document management industries.
The industry in which Precept operates is large, fragmented and, Precept
believes, rapidly consolidating. Precept believes that opportunities exist to
consolidate participants in the industry and that its principal competitors are
direct manufacturers and other, smaller independent distributors of business
products. Management believes the market for the business products it
distributes is in excess of $20 billion annually with the top 100 independent
distributors representing $1.6 billion annually, or 7.8% of the total market.
Over the last three years, total revenues from the top 100 independent business
products distributors have grown by 16% annually as distributors continue to
gain market share from the direct manufacturers. In 1996, this trend resulted in
independent distributors surpassing direct manufacturers in market share by
representing approximately 55% of the total business products market. Precept
believes independent distributors' market share will continue to grow in the
future as more of its target customers make the decision to outsource the
distribution of their business products and document management needs.
Precept believes that similar consolidation possibilities exist in the
corporate transportation services industry. Precept management believes the
chauffeured vehicle service industry, in particular, presents an
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attractive opportunity for consolidation. In 1996, the chauffeured vehicle
service business accounted for approximately $3.9 billion in revenues to roughly
9,000 companies throughout the United States. Precept believes that no one
company currently represents more than 2% of the overall market.
PRECEPT BUSINESS PRODUCTS SERVICES
Precept's business philosophy lies in the provision of services and
distribution, rather than the actual manufacturing of the products it sells.
Precept believes most manufacturers either sell directly to the end user or
through independent distributors. Because Precept utilizes in excess of 5,000
manufacturers nationwide that specialize in various products and quantity sizes,
Precept's management believes that it has the ability to be its customers'
single source supplier, and, as such, provides broader manufacturing capability
and enhanced delivery times as compared to direct manufacturers. Precept's
distribution business involves the design, warehousing and distribution of a
broad variety of business products. Through its document management services,
Precept provides a single point of contact for the purchase and warehousing of
all printed products and related items a customer may use. Typically, Precept
will consult with a customer to perform a documents analysis and then, after
determining what documents are required on an ongoing basis, will provide for
the design, production, inventory, management, storage and distribution of the
documents to the customer on an as-needed basis. Precept's sophisticated
management information systems enable it to offer customized services tailored
to the specific customer needs. As a result, customers are provided customized
product usage, stock status, customized billing formats and other custom reports
important to their operation. See Note 12 ("Segment Information"), Notes to
Consolidated Financial Statements of Precept Investors, Inc., for a discussion
of the principal industry segments in which Precept operates.
DISTRIBUTION
Precept believes that the current trend of downsizing and vendor reduction,
combined with customers' desire to maximize efficient commitment of capital in
the inventory of its business products makes distributers the customer's best
source for service and new products. Precept attempts to deliver a complete
solution for its customers' business products, inventory control and document
management needs along with the integration of the customers' accounting
operations to streamline the customer's workflow processes and reduce overall
operating costs. This one-step solution for all the customers' needs allows
Precept to act as the customer's business products outsourcer. As a distributor,
Precept believes it can provide a more effective business products solution
because it has the flexibility to offer the products of many vendors and
suppliers and not be burdened by having to only offer the products that it
manufactures. Furthermore, by foregoing the extensive capital investment
required by machinery and equipment, Precept is well positioned to act
immediately as new technologies present themselves. In addition to multiple
product offerings, Precept is able to leverage its size and scale to achieve
volume purchasing discounts which can be passed on to customers. Finally, acting
as a communications link between its customers and the suppliers allows Precept
to more efficiently inform suppliers what the end users want while
simultaneously making corresponding suggestions for the suppliers in-plant
operations.
Precept markets its various services directly to individual customers by
designing and offering a customized product and service package for that
customer after determining its specific needs. To emphasize its customization
approach, Precept can provide through its electronic forms system a single
customer catalog with increased utility as opposed to one catalog for all or
many customers.
To accomplish the above, Precept has the following capabilities:
DOCUMENTS MANUFACTURING. Precept does not manufacture any business product.
Management believes the vast majority of direct manufacturers are wholesale
producers and do not sell directly to the end user. As a distributor, Precept
has enhanced resources to typically provide its customers their business
products at a lower cost than the major direct manufacturers.
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DESIGN. Precept utilizes its experienced, on-site personnel directly
involved with a particular account for design work, rather than a corporate
department, to leverage the knowledge derived from the hands-on involvement with
a particular customer. In addition, Precept expends significant time with its
manufacturing partners with respect to new product developments on behalf of its
customers.
DISTRIBUTION AND WAREHOUSING. Both pick and pack distribution services as
well as full case shipping capabilities are available to Precept's customers. In
addition, Precept provides bulk storage (full case and full pallet), pick and
pack and secure storage. Nationwide warehousing, along with the excess warehouse
capacity offered in conjunction with its manufacturing partners gives Precept
location advantages superior to its competitors.
DOCUMENT MANAGEMENT SERVICE
Precept believes that its innovative management system streamlines business
product ordering and distribution, which simplifies documents monitoring and
storage and encourages "Just-In-Time" business product management. Through
Precept's fully integrated Computerized Forms Management and Inventory Analysis
System its customers are able to monitor, on-line, inventory, track orders, and
release products for distribution. Precept can receive, translate and process
all ANSI (American National Standards Institute) standard EDI (Electronic Data
Interchange) transaction sets (all versions) to give customers a channel to
access information in a seamless manner while providing electronic invoicing and
payments. This document management system allows Precept to maintain absolute
control through electronic forms, intelligent forms and print-on-demand
features. The complete management system allows a customer to have inventory
information, place orders and make payments all through electronic interface.
SALES AND MARKETING
Precept has a broad customer base and believes that no single customer
accounted for more than 6% of total sales during fiscal 1997. Precept relies on
a commission only-based sales force dedicated to all of its products and
services thereby ensuring product and service knowledge among its principal
customers. Precept emphasizes a personal sales and marketing relationship with
the customer by having a single account executive responsible for each customer
account. Precept's sales representatives offer customers customized
merchandising and purchasing programs tailored to each customer's needs. Sales
representatives have frequent contact with their customers and have
responsibility for increasing account penetration and solving customer problems.
For major accounts, Precept utilizes the "Team Concept" where an experienced
team of individuals, including an account executive and customer service
representative, maximize service and enhance long term customer relations.
Precept believes that its presence in 30 locations allows its sales
representatives to service large, national businesses in multiple locations.
Through a continued effort in improving efficiencies and providing customized
systems and enhancements, Precept is committed to a long term partnership with
its customers.
MANAGEMENT INFORMATION SYSTEMS
Precept believes that its management information system features
state-of-the-art hardware and software fully customized for the business
products and document management industry. This customization fully integrates
order entry, receiving, distribution, billing, accounts payable and general
ledger. The system generates reports such as customized summary billing, cost
center analysis, inventory stock status and reorder notices. Connectivity is
accomplished via direct link, dial up, satellite bounce off, VAN (Value Added
Network) systems and personalized Internet access. Precept has designed,
developed and has available an electronic forms package, that can operate on a
single PC, LAN (Local Area Network), Full Host or in an Internet environment and
features electronic cataloging, print-on-demand, intelligent and interactive
form processing and multimedia capabilities (audio and video) for instruction or
training needs.
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Ongoing analysis and hands-on involvement with its customers combined with
Precept's knowledge of new technologies allows it to constantly develop and
implement new technological enhancements.
CONSOLIDATION STRATEGY
Precept believes numerous factors exist which create a favorable environment
and significant opportunity for continued consolidation of the business product
distribution and document management industry. Among others, these factors
include: (i) the fragmented nature of the industries, (ii) the lack of operating
and acquisition expertise of target companies, (iii) industry participants
desire for liquidity and/or capital requirements for growth, (iv) industry
participants desire to utilize Precept's existing management information
systems, (v) the pressures of increasing competition, and (vi) creation of
operating efficiencies and synergies resulting in economies of scale.
Precept believes that it possesses substantial competitive advantages over
other industry consolidators. Precept bases this belief on management's track
record in previous growth and consolidation efforts at MTech, (sold to EDS in
1988) and ACS (NYSE:AFA) as well as its experience in acquiring and integrating
businesses at Precept. Precept believes it can leverage the experience and
expertise of the Precept executive management team to become a leading
consolidator of the business products distribution and document management
industries. Furthermore, Precept believes that its ability to attract and
acquire companies as a "consolidator of choice" is due to (i) its existing
operations as a nationwide business products distributor and document management
company and (ii) its corporate infrastructure and management information
systems. Under the Precept business model, acquired companies benefit from the
economies of scale of a larger organization while simultaneously retaining local
operational control thereby enabling them to provide flexible and responsive
service to long-term customers.
Precept seeks to achieve operating efficiencies in acquisitions through the
combination of (i) certain general and administrative functions, (ii)
elimination of redundant facilities, (iii) improved management information
systems and (iv) implementation of Precept's preferred vendor and volume
purchasing arrangements. Precept has, over the years, negotiated certain
arrangements with manufacturers, which it believes will enable it to reduce the
level of inventories in acquired companies thereby allowing more efficient
operations. Integration of acquisitions is often a complex process which may
entail material nonrecurring expenditures, including facility closing costs,
modernization of equipment and computer systems, warehouse assimilation
expenses, asset writedowns and severance payments.
Consideration for acquisitions has typically involved cash and promissory
notes. Future acquisitions may involve cash, promissory notes and in many cases
common stock. Acquisitions are made pursuant to acquisition agreements
containing customary representations, warranties, covenants and indemnification
provisions. Precept typically seeks to obtain noncompete and confidentiality
agreements from selling owners.
PRECEPT TRANSPORTATION SERVICES
Precept is also engaged in the corporate transportation service industry in
the Dallas/Fort Worth metropolitan area. Wingtip Couriers, Inc. ("Wingtip"), a
wholly owned subsidiary of Precept, is an on-demand package delivery service.
Wingtip targets professional organizations, large corporations and financial
institutions as its main business segment. Wingtip also provides bulk and
schedule delivery services along with on-site customer service. Precept conducts
its chauffeured vehicle service through its business, Lonestar Limousine
("Lonestar"). Lonestar's client list includes many of the larger professional
service corporations, financial institutions, hotels and other corporations in
the area. The core business of Lonestar is personal shuttle service to and from
Dallas/Fort Worth airport and other surrounding destinations. See Note 12
("Segment Information"), Notes to Consolidated Financial Statements of Precept
Investors, Inc., for a discussion of the principal industry segments in which
Precept operates.
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WINGTIP
Wingtip's core business is unscheduled package delivery within the
Dallas/Fort Worth metropolitan area. On-board computers in its vehicles, along
with automated tracking and dispatching, allow packages to be picked up and
delivered within various time constraints including one-hour deliveries. Wingtip
faces significant competition from several companies in the Dallas/Fort Worth
market. This market is unregulated, price sensitive and constantly evolving
through the development of new services. Wingtip has approximately 10,500
customers, which are supported by 155 full-time employees, and a fleet of 117
vehicles operating seven days a week.
LONESTAR
Lonestar utilizes chauffeured sedans and limousines to provide services for
airport shuttles, conventions, social events, business meetings and leisure
travel. Business customers utilize Lonestar's services primarily to achieve more
efficient use of its employee's time and other resources. Lonestar has
approximately 200 customers, which are supported by 30 full-time employees and a
fleet of 29 vehicles' operating seven days a week.
CONSOLIDATION STRATEGY
Precept believes significant consolidation opportunities exist in the
corporate transportation services industry. Precept management believes the
chauffeured vehicle service business accounted for approximately $3.9 billion in
revenues to roughly 9,000 companies throughout the United States. Precept
believes that no one company currently represents more than 2% of the overall
market.
Precept believes there are significant advantages to consolidating the
chauffeured vehicle service industry. Management believes it can increase
revenues of acquired companies through the implementation of training and
quality assurance programs as well as nationwide marketing of Precept services.
Moreover, Precept believes it can achieve cost savings in acquisitions through
the consolidation of certain administrative functions, increased use of
automation, and the elimination of redundant facilities, equipment and
personnel.
CUSTOMERS
Precept achieves growth in its business products revenues and customer base
through marketing and acquisitions of other business products distribution
companies. Precept has several thousand customers, however the five largest
customers accounted for approximately 23% of Precept's fiscal 1997 revenues. Two
of such customers, one of which is ACS, each represented approximately 6% of
such revenues, and the loss of either of these two customers would likely have a
material adverse affect on Precept.
COMPETITION
Precept believes that its ability to compete successfully in the business
product distribution and document management business is based upon its ability
to offer a complete range of products and services and achieving favorable
pricing by maintaining a significant volume of business with its suppliers.
Precept's principal competitors are direct manufacturers, local and regional
independent distributors and divisions of larger publicly held companies,
including Corporate Express and US Office Products.
FACILITIES
Precept's executive offices are located in a facility of approximately
34,000 square feet in Dallas, Texas. The facility is leased and has a term which
expires July 31, 2001. Precept leases a warehouse facility with approximately
100,000 square feet in Dallas, Texas with a term expiring March 31, 2001.
Precept leases 28 regional and branch locations throughout the U.S. ranging from
approximately 500 square feet to
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approximately 15,000 square feet, with varying expiration terms. All properties
leased by Precept are in good repair and in suitable condition for the purposes
for which they are used.
EMPLOYEES
As of November 30, 1997, Precept and its subsidiaries had 367 full-time
equivalent employees. None of Precept's or its subsidiaries' employees is
currently represented by a union, and there have been no work stoppages or
strikes. Management considers its relations with employees to be good.
LEGAL PROCEEDINGS
On January 23, 1996, Precept filed a collection action against John Alden
Life Insurance Co. ("Alden"), currently pending in the United States District
Court for the Southern District of Florida, for approximately $400 thousand in
past due invoice amounts. Alden has denied that it received any products and has
refused to pay Precept on that basis. Alden and its affiliate, John Alden
Systems Corp. ("Alden Systems") have asserted a counterclaim against Precept
alleging that a Precept employee participated with an Alden employee in a plan
to falsify sales to Alden. Alden is seeking approximately $9 million in damages.
In a related action, Alden Systems filed a claim in state circuit court in
Miami, Florida, making similar allegations and seeking similar damages as
contained in its counterclaim described above. Precept has denied the
allegations made by Alden Systems and has moved for a stay pending resolution of
the federal court suit in which Precept is the plaintiff. Precept intends to
pursue the claims asserted in its collection action, believes that it has
meritorious defenses to the above allegations and plans to vigorously defend
against them.
In addition to the foregoing, Precept is subject to certain other legal
proceedings, claims, and disputes which arise in the ordinary course of
business. While Precept has no reason to believe that any pending claims are
material, there can be no assurance that such claims, if adversely determined,
will not have a material adverse effect on the business, financial condition,
results of operations or liquidity of Precept.
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PRECEPT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
financial condition and results of operations of Precept should be read in
conjunction the Precept Consolidated Financial Statements and with the related
Notes thereto and other financial information appearing elsewhere in this Proxy
Statement/ Prospectus. Unless otherwise indicated or the context otherwise
requires, each reference to a year is to Precept's fiscal year which ends on
June 30 of such year, and "fiscal 1996" refers to the fiscal year ended June 30,
1996 and "fiscal 1997" refers to the fiscal year ended June 30, 1997.
HISTORY/OVERVIEW
Precept is an independent distributor of custom and stock business products
and provider of document management services ("Business Products") to businesses
in a variety of industries throughout the United States. Precept also operates
various corporate transportation services within the Dallas/Fort Worth
metropolitan area ("Transportation Services"). Precept was founded in 1988 as a
subsidiary of ACS and has grown significantly since then, both internally and
through acquisitions. In June 1994, Precept was spun-off from ACS in a tax-free
stock exchange to ACS shareholders in connection with the initial public
offering of ACS.
Precept was one of the first organizations to begin nationwide consolidation
of operating companies in the Business Products industry. Since 1991, Precept
has acquired 15 companies operating in this industry plus five transportation
entities. Each of these acquisitions was accounted for using the purchase method
of accounting. A substantial majority of the purchase price paid by Precept in
each acquisition represented intangible assets, including customer contracts and
non-compete agreements.
A component of Precept's business strategy is to increase the size of its
operations through strategic acquisitions and internally generated growth.
Precept places substantial emphasis on improving operational and information
system capabilities, while implementing subsequent integration of the Precept
business strategy in acquired operations. Precept's operational focus also
includes continuous upgrading of management systems allowing improved customer
access to financial, inventory and order status information; new product and
service offerings; preferred vendor programs incorporating volume purchasing;
regional and district management oversight; and recruiting experienced sales
individuals. Precept believes these strategies will lead to lower cost of goods
and increased sales of various products and services to existing and new
customers.
As part of the implementation of its business strategy, Precept decided to
focus on its core business by discontinuing certain non-core operations in real
estate construction and real estate related investments. See "Discontinued
Operations" below.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 PERIOD") COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 PERIOD")
Consolidated revenues from continuing operations decreased $877 thousand, or
4.4%, to $18.9 million in the 1997 Period, from $19.8 million for the 1996
Period. The majority of the decrease was from lower sales to Business Products
customers due, in part, to the loss of three customers. Precept has taken steps
to replace the lost revenue through the addition of new customers and the growth
of existing customer relationships. Revenue in the 1997 Period included $985
thousand from two Business Products acquisitions completed in March and July of
1997.
Cost of goods sold includes product, freight and delivery costs. Cost of
goods sold were $11.8 million for the 1997 Period, a decrease of $712 thousand
from $12.5 million in the 1996 Period. Cost of goods sold
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as a percentage of Business Products revenues decreased to 68.2% in the 1997
Period from 68.7% in the 1996 Period, due to a shift in revenue mix resulting in
a higher proportion of revenues in higher margin products and services.
Selling, general and administrative expenses include sales commissions,
drivers' wages, lease expense, and corporate overhead. Selling, general and
administrative expenses decreased by $55 thousand to $6.5 million in the 1997
Period from $6.6 million in the 1996 Period. As a percentage of revenues from
continuing operations, selling, general and administrative expenses increased to
34.5% in the 1997 Period from 33.2% in the 1996 Period. The increase as a
percentage of revenues in the 1997 Period is primarily due to an increase in
corporate resources to implement Precept's consolidation strategy.
Depreciation and amortization expense in the 1997 Period and the 1996 Period
were comparable.
Operating income was essentially unchanged at $354 thousand in the 1997
Period.
Interest expense remained flat at $125 thousand in the 1997 Period. While
non-bank debt increased by $520 thousand for acquisitions in the 1997 Period,
and Precept experienced higher outstanding balances under its credit facility,
overall borrowing rates were lower in the 1997 Period.
The effective tax rate in the 1997 Period was comparable to the 1996 Period.
As a result of the foregoing, net income from continuing operations was
essentially unchanged at $135 thousand in the 1997 Period, compared with $134
thousand in the 1996 Period.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Consolidated revenues from continuing operations increased $4.9 million, or
6.8%, to $77.3 million in fiscal 1997, from $72.4 million in fiscal 1996.
Approximately $3.7 million of this increase resulted from Business Products
acquisitions completed by Precept. The remaining revenue increase of $1.2
million, consisting of $726 thousand in Transportation Services increases and
$474 thousand in Business Products increases, resulted primarily from the
addition of new customers and growth among existing customers.
Cost of goods sold were $50.2 million in fiscal 1997, an increase of $5.0
million from $45.2 million in fiscal 1996. Cost of goods sold as a percentage of
revenues for Business Products increased to 70.9% in fiscal 1997 from 67.9% in
fiscal 1996, due to a higher proportion of revenues in lower margin products and
services.
Selling, general and administrative expenses decreased by $1.1 million to
$24.4 million in fiscal 1997 from $25.5 million in fiscal 1996. As a percentage
of revenues from continuing operations selling, general and administrative
expenses decreased from 35.1% to 31.5%, in fiscal 1996 and 1997, respectively.
This decrease is due largely to a reduction in incentive based compensation paid
to executive officers.
Depreciation and amortization expense in fiscal 1997 was comparable to
fiscal 1996.
Operating income increased to $1.3 million in fiscal 1997, compared to $330
thousand in fiscal 1996 due primarily to the factors set forth above.
Interest expense increased to $425 thousand in fiscal 1997 from $317
thousand in fiscal 1996 due to additional borrowings under Precept's credit
facility.
Precept's effective tax rate increased to 41.7% in fiscal 1997 from 31.2% in
fiscal 1996. The effective rate in 1997 exceeded the federal statutory rate of
35.0% due primarily to the amortization of certain acquisition-related costs
that were nondeductible for tax purposes, plus the net effect of state income
taxes.
Net income from continuing operations increased to $532 thousand in fiscal
1997, from a loss of $266 thousand in fiscal 1996 due to the factors discussed
above.
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COMPARISON OF FISCAL 1996 TO FISCAL 1995
Consolidated revenues from continuing operations increased $13.3 million, or
22.6%, to $72.4 million in fiscal 1996, from $59.1 million in fiscal 1995.
Approximately $7.5 million of this increase resulted from Business Products
acquisitions completed by Precept. The remaining increase of $5.8 million
resulted primarily from the addition of new Business Products customers and
growth among existing customers.
Cost of goods sold were $45.2 million in fiscal 1996, an increase of $9.6
million from $35.6 million in fiscal 1995. Cost of goods sold as a percentage of
revenues for Business Products increased slightly to 67.9% in fiscal 1996 from
67.1% in fiscal 1995.
Selling, general and administrative expenses increased by $4.5 million to
$25.5 million in fiscal 1996 from $21.0 million in fiscal 1995. As a percentage
of revenues from continuing operations, selling, general and administrative
expenses decreased slightly to 35.1% in fiscal 1996 from 35.5% in fiscal 1995.
Depreciation and amortization expense in fiscal 1996 was comparable to
fiscal 1995.
Operating income decreased to $330 thousand in fiscal 1996, compared to $976
thousand in fiscal 1995, due to the higher costs of goods sold and higher
selling, general and administrative expenses noted above.
Interest expense was $317 thousand in fiscal 1996, an increase of $169
thousand from $148 thousand in fiscal 1995. The increase resulted from
additional borrowings under Precept's credit facility.
Other expense in fiscal 1996 of $400 thousand was attributable to a one time
charge related to interest accrued for sales taxes.
Precept's effective tax rate increased to 31.2% in fiscal 1996 from 25.4% in
fiscal 1995. The low effective tax rate in fiscal 1995, compared to the federal
statutory rate of 35%, is primarily due to a federal income tax refund related
to physical inventory adjustments while Precept was a subsidiary of ACS.
Net loss from continuing operations of $266 thousand in fiscal 1996,
compared to net income of $617 thousand in fiscal 1995 due to the factors
discussed above.
CAPITAL RESOURCES AND LIQUIDITY
Precept's primary sources of funding have been cash flow from operations,
commercial bank credit facilities and notes issued by Precept to sellers of
acquired companies. Precept anticipates that cash flow from operations and
borrowings under credit facilities will continue to be its principal sources of
funding. Precept's principal uses of cash have been, and will continue to be,
the funding of acquisitions, repayment of debt, and capital expenditures for its
information and accounting systems.
Precept had a $10.0 million secured, revolving credit facility with Comerica
Bank ("Old Credit Facility"). Availability under the Old Credit Facility was
subject to a borrowing base calculated based upon accounts receivable. At June
30, 1997, Precept had approximately $6.3 million outstanding under the Old
Credit Facility at an annual interest rate of approximately 8.0%.
A new definitive loan agreement was signed on July 2, 1997, with Wells Fargo
Bank, Texas consisting of a $10.0 million secured revolving credit facility
("New Credit Facility"), which expires June 30, 2000. Borrowings under the New
Credit Facility bear interest at the bank's Prime rate or at LIBOR plus 1.75%,
2.25% or 2.50% dependent upon a financial ratio of Precept calculated at the
beginning of each month. The New Credit Facility is fully secured by
substantially all of the assets of Precept. Availability under the credit
facility is calculated based upon a borrowing base composed of eligible accounts
receivables and inventory. As of January 28, 1998, the amount available under
the New Credit Facility was $8,660,000 and the outstanding balance was
$7,000,000.
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Precept incurs capital expenditures primarily for its information and
accounting systems needs. Capital expenditures, from continuing operations, for
the 1997 Period and fiscal years ended June 30, 1997 and 1996, were $63
thousand, $170 thousand and $355 thousand, respectively. The majority of capital
expenditures related to the purchase of software and computer equipment. Planned
capital expenditures for fiscal 1998 are expected to be approximately $260
thousand to be used for upgrading and enhancing Precept's information and
accounting systems. Actual capital expenditures for fiscal 1998 may be greater
or less than budgeted amounts.
Precept had cash and cash equivalents totaling $1.7 million at September 30,
1997 compared to $2.5 million at June 30, 1997. The reason for the decrease is
payments for contingent obligations in connection with prior acquisitions and
cash utilized in the acquisition consummated during the 1997 Period. Precept had
cash and cash equivalents of $2.5 million at June 30, 1997, compared to cash and
cash equivalents of $3.5 million at June 30, 1996. Cash and cash equivalents
decreased $1.0 million primarily due to the use of cash to finance contingent
payments in connection with prior acquisitions. Cash and cash equivalents from
discontinued operations of $95 thousand, $0 and $363 thousand as of September
30, 1997, June 30, 1997 and June 30, 1996 have been excluded from the amounts
discussed above.
Working capital for the 1997 Period was $12.0 million compared to $12.3
million at June 30, 1997. The primary reason for the decrease is an increase in
accounts payable. Working capital at June 30, 1997 was $12.3 million as compared
to $14.5 million at June 30, 1996. The decrease in working capital as of June
30, 1997, is primarily a result of a $2.7 million reduction in accruals and
taxes payable, offset by a $1.7 million reduction in accounts receivable, a $1
million reduction in cash and $3.0 million reduction in net assets of
discontinued operations. Precept's capitalization, defined as the sum of
long-term debt and shareholders' equity at September 30, 1997 was approximately
$20.3 million.
In the 1997 Period, 1996 Period and fiscal years 1997 and 1996, cash used
includes discontinued operations. For the 1997 Period, Precept had net cash used
in operating activities of $483 thousand, compared to net cash used of $98
thousand for the 1996 Period. During the fiscal year ended June 30, 1997,
Precept had net cash used in operating activities of $177 thousand, compared to
net cash used of $1.3 million during the fiscal year ended June 30, 1996. The
increase in cash generated from operations during fiscal 1997 is due to the
decrease in receivables.
Cash used in investing activities was $654 thousand in the 1997 Period
compared to cash used in investing activities of $1.1 million in the 1996
Period. Cash was used in the 1997 Period to finance an acquisition and make
contingent payments in connection with prior acquisitions. For the 1996 Period,
contingent payments for prior acquisitions were made along with expenditures for
capitalized software and computer equipment. Cash used in investing activities
for fiscal 1997 was comparable to fiscal 1996.
Cash provided by financing activities was approximately $441 thousand in the
1997 Period compared to cash used in financing activities of $457 thousand in
the 1996 Period. The increase primarily resulted from borrowings under the New
Credit Facility. Cash provided by financing activities in fiscal 1997 was
generated primarily from a $1.7 million increase in borrowings under the Old
Credit Facility.
At September 30, 1997, Precept had working capital of $12.0 million.
Precept's management believes that cash generated from continuing operations and
additional financing available under the New Credit Facility will provide
adequate funds for Precept's anticipated working capital and capital expenditure
needs. However, favorable acquisition or expansion opportunities requiring large
commitments or capital may arise that Precept may be unable to finance
internally. Furthermore, in order to pursue such opportunities, Precept may be
required to incur debt or to issue additional, potentially dilutive, equity
securities. No assurance can be given as to Precept's future acquisition and
expansion opportunities.
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INCOME TAXES
At June 30, 1997, Precept had $2.3 million of gross deferred tax assets.
Precept has evaluated its deferred tax assets both individually and in the
aggregate as to the likelihood of realizability of these amounts, and has
concluded that there are no specific realizability issues related to any one
type of temporary difference that gave rise to the deferred tax assets. However,
Precept has concluded that it is more likely than not that some portion of its
deferred tax assets will not be realized. After considering the sources of
taxable income that may be available, Precept estimates that it will not realize
$637 thousand of its deferred tax assets, for which a valuation allowance is
recorded.
DISCONTINUED OPERATIONS
As part of its Precept's business strategy, Precept has decided to focus on
its core businesses and discontinue certain non-core business operations. To
effect this strategy, in February 1997, Precept decided to reduce its investment
in its real estate construction operation, Precept Builders, Inc. ("Builders"),
which performs free-standing construction and finish-out of existing locations,
primarily in the state of Texas, and to sell nearly all of the assets of Precept
Holdings, Inc. ("Holdings"), which owns and operates certain other real
estate-related investments. Builders' revenues for fiscal 1996 and fiscal 1997
were $38.8 million and $82.5 million, respectively. Holdings had minimal
revenues for each fiscal period. See "Certain Relationships and Related
Transactions."
INFLATION
Certain of Precept's business product offerings, particularly paper
products, have been and are expected to continue to be subject to significant
price fluctuations due to inflationary and other market conditions. Precept
generally is able to pass such increased costs on to its customers through price
increases, although it may not be able to adjust its prices immediately.
Significant increases in paper and other costs in the future could materially
affect Precept's profitability if these costs cannot be passed on to customers.
In general, Precept does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that Precept's business will not be affected by inflation in the future.
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 EARNINGS PER SHARE ("SFAS 128"), which
specifies a new methodology for calculating earnings per share and is effective
for fiscal years ending after December 15, 1997. This statement will have no
effect on the financial position, results of operations or cash flows of Precept
but will require a restatement of prior period earnings per share. Precept
believes that the earnings per share calculated under SFAS 128 will not be
materially different than the current method used.
In addition, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 REPORTING COMPREHENSIVE INCOME and
Statement of financial Accounting Standards No. 131 DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION which are effective for financial
statement periods beginning after December 15, 1997. As these statements require
only additional disclosures, they will have no effect on Precept's financial
position, results of operations or cash flows.
DESCRIPTION OF PRECEPT SECURITIES
Immediately prior to the Closing, the total authorized capital stock of
Precept will consist of 100,000,000 shares of Precept Class A Common Stock,
10,500,000 shares of Precept Class B Common Stock, par value $.01 per share (the
"Precept Class B Common Stock") and 3,000,000 shares of Preferred Stock, par
value $1.00 per share (the "Precept Preferred Stock"). As of February 9, 1998,
there were 25,928,559 shares of Precept Class A Common Stock held by 67
shareholders of record, 10,071,441 shares
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<PAGE>
of Precept Class B Common Stock held by 1 shareholder of record and no shares of
Preferred Stock outstanding. The following descriptions of the capital stock are
qualified in all respects by reference to the Precept Articles of Incorporation,
and Precept Bylaws, copies of which are filed as Exhibits to the Registration
Statement of which this Proxy Statement/Prospectus is a part.
As provided in the Precept Articles of Incorporation, no shareholder is
entitled to preemptive rights or cumulative voting rights. The board of
directors of Precept also have the authority to fix or alter the powers,
designations, preferences and relative, participating, optional or other special
rights of all classes of the capital stock of Precept; provided, however, that
the board of directors of Precept may not amend the terms of Precept Class A
Common Stock to provide greater powers, preferences and rights than provided in
the Precept Articles of Incorporation.
PRECEPT CLASS A COMMON STOCK
Each holder of Precept Class A Common Stock is entitled to one vote for each
share held of record on all matters submitted to the shareholders as a single
class with the holders of Precept Class B Common Stock. The Precept Class A
Common Stock does not have any conversion rights and is not subject to
redemption. After dividends have been declared and set aside for payment or paid
on any series of Preferred Stock, each holder of Precept Class A Common Stock
and Precept Class B Common Stock is entitled to receive and to share equally in,
when, as and if declared by the board of directors of Precept, dividends per
share, out of the funds legally available therefore, in such amounts as the
board of directors of Precept may from time to time fix and determine. Upon
liquidation, dissolution or winding up of the affairs of Precept, whether
voluntary of involuntary, after there has been paid or set apart for the holders
of any series of Precept Preferred Stock having a preference over the Precept
Class A Common Stock or Precept Class B Common Stock, the holders of Precept
Class A Common Stock and Precept Class B Common Stock are entitled to receive
and to share equally in all of the assets of Precept available for distribution
to the shareholders. All outstanding shares of Precept Class A Common Stock are
fully paid and nonassessable. The transfer agent and registrar for the Precept
Class A Common Stock is Continental Stock Transfer & Trust Company. The shares
of Precept Class A Common Stock trade together with certain stock purchase
rights pursuant to that certain Rights Agreement described more fully below. See
"Rights Agreement; Rights to Purchase Shares of Precept Class A Common Stock,"
below.
PRECEPT CLASS B COMMON STOCK
Each holder of Precept Class B Common Stock is entitled to ten votes for
each share held of record on all matters submitted to the shareholders as a
single class with the holders of Precept Class A Common Stock. Each share of
Precept Class B Common Stock is convertible at any time at the option of and
without cost to the holder of Precept Class B Common Stock into one fully paid
and nonassessable share of Precept Class A Common Stock by surrendering the
certificate of Precept Class B Common Stock to Precept. In the case of a
consolidation or merger of Precept as a result of which the holders of Precept
Class A Common Stock are entitled to receive cash, stock or other securities or
property with respect to an exchange of the Precept Class A Common Stock, each
holder of Precept Class B Common Stock shall have the right to convert such
share into the kind and amount of cash, shares of stock or other securities or
property receivable by each holder of Precept Class A Common Stock. No holder of
Precept Class B Common Stock may transfer such share whether by sale,
assignment, gift, bequest, appointment or otherwise except to certain permitted
transferees, and upon death of such holder of Precept Class B Common Stock, the
Precept Class B Common Stock shall automatically be converted into Precept Class
A Common Stock. All outstanding shares of Precept Class B Common Stock are fully
paid and nonassessable and are not subject to redemption.
No person or entity holding shares of Precept Class B Common Stock (a "Class
B Holder") may transfer such shares, whether by sale, assignment, gift, bequest,
appointment or otherwise, except to a Permitted Transferee (as hereinafter
defined). In the case of a Class B Holder who is a natural person and
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the beneficial owner of shares of Precept Class B Common Stock to be
transferred, a Permitted Transferee consists of (i) such Class B Holder's
spouse; provided, however, that upon divorce any Precept Class B Common Stock
held by such spouse shall automatically be converted into Precept Class A Common
Stock, (ii) any lineal descendant of any great-grandparent of such Class B
Holder, including adopted children, and such descendant's spouse (such
descendants and their spouses, together with such Class B Holder's spouse, are
referred to as "family members"), (iii) the trustee of a trust for the sole
benefit of such Class B Holder or any of such Class B Holder's family members,
(iv) any charitable organization established by such Class B Holder or any of
such Class B Holder's family members and (v) any partnership made up exclusively
of such Class B Holder and any of such Class B Holder's family members or any
corporation wholly-owned by such Class B Holder and any of such Class B Holder's
family members; provided that, if there is any change in the partners of such
partnership or in the shareholders of such corporation that would cause such
partnership or corporation no longer to be a Permitted Transferee, any Precept
Class B Common Stock held by such partnership or corporation shall automatically
be converted into Precept Class A Common Stock. In the case of a Class B Holder
that is a partnership or corporation, a Permitted Transferee consists of (i)
such partnership's partners or such corporation's stockholders, as the case may
be, (ii) any transferor to such partnership or corporation of shares of Precept
Class B Common Stock after the record date of the initial distribution of
Precept Class B Common Stock and (iii) successors by merger or consolidation. In
the case of a Class B Holder that is an irrevocable trust on the record date of
the distribution of Precept Class B Common Stock, a Permitted Transferee
consists of (i) certain successor trustees of such trust, (ii) any person to
whom or for whose benefit principal or income may be distributed under the terms
of such trust or any person to whom such trust may be obligated to make future
transfers, provided such obligation exists prior to the date such trust becomes
a holder of Precept Class B Common Stock and (iii) any family member of the
creator of such trust. In the case of a Class B Holder that is any trust other
than an irrevocable trust on the date of the distribution of Precept Class B
Common Stock, a Permitted Transferee consists of (i) certain successor trustees
of such trust and (ii) the person who established such trust and such person's
Permitted Transferees. Upon the death or permanent incapacity of any Precept
Class B Holder, such holder's Precept Class B Common Stock shall automatically
be converted into Precept Class A Common Stock. All shares of Precept Class B
Common Stock will automatically convert into shares of Precept Class A Common
Stock on the ninetieth day after the death of Darwin Deason or upon the
conversion by the Deason International Trust (the "Deason Trust") of all Precept
Class B Common Stock beneficially owned by Mr. Deason into shares of Precept
Class A Common Stock.
Shares of Precept Class B Common Stock are freely transferable among
Permitted Transferees, but any other transfer of Precept Class B Common Stock
will result in its automatic conversion into Precept Class A Common Stock. The
restriction on transfers of shares of Precept Class B Common Stock to other than
a Permitted Transferee may preclude or delay a change in control of Precept.
PRECEPT PREFERRED STOCK
The Precept Preferred Stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors of
Precept, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion rights, redemption rights and sinking
fund provisions. The issuance of any such Precept Preferred Stock could
adversely effect the rights of the holders of Precept Class A Common Stock and
Precept Class B Common Stock and, therefore, reduce the value of the Precept
Class A Common Stock and Precept Class B Common Stock. The ability of the Board
of Directors of Precept to issue Precept Preferred Stock could discourage, delay
or prevent a takeover of Precept.
PRECEPT CLASS A WARRANTS
Each USTS Class C Common Stock Purchase Warrant outstanding at the Closing
Date will automatically be converted into one Precept Class A Warrant and shall
become exercisable for shares of Precept
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Class A Common Stock in lieu of the USTS Common Stock previously purchasable
upon exercise. Certificates representing such Precept Class A Warrants will be
distributed promptly after the Closing Date in exchange for and replacement of
current certificates representing outstanding USTS Class C Warrants. Except for
the fact that the Precept Class A Warrants shall be exercisable for shares of
Precept Class A Common Stock, the Precept Class A Warrants shall have terms and
conditions substantially the same as those of the USTS Class C Warrants. The
Precept Class A Warrants, when issued, will be listed for trading on the Nasdaq.
Each Precept Class A Warrant allows the holder to purchase one share of Precept
Class A Common Stock at a price of $3.82 per share. The Precept Class A Warrants
expire on August 26, 1999. Precept may redeem the Precept Class A Warrants at a
price of $.01 per Precept Class A Warrant if the closing bid price for Precept
Common Stock equals or exceeds $5.157 for at least ten consecutive trading days.
RIGHTS AGREEMENT; RIGHTS TO PURCHASE SHARES OF PRECEPT CLASS A COMMON STOCK
On February 2, 1998 the Precept Board of Directors declared a dividend of
one common share purchase right (a "Right") for each outstanding share of
Precept Common Stock. The dividend was made on 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 Precept one share of
Precept Class A Common Stock, at a price of $50.00 (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 (i) ten Business Days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Precept Class A Common Stock (an "Acquiring Person") or (ii)
ten Business Days following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer, the consummation of which would
result in the beneficial ownership by a person or group of 15% or more of such
outstanding Precept Class A Common Stock (the earlier of such dates being the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
certificates for Precept Common Stock outstanding as of the Record Date, by such
certificates for the Precept Common Stock with a copy of a Summary of Rights
attached to the certificate. Additional Rights will be issued in respect of all
shares of Precept Common Stock that are issued after the Record Date but prior
to the earlier of the Distribution Date or the Expiration Date, including the
Shares issued in the Transfer.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Precept Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
certificates issued after the Record Date upon transfer or new issuance of
Precept Common Stock will contain a notation incorporating the Rights Agreement
by reference. Until the Distribution Date (or earlier redemption or expiration
of the Rights), the surrender for transfer of any certificates for Precept
Common Stock outstanding even without such notation or a copy of a Summary of
Rights being attached to such Certificate, will also constitute the transfer of
the Rights associated with the Precept Common Stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the Precept Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on February , 2008, (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed by
Precept, in each case, as described below.
The Purchase Price payable and the number of shares of Precept Class A
Common Stock or other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination, or
reclassification of, the Precept Class A Common Stock, (ii) upon the grant to
holders of the Precept Class A Common Stock
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<PAGE>
of certain rights or warrants to subscribe for or purchase Precept Class A
Common Stock at a price or securities convertible into Precept Class A Common
Stock with a conversion price less than the then current market price of the
Precept Class A Common Stock; (iii) upon the distribution to holders of the
Precept Class A Common Stock of evidences of indebtedness or assets or of
subscription rights or warrants (other than those referred to above); or (iv)
upon any of the foregoing happens with respect to the Precept Class B Common
Stock.
In the event that any person or entity becomes an Acquiring Person (the
beneficial owner of 15% or more of the Precept Class A Common Stock), prevision
will be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will then be void), will have the right to
receive upon exercise that number of shares of Precept Class A Common Stock
having a market value of two times the applicable exercise price of the Right.
The Rights Agreement excludes from the definition of Acquiring Person,
Persons who certify to Precept that they inadvertently acquired in excess of
14.9% of the outstanding Precept Class A Common Stock and thereafter divest such
excess Precept Class A Common Stock or who acquire 15% or more of the Precept
Class A Common Stock in a Permitted Transaction. A "Permitted Transaction" is a
stock acquisition or tender or exchange offer pursuant to a definitive agreement
which would result in a person beneficially owning 15% or more of the Precept
Class A Common Stock and which has been approved by the Board of Directors
(including a majority of the Directors not in association with an Acquiring
Person) prior to the execution of the agreement or the public announcement of
the offer.
In the event that Precept is acquired in a merger or other business
combination transaction, or 50% or more of its consolidated assets or earning
power are sold, proper provisions will be made so that each holder of a Right
will have the right to receive, upon the exercise of the Right at the then
applicable exercise price, that number of shares of common stock of the
acquiring company that at the time of such transaction will have a market value
of two times the applicable exercise price of the Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Precept Class A Common Stock will
be issued and, in lieu of such fractional shares, an adjustment in cash will be
made based on the market price of the Precept Class A Common Stock on the last
trading day prior to the date of exercise.
After a person becomes an Acquiring Person, Precept's Board of Directors may
exchange the Rights, other than those Rights owned by the Acquiring Person, in
whole or in part, at an exchange ratio of one share of Precept Class A Common
Stock per Right, subject to adjustment. However, the Board of Directors cannot
conduct an exchange at any time after any Person, together with its Affiliates
and Associates, becomes the Beneficial Owner of 50% or more of the outstanding
Precept Class A Common Stock.
At any time prior to any Person becoming an Acquiring Person, a Requisite
Majority may redeem the Rights in whole, but not in part, at a price of $0.01
per Right (the "Redemption Price"). In addition, the Precept Board of Directors
may extend or reduce the period during which the Rights are redeemable, so long
as the Rights are redeemable at the time of such extension or reduction.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Precept Board of Directors
without the consent of the holders of the Rights, including an amendment to
extend the Final Expiration Date, except that from and after the Distribution
Date no such amendment may adversely affect the economic interests of the
holders of the Rights.
Until a Right is exercised, the holder of the Right, as such, will have no
rights as a shareholder of Precept, including, without limitation, the right to
vote, or to receive dividends.
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OFFICERS AND DIRECTORS OF PRECEPT
The following table sets forth the names and positions of those persons who
are directors and officers of Precept prior to the consummation Transactions.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------------------ -----------------------------------------------------------------
<S> <C>
Darwin Deason............................. Director and Chairman of the Executive Committee of the Board
David L. Neely............................ Chairman of the Board and Chief Executive Officer
Douglas R. Deason......................... President, Chief Operating Officer and Director
Glenn R. Smith............................ Executive Vice President, Chief Administrative Officer and
Director*
D. Paul Cabra............................. Executive Vice President of Sales and Operations
Scott B. Walker........................... Senior Vice President, Chief Financial Officer and Director**
Layne A. Deutscher........................ Senior Vice President, General Counsel and Director**
J. Livingston Kosberg..................... Director**
Sheldon I. Stein.......................... Director**
</TABLE>
- ------------------------
* Mr. Smith will resign from the Board of Directors upon consummation of the
Transfer.
** Messrs. Walker, Deutscher, Kosberg and Stein will become members of the
Board of Directors upon consummation of the Transfer.
DARWIN DEASON, age 57, has served as a Director of Precept since its
formation in 1988. Mr. Deason is also currently the Chairman of the Board and
Chief Executive Officer of ACS. Prior to the formation of ACS, Mr. Deason spent
20 years with MTech, a data processing subsidiary of MCorp, a bank holding
corporation based in Dallas, Texas ("MCorp"), serving as MTech's Chief Executive
Officer and Chairman of the Board from 1978 until April 1988, and served on the
board of various subsidiaries of MTech and MCorp. Prior to that, Mr. Deason was
employed in the data processing department of Gulf Oil in Tulsa, Oklahoma.
Darwin Deason is the father of Douglas R. Deason.
DAVID L. NEELY, age 52, has served as Chairman of the Board and Chief
Executive Officer of Precept and Precept Business Products, Inc., its business
products distribution company, from formation in October 1988. Prior to the
spinoff of Precept from ACS, Mr. Neely also served as Executive Vice President
of ACS. Prior to founding Precept, Mr. Neely was a senior officer of MTech and
an Executive Vice President of Image Tech, the business products affiliate of
MTech. Mr. Neely has over 20 years of experience in the business products
industry.
DOUGLAS R. DEASON, age 35, has served as President and Chief Operating
Officer of Precept since 1995. Mr. Deason joined Precept in 1991 and from 1993
through 1995 served as Executive Vice President of an operating subsidiary of
Precept. For the seven years immediately prior to joining Precept, Mr. Deason
was a senior commercial real estate broker with the Dallas branch of New York
based Cushman and Wakefield. Douglas R. Deason is the son of Darwin Deason.
GLENN R. SMITH, age 41, has served as Executive Vice President and Chief
Administrative Officer of Precept since December 1989, responsible for corporate
purchasing, distribution operations and all administrative functions of Precept.
Mr. Smith joined Precept as Corporate Purchasing Manager at its formation in
October 1988. Prior to joining Precept, Mr. Smith was Corporate Purchasing
Manager of MTech. He began his employment with MTech as a corporate buyer in
October of 1984. Mr. Smith has over 13 years experience in the business products
industry. Upon consummation of the Transactions, Mr. Smith will resign as a
Director of Precept.
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D. PAUL CABRA, age 52, has served as Executive Vice President of Sales and
Operations for Precept since August 1997. Prior thereto, Mr. Cabra served as the
Senior Vice President of Sales for Precept's Central, South and Eastern regions
from 1993 to August 1997, and as Branch Manager from June 1991 to 1993. He was
the Chief Executive Officer and sole shareholder of CABCO Business Forms, Inc.,
a business products distributor, which was acquired by Precept in 1991. Mr.
Cabra has over 18 years experience in the business products industry.
SCOTT B. WALKER, age 42, joined Precept as Senior Vice President and Chief
Financial Officer in August 1996. Prior to joining Precept, Mr. Walker was Chief
Financial Officer of DirectNet Corporation from 1995 until August 1996.
Additionally, Mr. Walker previously served as Vice President in corporate
finance with Lloyds Bank and GE Capital from 1984 to 1991 and Vice President
with First Interstate Bank (now Wells Fargo Bank) from 1992 to 1995. Mr. Walker
holds a Graduate Degree in International Finance from Thunderbird.
LAYNE A. DEUTSCHER, age 38, joined Precept as Senior Vice President and
General Counsel in May 1997. Prior to joining Precept, he was with ACS from
February 1993 until May 1997 serving most recently as Senior Vice President of
Corporate Development responsible for all merger and acquisition activity and
before that as Senior Vice President and Associate General Counsel--Mergers and
Acquisitions. Mr. Deutscher previously was an attorney with the law firm of
Haynes and Boone, L.L.P. from 1987 until February 1993. He was licensed as a
Certified Public Accountant in 1988, and is a graduate of the Wharton School of
the University of Pennsylvania and the University of Texas School of Law.
J. LIVINGSTON KOSBERG, age 61, 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 CareerStaff Unlimited, Inc., which is a national provider of
temporary rehabilitation therapist staffing. Prior to April 1992, Mr. Kosberg
was primarily engaged in managing personal investments through a variety of
ventures and entities, including National Rehab Associates, Inc., the
predecessor of U.S. Physical Therapy. Mr. Kosberg was Chairman of the Board from
April 1990 to April 1992, and a member of the Board from May 1993 to March 1994,
of BioMedical Waste Systems, Inc., a medical waste treatment company.
SHELDON I. STEIN, age 45, is a Senior Managing Director and ovesees Bear
Stearns' Southwestern Corporate Finance Department. 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, FirstPlus Financial Group, Inc., Fresh America Corp., The
Men's Wearhouse, Inc. and Tandycrafts, Inc. He is also a Trustee of the
Greenhill School in Dallas and a Fellow of Brandeis University.
BOARD COMMITTEES
Precept maintains an Executive Committee, which has broad authority
consistent with the provisions of the TBCA to take action on behalf of the Board
of Directors. The Executive Committee consists of Darwin Deason (Chairman),
David Neely and Doug Deason. Upon consummation of the Transactions, Precept will
establish an Audit Committee and a Compensation Committee.
Following the Closing, Precept has agreed with Michael Margolies, Chairman
of the Board and Chief Executive Officer of USTS, that Mr. Margolies will serve
as Vice Chairman of the Board of Directors of Precept and has agreed with Robert
Blackman, a member of the USTS Board, that Mr. Blackman will serve on the Board
of Directors of Precept. See "The Transactions--Interests of Certain Persons in
the Transactions," and "USTS Directors and Officers."
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PRECEPT EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table sets
forth certain information regarding compensation paid for all services rendered
to Precept in all capacities during fiscal year 1997 to Precept's chief
executive officer, the other most highly compensated executive officers of
Precept whose total annual salary and bonus exceeded $100,000, based on salary
and bonuses earned during fiscal year 1997 (collectively, the "Named Precept
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
AWARDS
ANNUAL COMPENSATION --------------------------------
------------------------------------------- RESTRICTED
OTHER ANNUAL STOCK OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) SARS(2)(3)
- ------------------------------------ --------- --------- --------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David Neely ........................ 1997 241,500 279,700 -- -- --
Chairman and Chief Executive 1996 230,000 345,000 -- -- --
Officer 1995 196,236 182,198 -- -- --
Douglas R. Deason .................. 1997 210,000 162,310 -- -- --
President 1996 200,000 200,000 -- -- --
1995 100,000 68,000 -- -- --
Glenn R. Smith ..................... 1997 104,832 25,800 -- -- --
Executive Vice President 1996 97,853 67,500 -- -- --
1995 95,866 39,200 -- -- --
D. Paul Cabra ...................... 1997 96,000 39,100 -- -- --
Executive Vice President 1996 96,000 69,000 -- -- --
1995 84,000 48,000 -- -- --
<CAPTION>
PAYOUTS
---------------
PAYOUTS
LTIP ALL OTHER
NAME AND PRINCIPAL POSITION PAYOUTS(2) COMPENSATION
- ------------------------------------ --------------- -------------------
<S> <C> <C>
David Neely ........................ -- --
Chairman and Chief Executive -- --
Officer -- --
Douglas R. Deason .................. -- --
President -- --
-- --
Glenn R. Smith ..................... -- --
Executive Vice President -- --
-- --
D. Paul Cabra ...................... -- --
Executive Vice President -- --
-- --
</TABLE>
- --------------------------
(1) None of the Named Precept Executive Officers received personal benefits,
securities or property in excess of the lesser of $50,000 or 10% of such
individual's reported salary and bonus.
(2) Precept did not grant any restricted stock awards or SARs or long-term
incentive plan payouts to the Named Precept Executive Officers during fiscal
year 1996.
EXECUTIVE COMPENSATION
The objective of the Precept executive compensation program is to attract
and retain qualified, motivated executives and to closely align their financial
interests with both the short and long-term interests of the Precept
shareholders. The executive compensation program is intended to provide the
executive officers of Precept with overall levels of compensation that are
competitive within the business services industry, as well as within a broader
spectrum of companies of size and complexity.
The three principal components of the Precept executive compensation program
are base salary, annual incentive bonus opportunities, and stock options.
BASE SALARIES. Each executive officer's base salary is reviewed annually
and is subject to adjustment on the basis of individual, corporate, and business
unit performance, as well as competitive and inflationary considerations.
INCENTIVE BONUS. Incentive bonus payments for executive officers other than
the Chief Executive Officer and Chief Operating Officer are made at the end of
each fiscal year based upon the achievement of consolidated financial criteria,
business unit financial criteria, and the attainment of individual goals, all of
which are established informally by the Board of Directors of Precept.
Compensation for the Chief Executive Officer and Chief Operating Officer of
Precept consisted of a base salary and bonus compensation. Bonus compensation
was substantially dependent on the achievement of three targeted financial
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<PAGE>
measures: consolidated revenues, consolidated earnings before interest, taxes
and depreciation, and consolidated pre-tax earnings. During fiscal year 1997,
Precept achieved 94% of such measures. For fiscal year 1997, executive officers
were eligible to receive maximum bonuses of between 50% and 150% of salary
provided certain financial goals were met.
1996 STOCK OPTION PLAN. Employees of and consultants of Precept have been
eligible to receive grants of options under the Precept 1996 Stock Option Plan
("1996 Plan"). Precept did not grant any SARs to the Named Precept Executive
Officers during fiscal year 1997. The following table provides information
related to options granted and exercised by the Named Precept Executive Officers
during fiscal year 1997 and the number and value of options held at fiscal year
end. Precept does not have any SARs outstanding. Upon the adoption of the 1998
Stock Incentive Plan, the Precept Board determined that Precept would no longer
issue options under the 1996 Plan.
OPTION GRANTS DURING FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL
INDIVIDUAL GRANTS RATES OF
------------------------------------------------------------------------------- STOCK PRICE
NUMBER OF APPRECIATION
SECURITIES % OF TOTAL FOR OPTION
UNDERLYING OPTIONS/SARS GRANTED TERM(1)
OPTIONS/SARS TO EMPLOYEES IN FISCAL EXERCISE OR BASE EXPIRATION -----------
NAME GRANTED(#) YEAR(%) PRICE($) DATE 5%($)
- ------------------------------- ------------------- ------------------------- ------------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
David Neely.................... 211,150 16.3% 0.20 1/02/07 --
Douglas R. Deason.............. 211,150 16.3% 0.20 1/02/07 --
Glenn R. Smith................. 103,000 7.9% 0.20 1/02/07 --
D. Paul Cabra.................. 154,500 11.9% 0.20 1/02/07 --
<CAPTION>
NAME 10%($)
- ------------------------------- -----------
<S> <C>
David Neely.................... --
Douglas R. Deason.............. --
Glenn R. Smith................. --
D. Paul Cabra.................. --
</TABLE>
- ------------------------
(1) All of the options reflected in this table have been exercised. As a result,
potential realizable values over the option term have not been calculated.
AGGREGATE OPTION/SAR EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END 1997
OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED IN-
THE-MONEY
NUMBER OF UNEXERCISED OPTIONS/SARS OPTIONS/SARS AT
NUMBER OF FISCAL
SHARES AT FISCAL YEAR-END YEAR-END(1)
ACQUIRED ON VALUE ---------------------------------- ---------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ----------------------------------------- ----------- --------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
David Neely.............................. 211,150 -- -- -- --
Douglas R. Deason........................ 211,150 -- -- -- --
Glenn R. Smith........................... 103,000 -- -- -- --
Paul Cabra............................... 154,500 -- -- -- --
<CAPTION>
NAME UNEXERCISABLE
- ----------------------------------------- -----------------
<S> <C>
David Neely.............................. --
Douglas R. Deason........................ --
Glenn R. Smith........................... --
Paul Cabra............................... --
</TABLE>
- ------------------------
(1) Value is calculated based on the exercise price ($0.20) and the most recent
sale price of Precept Class A Common Stock prior to and after exercise
($0.20).
1998 STOCK INCENTIVE PLAN. In anticipation of the consummation of the
Transactions and in order to provide greater flexibility for incentive based
compensation, the Board of Directors and shareholders of Precept adopted the
1998 Stock Incentive Plan ("1998 Plan"). In connection with the adoption of the
1998 Plan, the Precept Board determined that Precept would no longer issue
options available under the 1996 Plan but shares available thereunder would be
available for grant under the 1998 Plan.
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<PAGE>
GENERAL. The 1998 Plan is designed to comply with the requirements of
Section 16b of the Exchange Act. The maximum aggregate number of shares of
Precept Class A Common Stock available for issuance under the 1998 Plan will
initially be 6,000,000, which amount is inclusive of shares of Class A Common
Stock that would have continued to be available for grant pursuant to options
under the 1996 Plan and which amount, when added to the number of shares of
Precept Class A Common Stock covered by options outstanding under the 1996 Plan
(and held by employees or consultants), equals approximately 12.5% of the total
number of shares of Precept Class A Common Stock and Precept Class B Common
Stock which will be outstanding after giving effect to the number of shares to
be issued in connection with the Transactions (such 12.5% being referred to as
the "Approved Amount"). The amount of shares of Precept Class A Common Stock
available for issuance pursuant to options under the 1998 Plan may, at the
discretion of the Precept Board, be increased from time to time as additional
shares of Precept Class A Common Stock are issued from time to time in order to
maintain the number of shares of Precept Class A Common Stock available for
grant, and previously granted and outstanding (and held by Employees and
Consultants), equal to 12.5% of the total number of shares of Precept Class A
Common Stock and Precept Class B Common Stock outstanding from time to time. No
more than 6,000,000 shares of Precept Class A Common Stock will be available for
the granting of incentive stock options within the meaning of Section 422 of the
Code ("Incentive Stock Options").
ADMINISTRATION. Under its terms, the 1998 Plan may be administered by the
Precept Board or one or more committees of the Precept Board, as permitted by
Rule 16b-3 ("Rule 16b-3") promulgated under the Exchange Act. Performance-based
awards to Precept's named executive officers are administered by a committee of
outside directors, as set forth in Section 162(m) of the Code. The Precept Board
or committee administering the 1998 Plan at a particular time (the
"Administrator") determines the individuals eligible to receive awards under the
1998 Plan, the types and number of awards to be granted, the terms and
conditions of such awards (including, for example, with respect to options, the
exercise price, exercise date, any restrictions on exercise), and prescribes the
forms of award agreements. The Administrator is also responsible for, among
other things, determining the advisability and terms of any buyout of options
previously granted and the reductions, if any, in the exercise prices of
previously granted options.
ELIGIBILITY. Employees (including employee directors) ("Employees") of and
consultants ("Consultants") to Precept and any parent or subsidiary of Precept
as well as outside directors of Precept ("Outside Directors") are eligible to
receive awards under the 1998 Plan.
TYPES OF GRANTS. The 1998 permits the grant of nonstatutory stock options
("Nonstatutory Stock Options"), "stock purchase rights" ("Stock Purchase
Rights"), stock appreciation rights ("SARs"), deferred stock ("Deferred Stock"),
dividend equivalents ("Dividend Equivalents") and awards of restricted stock
("Restricted Stock") to Employees, Consultants and Outside Directors. The 1998
Plan also permits the grant of Incentive Stock Options to Employees. The 1998
Plan further permits the Administrator to designate the grant of Options or SARs
to a "covered employee" (as defined in Section 162(m)(3) of the Code) as a
"performance based grant" ("Performance Based Grant"). Nonstatutory Stock
Options and Incentive Stock Options (collectively, "Options") entitle the
holders thereof to purchase Precept Class A Common Stock.
All awards under the 1998 Plan will be evidenced by a written agreement in
form approved by the Administrator. The Administrator may grant awards under the
1998 Plan alone or in addition to, in tandem with or in substitution for any
other award under the 1998 Plan. Awards granted in addition to or in tandem with
other awards under the 1998 Plan may be granted either at the same time or at
different times. Generally, awards under the 1998 Plan will be granted for no
consideration other than services.
OPTIONS. Each Option will be designated in the written option agreement
evidencing its grant whether the option is an Incentive Stock Option or a
Nonstatutory Stock Option. The exercise price of an Incentive Stock Option shall
be no less than 100% of the fair market value of Precept Class A Common Stock at
the time of the grant (110% of fair market value if the grant is made to an
employee that owns
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<PAGE>
stock representing more than 10% of the voting power of all classes of stock of
Precept or any parent or subsidiary of Precept (a "10% Holder"). Fair market
value is determined by reference to the stock's closing price on the date of the
grant. Incentive Stock Options shall have a term of no more than 10 years (5
years if granted to a 10% Holder). The exercise price of a Nonstatutory Stock
Option shall be determined by the Administrator.
In the event that an Employee, Consultant or Outside Director is terminated
for cause as set forth in the 1998 Plan, all Options granted to such person
under the 1998 Plan, whether or not vested, are forfeited unless previously
exercised. If an Employee, Consultant or Outside Director's relationship with
Precept terminates other than for cause, a vested Option granted to such person
is exercisable to the extent provided in the agreement granting the Option, but,
in the case of an Incentive Stock Option, shall be exercised within 60 days (or
such other period of time determined by the Administrator at the time of the
grant of the Option and not exceeding 90 days) of the date of such termination
(12 months, if the termination was the result of a disability) and only to the
extent exercisable on the date of such termination.
If there is a change in control of Precept, all Options previously granted,
whether or not vested, shall become fully vested and exercisable, effective the
day immediately prior to the change in control. If the recipient of an Option
dies, the Option may be exercised only to the extent vested at the time of death
and only by the estate of the recipient or a person who acquired the Option by
bequest or inheritance. The 1998 Plan also gives the Administrator the authority
to include a similar change of control provision in other grants under the Plan
(i.e., SAR's, Restricted or Deferred Stock, etc.)
TRANSFERABILITY. Generally, no Option is transferable by a recipient except
by will or the laws of descent and distribution. However, the Administrator
shall, with respect to the holder of a Nonstatutory Option who has a severance
agreement with Precept and may, in its discretion with respect to any other
holder of a Nonstatutory Option, permit the transfer and pledge of such options
under limited circumstances.
FEDERAL INCOME TAX CONSEQUENCES. The grant of an Incentive Stock Option has
no immediate federal income tax consequences to the optionee or Precept. The
exercise of an Incentive Stock Option while the optionee is an Employee or
within three months after termination of employment generally has no immediate
tax consequences to Precept or the optionee. If the optionee is subject to the
alternative minimum tax, however, the exercise of an Incentive Stock Option
would result in an increase in the optionee's alternative minimum taxable income
equal to the excess of the fair market value of the shares of Precept Class A
Common Stock at the time of exercise over the exercise price. If an optionee
holds the shares of Precept Class A Common Stock acquired pursuant to the
exercise of an Incentive Stock Option for the required holding period, the
optionee generally recognizes capital gain or loss upon a subsequent sale of the
shares in the amount of the difference between the amount realized upon the sale
and the exercise price of the shares. In such a case, Precept is not entitled to
a deduction in connection with the grant or exercise of the Incentive Stock
Option or the sale of shares of Precept Class A Common Stock acquired pursuant
to such exercise. If, however, an optionee exercises an Incentive Stock Option
more than three months after termination of employment or disposes of the shares
prior to the expiration of the required holding period, the optionee generally
recognizes ordinary income equal to the excess of the fair market value of the
shares of Precept Class A Common Stock on the date of exercise over the exercise
price. The required holding period is the longer of two years from the date the
option was granted and one year after the date of issuance of the shares upon
the exercise of the option.
The grant of a Nonstatutory Stock Option has no immediate federal income tax
consequences to the optionee or Precept. Upon the exercise of a Nonstatutory
Stock Option, the optionee recognizes ordinary income (subject to wage
withholding and employment taxes) in an amount equal to the excess of the fair
market value of the shares of Precept Class A Common Stock on the date of the
exercise over the exercise price, and Precept is entitled to a corresponding
deduction if the compensation constitutes an ordinary and
72
<PAGE>
necessary business expense. The optionee's tax basis in the shares of Precept
Class A Common Stock is the exercise price plus the amount of ordinary income
recognized by the optionee, and the optionee's holding period will commence on
the date the shares are received. Upon a subsequent sale of the shares of
Precept Class A Common Stock, an difference between the optionee's tax basis in
the shares and the amount realized on the sale generally is treated as capital
gain or loss.
OTHER EMPLOYEE BENEFIT PLAN. Precept has a contributory retirement and
savings plan which covers eligible employees and meets the requirements of
Section 401(k) of the Internal Revenue Code. The plan also allows for a
discretionary contribution by Precept as determined by Precept's Board of
Directors. There have been no contributions made by Precept to date.
EMPLOYMENT AGREEMENTS. Precept has no employment agreements with the Named
Precept Executive Officers. Precept intends to enter into employment agreements
with Michael Margolies and Ron Sorci upon the consummation of the Transactions.
See "The Transactions--Interests of Certain Persons in the Transactions."
Precept will not assume any employment agreements with current USTS officers.
Precept does not anticipate any other contractual compensation arrangements with
any such officers.
DIRECTORS' COMPENSATION. Precept's directors are not paid any compensation
for serving on the Board of Directors of Precept, although Precept may in the
future decide to pay directors' fees. Directors will be reimbursed for their
travel expenses in connection with meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to
consummation of the Transactions, Precept has not had, and will not have, a
Compensation Committee and executive compensation has been informally set by the
Board of Directors.
INDEMNIFICATION AND LIMITATION OF LIABILITY. As authorized by the TBCA, the
Precept Articles of Incorporation provide that, no director of Precept shall be
liable to Precept or its shareholders for monetary damages for an act or
omission in such director's capacity as a director of Precept except that such
provision does not eliminate or limit the liability of a director of Precept
for: (1) a breach of such director's duty of loyalty to Precept or its
shareholders; (2) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law; (3) a transaction from
which such director received an improper benefit, whether or not the benefit
resulted from such an action taken within the scope of such director's office;
(4) an act or omission for which the liability of such director is expressly
provided by statute; or (5) an act related to an unlawful stock repurchase or
payment of a dividend.
The Precept Articles also provide that each person who is or was a director,
officer, employee or agent of Precept, or is or was serving at the request of
Precept as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another corporation, partnership,
joint venture, sole proprietorship, trust or other enterprise or employee
benefit plan (including the heirs, executors, administrators or estate of such
person) shall be indemnified by Precept to the fullest extent that a corporation
is required or permitted to grant indemnification to such person under the TBCA,
as the same exists or may hereafter be amended.
Precept has entered into certain agreements ("Indemnification Agreements")
with each of its directors and executive officers designed to give effect to the
foregoing provisions of the Articles of Incorporation and to provide certain
additional protections against the possibility of liability. Pursuant to the
Indemnification Agreements, Precept will, to the extent permitted under
applicable law, indemnify such persons against all expenses, judgments, fines
and penalties incurred in connection with the defense or settlement of any
actions brought against them by reason of the fact that they are or were
directors or officers of Precept or assumed certain responsibilities at the
direction of Precept. The effect of such provisions of the Articles of
Incorporation and the Indemnification Agreements will be to eliminate the rights
of Precept and its shareholders (through shareholders' derivation suits on
behalf of Precept) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from negligence or
gross negligence).
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<PAGE>
PRECEPT CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERVICES AGREEMENT
In connection with the spinoff of Precept from its former parent company,
ACS, in 1994, Precept entered into a Reciprocal Services Agreement (the
"Services Agreement") with ACS, effective June 30, 1994, pursuant to which
Precept sells business products and provides package delivery services to ACS.
Prices charged by Precept to ACS under the Services Agreement shall be no less
favorable than could be obtained from an independent third party for comparable
products and services. Precept received approximately $5,400,000 and $712,000
from ACS in fiscal 1997 and during the first three months of fiscal 1998,
respectively. In addition to the foregoing, ACS provides data processing
services to Precept pursuant to the Services Agreement. Precept incurred
expenses of $416,179 and $40,424 to ACS in fiscal 1997 and during the first
three months of fiscal 1998, respectively, for these services. Pricing for ACS
services provided to Precept is no less than ACS' direct costs attributable to
such services. Precept expects to discontinue the purchase of these services
completely by January 31, 1998. The Services Agreement contains the agreements
of ACS and Precept to use reasonable efforts to recommend the services of the
other company to their customers and prospects. The Services Agreement, which
had an initial term of one year, automatically renews for additional consecutive
one-year periods unless earlier terminated by ACS or Precept upon 180 days'
written notice given prior to the expiration of any such one-year period. Mr.
Darwin Deason is Chairman and Chief Executive Officer of ACS.
INDEBTEDNESS OF MANAGEMENT
Precept loaned each of David L. Neely, Chairman and Chief Executive Officer
and Douglas R. Deason, President, Chief Operating Officer and a Director,
$379,988, the proceeds of which were used solely to acquire shares of Precept
Class A Common Stock from shareholders. The loans are evidenced by notes which
become due upon the earlier of (i) June 8, 2005, (ii) upon the sale or transfer
of the shares of Precept Class A Common Stock purchased with the proceeds or
(iii) upon termination of the employment of the maker of the particular note
prior to June 8, 2000. Each of the notes are secured by the shares of Precept
Class A Common Stock purchased with the proceeds of each loan. Interest accrues
at the 90-day U.S. Treasury Bill Rate as stated on June 8 of each year. In lieu
of cash payment, annually on June 8, interest is added to the then outstanding
principal amount of the note. The current balance of each of the notes is
$322,180.19.
On January 2, 1997, in connection with the exercise of options granted on
the same date pursuant to the Precept 1996 Stock Option Plan, Messrs. Neely,
Doug Deason, Smith, Cabra and Walker were made loans by Precept evidenced by
non-interest bearing demand promissory notes payable to Precept as consideration
for such exercise in the amounts of $42,230; $42,230; $20,600; $30,900 and
$20,600, respectively. These notes were repaid in October 1997.
DISCONTINUATION OF BUSINESSES
In an effort to focus on its core business, Precept consummated the
following transactions in connection with the discontinuation of the business,
real estate construction and investments, respectively, of Builders and
Holdings.
BUILDERS. Precept decreased its ownership percentage in Builders through a
private placement of common stock by Builders, which offering was directed
solely to (a) the other shareholder of Builders other than Precept, (b) the
existing shareholders of Precept and (c) any of their affiliates or assignees.
Darwin Deason, a Director and the Chairman of the Executive Committee of
Precept, acquired the full amount of the private placement, the other offerees
having waived their right to purchase their pro rata portion of the shares in
the offering. Precept's percentage ownership in Builders decreased from 90.5% to
1.8% of the total outstanding stock of Builders, and Darwin Deason holds
approximately 98% of the total outstanding stock of Builders. By participating
in the offering by Builders, Darwin Deason also agreed
74
<PAGE>
(i) to guarantee, if required, existing and future performance bonds securing
Builders' construction projects, and (ii) to provide to the companies issuing
the performance bonds letters of credit up to $7 million securing Builders
obligations. These guarantees were previously provided by Precept, Darwin Deason
and certain of Precept's affiliates.
HOLDINGS. A majority of the investment assets of Holdings have been or will
be divested by Precept prior to the Transfer in order to effect its focus on
core operations.
Ranch property located in Bells, Texas (the "Bells Property") owned by
Holdings was recently sold to D3 Holdings, Inc., ("D3 Holdings"), a corporation
controlled by Darwin Deason, a Director and Chairman of Precept's Executive
Committee, Douglas Deason, Precept's President and Chief Operating Officer and
David Neely, Chairman and the Chief Executive Officer of Precept, for $1,200,000
in cash. It is estimated that the purchase price paid to Holdings for the Bells
Property, together with the terms and structure of the purchase was
approximately equal to the estimated fair market value of the Bells Property at
the time of the sale. Precept has subsequently entered into a five year lease
for a more limited use of the Bells Property with variable monthly rental
payments, the amount of which currently is approximately $9,000 per month.
In 1992, Holdings purchased a building in Dallas for development into
condominiums for sale or lease. In April 1994, Darwin Deason leased a one-floor
condominium in the building as his residence under an 18-month lease (which was
subsequently modified). The lease contained an obligation of Mr. Deason to
purchase the condominium for the estimated fair market value of the condominium.
During the lease term, Mr. Deason received a waiver of lease payments, the
benefit of which was approximately $9,400 per month. Precept and Mr. Deason have
subsequently reached an agreement in principal that one full-floor condominium
and one half-floor condominium will be sold to Darwin Deason for approximately
$1,600,000 in cash, which is the estimated fair market value.
Holdings owns a limited partnership interest in Lone Star Jockey Club, Ltd.,
which investment resulted in Holdings becoming the owner of a luxury box at Lone
Star Park, a racing facility in Grand Prairie, Texas. Holdings and D3
Investments, L. P., a Texas limited Partnership ("D3 Investments"), with Darwin
Deason, David Neely and Doug Deason as equal limited partners, have an agreement
in principal that the rights to the luxury box will be sold to D3 Investments
for approximately $92,500, which is the estimated fair market value. After the
sale of the luxury box, the box would be leased to Precept for a term of five
years with monthly rental payments equaling $1,000.
Precept and Darwin Deason have an agreement in principal whereby Mr. Deason
will purchase from Holdings (i) certain real estate located at 72-191 Highway
111, Palm Desert, California (the "Palm Desert Property") for $1,025,125 in cash
and (ii) a 49% interest in CCC&D Corp., (which represents all of Precept's
interest in such entity), a privately held company operating a restaurant on the
Palm Desert Property for $90,000 in cash.
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<PAGE>
PRECEPT SECURITY OWNERSHIP
The following table sets forth certain information, with respect to the
beneficial ownership of Precept Common Stock, as of , 1998 (after giving
effect to the 3.154 to 1 stock split), by (i) all persons who are known by
Precept to be beneficial owners of 5% or more of such stock, (ii) each director
of Precept, (iii) certain executive officers and (iv) all executive officers and
directors of Precept as a group. Unless otherwise noted, the persons named below
have sole voting and investment power with respect to such shares. No effect has
been given to shares reserved for issuance under outstanding stock options
except where otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL AMOUNT AND PERCENT OF
AMOUNT AND SHARES OF NATURE OF PERCENT OF TOTAL TOTAL SHARES OF
NATURE OF CLASS A BENEFICIAL SHARES OF CLASS B CLASS A AND PERCENT OF
BENEFICIAL COMMON OWNERSHIP OF COMMON STOCK CLASS B COMMON TOTAL
DIRECTORS AND EXECUTIVE CLASS A COMMON STOCK OWNED CLASS B OWNED STOCK OWNED VOTING
OFFICERS STOCK BENEFICIALLY COMMON STOCK BENEFICIALLY BENEFICIALLY POWER(1)
- ------------------------------- -------------- ----------- ------------ ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Darwin Deason(2)............... 12,737,780 49.19% 10,102,997 100% 63.45% 89.63%
David L. Neely................. 5,150,510 19.89% -- -- -- 4.06%
Douglas R. Deason(3)........... 5,150,507 19.89% -- -- -- 4.06%
Glenn R. Smith................. 876,919 3.39% -- -- -- 0.69%
D. Paul Cabra.................. 1,039,370 4.01% -- -- -- 0.82%
All Executive Officers and
Directors as a Group (7
persons)(2).................. 12,737,780 49.19% 10,102,997 100% 63.45% 89.63%
Beneficial Owners of More than 5% of Precept Common Stock
First Nationwide Bank,
F.S.B........................ 3,286,263 12.69% -- -- -- 2.59%
Charles M. Young, Jr........... 1,928,638 7.45% -- -- -- 1.52%
<CAPTION>
PERCENT OF
TOTAL VOTING
DIRECTORS AND EXECUTIVE POWER AFTER THE
OFFICERS TRANSACTIONS
- ------------------------------- ---------------
<S> <C>
Darwin Deason(2)............... 83.39%
David L. Neely................. 3.78%
Douglas R. Deason(3)........... 3.78%
Glenn R. Smith................. .64%
D. Paul Cabra.................. .76%
All Executive Officers and
Directors as a Group (7
persons)(2).................. 83.39%
Beneficial Owners of More than
First Nationwide Bank,
F.S.B........................ 2.41%
Charles M. Young, Jr........... 1.41%
</TABLE>
- ------------------------------
(1) In calculating the percent of total voting power, the voting power of shares
of Precept Class A Common Stock (one vote per share) and Precept Class B
Common Stock (ten votes per share) is aggregated.
(2) Mr. Darwin Deason holds the sole voting power with respect to 12,737,780 of
the shares of Precept Class A Common Stock through an irrevocable proxy
granted by Messrs. David Neely, Doug Deason, Paul Cabra, Glenn Smith, Dennis
McGlynn, Jeff Neely, Scott Walker, James Wyse, Ms. Jill Deason and the 1997
Deason Children's Trust (the "Trust").
(3) Includes 200,000 shares of Precept Class A Common Stock held by the Trust to
which Mr. Doug Deason disclaims beneficial ownership.
PRECEPT SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Precept Class A Common Stock by shareholders pursuant to
Rule 144 under the Securities Act could have an adverse effect on the market
price of Precept's securities.
As of January , 1998, 25,928,559 shares of Precept Class A Common
Stock and 10,071,441 shares of Precept Class B Common Stock were outstanding. Of
the 25,897,003 shares of Precept Class A Common Stock outstanding as of January
, 1998, 22,876,118 shares are restricted securities, as that term is
defined in Rule 144 promulgated under the Securities Act. Absent registration
under the Securities Act, the sale of such restricted shares is subject to Rule
144, as promulgated under the Securities Act. In general, under Rule 144,
subject to the satisfaction of certain other conditions, a person, including an
affiliate of USTS, who has beneficially owned restricted shares of Precept
Common Stock for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the total
number of outstanding shares of the same class, or if the Precept Common Stock
is quoted on the Nasdaq, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of
USTS for at least three months immediately preceding the sale and who has
beneficially owned the shares of Precept Common Stock for at least three years
is entitled to sell such shares under Rule 144 without regard to any of the
volume limitations described above. No
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<PAGE>
assurance can be made as to the effect, if any, that sales of shares of Precept
Common Stock or the availability of such shares for sale will have on the market
prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Precept Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Precept Common Stock and could
impair Precept's ability to raise capital in the future through the sale of
equity securities.
CERTAIN DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS OF USTS
AND SHAREHOLDERS OF PRECEPT
If the Transfer is consummated, all shareholders of USTS immediately prior
to the Closing Date will also become shareholders of Precept. The following is a
summary of the material differences between the respective rights of holders of
the capital stock of USTS and the rights of holders of the capital stock of
Precept. These differences arise from the various provisions of the USTS
Articles of Incorporation, the USTS Bylaws, the Precept Articles and the Precept
Bylaws. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE NEVADA
GENERAL CORPORATION LAW ("NGCL"), THE USTS ARTICLES OF INCORPORATION AND USTS
BYLAWS, AND THE TEXAS BUSINESS CORPORATION LAW ("TBCL"), THE PRECEPT ARTICLES
AND PRECEPT BYLAWS.
AUTHORIZED STOCK
The USTS Articles of Incorporation provide that USTS shall have authority to
issue 50,000,000 shares of USTS Common Stock, and 10,000,000 shares of USTS
Preferred Stock. Pursuant to the USTS Articles of Incorporation the board of
directors of USTS may provide for the issuance of USTS Preferred Stock in one or
more series by filing a certificate with the Nevada Secretary of State setting
forth such designation, rights and preferences of such series of preferred
stock.
The Precept Articles of Incorporation provide that Precept shall have the
authority to issue 110,500,000 shares of Common Stock, par value $0.01 per
share, of which 100,000,000 shares have been designated as Class A Common Stock
and 10,500,000 have been designated as Class B Common Stock. Pursuant to the
Precept Articles, as amended, Precept is also authorized to issue up to
3,000,000 shares of Preferred Stock. The board of directors of Precept have the
authority to fix or alter the powers, designations, preferences and relative,
participating, optional or other special rights of such preferred stock by
filing a certificate with the Texas Secretary of State setting forth such
designation, rights and preferences of such series of preferred stock.
VOTING RIGHTS
The USTS Bylaws provide that the holders USTS Common Stock are entitled to
one vote per share. The holders of Series E through Series L Preferred Stock are
not entitled to vote with the holders of USTS Common Stock or as a separate
class unless otherwise entitled by law. The NGCL provides that a corporation's
articles of incorporation may provide for cumulative voting in connection with
the election of directors. The Articles of Incorporation of USTS do not contain
such a provision.
The Precept Articles of Precept provide that each holder of Precept Class A
Common Stock is entitled to one vote per share and that each holder of Precept
Class B Common Stock is entitled to have such number of votes equal to 10 votes
per share. Except as may be provided by law or in a resolution of the board of
directors of Precept, all actions submitted to a vote of the shareholders of
Precept shall be voted on by the holders of the Precept Class A Common Stock and
Precept Class B Common Stock as a single class. The TBCA provides that
shareholders will have the right cumulate votes in connection with the election
of directors unless prohibited by the articles of incorporation. The Precept
Articles of Precept contain such a prohibition.
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PREEMPTIVE RIGHTS
Under the NGCL, the shareholders of a corporation organized before October
1, 1991 have a preemptive right to acquire unissued shares, treasury shares or
securities convertible into such shares unless the corporation's articles of
incorporation provide otherwise. The USTS Articles of Incorporation provide that
no shareholder of USTS shall have preemptive rights to acquire any securities
issued or sold by USTS because of his ownership of USTS stock.
Under the TBCA, the shareholders of a corporation have a preemptive right to
acquire unissued shares, treasury shares or securities convertible into such
shares unless the corporation's articles of incorporation provide otherwise. The
Precept Articles of Precept provide that the no shareholder of Precept shall
have a preemptive right to acquire shares of Precept.
INSPECTION RIGHTS
The NGCL provides that any person who has been a shareholder of record of
any corporation and owns or has been authorized by the holders of at least 15%
of all of its outstanding shares, is entitled to inspect and copy the corporate
financial records. Notwithstanding, such shareholder is not entitled to inspect
and copy the corporate financial records if the corporation is listed and traded
on any recognized stock exchange or if the corporation furnishes a detailed,
annual financial statement to its shareholders.
The TBCA provides that a corporation shall keep correct and complete books
and records of account and shall keep minutes of the proceedings of its
shareholders and board of directors. The corporation shall also keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of the shareholders and
the number and the class of the shares held by each. The TBCA further provides
that any person who has been a shareholder for at least six months proceeding
his demand, or shall be the holder of at least 5% of all of the outstanding
shares of a corporation, is entitled to personally, or by agent or attorney, to
examine a corporation's relevant books and records for any proper purpose. The
shareholder must issue a written demand stating the purpose of the inspection,
and may examine the books and records at a reasonable time and make extractions
therefrom.
ACTION BY SHAREHOLDERS WITHOUT MEETING
The NGCL provides that unless otherwise set forth in a corporation's
articles of incorporation or bylaws, any action required or permitted to be
taken at a meeting of the shareholders may be taken without a meeting if the
holders of outstanding stock having at least the minimum number of votes that
would be necessary to authorize or take such action at the meeting, consent to
the action in writing. The USTS Bylaws provide that any action required to be
taken at any annual or special meeting of the shareholders may be taken without
a meeting, without prior notice, if a consent in writing is signed by the
holders of a majority of the holders of outstanding stock provided that prompt
notice is sent to the holders not consenting to the action taken thereto.
Under the TBCA, the shareholders may act without a meeting if a consent in
writing to such action is signed by all shareholders entitled to vote. In
addition, the TBCA permits the articles of incorporation of a Texas corporation
to provide that the shareholders may take action without a meeting if a consent
in writing to such action is signed by the shareholders having a minimum number
of votes that would be necessary to take such action at a meeting. The Amendment
and Restated Articles of Incorporation of Precept contain such a provision.
ANNUAL AND SPECIAL MEETINGS
The NGCL provides that a corporation is entitled to make bylaws pertaining
to the calling and holding of meetings of its shareholders. The USTS Bylaws
provide that the annual meeting of shareholders
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for the election of directors and for such other business as may be stated in
the notice of the meeting, shall be held at such place, either within or without
the state of Nevada, and at such time and date as the board of directors, by
resolution, shall determine and as set forth in the notice of the meeting. The
USTS Bylaws further provide that in the event that the board of directors fails
to determine the time, date and place of meeting, the annual meeting of the
shareholders shall be held at the registered office of USTS in Nevada. The USTS
Bylaws provide that special meetings of the shareholders may be called by the
president, secretary or by resolution of the board of directors.
The TBCA provides that the annual meeting of the shareholders shall be held
at such time as may be stated in or fixed in accordance with the bylaws. If the
annual meeting is not held within any 13-month period, any court of competent
jurisdiction in the county in which the principal office of the corporation is
located may, on the application of any shareholder, summarily order a meeting to
be held. Failure to hold the annual meeting at the designated time shall not
work a dissolution of the corporation. The Precept Bylaws provide that an annual
meeting of the shareholders will be held at such date and time as may be
designated from time to time by the Board of Directors of Precept.
The TBCA provides that special meetings of the shareholders may be called by
the (1) president, (2) board of directors (3) persons authorized in the articles
of incorporation or (4) by the holders of at least 10% of the stock entitled to
vote at such meeting unless the articles of incorporation requires a greater
percentage. The TBCA provides that in no event shall the articles of
incorporation require more than 50% of the voting stock to hold a special
meeting of the shareholders. The Precept Articles of Precept provide that
subject to the rights of the holders of Preferred Stock, special meetings of the
shareholders of Precept may be called only by: (1) that chairman of the board of
Precept, (2) the president of Precept, (3) the secretary of Precept, and (4) by
the holders of at least 50% of the voting stock of Precept voting as a single
class. Pursuant to the Precept Articles the affirmative vote of at least 80% of
the voting stock of Precept is required to modify the Precept Articles
pertaining to special meetings of shareholders.
DISTRIBUTION RIGHTS
A Nevada corporation may make distributions as long as after giving effect
to the distribution the corporation is able to pay is debts as they become due
in the usual course of business or, if the articles of incorporation otherwise
permit, the corporation's total assets are greater than the sum of its total
liabilities and the corporation would be able to pay the maximum amount, in any
liquidation, on shares of stock having preferential rights in liquidation. The
USTS Articles of Incorporation do not contain such a provision.
A Texas corporation may make distributions subject to any restrictions in
its articles of incorporation; provided, however, a corporation may not make a
distribution if (i) after giving effect to the distribution, the corporation
would be insolvent or (ii) the distribution exceeds the surplus of the
corporation. Surplus is defined as the excess of net assets of a corporation
over its stated capital.
ELECTION OF DIRECTORS
Under the NGCL, a corporation may provide shareholders with the right to
cumulate their votes in connection with the election of directors. The NGCL
requires that the a corporation have at least one director but provides that a
corporation may provide in its articles of incorporation or in its bylaws for a
fixed number of directors or a variable number of directors within a fixed
minimum or maximum. The USTS Articles of Incorporation do not contain such a
provision. The USTS Bylaws provide for five directors. The USTS Bylaws also
provide that the number of directors may be increased by an amendment to the
bylaws.
The TBCA provides that the board of directors of a corporation shall consist
of one or more members and that the number of directors shall be fixed by, or in
the manner provided in, the articles of incorporation or the bylaws, except to
the number constituting the initial board of directors which shall be
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fixed by the articles of incorporation. In the absence of a bylaw or a provision
in the articles of incorporation fixing the number of directors or providing for
the manner in which the number of directors shall be fixed, the number of
directors shall be the same as the number constituting the initial board of
directors as fixed in the articles of incorporation. The Precept Articles
provide that, subject to the rights of the holders of Preferred Stock, if any,
the number of directors shall not be less than three nor more than fifteen and
will be fixed from time to time as set forth in its bylaws. The Precept Bylaws
provide that subject to the rights, if any, of any series of Preferred Stock to
elect additional directors under circumstances specified in the designation of
rights and preferences of such preferred stock, the number of directors of
precept may be determined from time to time by a vote of a majority of the
directors then serving. Currently, the number of directors of Precept is four
(4) and simultaniously with the consummation of the Transaction, it is
anticipated that the number of directors will be increased to nine (9). The
Precept Articles and Bylaws provide that the Directors be divided into three
classes designated as Class I, Class II, and Class III, each class to be as
nearly equal in number as possible. Each Class of directors will initially be
elected as of the date of the consummation of the Transfer for the following
respective initial terms: Class I directors will be elected for a term ending at
the 2000 annual meeting; Class II directors will be elected for a term ending at
the 1999 annual meeting; and Class III directors will be elected for a term
ending at the 1998 annual meeting. The Precept Articles and Bylaws provide that
at each annual shareholders' meeting, commencing with the 1998 annual
shareholders' meeting, each of the successors to the directors of the Class
whose term will expire at such annual meeting will be elected for a term running
until the third annual meeting. Pursuant to the Precept Articles the affirmative
vote of at least 80% of the voting stock of Precept is required to modify the
Precept Articles pertaining to the election of directors.
REMOVAL OF DIRECTORS
The NGCL provides that any director may be removed from office by the vote
of shareholders representing not less than two-thirds (2/3) of the voting power
of the issued and outstanding stock entitled to vote unless the articles of
incorporation require a larger percentage. The USTS Bylaws provide that any
director may be removed at any time by the affirmative vote of a majority of all
the shares of stock outstanding and entitled to vote at a special meeting of the
shareholders called for that purpose.
The TBCA requires that the directors be removed in accordance with the
provisions of the bylaws or the articles of incorporation. Otherwise, each
director shall hold office for the elected term and until the successor shall
have been elected and qualified. The bylaws or the articles of incorporation may
provide that at any meeting of the shareholders called expressly for the purpose
of director removal, any director or the entire board may be removed, with or
without cause, by a vote of the holders of a specified portion, not less than a
majority, of the shares entitled to vote at an election of directors, subject to
any further restrictions on removal that may be contained in the bylaws. The
Precept Articles of Precept provide that subject to the rights of the holders of
Preferred Stock if any, any director may be removed without cause upon the
affirmative vote of at least 80% of the voting stock. Pursuant to the Precept
Articles the affirmative vote of at least 80% of the voting stock of Precept is
required to modify the Precept Articles pertaining to the removal of directors.
INDEMNIFICATION OF DIRECTORS
The NGCL provides that a corporation may indemnify any person made a party
or threatened to be made a party to any type of proceeding (other than certain
actions by or in right of the corporation) because he is or was a director,
officer, employee or agent of the corporation or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such proceeding if (i) such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, or (ii) in a criminal
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
Expenses incurred by an officer or director (or other employees
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or agents as deemed appropriate by the board of directors) in defending civil or
criminal proceedings may be paid by the corporation in advance of the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
such person to repay such amount if it is ultimately determined that such person
is not entitled to be indemnified by the corporation. To indemnify a party, the
corporation must determine that the party met the applicable standards of
conduct. The USTS Articles of Incorporation do not contain any provision
providing for the indemnification of any such director, officer, employee or
agent of the corporation.
Under the NGCL, a corporation, through its articles of incorporation, may
limit or eliminate the personal liability of directors to the corporation and
its shareholders for damages for breach of fiduciary duty. However, this
provision excludes any limitation on liability for (i) acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law or (ii) the
payment of distributions in violation of NGCL Section 78.300. The USTS Articles
of Incorporation contain such a provision.
Under the TBCA, a corporation may set limits on the extent of a director's
liability. The TBCA permits a corporation to indemnify an officer, director,
employee and agent who is the defendant or respondent to a proceeding if such
person (i) acted in good faith, (ii) reasonably believed that his conduct was in
the corporation's best interest if he was acting in his official capacity, and
if he was not acting in his official capacity, that his conduct was not opposed
to the bests interests of the corporation, and (iii) had no reason to believe
his conduct was unlawful in the case of a criminal proceeding. The TBCA provides
that no officer, director, employee, or agent may be indemnified in a proceeding
in which he is found liable on the basis that personal benefit was improperly
received by him or in a proceeding in which he is found liable to the
corporation. Pursuant to the TBCA, expenses incurred by an officer, director,
employee or agent in defending civil or criminal proceedings may be paid by the
corporation in advance of the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
corporation. To indemnify a party, the corporation must determine that the party
met the applicable standards of conduct. Under the TBCA, a provision in the
articles of incorporation, the bylaws, a resolution of shareholders or
directors, or an agreement that makes mandatory the indemnification permitted by
the TBCA is deemed to constitute authorization of indemnification in the manner
provided by the statute. The Precept Articles of Precept provide that each
person who is a director, officer, employee, or agent of Precept, or is serving
at the request of Precept shall be indemnified to the fullest extent permitted
under the TBCA and that reasonable expenses shall be paid or reimbursed in
advance of final disposition to the fullest extent permitted under the TBCA.
AMENDMENT TO ARTICLES
The NGCL requires the approval of the holders of a majority of all
outstanding shares entitled to vote to approve proposed amendments to a
corporation's charter. The holders of the outstanding shares of a particular
class are entitled to vote as a class on a proposed amendment if the amendment
would alter or change the power, preferences or special rights of one or more
series of any class so to affect them adversely.
The TBCA requires the approval of the holders of at least two-thirds (2/3)
of all outstanding shares entitled to vote to approve proposed amendments to a
corporation's articles of incorporation. The holders of the outstanding shares
of a particular class are entitled to vote as a class on a proposed amendment if
the amendment would: (i) increase or decrease the number of authorized shares of
such class or series; (ii) increase or decrease the par value of such class;
(iii) effect an exchange, reclassification or cancellation of all or part of
such class or series; (iv) effect a change or create a right of exchange of all
or part of such class or series; (v) change the designations, preferences,
limitations, or relative rights of the shares of such class or series; (vi)
change the shares of such class or series into the same or a different number of
shares; (vii) create a new class or series having rights equal, prior, or
superior to the shares of such class or series or increase the rights and
preferences of any class or series having rights equal, prior, or superior to
the
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shares of such class or series; (viii) divide the shares of such class into
series; (ix) limit or deny the existing preemptive rights of the shares of such
class or series; (x) cancel or affect dividends on the shares of such class or
series which had accrued but had not been declared; or (xi) include or delete
from the articles of incorporation any provisions required or permitted to be
included in the articles of incorporation of a close corporation. The Precept
Articles of Precept provide that the affirmative vote of at least 80% of the
voting stock of Precept, voting as a single class, is required to amend or
repeal, or adopt provisions inconsistent with the article pertaining to the
board of director's right to amend the Precept Bylaws the article pertaining to
special meetings of the shareholders or the article pertaining to the election
and removal of directors.
AMENDMENT TO BYLAWS
The NGCL provides that subject to the restrictions set forth in a
corporation's bylaws, the directors may make the bylaws of the corporation. The
USTS Bylaws provide that they may be amended by a majority of the shareholders
or directors.
The TBCA provides that a corporation's board of directors may amend or
repeal the corporation's bylaws or adopt new bylaws unless the articles of
incorporation reserve the power exclusively to the shareholders or the
shareholders expressly provide in amending, adopting or repealing a particular
bylaw that the board of directors may not amend or repeal the bylaw. In
addition, unless the articles of incorporation or a bylaw adopted by the
shareholders provides otherwise as to all or some portion of a corporation's
bylaws, a corporation's shareholders may also amend, adopt or repeal the
corporation's bylaws even though they may also be amended, adopted or repealed
by the board of directors. The Precept Articles of Incorporation provide that
the board of directors may make, amend, and repeal the Precept Bylaws. The
Precept Articles of Incorporation also provide that any bylaw made by the board
of directors may be amended or repealed by the board of directors or by the
shareholders. Notwithstanding the foregoing, the Precept Articles of
Incorporation provide that the Bylaws relating to time and place of shareholder
meetings, order of business thereat, number, election and form of directors,
vacancies and newly created directorships, removal, nomination and election of
directors, indemnification by Precept of officers, directors and others, and
signing of checks may not be amended or repealed by the shareholders, and no
provision inconsistent therewith may be adopted by the shareholders without the
affirmative vote of at least 80% of the voting stock entitled to vote.
MERGERS
Under the NGCL, shareholders have the right, subject to certain exceptions,
to vote on all mergers to which the corporation is a party. In certain
circumstances, different classes of securities may be entitled to vote
separately as a class with respect to mergers. Under the NGCL, unless the
articles of incorporation, the board of directors or the merger statutes require
a greater vote, a plan of merger must be approved by a majority of the voting
power of the shareholders entitled to vote thereon. The USTS Articles of
Incorporation do not contain any such provision.
The approval of the surviving corporation in a merger is not required under
the NGCL if: (i) the articles of incorporation of the surviving domestic
corporation will not differ from its articles before the merger, (ii) each
shareholder holds the same number of shares in the surviving corporation
immediately after the merger as prior thereto, and such shares have identical
designations, preferences, limitations and relative rights, (iii) the number of
voting shares in the surviving corporation immediately after the merger, plus
the voting power of the shares issued in the merger, does not exceed the voting
power of the shares prior to the merger by more than twenty percent (20%), and
(iii) the number of shares entitled to participate without limitations in
distributions immediately after the merger, plus the number of shares entitled
to participate without limitations in distributions shares issued in the merger,
does not exceed the number of shares entitled to participate without limitations
in distributions prior to the merger by more than twenty percent (20%).
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Under the TBCA, the shareholders have the right, subject to certain
exceptions, to vote on all mergers to which the corporation is a party. In
certain circumstances, different classes of securities may be entitled to vote
separately with respect to such mergers. The approval of the shareholders of the
surviving corporation in a merger is not required under Texas law if (i) the
corporation is the sole surviving corporation in the merger (ii) there is no
amendment to the surviving corporation's articles of incorporation, (iii) each
shareholder holds the same number of shares in the surviving corporation
immediately after the merger as prior thereto, and such shares have identical
designations, preferences, limitations and relative rights, (iv) the voting
power of the shares in the surviving corporation immediately after the merger,
plus the voting power of the shares issued in the merger, does not exceed the
voting power of the shares outstanding prior to the merger by more than twenty
percent (20%), and (v) the board of directors of the surviving corporation
adopts a resolution approving the plan of merger.
DISSENTERS' RIGHTS OF APPRAISAL
Under the NGCL, dissenting shareholders of a corporation engaged in certain
major corporate transactions are entitled to appraisal rights. Appraisal rights
permit a shareholder to receive cash equal to the fair market value of the
shareholders' shares (as determined by agreement by the parties or by a court),
in lieu of the consideration such shareholder would otherwise receive in any
such transaction.
Under the NGCL, a shareholder is entitled to dissent from, and obtain
payment for the fair value of his shares in the event of consummation of, a plan
of merger or plan of exchange in which the corporation is a party and any
corporate action taken pursuant to a vote of the shareholders to the extent that
the articles of incorporation, bylaws or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares. Notwithstanding, the NGCL provides that
shareholders do NOT have dissenters' rights of appraisal in connection with a
merger or plan of exchange if their shares are securities listed on a national
securities exchange or if they are designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or are securities held by 2,000 stockholders of record,
unless (1) the articles of incorporation provide otherwise or (2) the
shareholders entitled to vote thereon are required to accept anything except (a)
cash or owners' interest in (i) the surviving corporation or (ii) an entity
whose securities were listed n a national securities exchange, included on the
national market system by the National Association of Securities Dealers, Inc,
or held of record by at least 2,000 holders or (b) a combination thereof.
Shareholders of Texas corporations are entitled to exercise certain
dissenters' rights in the event a sale, lease, exchange or other disposition of
all or substantially all of the property and assets of the corporation, and with
certain exceptions, a merger or consolidation. Notwithstanding, no appraisal
rights are available under the TBCA for the holders of any shares of a class or
series of stock of a Texas corporation which is a party to a merger if that
corporation survives the merger and if the merger did not require the vote of
the holders of that class or series of such stock. The TBCA provides that
shareholders do not have appraisal rights in connection with a merger where, on
the record date fixed to determine the shareholders entitled to vote on the
merger or consolidation, the stock of the corporation is listed on a national
securities exchange or is held of record by more than 2,000 shareholders, unless
any of the exceptions discussed below concerning consideration paid to the
shareholder for his shares is met. Under the TBCA, a shareholder will be
entitled to dissent and be paid for his shares if, notwithstanding the above,
the shareholder is required to accept for his shares any consideration other
than (i) shares of stock of a corporation which, immediately after the effective
date of the merger, are listed on a national securities exchange or are held of
record by not less than 2,000 shareholders and (ii) cash in lieu of fractional
shares otherwise entitled to be received.
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SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION
USTS PLAN OF DISTRIBUTION
The Shares being offered hereby by USTS are being offered exclusively to
holders of USTS Class C Warrants for issuance upon exercise of the Warrants.
See: "Description of USTS Securities--USTS Class C Warrants."
The Class C Warrants were issued in 1996 as part of a public offering of
USTS securities that was underwritten by First London Securities Corporation
("FLSC"). The Underwriting Agreement between USTS and First London provides that
USTS will not solicit exercise of Class C Warrants other than through FLSC,
unless FLSC declines to make such solicitation. Upon any exercise of the Class C
Warrants, USTS will pay FLSC a fee of 5% of the aggregate exercise price of the
Class C Warrants if (i) the market price of the USTS Common Stock on the date
the Class C Warrants are exercised is greater than the exercise price of the
Class C Warrants; (ii) the exercise of the Class C Warrants was solicited by a
member of the NASD designated in writing by the holders of such Class C Warrants
as having solicited the exercise; (iii) the Class C Warrants are not held in a
discretionary account; (iv) disclosure of the compensation arrangement was made
both at the time of the public offering of the Warrants and at the time of
exercise; and (v) the solicitation of the exercise of the Class C Warrants was
not in violation of Rule 10b-6 promulgated by the Commission.
SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of the securities of
USTS held by each person who is a Selling Shareholder and by all Selling
Shareholders as a group prior to the Offering and after the Offering, assuming
all of shares offered by the Selling Shareholders in this Prospectus are sold.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
COMMON STOCK OWNED COMMON STOCK OWNED
---------------------- ------------------------
PRIOR TO AFTER PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OFFERING OFFERING OFFERING OFFERING
- ------------------------------------------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Argent Holdings, Inc. (1)................. 16,056 0 0.2% 0%
Timothy McAfee............................ 16,055 0 0.2% 0%
William L. Mello.......................... 16,055 0 0.2% 0%
BancPro, Inc.............................. 287,000 0 3.2% 0%
First London Securities Corp.(2).......... 358,133 18,133 4.0% 0.2%
--------- ----------- --- ---
Total................................... 693,299 18,133 7.7% 0.2%
</TABLE>
- ------------------------
(1) Argent Securities, Inc., an affiliate of Argent Holdings, Inc., is the
holder of warrants to purchase 8,333 shares of USTS Common Stock issued to
it as compensation for services as a financial advisor to USTS. See
"Relationships With USTS" below.
(2) First London Securities Corp. serves as a market maker for USTS'
publicly-traded securities and, as such, from time to time purchases and
sells the Common Stock and Class C Warrants. Included in the table above are
133 shares of Common Stock and 18,000 shares underlying Class C Warrants
held by First London in its trading account on January 6, 1998.
RELATIONSHIPS WITH USTS
ARGENT HOLDINGS, INC., TIMOTHY MCAFEE AND WILLIAM L. MELLO. Each of these
shareholders is, or was, an affiliate of Argent Securities, Inc. ("Argent"). On
December 1, 1994 Argent and USTS entered into a Letter of Agreement, pursuant to
which Argent Securities, Inc. agreed to provide investor relations and corporate
communications services to USTS for a period of one year. In consideration of
those services,
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USTS agreed to pay an annual fee of $20,000 and to issue to Argent Securities,
Inc. warrants to purchase 66,667 shares of USTS's Common Stock at $2.25 per
share. USTS further agreed that it would file a registration statement with the
Securities and Exchange Commission to permit the public sale of the shares of
Common Stock for which Argent Securities' warrants are exercisable. In November,
1995, USTS filed such a registration statement for Argent.
Subsequently, Argent was the underwriter of an offering of securities which
USTS completed on February 28, 1995. Argent received commissions and a
non-accountable expense allowance in compensation for those services. In
connection with that offering, USTS sold to Argent an Underwriter's Warrant for
a nominal price. The Underwriter's Warrant will permit Argent to purchase 17,000
shares of Series A Preferred Stock and 17,000 Class A Common Stock Purchase
Warrants between February 21, 1996 and February 20, 1999. if fully-exercised and
converted, those securities could be exchanged for the 48,166 shares of USTS
Common Stock being offered herein by Argent Holdings, Inc., Timothy McAfee and
William L. Melo, who acquired the Warrant from Argent. The underwriting
agreement between USTS and Argent gave Argent demand and piggy-back registration
rights, as a result of which Argent's shares have been included in this
Prospectus. USTS also gave Argent a right of first refusal to underwrite future
equity offerings by USTS, and agreed to elect two of Argent's nominees to USTS's
Board of Directors.
On April 11, 1995 USTS and Argent entered into a second Letter Agreement.
Among the terms of the new agreement were a reduction to 33,333 of the shares
which Argent could purchase under the warrants issued to it in 1994. Argent also
agreed to termination of its right of first refusal and of its right to nominate
members to USTS's Board of Directors. In exchange, USTS issued to Argent options
to purchase 33,333 shares of USTS's Common Stock as follows:
16,666 shares at $4.50 per share through April 11, 1998
8,333 shares at $6.00 per share through April 11, 1998
8,333 shares at $7.50 per share through April 11, 1997
BANCPRO, INC. In September, 1996, Consolidated Financial Management, Inc.
("CFM"), a wholly-owned subsidiary of BancPro, Inc., sold to USTS the
outstanding capital stock of BancPro-Transportation, Inc. As partial
consideration for that stock, USTS issued to CFM 300,000 shares of USTS Common
Stock and agreed to file a registration statement with the Commission covering
those shares. CFM subsequently liquidated, and the shares were transferred to
BancPro, Inc.
FIRST LONDON SECURITIES CORP. First London Securities Corp. ("FLSC") is a
market maker for USTS's Common Stock and Class C Warrants, and from time to time
owns securities issued by USTS which it holds for resale. On January 6, 1998,
the date of this Prospectus, FLSC was the beneficial owner of 133 shares of
USTS's Common Stock and 18,000 Class C Warrants.
In 1996, FLSC was the underwriter of an offering of securities which USTS
completed on August 31, 1996. FLSC received commissions and a non-accountable
expense allowance in compensation for those services. In connection with that
offering, USTS sold to FLSC an Underwriter's Warrant for a nominal price. The
Underwriter's Warrant will permit FLSC to purchase 170,000 shares of USTS Common
Stock and 170,000 Class C Common Stock Purchase Warrants between August 27, 1997
and August 27, 2001. The underwriting agreement between USTS and FLSC gave FLSC
demand and piggy-back registration rights, as a result of which FLSC's shares
have been included in this Prospectus.
FLSC generally serves as one of the market makers for USTS's securities.
Pursuant to Rule 10b-6 of the Securities and Exchange Commission, FLSC will not
be allowed to act as a market maker while it is offering the Shares for sale.
This restriction may have an adverse effect on the liquidity of USTS's
securities during that period.
85
<PAGE>
PLAN OF DISTRIBUTION BY SELLING SHAREHOLDERS
The securities offered by the Selling Shareholders may be sold from time to
time directly by the Selling Shareholders. Alternatively, the Selling
Shareholders may from time to time offer such securities through underwriters,
dealers or agents. The distribution of securities by the Selling Shareholders
may be effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Shareholders in connection with such
sales of securities. The Selling Shareholders and intermediaries through whom
such securities are sold may be deemed "underwriters" within the meaning of the
Act with respect to the securities offered, and any profits realized or
commissions received may be deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Shareholder, to the extent required, a prospectus will be distributed
which will set forth the number of securities being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for securities purchased from
the Selling Shareholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the regulations thereto, any person engaged in a distribution of the
securities of USTS offered by the Selling Shareholders may not simultaneously
engage in market-making activities with respect to such securities of USTS
during the applicable "cooling off" period (9 days) prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the Selling
Shareholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation, Rule 10b-6
and 10b-7, in connection with transactions in such securities, which provisions
may limit the timing of purchases and sales of such securities by the Selling
Shareholders.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
USTS by Bressler, Amery & Ross, P.C., 17 State Street, New York, New York 10004.
EXPERTS
The Consolidated Financial Statements of U.S. Transportation Systems, Inc.
included in this Prospectus and elsewhere in the Registration Statement as of
December 31, 1996 and for the year then ended have been audited by Mahoney Cohen
& Company, CPA, P.C., independent auditors as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report.
The Consolidated Financial Statements of Precept Investors, Inc. at June 30,
1996 and 1997, and for each of the three years ended June 30, 1995, 1996 and
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRECEPT INVESTORS, INC.
Consolidated Financial Statements
Report of Independent Auditors........................................................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997.............................................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995, 1996 and 1997................ F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years ended June 30, 1995, 1996 and
1997................................................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1996 and 1997................ F-6
Notes to Consolidated Financial Statements............................................................ F-7
PRECEPT INVESTORS, INC.
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (audited) and September 30, 1997 (unaudited).......... F-19
Consolidated Statements of Operations for the three months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-20
Consolidated Statements of Cash Flows for the three months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-21
Notes to Consolidated Financial Statements (unaudited)................................................ F-22
U.S. TRANSPORTATION SYSTEMS, INC.
Consolidated Financial Statements
Independent Auditor's Report.......................................................................... F-24
Consolidated Balance Sheet as of December 31, 1996.................................................... F-25
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995.................. F-26
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996 and 1995........ F-27
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995.................. F-28
Notes to Consolidated Financial Statements............................................................ F-31
U.S. TRANSPORTATION SYSTEMS, INC.
Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1997 (unaudited)....................................... F-52
Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-53
Consolidated Statements of Operations for the three months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-55
Consolidated Statements of Shareholders' Equity for the year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited).......................................................... F-57
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1997
(unaudited).......................................................................................... F-59
Notes to Consolidated Financial Statements (unaudited)................................................ F-63
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Precept Investors, Inc.
We have audited the accompanying consolidated balance sheets of Precept
Investors, Inc., as of June 30, 1996 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Precept
Investors, Inc. at June 30, 1996 and 1997, and the consolidated results of its
operations, changes in shareholders' equity, and its cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
Dallas, Texas
September 19, 1997 ERNST & YOUNG L.L.P.
F-2
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 3,516,057 $ 2,496,029
Trade receivables, net of $296,000 and $288,000 allowance for doubtful accounts,
respectively................................................................... 10,012,550 9,229,452
Accounts receivable from affiliates.............................................. 1,353,292 503,571
Other receivables................................................................ 571,057 456,942
Inventory........................................................................ 2,016,226 2,569,498
Other current assets............................................................. 317,621 642,819
Income taxes refundable.......................................................... -- 277,766
Deferred income taxes............................................................ 976,562 1,090,886
Net assets of discontinued operations............................................ 6,562,602 3,560,246
------------- -------------
Total current assets............................................................... 25,325,967 20,827,209
Property and equipment, net of accumulated depreciation............................ 1,316,355 1,857,793
Intangible assets, net of accumulated amortization................................. 4,567,252 4,790,608
Deferred income taxes.............................................................. 568,615 615,019
Other assets....................................................................... 912,959 1,200,379
------------- -------------
Total assets....................................................................... $ 32,691,148 $ 29,291,008
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 454,050 $ 58,160
Current portion of capital lease obligations..................................... -- 185,055
Trade accounts payable........................................................... 4,161,999 4,735,411
Sales taxes payable.............................................................. 2,543,972 1,181,047
Accrued compensation............................................................. 1,865,509 1,132,015
Other accounts payable and accrued expenses...................................... 1,824,013 1,192,475
------------- -------------
Total current liabilities.......................................................... 10,849,543 8,484,163
Long-term debt..................................................................... 5,260,062 6,984,644
Capital lease obligations, less current portion.................................... -- 517,234
Shareholders' equity:
Class A common stock, $.01 par value:
Authorized shares--17,195,742
Issued shares--8,361,647 in 1997; 7,253,845 in 1996............................ 71,668 83,616
Class B common stock, $.01 par value:
Authorized, issued, and outstanding shares--3,202,843.......................... 32,028 32,028
Additional paid-in capital....................................................... 17,449,785 17,676,797
Accumulated deficit.............................................................. (167,691) (3,475,167)
------------- -------------
17,385,790 14,317,274
Class A treasury stock, at cost:
Shares--151,803.................................................................. (191,271) (191,271)
Shareholder notes for stock purchases............................................ (612,976) (821,036)
------------- -------------
Total shareholders' equity......................................................... 16,581,543 13,304,967
------------- -------------
Total liabilities and shareholders' equity......................................... $ 32,691,148 $ 29,291,008
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Business Products................................................. $ 53,069,117 $ 66,592,016 $ 70,778,087
Transportation.................................................... 6,005,512 5,839,916 6,565,838
------------- ------------- -------------
59,074,629 72,431,932 77,343,925
Costs and expenses:
Cost of goods sold................................................ 35,592,200 45,195,583 50,157,418
Selling, general, and administrative.............................. 20,990,027 25,450,236 24,350,230
Depreciation and amortization..................................... 1,516,040 1,455,797 1,498,473
------------- ------------- -------------
58,098,267 72,101,616 76,006,121
------------- ------------- -------------
Operating income.................................................... 976,362 330,316 1,337,804
Interest expense.................................................... 148,336 316,767 425,314
Other expense....................................................... -- 400,000 --
------------- ------------- -------------
Income (loss) from continuing operations before income taxes........ 828,026 (386,451) 912,490
Income tax provision (benefit)...................................... 210,566 (120,676) 380,884
------------- ------------- -------------
Income (loss) from continuing operations............................ 617,460 (265,775) 531,606
Discontinued operations:
Discontinuation of Precept Holdings, Inc.:
Loss from disposal of discontinued operations, net of applicable
income taxes.................................................. -- -- (497,971)
Loss from discontinued operations, net of applicable income
taxes......................................................... (619,295) (339,553) (809,521)
Discontinuation of Precept Builders, Inc.:
(Loss) income from discontinued operations, net of applicable
income taxes.................................................. (434,214) 275,159 (2,531,590)
------------- ------------- -------------
Loss from discontinued operations................................... (1,053,509) (64,394) (3,839,082)
------------- ------------- -------------
Net loss............................................................ $ (436,049) $ (330,169) $ (3,307,476)
------------- ------------- -------------
------------- ------------- -------------
Net loss per common share:
Income (loss) from continuing operations.......................... $ 0.05 $ (0.02) $ 0.05
Loss from discontinued operations................................. (0.09) (0.01) (0.34)
------------- ------------- -------------
Net loss per common share........................................... $ (0.04) $ (0.03) $ (0.29)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding.......................... 11,624,688 11,524,189 11,515,687
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED SHAREHOLDER
CLASS A CLASS B ADDITIONAL EARNINGS CLASS A NOTES FOR TOTAL
COMMON COMMON PAID-IN (ACCUMULATED TREASURY STOCK SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT) STOCK PURCHASES EQUITY
----------- ----------- ---------- ------------ --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1994................ $ 55,654 $ 48,042 $16,834,785 $ 598,527 $ -- $ -- $17,537,008
Net loss............ -- -- -- (436,049) -- -- (436,049)
Purchase of treasury
stock............. -- -- -- -- (68,863) -- (68,863)
----------- ----------- ---------- ------------ --------- -------------- -------------
Balance at June 30,
1995................ 55,654 48,042 16,834,785 162,478 (68,863) -- 17,032,096
Net loss............ -- -- -- (330,169) -- -- (330,169)
Purchase of treasury
stock............. -- -- -- -- (122,408) -- (122,408)
Capital
contribution...... -- -- 615,000 -- -- -- 615,000
Loans made to
shareholders to
purchase stock.... -- -- -- -- -- (612,976) (612,976)
Stock conversion.... 16,014 (16,014) -- -- -- -- --
----------- ----------- ---------- ------------ --------- -------------- -------------
Balance at June 30,
1996................ 71,668 32,028 17,449,785 (167,691) (191,271) (612,976) 16,581,543
Net loss............ -- -- -- (3,307,476) -- -- (3,307,476)
Exercise of stock
options........... 11,948 -- 227,012 -- -- (208,060) 30,900
----------- ----------- ---------- ------------ --------- -------------- -------------
Balance at June 30,
1997................ $ 83,616 $ 32,028 $17,676,797 $(3,475,167) $(191,271) $ (821,036) $13,304,967
----------- ----------- ---------- ------------ --------- -------------- -------------
----------- ----------- ---------- ------------ --------- -------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net loss................................................................. $ (436,049) $ (330,169) $(3,307,476)
Adjustments to reconcile net loss from operations to cash provided by
(used in) operating activities:
Depreciation and amortization.......................................... 1,990,398 1,590,541 1,488,530
Write off of Precept Builders, Inc. property and equipment, net........ -- -- 408,245
Write off of Precept Builders, Inc. intangibles, net................... -- -- 150,477
Precept Holdings, Inc. loss from disposal.............................. -- -- 497,971
Deferred income taxes.................................................. (290,624) (495,102) 106,699
Changes in assets and liabilities, net of effects from acquisitions:
Receivables.......................................................... (4,480,061) (6,948,383) 9,208,773
Receivables from shareholders........................................ -- (612,976) --
Income taxes refundable.............................................. -- -- (277,766)
Inventory............................................................ (500,612) 62,450 (524,043)
Costs in excess of billings on uncompleted contracts, subcontracts
payable, and retainage............................................. 1,151,982 3,385,213 (4,923,077)
Other.................................................................. (262,316) (510,778) (487,695)
Sales taxes payable.................................................... 725,317 1,968,689 (1,527,415)
Accounts payable and other accrued expenses............................ 2,104,427 566,206 (989,922)
----------- ----------- -----------
Net cash (used in) provided by operating activities...................... 2,462 (1,324,309) (176,699)
Investing Activities
Acquisitions, including earnout payments................................. (927,386) (3,536,436) (1,185,575)
Acquisition of property and equipment, net............................... (652,314) (773,773) (1,301,544)
Maturity of restricted certificate of deposit............................ -- 1,732,500 --
----------- ----------- -----------
Net cash used in investing activities.................................... (1,579,700) (2,577,709) (2,487,119)
Financing Activities
Payments on long-term debt............................................... (242,354) (209,371) (454,050)
Issuance of common stock................................................. -- -- 30,900
Capital contribution..................................................... -- 615,000 --
Principal payments on capitalized lease obligations...................... -- -- (82,642)
Borrowings on revolving line of credit................................... -- 8,409,978 9,766,000
Payments on revolving line of credit..................................... -- (3,909,839) (7,979,819)
----------- ----------- -----------
Net cash provided by (used in) financing activities...................... (242,354) 4,905,768 1,280,389
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents..................... (1,819,592) 1,003,750 (1,383,429)
Cash and cash equivalents at beginning of year........................... 4,695,300 2,875,708 3,879,458
----------- ----------- -----------
Cash and cash equivalents at end of year................................. $ 2,875,708 $ 3,879,458 $ 2,496,029
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest expense....................................................... $ 200,243 $ 432,634 $ 575,592
----------- ----------- -----------
----------- ----------- -----------
Income taxes........................................................... $ 140,000 $ 492,000 $ 432,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997, the Company entered into capitalized leases at a recorded
value of $784,931.
In January 1997, 1,040,300 shares of Class A Common Stock were issued in
exchange for shareholder notes
of $208,060.
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1996, AND 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS/BASIS OF PRESENTATION
Precept Investors, Inc., and its subsidiaries, (Precept or the Company)
primarily engage in business forms management and, to a lesser degree, in real
estate construction, courier and chauffeured vehicle services, and investment
activities (collectively, the Precept Businesses). The forms management business
comprises: arranging for the manufacture, storage, and distribution of business
forms, computer supplies, advertising information, and other related business
products for mid- to large-sized corporate customers. The forms management
business is operated out of 28 offices located throughout the United States. The
courier and chauffeured vehicle services business operates primarily in the
Dallas/Fort Worth area.
Effective June 30, 1996, Precept Business Products, Inc., (Old Precept)
formed a new subsidiary, Precept Business Products, Inc. (New Precept) by
contributing all of the assets, liabilities, and operations of the forms
management business to New Precept. Simultaneously, Old Precept assumed the name
of one of its subsidiaries, Precept Investors, Inc. (the Company) and changed
the name of that subsidiary to Precept Holdings, Inc. (Holdings). The Company
retained investments in the related companies and certain other assets and
liabilities that were unrelated to the forms management business.
On June 30, 1994, the Company was party to a transaction (the
Reorganization) whereby, among other things, the Precept Businesses were merged
into Old Precept. Affiliated Computer Services, Inc. (ACS), the Company's former
parent, distributed the capital stock of Old Precept to ACS shareholders on a
pro rata basis. These financial statements reflect the financial position and
results of operations of the combined Precept Businesses on a historical cost
basis. As a result of the Reorganization, the Company and ACS entered into a
Reciprocal Services Agreement, as discussed in Note 7.
The consolidated financial statements comprise the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
In February 1997, the Company decided to reduce its investment in its real
estate construction operation, Precept Builders, Inc. (Builders), which performs
free-standing construction and finish-out of existing locations primarily in the
state of Texas, and to sell the majority of the assets of Holdings, which owns
and operates certain other real estate-related investments. Accordingly, the net
assets and results of operations of these entities have been classified as
discontinued operations in the accompanying financial statements. (See Note 2
for further discussion of the discontinued operations and proposed
transactions.)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments with an initial maturity of
three months or less, primarily overnight investments. Cash and cash equivalents
reflected in the Consolidated Statement of Cash Flows also include amounts
related to discontinued operations of $363,401 and $-0- as of June 30, 1996 and
1997 respectively.
INVENTORY
Inventories, which consist primarily of business forms, are recorded at the
lower of cost as determined using the first-in, first-out (FIFO) method or
market (net realizable value).
F-7
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Amortization of assets recorded under capital leases is included in depreciation
expense.
INTANGIBLES
Intangibles consist primarily of customer contracts acquired in conjunction
with the acquisition of various business forms management companies. Customer
contracts are amortized using the straight-line method primarily over a ten year
period, which represents the historical time period typical of the Company's
relationship with its customers. Accumulated amortization of intangibles totaled
$3,652,552 and $4,475,565 at June 30, 1996 and 1997, respectively.
It is the Company's policy to periodically review the net realizable value
of its intangible assets through an assessment of the estimated future cash
flows related to such assets. Each business unit to which these intangible
assets relate is reviewed to determine whether future cash flows, over the
remaining estimated useful life, provide for recovery of the intangible assets.
In the event that assets are found to be carried at amounts which are in excess
of estimated future gross cash flows, then the intangible assets are adjusted
for impairment to a level commensurate with a discounted cash flow analysis of
the underlying assets.
REVENUE RECOGNITION
For substantially all of the Company's sales, the Company recognizes revenue
when it ships goods to the customer, or for items shipped directly to the
customer from the vendor, the Company recognizes revenue when the Company
receives notification that the vendor has shipped goods to the customer. For
certain customers which represent a minor amount of the Company's sales, the
Company enters into a business products management agreement under which the
customer requests the Company to hold and manage customized products that the
customer has ordered. Under this arrangement, the Company generally recognizes
the revenue at the time the goods are received in its warehouse, which also
represents the time title passes to the customer.
Concentration of credit risk with respect to trade receivables is limited
due to the large number of customers and their geographic dispersion across the
United States. The provision for bad debts was $81,000, $25,000 and $121,000 in
1995, 1996, and 1997, respectively. Account write-offs were $71,000, $-0-, and
$247,000 in 1995, 1996 and 1997, respectively. The allowance for doubtful
accounts increased by $118,000 in 1997 as part of the purchase price allocation
related to the purchase of certain assets of a business forms distributor.
INCOME TAXES
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the
use of an asset and liability approach for financial reporting of income taxes.
SFAS 109 requires provision for deferred taxes for the tax effects (based upon
tax rates currently in effect) arising from basis differences of assets and
liabilities for financial reporting and income tax purposes.
F-8
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXPENSE ALLOCATION TO DISCONTINUED AND CONTINUING OPERATIONS
The Company allocates interest expense on its borrowings to discontinued and
continuing operations proportionately based on net assets of each of the
respective components. Interest expense allocated to discontinued operations was
$51,907, $146,743, and $150,278 in 1995, 1996, and 1997, respectively. General
corporate overhead has not been allocated to discontinued operations.
EARNINGS PER SHARE
Earnings per share computations are based upon the weighted average of
common shares outstanding during the year. Stock options granted during fiscal
1997 have been treated as outstanding for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.
2. DISCONTINUED OPERATIONS
In February, 1997, the Company decided to reduce its investment in Precept
Builders, Inc. (Builders) and to sell the majority of the assets of Precept
Holdings, Inc. (Holdings), the two subsidiaries that performed real estate and
related construction activities.
The Company owned 810 shares of Builders common stock, making it an 81%
shareholder of Builders. Effective March 31, 1997, the Company obtained an
additional 1,000 shares, increasing its ownership to 90.5%, in exchange for a
contribution of capital of approximately $2.3 million. At an unspecified date
within the next year, Builders expects to sell 100,000 shares of its common
stock in a private offering to an officer of the Company, diluting the Company's
ownership percentage to 1.8%. Consequently, in accordance with Accounting
Principles Board Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS--DISCONTINUED EVENTS AND EXTRAORDINARY ITEMS, the Company recorded
the net assets of Builders at the estimated expected value remaining at the
disposal date, which is zero.
The Company also has decided to sell the majority of the assets of Holdings.
The assets to be sold include two condominiums, a ranch, a restaurant, and a
luxury suite at a local racing facility. The assets will be sold to entities
controlled by certain officers and directors of the Company for cash. The
Company has recorded a loss from disposal of these assets of $497,971, which
includes $300,000 that the Company expects to incur for repairs related to the
sale of the assets.
Following is a summary of the net assets and results of operations of the
two entities, which have been reported as discontinued operations for all
periods presented in the Consolidated Balance Sheets and
F-9
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Consolidated Statements of Operations. Note: the net assets of the discontinued
operations as of June 30, 1997, exclude amounts related to Builders, as
described above.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------
1996 1997
------------- ------------
<S> <C> <C>
Receivables and unbilled work.................................... $ 9,584,987 $ 66,055
Other current assets............................................. 432,855 34,907
Real estate, property, and equipment, net........................ 3,663,996 3,988,007
Deferred income taxes............................................ 267,427 --
Other non-current assets......................................... 257,168 --
------------- ------------
Total assets..................................................... 14,206,433 4,088,969
Payables and other accrued expenses.............................. 7,535,180 525,286
Other current liabilities........................................ 108,651 --
Non-current liabilities.......................................... -- 3,437
------------- ------------
Net assets of discontinued operations............................ $ 6,562,602 $ 3,560,246
------------- ------------
------------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales and other income............................ $15,165,647 $39,341,903 $82,661,862
Costs and expenses.................................... 16,673,455 39,443,119 86,002,973
Loss from disposal.................................... -- -- (497,971)
---------- ---------- ----------
Loss before income taxes.............................. (1,507,808) (101,216) (3,839,082)
Income tax benefit.................................... (454,299) (36,822) --
---------- ---------- ----------
Net loss from discontinued operations................. $(1,053,509) $ (64,394) $(3,839,082)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A federal net operating loss (NOL) carryforward of $2,895,036 was generated
by discontinued operations during fiscal 1997. A deferred tax asset of
$1,445,115 attributable to discontinued operations, most of which is applicable
to this NOL, has been reserved for with a valuation allowance due to the
uncertainty of the use of the asset to offset future taxable income of
discontinued operations.
F-10
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment comprises:
<TABLE>
<CAPTION>
JUNE 30
--------------------------
ESTIMATED LIVES 1996 1997
---------------- ------------ ------------
<S> <C> <C> <C>
Buildings...................................... 17 to 20 years $ 772,814 $ 772,814
Vehicles and equipment......................... 3 to 5 years 1,712,146 1,899,715
Leasehold improvements......................... 1 to 10 years 276,143 253,800
Capitalized leases............................. 2 to 5 years -- 784,931
------------ ------------
Accumulated depreciation....................... 2,761,103 3,711,260
1,444,748 1,853,467
------------ ------------
$ 1,316,355 $ 1,857,793
------------ ------------
------------ ------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt at June 30 comprises:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revolving line of credit secured by substantially all of the assets of the Company;
interest accrues at prime plus .25% or LIBOR plus 2.5% (8.75% or 8.22%, respectively
at June 30, 1997) for outstanding borrowings and .25% for unused borrowings
(approximately $3.7 million at June 30, 1997); interest is paid monthly; due July
1998................................................................................ $ 4,500,139 $ 6,275,000
Note payable to Texas Stadium Corporation; secured by stadium box; interest accrues at
9% a year; paid annually............................................................ 531,980 530,617
Other indebtedness.................................................................... 681,993 237,187
------------ ------------
5,714,112 7,042,804
Less current portion.................................................................. 454,050 58,160
------------ ------------
$ 5,260,062 $ 6,984,644
------------ ------------
------------ ------------
</TABLE>
The revolving line of credit contains restrictions as to net worth, interest
coverage, and fixed charge minimum levels as well as limitations on making
certain investments and capital expenditures.
The principal maturities of long-term debt at June 30, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 58,160
1999............................................................ 22,584
2000............................................................ 6,299,616
2001............................................................ 26,832
2002............................................................ 29,246
Thereafter...................................................... 606,366
---------
$7,042,804
---------
---------
</TABLE>
F-11
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes fair value disclosures for financial instruments:
SHAREHOLDER NOTES--The carrying amount of the Company's shareholder notes
(Note 7) approximates their fair value. The carrying amount at June 30,
1997, represents the advances without accrued interest, which management
believes is not impaired.
LONG-TERM DEBT--The carrying amount of the Company's borrowings under its
revolving credit agreement approximates its fair value. The fair value of
other borrowings are not significant to the Company's financial
statements.
6. TAXES
The provision (benefit) for federal and state income taxes attributable to
continuing operations for each of the fiscal years ended June 30 comprises:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current................................................ $ 482,534 $ 408,992 $ 541,612
Deferred............................................... (271,968) (529,668) (160,728)
----------- ----------- -----------
$ 210,566 $ (120,676) $ 380,884
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets consist of the following:
<TABLE>
<CAPTION>
JUNE
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses................................................ $ 844,240 $ 1,318,401
Asset book/tax basis difference................................. 725,600 943,344
Investment basis difference..................................... 438,286 --
Accrued compensation............................................ 174,323 81,432
------------ ------------
Total deferred tax assets......................................... 2,182,449 2,343,177
Valuation allowance............................................... (637,272) (637,272)
------------ ------------
$ 1,545,177 $ 1,705,905
------------ ------------
------------ ------------
</TABLE>
The valuation allowance exists principally due to uncertainty related to the
timing and magnitude of future earnings and taxable transactions. The valuation
allowance as of June 30, 1995 was $637,272.
F-12
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TAXES (CONTINUED)
The provision for income taxes for income from continuing operations before
taxes varies from the statutory U.S. federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Income tax expense at statutory rate.................... $ 281,529 $ (131,393) $ 310,247
State income expense, less federal benefit.............. 11,146 13,945 58,530
Other................................................... (82,109) (3,228) 12,107
---------- ----------- ----------
Income tax provision.................................... $ 210,566 $ (120,676) $ 380,884
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
During fiscal 1996, the Company received a federal income tax refund related
to New Precept physical inventory adjustments that pertain to years when the
Company was a subsidiary of ACS. Under the Company's tax sharing agreement with
ACS, the benefit of $615,000 accrued to the Company. At the time of formation of
the Company on June 30, 1994, the assets and liabilities of the Company were
recorded through recording of a capital contribution equal to the net book value
of the assets and liabilities of the Company. Therefore, this refund has been
credited directly to paid-in capital as it results from periods prior to the
formation of the Company and would have impacted paid-in capital if it were
known at June 30, 1994.
Other expense in fiscal 1996 includes $400,000 primarily related to
estimated interest accrued for sales tax settlements.
7. TRANSACTIONS WITH AFFILIATES AND STOCKHOLDERS
In connection with the Reorganization (Note 1), the Company entered into a
Reciprocal Services Agreement (the Services Agreement) with ACS, effective June
30, 1994. Under the terms of the Services Agreement, the Company will sell
business forms and supplies and provide courier and administrative services at
prices which result in an average gross margin of 20% (subsequent to June 30,
1997, the Services Agreement was amended to an average gross margin of 30%).
Revenues for services provided to ACS under this agreement were $6,044,828,
$6,003,473 and $5,431,109 in 1995, 1996 and 1997, respectively. Amounts due from
ACS were $1,091,254 and $478,915 at June 30, 1996 and 1997, respectively.
In addition, the Company buys certain general and administrative services,
including data processing, from ACS. The Company incurred expenses of $745,574,
$335,613, $416,179, and to ACS in 1995, 1996, and 1997, respectively, for these
services. The Company expects to discontinue the purchase of these services
completely by December 31, 1997.
In connection with the Reorganization (Note 1), shareholders of ACS
receiving shares of the Company agreed to a "linked sales" arrangement for a two
year period commencing June 30, 1994, and ending June 30, 1996. Under the
arrangement, a selling shareholder of ACS stock was required to sell an equal
number of shares of stock in the Company at approximately the same time. To
accommodate the selling shareholders, if a third-party purchaser was not
available, the Company agreed to purchase its shares at $1.26 a share, which
amount was payable at the end of 15 years without interest. Common stock
acquired under these arrangements was classified as treasury stock with the
offsetting obligation reflected in long-term debt. The treasury stock and
related debt are carried at this redemption price in these financial statements.
During 1995 and 1996, the Company repurchased 54,653 and 97,150 shares for
$68,863 and $122,408, respectively, which is classified as a reduction in
shareholders' equity.
F-13
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. TRANSACTIONS WITH AFFILIATES AND STOCKHOLDERS (CONTINUED)
During fiscal year ended June 30, 1996, the Company loaned certain senior
executives $759,976 to be used exclusively to purchase the Company's stock from
selling shareholders. The notes are due in June 2005 or upon the sale or
transfer of the underlying stock and are secured by the underlying stock.
Interest accrues at the 90-day U.S. Treasury Bill rate as stated on June 5 of
each year. In lieu of cash payment, annually on June 5, interest is added to the
then outstanding principal amount of the advance. The shareholder notes have
been paid down to $612,976. As of June 30, 1997, and June 30, 1996, this amount
has been classified as a reduction in shareholders' equity and no interest
income is being accrued by the Company.
In conjunction with the exercise of stock options under the Company's stock
option plan, $208,060 in notes receivable, with recourse, were issued by the
Company for the purchase of the Company's stock by certain executives. As of
June 30, 1997, shareholder notes of $208,060 have been classified as a reduction
in shareholders' equity.
Class B common stock is held exclusively by the major shareholder and is
entitled to vote at 10 votes for each share held. Class A common stock receives
one vote on matters subject to a vote of shareholders. During fiscal 1996, the
remaining Class B shareholder, other than the major shareholder, converted
1,601,415 Class B shares into 1,601,415 Class A shares.
During fiscal 1994, the Company entered into an agreement with its major
shareholder, who also is a director of the Company, for the lease and purchase
of a portion of a condominium building (Condominium) for the Company's original
cost basis. The agreement, as amended, provides for the major shareholder to
receive a waiver of all lease payments, which approximate $9,400 per month,
until said sale. During fiscal 1994, the Company considered the original cost
basis of the Condominium impaired by $100,000, which approximated the decrease
in value caused by identified structural damage, and expensed the amount of this
impairment. In fiscal 1995, the Company identified additional impairment of
value of approximately $500,000, due to further structural damage not identified
in the previous year, and accordingly expensed this amount during fiscal 1995.
The adjusted cost of the Condominium is recorded as real estate, property, and
equipment in net assets of discontinued operations and now represents the new
purchase price of the Condominium. The Company currently anticipates completing
the sale of the Condominium in conjunction with the sale of the majority of the
assets of Holdings (see Note 2).
8. EMPLOYEE BENEFIT PLAN
New Precept maintains a 401(k) plan (the Plan) which is available to
qualified Company employees meeting certain eligibility requirements.
Participants may contribute up to 15% of their aggregate compensation as defined
in the Plan. On a discretionary basis, the Company may match up to 6% of
participants' aggregate compensation. The Company made no contributions during
fiscal 1995, 1996, and 1997.
F-14
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLAN
In December 1996, the Company adopted a stock option plan. The plan
authorizes the grant of up to 1,300,000 shares of the Company's Class A Common
Stock in the form of non-qualified stock options. Generally, options granted
vest on a pro-rata basis over a five year period, although the vesting period
may be modified at the time of grant by the administrator of the plan. The term
of the options granted is at the discretion of the administrator, but not to
exceed ten years. During January 1997, 1,194,800 options were granted, with
immediate vesting, and exercised for one share each of Common Stock at an
exercise price of $0.20 each. In April 1997, 103,000 options were granted, with
immediate vesting and an exercise price of $0.20. These options remain
outstanding as of June 30, 1997 and are not exercisable until certain provisions
of the grant are met. As of June 30, 1997, 2,200 shares of Class A Common Stock
remain reserved for future issuance under the stock option plan.
10. LEASES
The Company enters into operating and capital lease agreements for
facilities, vehicles, and office equipment in the normal course of business.
Rent expense from operating leases approximated $1,178,788, $1,847,250, and
$2,160,719, for the years ended June 30, 1995, 1996, and 1997, respectively.
Future minimum payments under the capital leases and non-cancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at June 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
---------- ------------
<S> <C> <C>
1998................................................................ $ 243,490 $ 1,791,770
1999................................................................ 226,142 1,660,121
2000................................................................ 160,445 1,291,605
2001................................................................ 168,335 993,862
2002................................................................ 38,145 11,386
Thereafter.......................................................... -- 3,450
---------- ------------
Total minimum lease payments........................................ 836,557 $ 5,752,194
------------
------------
Less amounts representing interest.................................. 134,268
----------
Present value of net minimum lease payments......................... $ 702,289
----------
----------
</TABLE>
11. ACQUISITIONS
During fiscal 1995, the Company acquired the assets, primarily customer
contracts, of a business forms distributor. The transaction was accounted for
using the purchase method of accounting. The acquisition terms included the
payment of $350,000 plus provisions to allow the seller to receive up to an
additional $1,150,000 contingent consideration upon the performance of the
business over a 12 year period. Approximately $531,000 and $265,000 of the
contingent consideration was earned during fiscal years 1995 and 1996,
respectively, and recorded as additional purchase price. As of June 30, 1997, no
additional contingent consideration related to this transaction is required.
During fiscal 1996, the Company acquired the assets, primarily customer
contracts, of Central Ohio Business Forms, Inc., a business forms distributor,
and another business forms distributor, for a total of $3,056,000 plus up to
$3.5 million of contingent consideration based on the subsequent operating
results of the businesses for an agreed upon amount of time. The acquisitions
were accounted for using the purchase
F-15
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS (CONTINUED)
method of accounting. Approximately $143,000 and $252,000 of the contingent
consideration was earned during fiscal years 1996 and 1997, respectively, and
recorded as additional purchase price. As of June 30, 1997, no additional
contingent consideration related to the Central Ohio Business Forms, Inc.
transaction is required since the Company entered into an agreement whereby all
rights to any additional contingent consideration were terminated in exchange
for a lump sum of $200,000 recorded in fiscal year 1997.
During fiscal 1997, the Company completed the purchase of certain assets of
two business forms distributors for a total of $908,000 plus up to $6.3 million
of contingent consideration based on the subsequent operating results of one of
the businesses over a five year period. The acquisitions were accounted for
using the purchase method of accounting with the majority of the purchase price
attributable to customer contracts, accounts receivable, inventory, and fixed
assets. The transactions resulted in the recording of $271,285 in goodwill in
fiscal 1997. Approximately $101,000 of the contingent consideration was earned
during fiscal year 1997 and recorded as additional purchase price.
The above acquisitions resulted in increases of intangible assets of
approximately $881,000, $3,285,000, and $1,075,000 in fiscal years 1995, 1996,
and 1997, respectively.
Results of operations for these acquisitions have been included in the
consolidated results of operations since the date of acquisition. The following
table presents the unaudited pro forma results of operations as if the
acquisitions had occurred at the beginning of each respective period presented.
Pro forma adjustments reflect additional amortization expense based on the fair
value of the assets acquired as if the acquisitions had occurred at the
beginning of the periods presented. Pro forma adjustments also reflect
additional interest expense due to additional borrowings required to fund the
purchase price of each acquisition and income tax effects of the pro forma
adjustments. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had the
acquisitions been made as of those dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
JUNE 30
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Total revenues...................................................... $ 79,961,135 $ 82,431,381 $ 82,317,092
------------- ------------- -------------
------------- ------------- -------------
Income (loss) from continuing operations............................ 1,803,313 (304,247) 490,018
Loss from discontinued operations................................... (1,053,509) (64,394) (3,839,082)
------------- ------------- -------------
Net (loss) income................................................... $ 749,804 $ (368,641) $ (3,349,064)
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per common share:
Income (loss) from continuing operations.......................... $ 0.15 $ (0.02) $ 0.04
Loss from discontinued operations................................... (0.09) (0.01) (0.33)
------------- ------------- -------------
$ 0.06 $ (0.03) $ (0.29)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
12. SEGMENT INFORMATION
The Company operates principally in the business products and transportation
industry segments. Operations in the business products segment involves
arranging for the manufacture, storage, and distribution of business forms,
computer supplies, advertising information, and other related business products
for mid-to large-sized corporate customers. Operations in the transportation
segment primarily
F-16
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
involve courier and chauffeured vehicle services. Total revenue by industry
includes both sales to unaffiliated customers, as reported in the Company's
consolidated income statement, and intersegment sales, which are eliminated in
consolidation of the Company's financial statements. Intersegment sales included
in operating profits below were $31,350, $35,735, and $25,028 for the business
products segment and $155,617, $230,165, and $220,363 for the transportation
segment for the years ended June 30, 1995, 1996, and 1997, respectively.
In computing operating income (loss), none of the following items have been
added or deducted: general corporate expenses (these expenses were included in
the computation of Corporate and Other operating income (loss)), interest
expense, income taxes, and loss from discontinued operations. The following
details depreciation and capital expenditures for each fiscal year by segment.
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each industry. Corporate assets are principally cash and
certain investments.
Segment data as of and for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating income (loss):
Business Products................................................. $ 1,034,768 $ 329,677 $ 1,164,802
Transportation.................................................... (419,637) 88,582 (116,271)
Other and Corporate............................................... 361,231 (87,943) 289,273
------------- ------------- -------------
Total............................................................... $ 976,362 $ 330,316 $ 1,337,804
------------- ------------- -------------
------------- ------------- -------------
Depreciation and amortization:
Business Products................................................. $ 986,658 $ 1,066,228 $ 1,046,948
Transportation.................................................... 452,960 316,611 414,717
Other and Corporate............................................... 76,422 72,958 36,808
------------- ------------- -------------
Total............................................................... $ 1,516,040 $ 1,455,797 $ 1,498,473
------------- ------------- -------------
------------- ------------- -------------
Capital expenditures:
Business Products................................................. $ 113,500 $ 355,491 $ 91,975
Transportation.................................................... 7,250 -- 77,950
Other and corporate............................................... -- -- --
------------- ------------- -------------
Total............................................................... $ 120,750 $ 355,491 $ 169,925
------------- ------------- -------------
------------- ------------- -------------
Identifiable assets:
Business Products................................................. $ 15,134,272 $ 20,084,085 $ 20,179,707
Transportation.................................................... 2,266,758 2,488,849 1,247,953
Other and Corporate............................................... 1,884,332 3,555,612 4,303,102
------------- ------------- -------------
Total............................................................... $ 19,285,362 $ 26,128,546 $ 25,730,762
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
13. TRANSACTION WITH USTS
Effective March 7, 1997, the Company entered into a letter of intent
(Letter) to merge with U.S. Transportation Systems, Inc. (USTS). USTS is engaged
in business areas which relate to transportation, including providing bus,
chauffeured vehicle, motor vehicle, package, and delivery transportation-related
F-17
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTION WITH USTS (CONTINUED)
services. The terms of the Letter have been modified such that upon consummation
of the transaction, the Company will purchase nearly all of the operating assets
and assume certain operating liabilities of USTS. The transaction will be
structured as a tax-free reorganization under Internal Revenue Code Section
368(a)(1)(C) (type C reorganization). In conjunction with the plan of
reorganization, all outstanding shares of the Company shall be split into an
aggregate of 36,000,000 shares. In addition, 9.6 million shares of Class A
common stock will be exchanged as consideration to USTS for the net assets
acquired. As a result, the outstanding shares will total 45,612,500. The Company
will register its common stock with the Securities and Exchange Commission in a
Form S-4 registration statement. USTS is required to liquidate or dissolve as a
corporation and distribute its Precept shares to existing shareholders for the
transaction to qualify with the Internal Revenue Service as a type C
reorganization. The transaction will be accounted for using the purchase method
of accounting with Precept as the purchaser.
14. SUBSEQUENT EVENTS
On July 2, 1997, the Company entered into a new revolving credit agreement
with another financial institution for borrowings not to exceed $10,000,000 (new
line of credit) and terminated the existing outstanding line of credit (old line
of credit). The new line of credit includes restrictions as to the current ratio
and debt service coverage as well as borrowing restrictions based upon accounts
receivable and inventory. The new line of credit is secured by substantially all
of the assets of the continuing operations of the Company. Interest accrues at
prime or LIBOR plus 1.75%, 2.25%, or 2.5% for outstanding borrowings and .25%
for unused borrowings. The additional percentage points added to the LIBOR rate
are dependent upon the Company's Senior Funded Debt to EBITDA ratio at the
beginning of each month the LIBOR based borrowing is renewed. Interest is paid
monthly. The principal balance of the line of credit is due and payable on June
30, 2000.
Subsequent to June 30, 1997, the Company completed acquisitions of certain
assets of two business forms distributors for a total of $955,000, comprised of
$435,000 in cash and $520,000 in notes payable, plus up to $670,000 of
contingent consideration based on the subsequent operating results of the
businesses over a five year period. The acquisitions will be accounted for using
the purchase method of accounting with the majority of the purchase price
attributable to customer contracts.
F-18
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1997
------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 2,496,029 $ 1,704,676
Trade receivables, net of $288,000 and $321,000 allowance for doubtful accounts,
respectively.................................................................... 9,229,452 10,119,761
Accounts receivable from affiliates............................................... 503,571 524,174
Other receivables................................................................. 456,942 520,812
Inventory......................................................................... 2,569,498 2,828,884
Other current assets.............................................................. 642,819 630,042
Income taxes refundable........................................................... 277,766 215,830
Deferred income taxes............................................................. 1,090,886 1,090,886
Net assets of discontinued operations............................................. 3,560,246 3,622,019
------------ -------------
Total current assets................................................................ 20,827,209 21,257,084
Property and equipment, net of accumulated depreciation............................. 1,857,793 1,803,387
Intangible assets, net of accumulated amortization.................................. 4,790,608 5,474,760
Deferred incomes taxes.............................................................. 615,019 615,019
Other assets........................................................................ 1,200,379 1,326,288
------------ -------------
Total assets........................................................................ $ 29,291,008 $30,476,538
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 58,160 $ 45,915
Current portion of capital lease obligations...................................... 185,055 185,055
Trade accounts payable............................................................ 4,735,411 6,351,991
Sales taxes payable............................................................... 1,181,047 995,256
Accrued compensation.............................................................. 1,132,015 786,942
Other accounts payable and accrued expenses....................................... 1,192,475 880,921
------------ -------------
Total current liabilities........................................................... 8,484,163 9,246,080
Long-term debt...................................................................... 6,984,644 7,462,857
Capital lease obligations, less current portion..................................... 517,234 492,503
Shareholders' equity:
Class A common stock, $.01 par value:
Authorized shares--17,195,742
Issued shares--8,361,647........................................................ 83,616 83,616
Class B common stock, $.01 par value:
Authorized, issued and outstanding shares--3,202,843.............................. 32,028 32,028
Additional paid-in capital...................................................... 17,676,797 17,676,797
Accumulated deficit............................................................. (3,475,167) (3,505,036)
------------ -------------
14,317,274 14,287,405
Class A treasury stock, at cost:
Shares--151,803................................................................. (191,271) (191,271)
Shareholder notes for stock purchases........................................... (821,036) (821,036)
------------ -------------
Total shareholders' equity.......................................................... 13,304,967 13,275,098
------------ -------------
Total liabilities and shareholders' equity.......................................... $ 29,291,008 $30,476,538
------------ -------------
------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-19
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Revenues:
Business Products................................................................ $ 18,198,109 $ 17,296,931
Transportation................................................................... $ 1,614,546 1,638,547
------------- -------------
19,812,655 18,935,478
Costs and expenses:
Costs of goods sold.............................................................. 12,510,280 11,797,855
Selling, general, and administrative............................................. 6,593,560 6,538,777
Depreciation and amortization.................................................... 354,384 245,277
------------- -------------
19,458,224 18,581,909
------------- -------------
Operating income................................................................... 354,431 353,569
Interest expense................................................................... 122,570 125,359
------------- -------------
Income from continuing operations before income taxes.............................. 231,861 228,210
Income tax provision............................................................... 97,382 93,102
------------- -------------
Income from continuing operations.................................................. 134,479 135,108
Discontinued operations:
Discontinuation of Precept Holdings, Inc.:
Loss from discontinued operations, net of applicable income taxes.............. (122,046) (164,977)
Discontinuation of Precept Builders, Inc.:
Income from discontinued operations, net of applicable income taxes.......... 207,732 --
------------- -------------
Income (loss) from discontinued operations......................................... 85,686 (164,977)
------------- -------------
Net income (loss).................................................................. $ 220,165 $ (29,869)
------------- -------------
------------- -------------
Net earnings (loss) per common share:
Income from continuing operations................................................ $ 0.01 $ 0.01
Income (loss) from discontinued operations....................................... 0.01 (0.01)
------------- -------------
Net earnings (loss) per common share............................................... $ 0.02 $ 0.00
------------- -------------
------------- -------------
Weighted average common shares outstanding......................................... 11,515,687 11,515,687
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-20
<PAGE>
PRECEPT INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES.............................................. $ (98,356) $ (483,045)
INVESTING ACTIVITIES
Acquisitions, including earnout payments........................................... (669,342) (496,941)
Acquisition of property and equipment, net......................................... (433,348) (157,184)
------------- -------------
Net cash used in investing activities.............................................. (1,102,690) (654,125)
FINANCING ACTIVITIES
Payments on long-term debt......................................................... (275,843) (12,245)
Principal payments on capitalized lease obligations................................ (20,661) (24,731)
Borrowings on revolving line of credit............................................. 746,552 2,781,018
Payments on revolving line of credit............................................... (907,380) (2,302,805)
------------- -------------
Net cash provided by (used in) financing activities................................ (457,332) 441,237
------------- -------------
Net decrease in cash and cash equivalents.......................................... (1,658,378) (695,933)
Cash and cash equivalents at beginning of period................................... 3,879,458 2,496,029
------------- -------------
Cash and cash equivalents at end of period......................................... $ 2,221,080 $ 1,800,096
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest expense................................................................. $ 146,842 $ 200,813
------------- -------------
------------- -------------
Income taxes..................................................................... $ 123,005 $ 26,586
------------- -------------
------------- -------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended September 30, 1996, the Company entered into
capitalized leases at a
recorded value of $196,233.
During the three months ended September 30, 1997, the Company issued $520,000 in
notes payable for
consideration in two acquisitions.
SEE ACCOMPANYING NOTES.
F-21
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. MANAGEMENT'S REPRESENTATION
In the opinion of management, the accompanying unaudited financial
statements present fairly, in all material respects, the financial position of
Precept Investors, Inc. and the results of their operations and their cash flows
for the three months ended September 30, 1996 and 1997 and, accordingly, all
adjustments (which include only normal recurring adjustments) necessary to
permit fair presentation have been made. Certain information and footnote
disclosures normally required by financial accounting principles have been
condensed or omitted. It is recommended that these statements be read in
conjunction with the financial statements and notes thereto included in the
Company's June 30, 1997 annual report. The results of operations for the period
ended September 30, 1997 are not necessarily indicative of the operating results
for the full year.
2. SELECTED SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents reflected in the Consolidated Statement of Cash
Flows also include amounts related to discontinued operations of $-0- and
$95,420 as of June 30, 1997 and September 30, 1997.
EARNINGS PER SHARE
Earnings per share computations are based upon the weighted average of
common shares outstanding during the year. Stock options granted during fiscal
1997 have been treated as outstanding for all periods presented.
3. ACQUISITIONS
During the three months ended September 30, 1997, the Company completed
acquisitions of certain assets of two business forms distributors for a total of
$955,000, comprised of $435,000 in cash and $520,000 in notes payable, plus up
to $670,000 of contingent consideration based on the subsequent operating
results of the businesses over a five year period. The acquisitions were
accounted for using the purchase method of accounting with the majority of the
purchase price attributable to customer contracts.
4. SUBSEQUENT EVENTS
In February, 1997, the Company decided to reduce its investment in Precept
Builders, Inc. (Builders), a subsidiary of Precept that performed construction
activities. The Company owned 810 shares of Builders common stock, making it an
81% shareholder of Builders. Effective March 31, 1997, the Company obtained an
additional 1,000 shares, increasing its ownership to 90.5%, in exchange for a
contribution of capital of approximately $2.3 million. As of June 30, 1997,
Builders expected to sell 100,000 shares of its common stock in a private
offering to an officer of the Company, diluting the Company's ownership
percentage to 1.8%. Consequently, the financial position and operations of
Builders would no longer be consolidated in the Company's financial statements,
and the cost method of accounting would be used. Considering the value of the
subsequent interest in Builders would not be significant, Precept wrote off its
entire investment in Builders during June 1997. On December 2, 1997, the private
offering was consummated.
F-22
<PAGE>
PRECEPT INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. SUBSEQUENT EVENTS (CONTINUED)
Subsequent to September 30, 1997, the Company completed acquisitions of
certain assets of two business forms distributors and one chauffeured vehicle
service company for a total of $1,740,000, comprised of $1,240,000 in notes
payable, $146,000 in assumed debt and 250 shares of common stock of a Precept
subsidiary, which can subsequently be exchanged into shares of Precept common
stock equal to a fair value of $354,000 at time of exchange, or for a note equal
to $354,000. The acquisitions will be accounted for using the purchase method of
accounting with the majority of the purchase price attributable to customer
contracts.
F-23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
U.S. Transportation Systems, Inc.
We have audited the accompanying consolidated balance sheet of U.S.
Transportation Systems, Inc. and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
U.S. Transportation Systems, Inc. and subsidiaries as of December 31, 1996, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 26, 1997, except for Note 14
relating to the sale of ASI, as to which
the date is March 28, 1997.
F-24
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................................................... $3,392,629
Cash--restricted................................................................................... 159,747
Accounts receivable, net of allowance for doubtful accounts of $546,000 (Note 3)................... 4,995,999
Notes receivable................................................................................... 930,584
Net investment in sales-type leases (Note 2)....................................................... 840,263
Inventories (Note 1)............................................................................... 594,275
Prepaid and other current assets................................................................... 653,521
----------
TOTAL CURRENT ASSETS............................................................................. 11,567,018
----------
PROPERTY, PLANT AND EQUIPMENT:
Revenue equipment (Notes 3 and 4).................................................................. 7,714,168
Land and buildings................................................................................. 1,020,770
Other.............................................................................................. 1,897,346
----------
Total--at cost................................................................................... 10,632,284
Less: Accumulated depreciation and amortization.................................................... (3,188,342)
----------
PROPERTY, PLANT AND EQUIPMENT--NET................................................................... 7,443,942
----------
NET ASSETS HELD FOR SALE (Note 14)................................................................... 4,591,806
----------
OTHER ASSETS:
Net investment in sales-type leases (Note 2)....................................................... 1,520,474
Goodwill, net of accumulated amortization of $496,075 (Note 1)..................................... 1,461,093
Other intangible assets, net of accumulated amortization of $172,026 (Note 1)...................... 986,974
Notes receivable................................................................................... 354,218
Other assets....................................................................................... 402,305
----------
TOTAL OTHER ASSETS................................................................................... 4,725,064
----------
TOTAL ASSETS......................................................................................... $28,327,830
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft..................................................................................... $ 395,156
Notes payable (Note 4)............................................................................. 1,580,269
Line of credit (Note 3)............................................................................ 3,093,044
Accounts payable................................................................................... 998,347
Accrued liabilities................................................................................ 471,409
Due to related party (Note 9)...................................................................... 439,646
----------
TOTAL CURRENT LIABILITIES............................................................................ 6,977,871
----------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES:
Notes payable (Note 4)............................................................................. 3,710,740
Due to related party (Note 9)...................................................................... 665,468
----------
TOTAL LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES............................................... 4,376,208
----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10, 11, 18)
STOCKHOLDERS' EQUITY (Notes 11 and 20):
Preferred stock--par value $.01 per share, redemption value $10.00 per share:
Authorized--10,000,000 shares....................................................................
Issued and outstanding--180,000 shares........................................................... 1,800,000
Common stock--par value $.01 per share:
Authorized--50,000,000 shares....................................................................
Issued and outstanding--6,801,512 shares......................................................... 68,015
Additional paid-in capital......................................................................... 29,204,181
Stock subscription receivable...................................................................... (37,785)
Deferred compensation (Note 11).................................................................... (545,089)
Accumulated deficit................................................................................ (13,515,571)
----------
TOTAL STOCKHOLDERS' EQUITY........................................................................... 16,973,751
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................................... $28,327,830
----------
----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-25
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUES.............................................................................. $ 21,509,751 $ 13,670,321
------------ ------------
EXPENSES:
Cost of goods sold.................................................................. 996,673 2,180,195
Operating expenses for services..................................................... 12,376,818 5,814,900
Selling, general and administrative................................................. 8,253,096 3,149,187
Depreciation expense................................................................ 973,570 607,095
Rent expense........................................................................ 1,300,311 404,147
Amortization of intangible assets................................................... 425,579 124,861
------------ ------------
TOTAL EXPENSES........................................................................ 24,326,047 12,280,385
------------ ------------
(LOSS) INCOME FROM OPERATIONS......................................................... (2,816,296) 1,389,936
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense.................................................................... (617,029) (339,042)
Interest income..................................................................... 387,305 276,054
Gain / (loss) on sales of assets.................................................... 54,680 (419,775)
Loss on Mt. View Settlement......................................................... (215,500) (75,796)
Other expenses...................................................................... (69,395) (34,135)
------------ ------------
Other expenses, net............................................................... (459,939) (592,694)
------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.......................... (3,276,235) 797,242
INCOME TAX EXPENSE (BENEFIT).......................................................... 750,000 (364,000)
------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS.............................................. (4,026,235) 1,161,242
------------ ------------
DISCONTINUED OPERATIONS (Note 14):
Discontinuation of custom equipment manufacturing segment:
(Loss) income from custom equipment manufacturing operations........................ (1,787,859) 94,545
Estimated losses during phase-out period (Note 14).................................. (196,843) --
Discontinuation of entertainment ticket segment:
(Loss) income from entertainment operations......................................... (683,514) 35,330
Adjustment of estimated loss on disposal of charter segment, net of income tax benefit
of $86,000 in 1995 (Note 14)......................................................... -- (167,199)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS..................................................... (2,668,216) (37,324)
------------ ------------
NET (LOSS) INCOME..................................................................... (6,694,451) 1,123,918
LESS: PREFERRED DIVIDEND.............................................................. 169,335 191,700
------------ ------------
NET (LOSS) INCOME APPLICABLE TO COMMON SHAREHOLDERS................................... $ (6,863,786) $ 932,218
------------ ------------
------------ ------------
(LOSS) EARNINGS PER COMMON SHARE:
(Loss) income from continuing operations............................................ $ (1.04) $ .53
(Loss) from discontinued operations................................................. (.66) (.02)
------------ ------------
(LOSS) EARNINGS PER COMMON SHARE...................................................... $ (1.70) $ .51
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................................ 4,036,930 1,823,588
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-26
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK SUB- DEFERRED
--------------------- ----------------------- PAID-IN SCRIPTION COMPEN-
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE SATION
---------- --------- --------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994............... 1,222,198 $ 12,222 180,000 $ 1,800,000 $ 13,570,093 $ -- $ (811,359)
---------- --------- --------- ------------ ------------ ----------- ----------
Preferred stock issuance................. -- -- 170,000 2,040,000 (1,073,524) -- --
Preferred stock conversion............... 425,000 4,250 (170,000) (2,040,000) 2,035,750 -- --
Restricted stock grant issuance.......... -- -- -- -- -- -- 135,667
Stock options issued..................... -- -- -- -- -- -- 17,188
Preferred dividends...................... 9,580 96 -- -- (96) -- --
Common stock issued in connection with
purchase of Armstrong Freight
Express................................ 130,000 1,300 -- -- 564,200 -- --
Common stock issued in connection with
purchase of Trans-Lynx Express......... 19,424 194 -- -- 84,296 -- --
Common stock issued in connection with
purchase of Automated Solutions........ 300,000 3,000 -- -- 1,347,000 -- --
Common stock issued in exchange for
consulting services.................... 55,833 558 -- -- 242,067 -- --
Common stock issued in connection with
contract settlement.................... 8,333 83 -- -- 36,167 (36,250) --
Stock options exercised.................. 61,667 617 -- -- 250,558 (254,035) --
Net income............................... -- -- -- -- -- -- --
---------- --------- --------- ------------ ------------ ----------- ----------
Balance, December 31, 1995............... 2,232,035 $ 22,320 180,000 $ 1,800,000 $ 17,056,511 $(290,285) $ (658,504)
---------- --------- --------- ------------ ------------ ----------- ----------
Net proceeds from exercise of warrants
and options............................ 60,000 600 -- -- 206,900 -- --
Common stock issued in connection with
purchase of Krogel Freight............. 18,333 183 -- -- 54,817 -- --
Preferred stock issuance................. -- -- 300 300,000 (43,272) -- --
Conversion of debentures into common
stock.................................. 753,667 7,537 -- -- 1,768,751 -- --
Preferred stock conversion............... 88,889 889 (300) (300,000) 299,111 -- --
Restricted stock grant issuance.......... -- -- -- -- -- -- 113,415
Preferred stock dividends................ -- -- -- -- -- -- --
Repurchase of common stock............... (47,500) (475) -- -- (89,495) -- --
Common stock issued in connection with
bridge loan............................ 109,957 1,100 -- -- 248,454 -- --
Common stock offering net of offering
costs of $1,500,208.................... 1,705,043 17,050 -- -- 4,996,006 -- --
Common stock issued in connection with
consulting services.................... 314,167 3,142 -- -- 874,733 252,500 --
Common stock issued in connection with
employment contracts................... 16,667 167 -- -- 124,833 -- --
Common stock issued in connection with
purchase of BancPro Transportation and
employment agreement................... 336,000 3,360 -- -- 864,540 -- --
Common stock issued in exchange for
covenant not-to-compete................ 199,444 1,994 -- -- 548,006 -- --
Change in features of preferred stock.... -- -- -- -- 680,000 -- --
Obligation to issue 1,000,000 shares of
common stock in regards to long-term
employment agreement with Company
officer................................ 1,000,000 10,000 -- -- 1,552,500 -- --
Other.................................... 14,810 148 -- -- 61,786 -- --
Net loss................................. -- -- -- -- -- -- --
---------- --------- --------- ------------ ------------ ----------- ----------
Balance, December 31, 1996............... 6,801,512 $ 68,015 180,000 $ 1,800,000 $ 29,204,181 $ (37,785) $ (545,089)
---------- --------- --------- ------------ ------------ ----------- ----------
---------- --------- --------- ------------ ------------ ----------- ----------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
------------- ------------
<S> <C> <C>
Balance, December 31, 1994............... $ (7,555,263) $ 7,015,693
------------- ------------
Preferred stock issuance................. -- 966,476
Preferred stock conversion............... -- --
Restricted stock grant issuance.......... -- 135,667
Stock options issued..................... -- 17,188
Preferred dividends...................... (220,440) (220,440)
Common stock issued in connection with
purchase of Armstrong Freight
Express................................ -- 565,500
Common stock issued in connection with
purchase of Trans-Lynx Express......... -- 84,490
Common stock issued in connection with
purchase of Automated Solutions........ -- 1,350,000
Common stock issued in exchange for
consulting services.................... -- 242,625
Common stock issued in connection with
contract settlement.................... -- --
Stock options exercised.................. -- (2,860)
Net income............................... 1,123,918 1,123,918
------------- ------------
Balance, December 31, 1995............... $ (6,651,785) $ 11,278,257
------------- ------------
Net proceeds from exercise of warrants
and options............................ -- 207,500
Common stock issued in connection with
purchase of Krogel Freight............. -- 55,000
Preferred stock issuance................. -- 256,728
Conversion of debentures into common
stock.................................. -- 1,776,288
Preferred stock conversion............... -- --
Restricted stock grant issuance.......... -- 113,415
Preferred stock dividends................ (169,335) (169,335)
Repurchase of common stock............... -- (89,970)
Common stock issued in connection with
bridge loan............................ -- 249,554
Common stock offering net of offering
costs of $1,500,208.................... -- 5,013,056
Common stock issued in connection with
consulting services.................... -- 1,130,375
Common stock issued in connection with
employment contracts................... -- 125,000
Common stock issued in connection with
purchase of BancPro Transportation and
employment agreement................... -- 867,900
Common stock issued in exchange for
covenant not-to-compete................ -- 550,000
Change in features of preferred stock.... -- 680,000
Obligation to issue 1,000,000 shares of
common stock in regards to long-term
employment agreement with Company
officer................................ -- 1,562,500
Other.................................... -- 61,934
Net loss................................. (6,694,451) (6,694,451)
------------- ------------
Balance, December 31, 1996............... $ (13,515,571) $ 16,973,751
------------- ------------
------------- ------------
</TABLE>
F-27
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income / (Loss) from continuing operations......................................................... $ (4,026,235) $ 1,161,242
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization.................................................................... 1,399,149 731,956
Amortization of deferred compensation............................................................ 113,415 152,855
Deferred tax benefit............................................................................. 750,000 (450,000)
Stock issued in exchange for consulting services................................................. 1,030,410 --
Write off of notes receivable.................................................................... -- 75,796
Loss on Mt. View settlement...................................................................... 215,500 --
Bad debt expense................................................................................. 339,969 --
Changes in features of preferred stock........................................................... 680,000 --
Obligation to issue stock in regards to long-term employment agreement........................... 1,562,500 --
Loss / (gain) on sales of assets................................................................. (54,680) 419,775
Other............................................................................................ 94,605 --
Change in assets and liabilities:
Accounts receivable............................................................................ (1,774,357) (452,231)
Inventories.................................................................................... (381,542) (300,655)
Other receivables.............................................................................. -- (14,980)
Prepaid and other current assets............................................................... 311,361 (279,566)
Other intangibles.............................................................................. (50,000) --
Accounts payable............................................................................... 476,924 (762,358)
Accrued liabilities............................................................................ 31,609 (280,481)
------------- -------------
Net cash provided by continuing operations......................................................... 718,628 1,353
------------- -------------
Loss from discontinued operations.................................................................. (2,668,216) (37,324)
Adjustments to reconcile loss to net cash used in discontinued operations:
Depreciation and amortization.................................................................. 611,031 306,482
Change in net assets and liabilities and losses of discontinued operations..................... (1,504,394) (1,098,916)
------------- -------------
Net cash used in discontinued operations........................................................... (3,561,579) (829,758)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES.............................................................. (2,842,951) (828,405)
------------- -------------
INVESTING ACTIVITIES:
Capital expenditures............................................................................. (854,926) (786,891)
Purchase of intangible assets in Krogel acquisition.............................................. (150,000) --
Purchase of intangible assets in Eagle Air Express acquisition................................... (10,800) --
Proceeds from sales of assets.................................................................... 149,803 1,047,756
Transfers from cash--restricted.................................................................. 6,006 16,726
Advances on notes receivable..................................................................... (952,532) (160,552)
Collection of notes and leases receivable........................................................ 691,714 813,431
Other............................................................................................ 86,587 (246,796)
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................................ (1,034,148) 683,674
------------- -------------
FINANCING ACTIVITIES:
Cash overdraft................................................................................... 395,156 (35,570)
Cash received from related parties............................................................... 500,000 295,465
Cash paid to related parties..................................................................... (237,181) (400,946)
Cash obtained through business acquisitions...................................................... -- 75,266
Proceeds from issuance of preferred stock........................................................ 256,728 1,555,933
Proceeds from common stock offering.............................................................. 5,013,056 --
Proceeds from bridge loan........................................................................ 982,000 --
Payment of preferred dividends................................................................... (169,335) (220,439)
Principal payments on debt....................................................................... (10,392,011) (10,949,935)
Borrowings on debt............................................................................... 8,986,026 9,776,459
Proceeds from issuance of convertible debentures................................................. -- 1,776,287
Proceeds from options and warrants exercised..................................................... 207,500 --
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................................................... 5,541,939 1,872,520
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................................................... 1,664,840 1,727,789
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................................... 1,727,789 --
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................................. $ 3,392,629 $ 1,727,789
------------- -------------
------------- -------------
</TABLE>
F-28
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash paid during the year for:
Interest................................................................................ $ 744,200 $ 484,600
---------- ----------
---------- ----------
Taxes................................................................................... $ -0- $ -0-
---------- ----------
---------- ----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
The Company acquired revenue equipment in 1996 and 1995 utilizing long-term
debt of $4,849,137 and $554,907, respectively.
During 1996 and 1995 the Company sold buses in exchange for $154,351 and
$2,151,630 respectively, of sales type financing lease receivables.
During 1996 and 1995, the Company issued 314,167 and 55,833 shares of common
stock in exchange for consulting services.
During 1995, the Company sold various assets, including the discontinued
charter operations, in exchange for notes receivable aggregating to $403,500 and
the assignment of $58,579 of debt held by the Company.
In March 1995, the Company sold a substantial portion of the assets of
Suncoast Transportation for $25,000 cash and a promissory note of $175,000.
In June 1995, the Company issued 130,000 shares of common stock in exchange
for 100% of the outstanding common stock of Avanti Delivery Services, Inc. and
Priority Express, Inc.
In July 1995, the Company issued 19,424 shares of common stock in exchange
for 100% of the outstanding common stock of Trans-Lynx Express, Inc.
In November 1995, the Company issued 300,000 shares of common stock in
exchange for 100% of the outstanding common stock of Automated Solutions, Inc.
In 1996, the Debentures with a book value of $1,776,288 at December 31, 1995
were converted into 753,667 shares of the Company's common stock.
In February 1996, the Company issued 18,333 shares of common stock in
exchange for certain assets of Krogel Air Freight, Inc. and Krogel Freight
Systems of Tampa, Inc.
In 1996, the Company issued 252,111 shares of common stock in regards to
employment contracts and covenants not-to-compete.
In 1996, the Company converted 300 shares of convertible preferred stock
into 88,889 shares of common stock.
In 1996, the Company acquired 47,500 shares of its common stock for $89,970,
which included the cancellation of a note receivable of $68,960.
F-29
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
In September 1996, the Company issued 300,000 shares of common stock in
exchange for 100% of the outstanding common stock of BancPro Transportation,
Inc.
In October 1996, the Company acquired certain intangible assets of Eagle Air
Express in exchange for a note of $32,400 and a cash payment of $10,800.
In November 1996 the Company converted the Preferred Stock Series C to
Preferred Stock Series M, which on the date of conversion had a market value
differential of $680,000.
In November 1996 the Company executed a long term employment contract with
its Chairman which obligated the Company to issue 1,000,000 shares of its Common
Stock which on the date of issuance had a market value of $1,562,500.
F-30
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
U.S. Transportation Systems, Inc. and Subsidiaries (the "Company") are
currently engaged in business areas which relate to transportation. The
transportation services consist of: (i) providing bus, motor vehicle and
packaging and delivery transportation related services; and (ii) manufacturing
of electrical harnesses for transportation equipment. The Company's operations
are conducted in selected cities throughout the United States and
internationally.
In November 1996 the Company made the decision to discontinue Automated
Solutions, Inc. ("ASI"), a segment engaged in custom designing and manufacturing
machinery which folds and tests airbags, and the entertainment divisions
(Downtown Theatre Ticket Agency, Inc., DBA "Advance Entertainment," Advance
Entertainment--Chicago, Inc., Broadway Theatours, Inc. and Premier Box Office,
Inc.), a segment specializing in the retail sale of tickets for theater, sports
and various entertainment events in New York and Chicago (see Note 14).
As more fully discussed in Note 13, during 1996 the Company acquired certain
intangible assets of Krogel Air Freight, Inc. and Krogel Freight Systems of
Tampa, Inc. ("Krogel") which operate a local package pick-up and delivery
service; certain assets of Jackson & Johnson, Inc., which operates a tractor/
trailer delivery service; 100% of the stock of BancPro Transportation, Inc.,
which operates a car rental service; and certain assets of U&M Express and Eagle
Air Express; which operate a pick-up and delivery service.
In October 1996, the Company's harness manufacturing subsidiary, American
Trade-A-Bus, Inc. (ATAB), lost its long term profitable contract with its only
customer Stewart & Stevenson ("S&S"). During the 1996 year, ATAB contributed
approximately $140,000 to continuing operations. Management is attempting to
secure other customers and other profitable work with S&S. If management is
unsuccessful, the Company may be required to liquidate the assets of ATAB.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
USES OF ESTIMATES
The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed.
F-31
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Inventories were comprised of:
<TABLE>
<S> <C>
Parts............................................................. $ 192,549
Raw materials..................................................... 169,400
Work in Process................................................... 220,088
Sundry............................................................ 12,238
---------
Total............................................................. $ 594,275
---------
---------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company records
depreciation utilizing the straight-line method over estimated useful lives of
10 to 17 years for highway coaches and 3 to 7 years for school buses,
tractor-trailers and other revenue equipment with no residual value. Other
depreciable assets have estimated useful lives of 3 to 30 years, with no assumed
residual value. Overhauls of major highway coach components are capitalized and
written off utilizing the straight-line method over a period of thirty months.
When an asset is sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective accounts, and any
resulting gain or loss is reflected in income.
INVESTMENT TAX CREDIT
The Company accounts for investment and other tax credits (when available)
by the flow-through method.
CASH RESTRICTED
The Company maintains cash balances in certificates of deposit which secure
letters of credit for various insurance policies and bonds. It is the Company's
policy to classify the restricted cash consistent with the liabilities to which
they relate. Therefore, the Company treats restricted cash securing letters of
credit as a current asset.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
GOODWILL
Goodwill and other intangible assets are amortized by the straight-line
method over lives ranging from 5 to 20 years. The Company periodically evaluates
the carrying value and the periods of amortization of goodwill based on the
current and expected future non-discounted income from operations of the
entities giving rise to the goodwill to determine whether events and
circumstances warrant revised estimates of carrying value or useful lives.
Goodwill identifiable to a particular segment or group of assets is charged to
earnings upon disposition of the particular segment or group of assets.
F-32
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
periods presented (see Note 9). Common stock equivalents include shares issuable
upon conversion of the Company's convertible debentures and
exercise of certain of the Company's options and warrants. Such common stock
equivalents were antidilutive in 1996. All share and per share amounts have been
retroactively adjusted for the one-for-six reverse stock split declared on
August 27, 1996.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In evaluating the fair value and the future benefits of
long-lived assets, the Company performs an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, of the result of such calculation.
The Company adopted SFAS No. 121 effective January 1, 1996.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation" effective January 1, 1996. SFAS
No. 123 establishes financial accounting and reporting standards for stock-based
employee compensation plans. The Company elected to continue to account for
employee stock-based compensation as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and to provide pro forma disclosures
in the Notes to Financial Statements of the effects of SFAS No. 123 on net
income and earnings per share. There was no effect on the results of operations
as a result of adopting SFAS No. 123.
[2] NET INVESTMENT IN SALES-TYPE LEASES
The Company's leasing activities consist entirely of revenue equipment.
These leases expire at various times through November 2001. There were no
initial or executory costs with respect to these leases.
The following is a summary of the components of the Company's net investment
in these sales-type leases at December 31, 1996:
<TABLE>
<S> <C>
Total Minimum Lease Payments Receivable................................. $3,046,000
Less: Unearned Income................................................... 685,263
---------
Net Investment in Sales Type Leases..................................... $2,360,737
---------
---------
</TABLE>
F-33
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[2] NET INVESTMENT IN SALES-TYPE LEASES (CONTINUED)
Minimum lease payments to be received as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................................ $1,199,000
1998............................................................ 750,000
1999............................................................ 545,000
2000............................................................ 323,000
2001............................................................ 229,000
---------
Total........................................................... $3,046,000
---------
---------
</TABLE>
[3] SECURED LINE OF CREDIT
The Company entered into a line of credit agreement with a Bank in October
1996, which agreement replaced the Company's previous line of credit agreement
with a different institution. The agreement contains an accounts receivable
financing component and an equipment loan component which provide for an
aggregate maximum borrowing balance of $5,000,000. The accounts receivable
component of the line of credit is secured by accounts receivable and sales-type
leases receivable and has a maximum borrowing limit of $3,500,000; the
receivables component borrowing base is computed at 80% of eligible accounts
receivable and 90% of eligible sales-type leases receivable. The equipment loan
component, which has a maximum borrowing limit of $1,500,000, is secured by
equipment, primarily buses, tractors and trailers. All outstanding balances are
due October 8, 1999, the termination date of the agreement. The borrowings are
further secured by property belonging to an officer of the Company. Borrowings
under the finance agreement bear interest at prime plus 1.5 percent (9.75% at
December 31, 1996), which interest is payable monthly. At December 31, 1996, the
amount borrowed and outstanding under the line of credit agreement was
$3,093,044 and is included on the balance sheet in Line of Credit Obligation.
F-34
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[4] NOTES PAYABLE
Notes payable consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Notes payable and capitalized leases, collateralized by equipment,
payable monthly and maturing through December 2001, interest rates
ranging from 8% to 14% (including certain notes with interest based
upon the prime rate, average interest rate approximately 10%)......... $4,056,451
Notes payable, unsecured, resulting from acquisitions, payable monthly
and maturing through Sept. 1998 with interest rates which approximate
10%................................................................... 1,000,398
Mortgage notes payable, collateralized by real property, payable in
monthly installments of $5,310 and $1,879 through August 1998 and
November 2007 respectively. (average interest rate approximately 11%)
Property with a carrying value approximating $675,000 secures the
mortgages............................................................. 234,160
---------
Total Notes Payable..................................................... 5,291,009
Less: Current Maturities................................................ 1,580,269
---------
NON-CURRENT NOTES PAYABLE............................................... $3,710,740
---------
---------
Annual maturities of notes payable, as of December 31, 1996, are as follows:
1997.................................................................... $1,580,269
1998.................................................................... 2,041,170
1999.................................................................... 810,163
2000.................................................................... 548,914
2001.................................................................... 215,294
Thereafter.............................................................. 95,199
---------
TOTAL................................................................... $5,291,009
---------
---------
</TABLE>
In April 1996, the Company completed a Bridge Financing issuing an aggregate
of $1,200,000 principal amount of Bridge Notes. The Company received net
proceeds of $982,000, after deducting the placement agent's discount and expense
allowance and other expenses of the offering. Upon repayment of the Bridge
Notes, the Company recognized a charge to operations of $441,038 based on the
difference between the amount allocated to the note and the principal repaid.
Such charges are included in interest expense.
[5] LONG-TERM LEASES
The Company leases real property under operating leases expiring in 2005.
These leases generally require that the Company pay all costs of maintenance,
insurance and licenses. Future minimum payments,
F-35
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[5] LONG-TERM LEASES (CONTINUED)
on non-cancelable operating leases with initial or remaining terms of one year
or more, are as follows at December 31, 1996:
<TABLE>
<CAPTION>
(NON-
OPERATING LEASES RELATED)
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
1997...................................................................................... $ 444,000
1998...................................................................................... 390,000
1999...................................................................................... 390,000
2000...................................................................................... 368,000
2001...................................................................................... 312,000
------------
Total Minimum Lease Payments.............................................................. $ 1,904,000
------------
------------
</TABLE>
[6] INCOME TAX EXPENSE
The Company accounts for its income taxes under the liability method. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Differences between financial reporting
and tax basis arise most frequently from differences in timing of income and
expense recognition and as a result of business acquisitions.
In 1996, the Company fully reserved its previously recorded net deferred tax
asset of $750,000. The decision to fully reserve the previously recorded
deferred tax asset of $750,000 was based upon management's evaluation that, with
the Company's losses in 1996 and the aspect of losses continuing at least
through June 30, 1997, future profits are not certain enough to presently
substantiate carrying a tax asset on the books. At December 31, 1996, the
Company had available for tax purposes net operating loss ("NOL") carryforwards
of approximately $12,100,000 and general business credits of approximately
$470,000. NOL carryforwards will expire commencing in 2002 and ending in 2011,
as follows: $3,800,000 expiring in 2002; $1,440,000 expiring in 2007; $5,310,000
expiring in 2008; $370,000 expiring in 2009 and the remainder expiring in 2011.
Tax credit carryforwards will expire commencing in 1997 and ending in 2000;
because of the timing of the tax credits, and as ("IRS") rules require the NOL
to be first utilized to offset future earnings, it is less certain to what
extent the Company will realize any benefit from its tax credits.
The Company has reserved $2,838,000 against these expected benefits. This is
due to the relative uncertainty regarding long-term future earnings and the NOL
annual limitations resulting from an "ownership change" which occurred in
January 1996, within the meaning of section 382 of the IRS Code. Although the
determination of whether an ownership change has occurred is subject to factual
and legal uncertainties, the Company believes that an ownership change occurred
in January 1996 from the issuance of common stock pursuant to the conversion of
convertible debentures. Under an ownership change, the Company will be permitted
to utilize NOL carryforwards (available on the date of such change) in any year
thereafter to reduce its income only to the extent that the amount of such
income does not exceed the product of (the "Section 382 limit") the fair market
value of the Company's outstanding equity at the time of the ownership change
and long term tax exempt rate published by the IRS; the Company's Section 382
limits on all NOL carryforwards originating before 1996 will be approximately
$605,000 per year, and accordingly, the Company will not, in any case, be able
to utilize its full NOL benefits.
F-36
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[6] INCOME TAX EXPENSE (CONTINUED)
A reconciliation of the total income taxes computed by applying the
statutory federal rate and the effective tax rate follows:
<TABLE>
<CAPTION>
1996
INCOME 1995 INCOME
TAXES % TAXES %
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal Statutory Tax Rate............................................. $ -- -- $ 382,000 34%
Use of NOL to offset tax............................................... -- -- (746,000) (66)
Increase in valuation allowance........................................ 750,000 11% -- --
---------- --- ----------- ---------
Total Federal Income Tax (Benefit)/Expense............................. $ 750,000 11% $ (364,000) (32)%
---------- --- ----------- ---------
---------- --- ----------- ---------
</TABLE>
The components of deferred taxes are as follows as of December 31, 1996:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
------------- ----------
<S> <C> <C>
Accelerated Depreciation............................................................... $ 194,000
Discontinued Operations................................................................ 12,000
Goodwill............................................................................... 145,000
Installment Sales...................................................................... 332,000
Bad Debts.............................................................................. $ 56,000
Tax Credits............................................................................ 470,000
Net Operating Loss..................................................................... 2,995,000
------------- ----------
Total.................................................................................. 3,521,000 683,000
Valuation Allowance.................................................................... (2,838,000)
------------- ----------
Total.................................................................................. $ 683,000 $ 683,000
------------- ----------
------------- ----------
</TABLE>
F-37
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[7] SEGMENT INFORMATION
In 1996 and 1995 the Company's operations are classified into two principal
industry segments: transportation and manufacturing. The following is a summary
of segment information.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Net Sales to Unaffiliated Companies:
Transportation................................................................... $ 18,697,452 $ 9,455,622
Manufacturing.................................................................... 2,812,299 4,214,699
------------- -------------
Totals........................................................................... $ 21,509,751 $ 13,670,321
------------- -------------
------------- -------------
Income (Loss) from Operations:
Transportation................................................................... $ (2,957,159) $ 331,651
Manufacturing.................................................................... 140,863 1,058,285
------------- -------------
Totals........................................................................... (2,816,296) 1,389,936
Other expense, net................................................................. (459,939) (592,694)
------------- -------------
(Loss) Income Before Income Taxes and Discontinued Operations as Reported in the
Accompanying Statement of Operations............................................. $ (3,276,235) $ 797,242
------------- -------------
------------- -------------
Identifiable Assets from Continuing Operations:
Transportation................................................................... $ 20,506,506 $ 10,961,938
Manufacturing.................................................................... 781,451 1,161,709
------------- -------------
Totals........................................................................... $ 21,287,957 $ 12,123,647
------------- -------------
------------- -------------
Depreciation and Amortization:
Transportation................................................................... $ 1,175,799 $ 654,143
Manufacturing.................................................................... 223,350 77,813
------------- -------------
Totals........................................................................... $ 1,399,149 $ 731,956
------------- -------------
------------- -------------
Capital Expenditures:
Transportation................................................................... $ 5,463,707 $ 1,080,292
Manufacturing.................................................................... 240,356 198,084
------------- -------------
Totals........................................................................... $ 5,704,063 $ 1,278,376
------------- -------------
------------- -------------
</TABLE>
[8] MAJOR CUSTOMERS
Revenues from a single transportation contract with Ford Motor Company
approximated 12% and 17% of the Company's revenues from continuing operations in
1996 and 1995, respectively. Revenues received in 1996 and 1995 approximated
$2,520,000 and $2,364,000, and their receivables at December 31, 1996
approximated $407,000.
ATAB, a wholly-owned subsidiary, derives substantially 100% of its revenue
from S&S. Revenues received in 1996 and 1995 approximated $2,812,000 and
$4,112,000, and their receivable at December 31, 1996 approximated $17,000. The
remaining contract work for S&S will be completed in June 1997.
F-38
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[9] RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company owed its Chairman, and or corporations
under his control, and related family entities $1,105,114 which consists of the
following:
<TABLE>
<S> <C>
Balance due at December 31, 1995........................................ $ 602,295
Accrued preferred stock dividends....................................... 169,335
Accrued interest charged to operations.................................. 131,484
Sale of buses to Company................................................ 240,000
Advances--cash.......................................................... 500,000
Repayments.............................................................. (538,000)
---------
Balance due at December 31, 1996........................................ $1,105,114
---------
---------
Annual maturities as of December 31, 1996 are as follows:
1997.................................................................... $ 439,646
1998.................................................................... 203,000
1999.................................................................... 146,700
2000.................................................................... 170,300
2001.................................................................... 145,468
---------
Total................................................................... $1,105,114
---------
---------
</TABLE>
The above loan bears interest at 15% per annum, with weekly payments
including interest of $10,000. $500,000 of the balance due at December 31, 1996
are subordinated to amounts due under a line of credit agreement (See Note 3).
In November 1996, the Company entered into an eleven year employment
agreement, commencing January 1, 1997, with the Chairman. The agreement
provides, among other things for the Chairman to receive a salary of $250,000
per year plus annual CPI adjustments and for a bonus equal to 8% of the
Company's pretax income. In addition, the agreement grants the Chairman the
right to receive 1,000,000 shares of the Company's common stock until March
1997.
The Company recorded compensation expense for $1,562,500 in 1996 for the
market value of the stock on the day the agreement was executed. The stock was
issued to the Chairman in February 1997. The number of shares outstanding and
weighted average number of shares of common stock and common stock equivalents
outstanding during 1996 have been adjusted to reflect the issuance as if it
occurred in November 1996. See Note 18 with respect to the Company's obligation
to repurchase the capital stock owned by Mr. Margolies or members of his family.
In November 1996, the Company entered into an agreement whereby the 180,000
shares of Preferred Stock Series C, all of which is held by the Company's
Chairman and his family, were converted to 180,000 shares of Preferred Stock
Series M. The Preferred Series C had the following features: dividends
cumulative and payable annually at a rate of $1.065 per share; redeemable at the
option of the Issuer after January 1, 2000, at a price of $10.00 per share;
voting rights at the rate of 3.3 common stock voting shares per each preferred
share. The Preferred Series M has the following features: no dividend rights; no
redemption rights; no voting rights; convertible into the Company's common stock
after December 31, 1997 at the rate of 9.5 common shares per each preferred
share. In connection with this conversion, the Company recorded an expense of
$680,000 in 1996. This expense was calculated based on the excess of the market
value of the Company's common stock (on the date of the conversion) over the
value of the
F-39
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Series C Preferred Stock, further reduced by the dividends the Chairman would
have received on the Series C Preferred Stock.
[10] PROFIT-SHARING PLAN
One of the companies adopted a voluntary profit-sharing plan for the benefit
of its employees. Contributions are at the discretion of the company. No
contributions were accrued or paid during the years ended December 31, 1996 and
1995. Another company maintains a non-contributory 401(k) plan.
[11] STOCK OPTIONS:
The Company has the following stock options plans:
- In August 1995, the Company adopted an incentive stock option plan for the
benefit of its key officers, directors and employees. The Company reserved
20,000 shares of its common stock for issuance under the Plan, which
expired on September 1, 1995.
- On April 11, 1995, as part of an agreement with Argent Securities, Inc.
("Argent") Argent gave up its right to first refusal to underwrite future
equity offerings of the Company, and its right to nominate two members to
the Company's Board of Directors; in exchange the Company reserved and
issued to Argent options to purchase 33,333 shares of the Company's common
stock, all of which were exercised except as follows:
8,333 shares at $7.50 per share through April 11, 1997
- In October 1994 the Company issued stock options, pursuant to a consulting
agreement in connection with the acquisition of ATAB, for 18,333 shares of
common stock in 1994 and 50,000 shares of common stock in 1995, of which
59,167 options were exercised in 1995 at $3.00 and $4.50 per share; the
remaining option was canceled pursuant to a superseding consulting
agreement.
- In November 1995, the Company, pursuant to the acquisition of ASI,
reserved and issued options to certain principals and/or employees to
purchase 55,000 shares of common stock as follows:
18,333 shares at $7.50 per share between December 1, 1996 through
December 31, 1998
18,333 shares at $9.00 per share between December 1, 1997 through
December 31, 1998
18,334 shares at $12.00 per share between December 1, 1998 through
December 31, 1998
F-40
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the plans are as follows:
<TABLE>
<CAPTION>
STOCK OPTION INCENTIVE
PLAN FOR NON- STOCK
EMPLOYEE OPTIONS; OTHER
DIRECTORS, SHARES OPTIONS;
CONSULTANTS & EXERCISE UNDER EXERCISE SHARES UNDER EXERCISE
ADVISORS PRICE OPTION PRICE OPTION PRICE
------------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31,
1994............................ -- $ -- 833 $ .36 18,333 $ 3.00
Granted.......................... 33,333 4.50-7.50 -- -- 106,667 4.50-12.00
Exercised........................ -- -- (833) .36 (60,833) 3.00-4.50
Expired.......................... -- -- -- -- -- --
Canceled......................... -- -- -- -- -- --
Outstanding at December 31,
1995............................ 33,333 4.50-7.50 -- -- 64,167 4.50-12.00
------------- ----- -------------
Granted.......................... -- -- -- -- -- --
Exercised........................ (25,000) 4.50 -- -- -- --
Expired.......................... -- -- -- -- -- --
Canceled......................... -- -- -- -- (9,167) 4.50
Outstanding at December 31,
1996............................ 8,333 $ 7.50 -- $ -- 55,000 $ 7.50-12.00
------------- ----------- ----- --- ------------- -------------
------------- ----------- ----- --- ------------- -------------
</TABLE>
STOCK BASED COMPENSATION
The Company has elected to adopt the disclosure-only provisions of SFAS No.
123 (as discussed in Note 1) and will continue to apply APB Opinion No. 25 to
account for stock options. Had compensation expense been determined as provided
in SFAS No. 123 for stock options using the Black-Scholes option pricing model,
the pro forma effect for the years ended December 31, 1996 and 1995 would have
been:
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Net income (loss) applicable to common shares--as reported............................. $ (6,863,786) $ 932,218
Net income (loss) applicable to common shares--pro forma............................... $ (6,989,441) $ 915,722
Net income (loss) per common share--as reported........................................ (1.70) 0.51
Net income (loss) per common share--pro forma.......................................... (1.73) 0.50
</TABLE>
The fair value of each option grant is calculated using the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Expected life (in years)............................................................... 3 3
Interest rate.......................................................................... 5.4% 5.4%
Volatility............................................................................. 75.2% 75.2%
Dividend yield......................................................................... 0.0% 0.0%
</TABLE>
The weighted average fair value of the stock options granted in 1995 was
$3.88.
F-41
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PUBLIC OFFERING OF SECURITIES
In August, 1996 the Company completed a public offering of 1,815,000 Units
of securities. Each "Unit" consisted of one share of Common Stock, $.01 par
value, and one Redeemable Class C Common Stock Purchase Warrant (See "Stock
Warrants" below). The offering was underwritten by a syndicate of
broker-dealers, with First London Securities Corporation acting as
Representative of the underwriters. The Units were offered to the public at a
price of $3.82 per Unit, or a total offering of $6,933,300. The prospectus
prepared by the Company stated that net proceeds of $5,496,805 (after payment of
the expenses of the offering, including payments to the underwriters) were
anticipated. For purposes of this accounting, net proceeds from the offering of
$5,013,056 have been recorded, as additional expenses have been charged to the
offering. The Company expects to use the net proceeds primarily to repay debt,
to finance acquisitions and for working capital.
STOCK GRANT
On January 18, 1994, the Board of Directors of the Company adopted a
Restricted Stock Grant Program (the "Program") pursuant to which 183,333 shares
of Common Stock were reserved for issuance. The Program provides that if the
Company met certain sales and income goals for the twelve months ended June 30,
1994, the shares would be granted to each of the Company's executive officers
(the "Grantees") who remain employed by the Company on that date. These 183,333
shares of restricted common stock were issued to the Company's Executive
Officers on August 15, 1994 and may be voted by Grantees. Originally, the
restricted common stock shares issued were subject to forfeiture each year on
May 1 of 1995 through 1998 if total Company sales for the preceding fiscal year
did not meet certain goals, and it was the Company's opinion that attainment of
the specified sales goals was probable. The Plan was amended in April 1995.
Subsequent to the amendment, 20% of the restricted common stock shares issued
shall be subject to forfeiture each year on May 1 of 1995 through 1999 if the
Company does not meet certain sales, profit and income per share goals for the
preceding fiscal year. The amendment divides the grant into three sections; one
third of the grant is based on obtaining a minimum sales goal, one third is
based on a specified amount of income from operations and one third based on
earnings per share. If the second and third goal are not met in any one year,
they can be carried over to the subsequent year. All items were met in 1994,
items one and two were met in 1995 and item one was met in 1996. Additionally,
on August 15, 1998 and August 15 of each successive year through August 15,
2001, restrictions shall lapse on 25% of the restricted common stock shares
issued (and not forfeited due to the Company's failure to meet the specified
goals); however, all shares on which restrictions have not lapsed shall be
forfeited by the grantee upon the grantee's termination of employment with the
Company. The shares were valued at $4.50 per share, the price of the common
stock at time of issuance and a deferred compensation contra equity account,
amortized over the 84 month period restrictions and forfeiture provisions lapse,
was recorded at time of issuance. The balance of the deferred compensation
related to this stock grant at December 31, 1996 was $545,089. Deferred
compensation expense in connection with this grant was $113,415 and $135,667,
respectively, for the years ended December 31, 1996 and 1995, respectively. When
and if the restrictions lapse on the restricted common stock shares, the
Company, under certain conditions, will indemnify the Grantees of the income tax
consequences accruing to the Grantees by virtue of the lapse of restrictions.
STOCK SPLIT
The Company's Board of Directors declared a one-for-six reverse stock split
of its common stock, effective August 27, 1996. The par value of the common
stock remains at $.01 per share. All share data have been adjusted for the
effects of the split.
F-42
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK WARRANTS
On December 1, 1994, Argent and the Company entered into a Letter of
Agreement, pursuant to which Argent Securities, Inc. agreed to provide investor
relations and corporate communications services to the Company for a period of
one year. In consideration of those services, the Company agreed to pay an
annual fee of $20,000 and to issue to Argent warrants to purchase 66,667 shares
of the Company's Common Stock at $2.25 per share. On April 11, 1995 the Company
and Argent entered into a second Letter Agreement. Among the terms of the new
agreement were a reduction to 33,333 of the shares which Argent could purchase
under the warrants issued to it in 1994. These warrants were fully exercised in
1996.
Argent was the underwriter of an offering of securities which the Company
completed on February 28, 1995. Argent received commissions and a
non-accountable expense allowance in compensation for those services. In
connection with that offering, the Company sold to Argent an Underwriter's
Warrant for a nominal price. The Underwriter's Warrant will permit Argent to
purchase 17,000 shares of Series A Preferred Stock between February 21, 1996 and
February 20, 1999.
Effective with the February 28, 1995 offering, the Company issued 170,000
Class A Common Stock Purchase Warrants, each of which allowed the holders to
purchase a share of the Company's common stock and a Class B Common Stock
Purchase Warrant for $8.10. Each Class B Warrant permitted the purchase of a
share of common stock at $9.90. No Class A Warrants were exercised before such
warrants expired on August 20, 1996. Accordingly, there are no Class A Warrants
or Class B Warrants currently outstanding.
Effective with the August 27, 1996 offering, the Company issued 1,815,000
Class C Common Stock Purchase Warrants, each of which allows the holders to
purchase a share of the Company's common stock at $3.82 per share. The Class C
Warrants expire on August 27, 1999. No Class C Warrants have been exercised as
December 31, 1996.
STOCK AUTHORIZATION
On February 21, 1996, the Board of Directors approved an increase in the
authorized common stock shares from 20,000,000 to 50,000,000 shares.
REGISTRATION OF "FORM S-8" STOCK
In September 1996 the Company established the U.S. Transportation Systems,
Inc. Employee Stock and Stock Option Plan.
On October 16, 1996, the Company registered 2,000,000 common shares pursuant
to a Form S-8 filing with the Securities and Exchange Commission. The stock is
reserved for issuance to the Company's Employees, Directors, Officers, or in
consideration for bona fide services provided to the Company by consultants or
advisors. The Company's Board has the sole discretion in determining when to
issue such shares. As of December 31, 1996, the Company had issued 326,000
Common Shares so registered under such Form S-8 filing. The Company had no
commitment at December 31, 1996 to issue any additional shares.
[12] MOUNTAIN VIEW SETTLEMENT
In 1993 the pending litigation between Mountain View Coach Lines, Inc.
(which was in Chapter 7 bankruptcy proceeding) and the State of New York was
settled for $376,000. This settlement, which was approved by the bankruptcy
court on March 28, 1994, insured Mountain View sufficient assets to pay all of
F-43
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[12] MOUNTAIN VIEW SETTLEMENT (CONTINUED)
its administrative expenses and priority claims. The Company's approved priority
claims against Mountain View's assets aggregated $325,000. These claims were not
recorded previous to December 31, 1993 by the Company as this receivable was not
considered realizable until the aforementioned settlement. The bankruptcy estate
could not be concluded until payment of the settlement with the State of New
York cleared administrative procedures, which process took longer than
originally anticipated. In October 1996, after deducting court-approved offsets
of liabilities to the New York Department of Taxation & Finance and the New York
Worker's Compensation Board, the Company received approximately $109,000 in
regards to its claim against Mountain View; the difference between the amount
receivable on the Company's books and the eventual proceeds were expensed in
1996.
[13] ACQUISITIONS
In February 1996, the Company acquired certain personal property, intangible
assets and contract rights from Krogel Air Freight, Inc. and Krogel Freight
Systems of Tampa, Inc. for $150,000 in cash and 18,333 shares of the Company's
common stock. This acquisition was accounted for as a purchase. As a result of
this acquisition the Company recorded goodwill of $205,000 which is being
amortized over eight years.
In June 1996, the Company purchased certain assets from Jackson & Johnson,
Inc. for $160,000 in cash and the assumption of approximately $2,860,000 in
secured debt. No goodwill was recorded as the fair value of the assets acquired
approximated the consideration given by the Company.
In September 1996, the Company acquired 100% of the common stock of BancPro
Transportation, Inc. in exchange for: a $1,150,000 zero interest-bearing note
due September 1998; 300,000 shares of the Company's common stock; and the
following preferred stock (25% of which relates to an employment contract with
the principal officer of BancPro Transportation, Inc.), the balance of the
shares relate to a consulting agreement with CFM:
<TABLE>
<C> <S>
6,667 shares of Preferred Stock
Series E
8,333 shares of Preferred Stock
Series F
10,833 shares of Preferred Stock
Series G
12,500 shares of Preferred Stock
Series H
14,167 shares of Preferred Stock
Series I
15,833 shares of Preferred Stock
Series J
17,500 shares of Preferred Stock
Series K
19,167 shares of Preferred Stock
Series L
</TABLE>
Each share of preferred stock is convertible into a maximum of ten shares of
the Company's common stock upon the attainment by BancPro of certain revenue
goals. Since it is not certain that any such goals will be attained, no amount
was booked for the issuance of these preferred shares. As revenue goals are
reached, the Company will record expense for the respective common shares which
are issued. As part of the agreement the Company received a guarantee from the
Seller in regards to BancPro receivables acquired. This acquisition was
accounted for as a purchase and resulted in recorded goodwill of $455,906, which
is being amortized over eight years.
In June 1995, the Company acquired the capital stock of Avanti Delivery
Services, Inc. and Priority Express Service, Inc. for an aggregate of 130,000
shares of the Company's common stock and, in July 1995,
F-44
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[13] ACQUISITIONS (CONTINUED)
the assets of Falcon Freight, Inc. for $20,000. The acquired companies were all
Florida based corporations which collectively operate a package delivery service
under the name "Armstrong Freight Service" ("Armstrong"). Further, in July 1995,
the Company acquired the capital stock of Trans Lynx Express Inc. ("TLE"),
another Florida based company that provides ground transportation of
containerized air cargo, for 19,424 shares of the Company's common stock. These
acquisitions were accounted for as purchases, which resulted in aggregate
recorded goodwill of $449,483 for the excess of the purchase price over the fair
value of the assets acquired, less liabilities assumed. Goodwill is being
amortized over eight years.
In November 1995, the Company acquired all of the issued and outstanding
capital stock of ASI in exchange for 300,000 shares of the Company's common
stock. ASI is engaged in designing, manufacturing and selling machinery which
folds and tests airbags and assembles airbag modules, for installation in
passenger and utility vehicles. ASI holds several design patents on automatic
bag folding machinery and the process through which these machines operate. This
acquisition was also accounted for as a purchase, which resulted in recorded
goodwill of $3,970,072 for the excess of the purchase price over the fair value
of the assets acquired, less liabilities assumed. Goodwill is being amortized
over eight years. In November 1996, the Company's management made the decision
to discontinue ASI's operations, and it is, thereby, accounted for in the
accompanying financial statements as a discontinued operation (See Note 14).
The purchase price for all acquisitions in 1996 and 1995 was allocated as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Property and equipment............................................. $ 3,029,900 $ 953,800
660,900 4,464,300
Working capital, net............................................... 1,250,000 (3,395,700)
----------- ------------
Total.............................................................. $ 4,940,800 $ 2,022,400
----------- ------------
----------- ------------
</TABLE>
F-45
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[13] ACQUISITIONS (CONTINUED)
The following unaudited pro forma statements do not purport to be indicative
of the results of operations that would have occurred if U.S. Transportation
Systems, Inc. had acquired Armstrong, Krogel, Jackson & Johnson and BancPro at
the beginning of the periods presented.
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------------------------------
ARMSTRONG
FREIGHT TOTAL
U.S. KROGEL, JAY & SERVICE AND BEFORE PRO
TRANSPORTATION JAY AND TRANS LYNX FORMA PRO FORMA
SYSTEMS BANCPRO EXPRESS ADJUSTMENTS ADJUSTMENTS TOTAL
-------------- ------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue................................ $ 12,225,000 $15,610,000 $2,050,000 2$9,885,000 $ -- $29,885,000
Total expenses......................... 10,770,000 15,970,000 2,030,000 28,770,000 30,000 28,800,000
Other expense.......................... 220,000 260,000 15,000 495,000 90,000 585,000
Income tax benefit..................... 364,000 -- -- 364,000 -- 364,000
-------------- ------------- ----------- ----------- ----------- ----------
Income/(loss) from continuing
operations........................... 1,599,000 (620,000) 5,000 984,000 (120,000) 864,000
Loss from discontinued operations...... (37,000) -- -- (37,000) -- (37,000)
-------------- ------------- ----------- ----------- ----------- ----------
Net income/(loss)...................... $ 1,562,000 $ (620,000) $ 5,000 $ 947,000 $(120,000) $ 827,000
-------------- ------------- ----------- ----------- ----------- ----------
-------------- ------------- ----------- ----------- ----------- ----------
Earnings per share:
Income from continuing operations.... $ .37
Loss from discontinued operations.... (.02)
----------
$ .35
----------
----------
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------------------------------
ARMSTRONG
FREIGHT TOTAL
U.S. KROGEL, JAY & SERVICE AND BEFORE PRO
TRANSPORTATION JAY AND TRANS LYNX FORMA PRO FORMA
SYSTEMS BANCPRO EXPRESS ADJUSTMENTS ADJUSTMENTS TOTAL
-------------- ------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenue................................ $ 16,610,000 $10,330,000 $ -- 2$6,940,000 $ -- $26,940,000
Total expenses......................... 18,020,000 11,190,000 -- 29,210,000 110,000 29,320,000
Other expense.......................... 1,110,000 150,000 -- 1,260,000 90,000 1,350,000
Income tax (expense)................... (750,000) -- -- (750,000) -- (750,000)
-------------- ------------- ----------- ----------- ----------- ----------
Loss from continuing operations........ (3,270,000) (1,010,000) -- (4,280,000) (200,000) (4,480,000)
Loss from discontinued operations...... (2,668,000) -- -- (2,668,000) -- (2,668,000)
-------------- ------------- ----------- ----------- ----------- ----------
Net loss............................... $ (5,938,000) $(1,010,000) $ -- ($6,948,000) $(200,000) $(7,148,000)
-------------- ------------- ----------- ----------- ----------- ----------
-------------- ------------- ----------- ----------- ----------- ----------
Earnings per share:
Income from continuing operations.... $ (1.15)
Loss from discontinued operations.... (.66)
----------
($ 1.81)
----------
----------
</TABLE>
F-46
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[13] ACQUISITIONS (CONTINUED)
The proforma adjustments for the years ended December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Amortization of goodwill.............................................. $ 110,000 $ 30,000
Interest expense on note issued....................................... 90,000 90,000
---------- ----------
Total proforma adjustments............................................ $ 200,000 $ 120,000
---------- ----------
---------- ----------
</TABLE>
[14] DISCONTINUED OPERATIONS
AIRBAG EQUIPMENT MANUFACTURER
In November 1996, the Company adopted a formal plan to discontinue its
operation that engages in the design, manufacturing and sales of machinery which
folds and tests airbags and assembles airbag modules for installation in
passenger and utility vehicles. These operations were located in Phoenix,
Arizona. ASI's operations experienced lower gross profit margins than the
Company believed was attainable at the time of acquisition. Further, ASI's
projected capital requirements for 1997 exceeded any amount the Company believed
were warranted by the timing of the anticipated returns. The decision to
discontinue ASI's operations was, thus, precipitated by management's belief that
this segment no longer represented the best utilization of the Company's assets.
On March 28, 1997 the Company sold ASI as a continuing operation for:
$100,000 cash; a 10.5% interest bearing note of approximately $5,200,000 with
monthly payments of approximately $80,000, the unpaid principal fully due on
April 1, 1999; and a non-interest bearing note of $685,000 due April 1, 1999.
These notes are guaranteed personally by the Seller's principal shareholder and
secured by the assets of ASI; additionally, 100% of ASI stock is pledged against
these notes.
During the year ended December 31, 1996, the Company booked $196,843 for the
Company's provision for the estimated operating losses from discontinued
operations during the phase-out period. The operating loss of the Company's
airbag equipment manufacturing segment for the year ended December 31, 1996 was
$1,787,859 (excluding the phase-out period losses) as compared to net income for
the period from November 15, 1995 (the date of acquisition) to December 31, 1995
of $94,545. The results of operations of ASI have been reclassified to
discontinued operations for the years ended December 31, 1996 and 1995. The
segment's net sales were $6,889,758 in 1996 and $905,247 in the aforementioned
period in 1995. Net assets of the discontinued segment held for sale, includes
accounts receivable, inventory (including work in progress), property and
equipment and intangibles.
ENTERTAINMENT DIVISIONS
In November 1996, the Company adopted a formal plan to discontinue its
entertainment divisions which specialize in the retail sale of tickets for
theater, sports and various entertainment events in the New York and Chicago
area. These operations were located in Chicago and New York. The entertainment
divisions experienced lower gross profit margins and increasing losses in recent
years, and the Company believed that the potential for profitability is doubtful
in the near future and was attainable at the time of acquisition. The decision
to discontinue the entertainment divisions was based upon management's belief
that this segment no longer represented a profitable segment.
On January 7, 1997 the Company sold the entertainment divisions as a
continuing operation for 850,000 shares of common stock of Packaging Plus
Services, Inc., a publicly-held company. PKGP was trading at $0.875 per share
and the 850,000 shares represented approximately 28% of PKGP's total issued and
outstanding common stock at the time of the sale.
F-47
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[14] DISCONTINUED OPERATIONS (CONTINUED)
During the year ended December 31, 1996, the Company recorded no provision
for the estimated operating losses from discontinued operations during the
phase-out period (January 1-7, 1997), as the operating activity for such period
was de minimus. The operating loss of the Company's entertainment divisions for
the year ended December 31, 1996 was $683,514, as compared to a net income of
$35,330 for 1995. The results of operations for the entertainment division have
been reclassified to discontinued operations for the years ended December 31,
1996 and 1995. The segment's net sales were $2,331,770 and $2,775,480 in 1996
and 1995, respectively. Net assets of the discontinued segment held for sale of
$189,400 comprised of approximately $80,000 in ticket inventory and the
remainder in computer equipment and furniture and fixtures are included in Net
Assets Held for Sale on the Balance Sheet at December 31, 1996.
CHARTER BUS
On December 31, 1993, the Company adopted a formal plan to discontinue its
charter bus operations. The Company's charter operations were primarily located
in New York, Atlantic City and Toledo. The Company's charter operations had
minimal gross profit margins which continued to decrease over the last few years
and, in fact, were profitable only when used in conjunction with contract
operations. The decision to discontinue the charter segment resulted from
management's belief that charter operations no longer represented a profitable
segment and that the segment's assets could best be utilized elsewhere.
During 1994, the Company disposed of its charter operations in New York and
New Jersey by selling off assets and transferring the assets to other Company
locations. Additionally, in 1995 the Company disposed of its charter bus
operations in Florida (March 1995) and Ohio (October 1995) as continuing
operations. As of December 31, 1996, all assets relating to discontinued charter
operations had been disposed of with the exception of one highway motorcoach
with a carrying value approximating fair market value of $55,953, which amount
is included in Assets Held for Sale. The company generated $97,000 and
$3,091,000 from the sale of assets of the discontinued charter bus segment
during the years ended December 31, 1996 and 1995: $97,000 and $2,123,000 in the
form of sale-type leases in 1996 and 1995, respectively; and $375,000 in two
promissory notes in 1995.
The results of operations for charter bus operations have been reclassified
to discontinued operations for the year ended December 31, 1995. During the year
ended December 31, 1995, the Company increased its reserve for estimated loss on
disposal of discontinued operations by $167,199 (net of income tax benefit of
$86,000) as a result of losses from discontinued operations exceeding the
Company's previous provision for such losses. The operating loss of the
Company's charter bus segment for the year ended December 31, 1995 was $410,431
and net sales were $1,275,182. Net assets of the discontinued segment of
$55,953, relating to one highway motor coach, are included in Net Assets Held
for Sale on the Balance Sheet as of December 31, 1996.
INTEREST EXPENSE ALLOCATION
Interest expense has been allocated to discontinued operations. Interest
expense allocated to discontinued operations totals $577,000 and $129,000 in
1996 and 1995, respectively, and is comprised of: 1) interest directly
attributed to the discontinued operations; and 2) interest not directly
attributed to any operating segment, which amount has been allocated based upon
the ratio of net assets of the discontinued operation to the sum of the
Company's total net assets.
NET ASSETS HELD FOR SALE
In November 1996, the Company announced its intention to dispose of its
airbag equipment manufacturer and entertainment division. In a prior year, the
Company's charter bus operation was
F-48
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[14] DISCONTINUED OPERATIONS (CONTINUED)
discontinued. The consolidated balance sheet relating to the discontinued
operations as of December 31, 1996 has been reclassified to net assets held for
sale as follows:
<TABLE>
<S> <C>
Net Assets Held for Sale:
Current assets........................................ $2,879,257
Property, net......................................... 905,522
Intangibles net....................................... 3,586,800
---------
Total assets........................................ 7,371,579
---------
Bank debt............................................. 766,327
Other liabilities..................................... 2,013,446
---------
Total liabilities................................... 2,779,773
---------
Net assets held for sale.............................. $4,591,806
---------
---------
</TABLE>
[15] FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of trade receivables
and payables, notes receivable and payable, investments in sales-type leases and
related party debt. The book values of trade receivables, payables, notes
payable and related party debt are considered to be representative of their
respective fair values. The calculation of the fair value of financial
instruments requires assumptions which include interest rates for similar
instruments and expected settlement dates.
The estimated fair value of the Company's other financial instruments are as
follows:
<TABLE>
<CAPTION>
ESTIMATED FAIR
CARRYING AMOUNT VALUE
---------------- -------------------
<S> <C> <C>
Notes Receivable................................................. $ 1,284,802 $ 1,261,000
BancPro's receivables............................................ $ 1,776,282 $ 1,692,000
Investments in sales-type leases................................. $ 2,360,737 $ 2,293,000
</TABLE>
[16] CONCENTRATION OF CREDIT RISK
The Companies have cash deposits with various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000.
The Companies maintain cash funds with a brokerage house. These accounts are
insured up to $100,000 by Securities Investor Protection Corporation.
[17] CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED STOCK
In November 1995, the Company sold an aggregate of $3,150,000 principal
amount of 8% convertible debentures for net proceeds of $1,776,288 and, in
February 1996, the Company sold $300,000 of convertible preferred stock for net
proceeds of $256,728. Each of these transactions were made in reliance upon
Regulation S of the Securities Act. The Securities and Exchange Commission (the
"Commission") has taken the position that certain sales of securities pursuant
to Regulation S, effected in a manner similar to the sales made by the Company
(which includes the sale of a substantial number of shares at a significant
discount to the then market price, which shares were resold soon after the 40
day holding period expired), were in fact not made in compliance with such
Regulation. Although management believes that its transactions were in
compliance with the requirements of Regulation S, there can be no assurance that
the Commission will not review such transactions and determine that securities
laws have been violated. If this
F-49
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[17] CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED STOCK (CONTINUED)
were to occur, the Company could become subject to actions by the Commission
which could result in an injunction and/or fines against the Company. Any such
actions by the Commission could have an adverse impact on the Company for which
no reserve has been established. In January 1996, the debentures were converted
by the holders into 753,667 shares of common stock. In March 1996, the preferred
stock was converted into 88,889 shares of the Company's common stock.
[18] COMMITMENTS AND CONTINGENCIES
The Company is a party to various matters in litigation. These matters are
subject to many uncertainties and the outcome of all individual matters is not
predictable. Although the amount of liability at December 31, 1996 with respect
to these matters cannot be currently determined, management believes, based upon
the advice of legal counsel, that the outcome of such litigation will not have a
material adverse effect on the consolidated financial position, operations, cash
flow or liquidity of the Company.
The Company is primarily regulated by the Department of Transportation
("DOT") which sets certain safety standards which must be met by the Company's
revenue equipment and sets certain driver requirements. Substantially all of the
Company's transportation segment is subject to these regulations.
At December 31, 1996, the Company has $126,000 of irrevocable standby
letters of credit, $50,000 of which is to cover the Company's liability with
respect to pending accident claims and $76,000 of which is to collateralize
various operational bonds. At December 31, 1996, the Company has recorded a
liability of approximately $55,000 with respect to pending accident claims,
which amount is included in "Accrued Liabilities", in the accompanying balance
sheet. The Company has recorded all contingent liabilities which it believes are
likely and measurable and does not anticipate actual losses in these matters to
exceed what has been accrued.
The Company maintains a self-insurance program for that portion of health
care costs not covered by insurance. The Company is liable for claims up to
$25,000 per family annually, and aggregate claims up to $500,000 annually. Self
insurance costs are accrued based upon the aggregate of the liability for
reported claims. The Company recorded expense in connection with the insurance
plan of $372,000 and $480,000 for 1996 and 1995, respectively.
On July 10, 1996 the Company entered into an employment agreement with
Ronald P. Sorci to act as the Company's controller for a term of five years. The
agreement was modified on November 22, 1996. Under the agreement as modified,
Mr. Sorci will receive an annual salary of $100,000, an annual non-accountable
expense allowance of $25,000, 2,083 shares of Common Stock each March 31 and
November 30, and other customary benefits. The agreement also contained a
covenant by Mr. Sorci that he would not compete with the Company, for which Mr.
Sorci received 199,444 shares of Common Stock plus a loan in the amount of
$250,000. The loan is due on May 31, 1997 with interest at 9.5%, and is secured
by 70,000 shares of Common Stock. In addition, the Company agreed to indemnify
Mr. Sorci against certain contingent liabilities which may arise from Mr.
Sorci's previous service as Chief Executive Officer of RPS Executive Limousines
Ltd., a limousine service in the New York metropolitan area.
In November 1996, the Company entered into an employment agreement with the
Chairman (See Note 9). The Agreement further provides that in the event of a
change in control of the Company the Company must (i) repurchase all shares of
capital stock owned by Mr. Margolies or members of his family, (ii) pay Mr.
Margolies ten times his last annual salary, (iii) issue to Mr. Margolies 25% of
the Common Stock of the Company, and (iv) repay all loans by the Margolies
family to the Company. Mr. Margolies has agreed to waive these "change of
control" provisions in connection with the proposed merger with Precept
Investors, Inc.
F-50
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[19] IMPAIRMENT OF ASSET
In October 1996 the Company's harness manufacturing subsidiary, ATAB of
Texas, lost its long term profitable contract with Stewart & Stevenson ("S&S"),
ATAB's only customer. Although ATAB continues to do work for S&S, all subsequent
work has materially lower profit margins to the extent that future profits at
ATAB are uncertain. As such, management determined that certain intangible
assets including goodwill should be written off as the net realizable value of
such assets had been significantly impaired as a result of the significant
change in the profit outlook for ATAB.
[20] SUBSEQUENT EVENTS
On March 7, 1997 the Company signed a letter of intent to enter into a
merger agreement with Precept Investors, Inc. ("Precept"), a Texas corporation,
which is a leading distributor of business forms and product management systems
and which also has a limousine service business and a package delivery business.
Pursuant to the aforementioned agreement, Precept would be merged into the
Company with the Precept shareholders receiving an aggregate of 36,000,000
shares of the Company's common stock. The merger will not be completed, however,
unless a number of conditions precedent are satisfied, including inter alia;
negotiation and execution of a binding merger agreement and other related
agreements, documents and instruments; satisfactory completion of due diligence
reviews by both Precept and the Company, which reviews are presently ongoing;
receipt of a fairness opinion from an investment banker of the Company; the
expiration or termination of any applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and approval
of the merger by the shareholders of the Company and of Precept. Accordingly,
these financial statements have been prepared as if no merger will take place.
On January 30, 1997 the Company formed a wholly-owned subsidiary named U. S.
Trucking, Inc. ("USTI"). Thereafter, the following transactions
contemporaneously took place:
- 100% of the issued and outstanding stock of the Company's wholly-owned
tractor-trailer subsidiaries, Trans Lynx Express, Inc. and Jay & Jay
Transportation, Inc., were merged into USTI as wholly-owned subsidiaries
thereof;
- USTI acquired 100% of the issued and outstanding stock of Mencor, Inc., a
tractor-trailer brokerage company in exchange for $75,000 and 37,500
shares of the Company's common stock;
- USTI acquired 100% of the issued and outstanding stock of Gulf Northern
Transport, Inc. ("GNTI"), a tractor-trailer delivery company for common
shares of USTI which represented 25% of the issued and outstanding stock
of USTI.
In connection with the acquisition of Mencor and GNTI, USTI entered into
employment agreements with Danny Pixler and Michael Menor. The agreement with
Danny Pixler provides that USTI will employ Mr. Pixler through January 30, 2002
as President of USTI and GNTI. Mr. Pixler will receive an annual salary of
$105,000 as well as options to purchase 60,000 shares of the Company's Common
Stock at prices from $1.75 through $3.75. The Agreement with Mr. Menor provides
that he will be employed through January 30, 2000 as President of Mencor. Mr.
Menor will receive an annual salary of $60,000. The Company also issued 18,750
shares of Common Stock to Mr. Menor as consideration for his covenant not to
compete with the Company for two years after termination of his employment.
F-51
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 905,242
Cash--restricted............................................................... 232,879
Accounts receivable, net allowance for doubtful accounts of $946,000........... 8,014,234
Notes receivable............................................................... 609,063
Net investment in sales-type leases............................................ 937,233
Inventories.................................................................... 393,943
Prepaid and other assets....................................................... 836,795
---------
TOTAL CURRENT ASSETS........................................................... 11,929,389
---------
PROPERTY, PLANT AND EQUIPMENT:
Revenue equipment.............................................................. 12,199,402
Land & building................................................................ 636,119
Other.......................................................................... 1,429,388
---------
Total (at cost).............................................................. 14,264,909
Less: Accumulated depreciation................................................. (4,365,405)
---------
PROPERTY, PLANT AND EQUIPMENT-- NET.............................................. 9,899,504
---------
ASSETS HELD FOR SALE............................................................. 527,810
---------
NET ASSETS OF BUSINESS TRANSFERRED UNDER CONTRACTUAL ARRANGEMENT (NOTE 3)........ 500,000
---------
OTHER ASSETS:
Net investment in sales-type leases............................................ 1,148,985
Goodwill, net of accumulated amortization of $658,502.......................... 1,848,117
Other intangible assets, net of accumulated amortization of $336,265........... 999,611
Notes receivable............................................................... 239,432
Marketable securities.......................................................... 189,400
Other assets................................................................... 429,274
---------
TOTAL OTHER ASSETS............................................................... 4,854,819
---------
TOTAL ASSETS..................................................................... $27,711,522
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft................................................................. $ 13,679
Notes payable.................................................................. 2,218,847
Line of credit................................................................. 5,679,586
Accounts payable............................................................... 1,526,279
Accrued liabilities............................................................ 1,355,408
Due to related party........................................................... 181,257
---------
TOTAL CURRENT LIABILITIES........................................................ 10,975,056
---------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES:
Notes payable.................................................................. 5,223,088
Due to related party........................................................... 817,312
---------
TOTAL LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES........................... 6,040,400
---------
MINORITY INTEREST IN SUBSIDIARY.................................................. 580,125
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--par value $.01 per share, redemption value $10.00 per share:
Authorized--10,000,000 shares
Issued and outstanding--180,000 shares....................................... 1,800,000
Common stock--par value $.01 per share:
Authorized--50,000,000 shares
Issued and outstanding--7,020,679 shares..................................... 70,207
Additional paid-in capital..................................................... 29,964,698
Stock subscription receivable.................................................. (25,785)
Deferred compensation.......................................................... (456,697)
Retained earnings (deficit).................................................... (21,236,482)
---------
TOTAL SHAREHOLDERS' EQUITY....................................................... 10,115,941
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................... $27,711,522
---------
---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-52
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
REVENUES........................................................................... $ 13,065,678 $ 25,417,444
------------- -------------
EXPENSES:
Operating expenses............................................................... 8,651,788 17,328,872
Selling, general and administrative.............................................. 2,162,172 7,856,483
Depreciation expense............................................................. 638,655 1,495,892
Rent expense..................................................................... 693,036 998,345
Amortization of intangible assets................................................ 124,169 403,105
------------- -------------
TOTAL EXPENSES..................................................................... 12,269,820 28,082,697
------------- -------------
INCOME (LOSS) FROM OPERATIONS...................................................... 795,858 (2,665,253)
------------- -------------
OTHER INCOME (EXPENSES):
Interest expense................................................................. (400,501) (894,173)
Interest income.................................................................. 212,465 378,183
Gain/(loss) on sales of assets................................................... 80,285 148,333
Minority interest in subsidiary losses........................................... -- 77,569
Bridge loan expense.............................................................. (441,038) --
Other............................................................................ (10,313) (66,363)
------------- -------------
TOTAL OTHER EXPENSES, net.......................................................... (559,102) (356,451)
------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (CARRIED FORWARD)......................... $ 236,756 $ (3,021,704)
------------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-53
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS (BROUGHT FORWARD)........................... $ 236,756 $ (3,021,704)
------------ -------------
DISCONTINUED OPERATIONS:
(Loss) on operations from entertainment ticketing segment.......................... (375,188) --
(Loss) on operations of custom equipment manufacturing segment..................... (221,931) --
Income (loss) on operations from automobile harness manufacturing segment.......... 1,187,709 (34,932)
Adjustment of reserve for discontinued operations.................................. -- (4,664,275)
------------ -------------
PROFIT (LOSS) FROM DISCONTINUED OPERATIONS........................................... 590,590 (4,699,207)
------------ -------------
NET INCOME (LOSS).................................................................... 827,346 (7,720,911)
LESS: PREFERRED DIVIDENDS............................................................ 143,775 --
------------ -------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS........................................................................ $ 683,571 $ (7,720,911)
------------ -------------
------------ -------------
EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations........................................... $ .03 $ (.44)
Income (loss) from discontinued operations......................................... .18 (.68)
------------ -------------
EARNINGS (LOSS) PER SHARE............................................................ $ 0.21 $ (1.12)
------------ -------------
------------ -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................................... 3,307,110 6,901,253
------------ -------------
------------ -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-54
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
REVENUES............................................................................. $ 5,462,204 $ 8,742,778
------------ -------------
EXPENSES:
Operating expenses................................................................. 3,145,740 6,030,781
Selling, general and administrative................................................ 1,511,142 4,440,741
Depreciation expense............................................................... 187,993 509,392
Rent expense....................................................................... 201,503 267,117
Amortization of intangible assets.................................................. 108,501 145,079
------------ -------------
TOTAL EXPENSES....................................................................... 5,154,879 11,393,110
------------ -------------
INCOME (LOSS) FROM OPERATIONS........................................................ 307,325 (2,650,332)
------------ -------------
OTHER INCOME (EXPENSES):
Interest expense................................................................... (167,888) (340,815)
Interest income.................................................................... 72,333 51,517
Gain on sales of assets............................................................ 44,756 123,676
Bridge loan expense................................................................ (441,038) --
Minority interest in subsidiary loss............................................... -- 48,821
Other.............................................................................. 44,890 --
------------ -------------
Total Other expenses, net.......................................................... (446,947) (116,801)
------------ -------------
LOSS FROM CONTINUING OPERATIONS (CARRIED FORWARD).................................... $ (139,622) $ (2,767,133)
------------ -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-55
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
LOSS FROM CONTINUING OPERATIONS (BROUGHT FORWARD).................................... $ (139,622) $ (2,767,133)
------------ -------------
DISCONTINUED OPERATIONS:
(Loss) on operations from custom equipment manufacturing segment................... (73,857) --
Income (loss) on operations of harness manufacturing segment....................... 523,242 (86,695)
(Loss) on operations of entertainment ticketing segment............................ (316,900) --
Adjustment of reserve for discontinued operations.................................. -- (4,517,330)
------------ -------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS........................................... 132,485 (4,604,025)
------------ -------------
NET LOSS............................................................................. (7,137) (7,371,158)
LESS: PREFERRED DIVIDENDS............................................................ 47,295 --
------------ -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS........................................... $ (54,432) $ (7,371,158)
------------ -------------
------------ -------------
EARNINGS PER COMMON SHARE:
Loss from continuing operations.................................................... $ (.06) $ (.39)
Income (loss) from discontinued operations......................................... .04 (.66)
------------ -------------
EARNINGS (LOSS) PER SHARE............................................................ $ (.02) $ (1.05)
------------ -------------
------------ -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................................... 3,111,746 7,002,343
------------ -------------
------------ -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-56
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
----------------------- ---------------------- PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ----------- --------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,232,035 $ 22,320 180,000 $ 1,800,000 $ 17,056,511 $ (290,285) $ (658,504)
Net proceeds from exercise of
warrants and options......... 60,000 600 -- -- 206,900 -- --
Common stock issued in
connection with purchase of
Krogel Freight............... 18,333 183 -- -- 54,817 -- --
Preferred stock issuance....... -- -- 300 300,000 (43,272) -- --
Conversion of debentures into
common stock................. 753,667 7,537 -- -- 1,768,751 -- --
Preferred stock conversion..... 88,889 889 (300) (300,000) 299,111 -- --
Restricted stock grant
issuance..................... -- -- -- -- -- -- 113,415
Preferred stock dividends...... -- -- -- -- -- -- --
Repurchase of common
stock........................ (47,500) (475) -- -- (89,495) -- --
Common stock issued in
connection with bridge
loan......................... 109,957 1,100 -- -- 248,454 -- --
Common stock offering.......... 1,705,043 17,050 -- -- 4,996,006 -- --
Common stock issued in
connection with consulting
services..................... 314,167 3,142 -- -- 874,733 252,500 --
Common stock issued in
connection with employment
contracts.................... 16,667 167 -- -- 124,833 -- --
Common stock issued in
connection with purchase of
Banc-Pro Transportation...... 336,000 3,360 -- -- 864,540 -- --
Common stock issued in exchange
for covenant not-
to-compete................... 199,444 1,994 -- -- 548,006 -- --
Change in features of preferred
stock........................ -- -- -- -- 680,000 -- --
Obligation to issue 1,000,000
shares of common stock in
regards to long-term
employment agreement with
Company officer.............. 1,000,000 10,000 -- -- 1,552,500 -- --
Other.......................... 14,810 148 -- -- 61,786 -- --
Net loss....................... -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------------ ------------- --------------
Balance, December 31, 1996 6,801,512 $ 68,015 180,000 $ 1,800,000 $ 29,204,181 $ (37,785) $ (545,089)
---------- ----------- --------- ----------- ------------ ------------- --------------
---------- ----------- --------- ----------- ------------ ------------- --------------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
------------- -------------
<S> <C> <C>
Balance, December 31, 1995 $ (6,651,785) $ 11,278,257
Net proceeds from exercise of
warrants and options......... -- 207,500
Common stock issued in
connection with purchase of
Krogel Freight............... -- 55,000
Preferred stock issuance....... -- 256,728
Conversion of debentures into
common stock................. -- 1,776,288
Preferred stock conversion..... -- --
Restricted stock grant
issuance..................... -- 113,415
Preferred stock dividends...... (169,335) (169,335)
Repurchase of common
stock........................ -- (89,970)
Common stock issued in
connection with bridge
loan......................... -- 249,554
Common stock offering.......... -- 5,013,056
Common stock issued in
connection with consulting
services..................... -- 1,130,375
Common stock issued in
connection with employment
contracts.................... -- 125,000
Common stock issued in
connection with purchase of
Banc-Pro Transportation...... -- 867,900
Common stock issued in exchange
for covenant not-
to-compete................... -- 550,000
Change in features of preferred
stock........................ -- 680,000
Obligation to issue 1,000,000
shares of common stock in
regards to long-term
employment agreement with
Company officer.............. -- 1,562,500
Other.......................... -- 61,934
Net loss....................... (6,694,451) (6,694,451)
------------- -------------
Balance, December 31, 1996 $ (13,515,571) $ 16,973,751
------------- -------------
------------- -------------
</TABLE>
F-57
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
----------------------- ---------------------- PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ----------- --------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996
(carried forward)............ 6,801,512 $ 68,015 180,000 $ 1,800,000 $ 29,204,181 $ (37,785) $ (545,089)
---------- ----------- --------- ----------- ------------ ------------- --------------
Restricted stock grant......... -- -- -- -- -- -- 88,392
Common stock issued in
connection with Mencor
acquisition.................. 37,500 375 -- -- 74,625 -- --
Common stock issued in exchange
for consulting services and
board participation.......... 165,000 1,650 -- -- 655,850 -- --
Stock options exercised........ 12,500 125 -- -- 21,750 -- --
Other.......................... 4,167 42 -- -- 8,292 12,000 --
Net loss....................... -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------------ ------------- --------------
Balance, September 30, 1997 7,020,679 $ 70,207 180,000 $ 1,800,000 $ 29,964,698 $ (25,785) $ (456,697)
---------- ----------- --------- ----------- ------------ ------------- --------------
---------- ----------- --------- ----------- ------------ ------------- --------------
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
------------- -------------
<S> <C> <C>
Balance, December 31, 1996
(carried forward)............ $ (13,515,571) $ 16,973,751
------------- -------------
Restricted stock grant......... -- 88,392
Common stock issued in
connection with Mencor
acquisition.................. -- 75,000
Common stock issued in exchange
for consulting services and
board participation.......... -- 657,500
Stock options exercised........ -- 21,875
Other.......................... -- 20,334
Net loss....................... (7,720,911) (7,720,911)
------------- -------------
Balance, September 30, 1997 $ (21,236,482) $ 10,115,941
------------- -------------
------------- -------------
</TABLE>
F-58
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations................................................... $ 236,756 $ (3,021,704)
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization..................................................... 762,824 1,856,798
Amortization of deferred compensation............................................. -- 88,392
Minority interest in subsidiary losses............................................ -- 77,569
Stock issuance in exchange for consulting services and board participation...... -- 657,500
Bad debt expense.................................................................. -- 640,217
Gain on sales of assets........................................................... (80,285) 148,333
Change in assets and liabilities:
Accounts receivable............................................................. (2,145,698) (1,891,289)
Inventories..................................................................... (220,862) 336,793
Other receivables............................................................... 42,092 --
Notes receivables............................................................... -- 98,148
Prepaid and other assets........................................................ 35,317 127,627
Accounts payable................................................................ (212,251) 26,871
Accrued liabilities............................................................. (55,557) 637,870
------------- -------------
Net cash used in continuing operations.............................................. (1,637,664) (216,875)
------------- -------------
Income (loss) from discontinued operations: 590,590 (4,699,207)
Adjustments:
Change in net assets and liabilities of discontinued operations................... (1,126,602) 3,299,420
Proceeds from sale of assets held for sale........................................ -- 100,000
Depreciation and amortization..................................................... -- 21,317
------------- -------------
Net cash used in discontinued operations............................................ (536,012) (1,278,470)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (CARRIED FORWARD)............................. $ (2,173,676) $ (1,495,345)
------------- -------------
</TABLE>
F-59
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES (BROUGHT FORWARD)............................. $ (2,173,676) $ (1,495,345)
------------- -------------
INVESTING ACTIVITIES:
Capital expenditures.............................................................. (266,117) (402,420)
Acquisition of intangible assets.................................................. (506,000) (126,016)
Transfers to restricted cash...................................................... (3,063) (73,132)
Advances on notes receivable...................................................... (204,000) (586,750)
Collection of notes receivable.................................................... 90,007 1,023,140
Collection of leases receivable................................................... 210,750 262,420
Proceeds from sale of assets...................................................... 10,500 48,700
Other............................................................................. 2,121 34,869
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................. (665,802) 180,811
------------- -------------
FINANCING ACTIVITIES:
Cash overdraft.................................................................... 484,565 (381,476)
Advances from related party....................................................... 883,430 146,315
Proceeds from issuance of convertible debentures.................................. 256,728 --
Payment of preferred dividends.................................................... (143,775) --
Principal payments to related party............................................... (367,354) (252,860)
Principal payments on debt........................................................ (8,326,909) (4,285,785)
Borrowing on debt................................................................. 5,886,614 3,579,078
Proceeds from common stock offering............................................... 5,117,709 --
Proceeds from options and warrants................................................ 207,500 21,875
Proceeds from bridge loan......................................................... 887,554 --
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................. 4,886,062 (1,172,853)
------------- -------------
NET INCREASED (DECREASED) IN CASH AND CASH EQUIVALENTS.............................. 2,046,584 (2,487,387)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................................ 1,645,031 3,392,629
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................ $ 3,691,615 $ 905,242
------------- -------------
------------- -------------
</TABLE>
F-60
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Cash paid for:
Interest............................................................ $ 454,000 $ 742,000
---------- ----------
---------- ----------
Taxes............................................................... (0) $ 75,000
---------- ----------
---------- ----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
In January 1997, the Company acquired 100% of the common stock of Mencor
Inc. in exchange for $70,000 cash and 37,500 shares of the Company's common
stock. (See Note 2.)
In January 1997, the Company sold the assets of its discontinued
entertainment segment in exchange for 850,000 shares of common stock of
Packaging Plus Services, Inc. (See Note 3.)
In January 1997, the Company acquired 100% of the common stock of Gulf
Northern Transport, Inc. in exchange for $225,000 cash and common shares of its
subsidiary U.S. Trucking, Inc. ("USTI") representing 25% of the issued and
outstanding common stock of USTI. (See Note 2.)
In March 1997, the Company sold the assets of its discontinued custom
equipment manufacturing segment in exchange for $100,000 cash and notes with a
present value of $5,810,868. (See Note 3.)
In 1997, the company issued 165,000 shares of common stock in exchange for
consulting services and board participation.
During the nine months ended September 30, 1996, the Company sold buses in
exchange for $154,000 of sales type financing lease receivables.
During the nine months ended September 30, 1996, the Company acquired
revenue equipment utilizing long term debt of $4,555,205.
During the nine months ended September 30, 1996, holders of $1,776,288 of
convertible debentures converted such debentures into 753,667 shares of the
Company's stock.
During the nine months ended September 30, 1996, the Company converted 300
shares of convertible preferred stock into 88,889 shares of common stock.
During the nine months ended September 30, 1996, the Company acquired 47,500
shares of its common stock for $89,970, which included the cancellation of a
note receivable of $68,960.
During the nine months ended September 30, 1996, the Company declared
$150,660 of preferred dividends.
During the nine months ended September 30, 1996, the Company issued 18,333
shares of common stock valued at $55,000 as part of its acquisition of certain
personal property and contract rights from Krogel Freight Systems of Tampa, Inc.
and Krogel Air Freight, Inc.
During the nine months ended September 30, 1996, the Company issued 136,111
shares of common stock in connection with a covenant not to compete.
F-61
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
During the nine months ended September 30, 1996, the Company issued 104,167
shares of common stock and forgave notes aggregating $252,500 in exchange for
consulting agreement.
During the nine months ended September 30, 1996, the Company acquired
Banc-Pro Transportation, Inc. in exchange for a $1,150,000 zero interest-bearing
note due September 1998; 336,000 shares of the Company's common stock; and
105,000 shares of convertible preferred stock that relate to an employment
contract and a consulting agreement with the sellers.
F-62
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(1) MANAGEMENT'S REPRESENTATION
In the opinion of management, the accompanying unaudited financial
statements present fairly, in all material respects, the financial position of
U.S. Transportation Systems, Inc. and Subsidiaries and the results of their
operations and their cash flows for the nine months ended September 30, 1997 and
1996, and, accordingly, all adjustments (which include only normal recurring
adjustments) necessary to permit a fair presentation have been made. Certain
information and footnote disclosures normally required by financial accounting
principles have been condensed or omitted. It is recommended that these
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1996 Form 10-KSB report. The
results of operations for the period ended September 30, 1997 are not
necessarily indicative of the operating results for the full year.
U.S. Transportation Systems, Inc. has signed a definitive agreement to
transfer substantially all of the assets and certain liabilities to Precept
Investments, Inc. (Precept) in exchange for 9,612,500 shares of Precept Class A
Common Stock which will represent 21% of the outstanding Precept Common Stock
upon completion of the asset sale. The agreement provides that the Precept Class
A Common Stock will be listed on NASDAQ and that they will be distributed to the
shareholders of USTS immediately after completion of the sale, except that some
number of the shares (currently estimated at 600,000) will be used by USTS to
satisfy liabilities which are not being assumed by Precept. USTS is withholding
its rental car brokerage business from the sale.
(2) ACQUISITIONS
On January 30, 1997 the Company formed a wholly-owned subsidiary, U.S.
Trucking, Inc. ("USTI"). Thereafter, the following transactions took place:
- -- 100% of the issued and outstanding stock of the Company's wholly-owned
tractor-trailer subsidiaries, Trans Lynx Express, Inc. and Jay & Jay
Transportation, Inc., were merged into USTI as wholly-owned subsidiaries
thereof;
- -- USTI acquired 100% of the issued and outstanding stock of Mencor, Inc.
("Mencor"), a tractor-trailer brokerage company, in exchange for $70,000 and
37,500 shares of the Company's common stock;
- -- USTI acquired 100% of the issued and outstanding stock of Gulf Northern
Transport, Inc. ("GNTI"), a tractor-trailer delivery company, for $225,000
cash and common shares of USTI which represented 25% of the issued and
outstanding stock of USTI.
The acquisitions of Mencor and GNTI were accounted for as purchases and
resulted in goodwill of $352,396. Additionally, at the time of the acquisition
of GNTI, the Company recorded a liability for the resulting minority interest in
USTI of $645,194.
During the nine months ended September 30, 1996, the Company purchased
certain personal property, intangible assets and contract rights from Krogel Air
Freight, Inc. and Krogel Freight Systems of Tampa, Inc. for $150,000 in cash and
18,333 shares of common stock. The acquisition was accounted for as a purchase.
During the nine months ended September 30, 1996, the Company purchased
certain assets from Jackson & Johnson, Inc. for $160,000 in cash and the
assumption of approximately $2,930,000 in accrued debt. The acquisition was
accounted for as a purchase.
F-63
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(2) ACQUISITIONS (CONTINUED)
During the nine months ended September 30, 1996, the Company purchased 100%
of the outstanding stock of Banc-Pro Transportation, Inc. for 336,000 shares of
common stock. This acquisition was accounted for as a purchase.
(3) DISCONTINUED OPERATIONS
During the third quarter of 1997, the Company closed ATAB of Texas, all
equipment was sold yielding a profit of $1,545, all personnel were terminated
and land and building were transferred to Assets Held for Sale.
On March 28, 1997, the Company sold ASI for: $100,000 cash; a 10.5% interest
bearing note of approximately $5,200,000 with monthly payments of approximately
$80,000, the unpaid principal fully due April 1, 1999; and a non-interest
bearing note of $685,000 also due April 1, 1999. Pursuant to Staff Accounting
Bulletin 5(e), as a result of (a) the purchaser's minimal working capital
investment in ASI and (b) the repayment of the purchase notes which is dependent
on ASI's future operations, substantial doubt exists as to whether the sale of
ASI has been consummated for accounting purposes. Accordingly, the Company has
determined not to recognize the transaction as a divestiture. The Company
received the first two payments from the purchaser of ASI. Subsequently, the
purchaser of ASI defaulted on the note. ASI is currently experiencing severe
cash flow problems. Negotiations are underway to modify the note extending
payment terms. ASI is currently attempting to raise additional capital to
support its operations. There is no assurance that ASI will be able to raise
this capital and accordingly, the Company has recorded a reserve of $5,239,086
to adjust the carrying value of the net assets of the business transferred to
the estimated cash to be received. The adjustment is included in the reserve for
discontinued operations.
On January 7, 1997, the Company sold the entertainment divisions as a
continuing operation for 850,000 shares of common stock of Packaging Plus
Services, Inc., a publicly-held company (Symbol: "PKGP"). PKGP was trading at
$1.0625 per share at the time of the sale. This transaction resulted in a loss
on disposal of $146,944.
At September 30, 1997, Assets Held for Sale consisted of one motorcoach bus
with a carrying value of $55,953, land and building in Phoenix, Arizona with a
carrying value, net of related debt, of $153,080 and land and building in Sealy,
Texas with a carrying value of $318,777. The carrying values of these assets
approximate estimated realizable value.
(4) CAPITALIZATION
In January 1996, the Company issued $300,000 of convertible preferred stock,
which were converted into 88,889 shares of common stock in March 1996.
During the nine months ended September 30, 1996, the Company increased the
authorized common stock shares from 20,000,000 to 50,000,000 shares.
During the nine months ended September 30, 1996, the Company issued
$1,200,000 of 5% subordinated promissory notes and bridge units. These notes
were paid and the Company recorded expenses related to this issuance of $441,038
during the nine months ended September 30, 1996.
During the nine months ended September 30, 1996, the Company had a
one-for-six reverse split of its common stock, effective August 27, 1996. The
par value remained at $.01 per share, and all share data has been adjusted for
this split.
F-64
<PAGE>
U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(4) CAPITALIZATION (CONTINUED)
During the nine months ended September 30, 1996, the Company had a common
stock unit offering whereby 1,705,043 units, each comprising of one share of
common stock and one warrant (exercisable under certain conditions) at $3.82 for
one share of common stock, were issued.
(5) SUBSEQUENT EVENTS
On January 30, 1997, USTI, which owns the Company's tractor-trailer
operations, acquired 100% of capital stock of GNTI. On April 16, 1997, United
Acquisition II Corporation ("UACQ"), which is the subject of a bankruptcy
petition, commenced an adversary proceeding in the Bankruptcy Court against the
Company, its Chairman and many other corporate and individual defendants. UACQ
alleges that it acquired beneficial ownership of GNTI prior to the transfer of
GNTI to USTI, and that the defendants conspired to deprive UACQ of its interest
in GNTI. In November 1997, the defendants reached an agreement with UACQ to
settle the litigation. The settlement will be effective only if it is approved
by the Bankruptcy Court. If approved, the settlement would eliminate the claims
by UACQ to ownership of GNTI, in exchange for 25,000 shares of the Company's
common stock and payment of $100,000 plus a promissory note of $100,000 payable
over three years.
F-65
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the General Corporation Law of the State of Nevada
authorizes a corporation to provide indemnification to a director, employee or
agent of the corporation, including attorneys' fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by him in
connection with such action, suit or proceeding, if such party 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, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful as
determined in accordance with the statute.
Section 78.751 further provides that indemnification shall be provided if
the party in question is successful on the merits.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer 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. If 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 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS
The following are the estimated expenses in connection with the distribution
of the securities being registered here under:
<TABLE>
<CAPTION>
<S> <C>
Accounting fees................................................................ $ 5,000.00*
Legal fees..................................................................... 15,000.00*
Printing expenses.............................................................. 4,000.00*
Miscellaneous.................................................................. 1,000.00*
-------------
TOTAL........................................................................ $ 25,000.00*
-------------
-------------
</TABLE>
- ------------------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On June 12, 1995 the Company issued 5,833 shares of Common Stock to Stock
Deck Communications, Ltd. as payment for advertising services. The sale was
exempt pursuant to Section 4(2) of the Act since the sale was not made in a
public offering and was made to a corporation whose principals had access to
detailed information about the Company and were buying for their own account.
On June 30, 1995 the Company issued 130,000 shares of Common Stock to Bart
and Joanne Citro as payment for two corporations known as "Armstrong Freight
Service". The sale was exempt pursuant to Section 4(2) of the Act since the sale
was not made in a public offering and was made to individuals who had access to
detailed information about the Company and were buying for their own account.
On July 19, 1995 the Company issued a total of 21,666 shares of Common Stock
to Bart Citro, Russell Jarmusch and Larry Schaefer as payment for the
corporation known as "Trans Lynx Express Inc. The sale
II-1
<PAGE>
was exempt pursuant to Section 4(2) of the Act since the sale was not made in a
public offering and was made to individuals who had access to detailed
information about the Company and were buying for their own account.
On July 1, 1995 the Company issued 16,666 shares of Common Stock to Sheldon
Kraft as payment for consulting services The sale was exempt pursuant to Section
4(2) of the Act since the sale was not made in a public offering and was made to
an individual who had access to detailed information about the Company and was
buying for his own account.
On July 1, 1995 the Company issued 33,333 shares of Common Stock to
Corporate Network, Inc. as payment for radio broadcasting services. The sale was
exempt pursuant to Section 4(2) of the Act since the sale was not made in a
public offering and was made to a corporation whose principals had access to
detailed information about the Company and were buying for their own account.
On September 30, 1995 the Company issued 50,000 shares of Common Stock to
American Trade-A-Bus, Inc. for $4.50 per share. The sale was exempt pursuant to
Section 4(2) of the Act since the sale was not made in a public offering and was
made to a corporation whose principals had access to detailed information about
the Company and were buying for their own account.
On November 1995 the Company issued a total of 300,000 shares of Common
Stock to three individuals as payment for the corporation known as "Automated
Solutions Inc." The sale was exempt pursuant to Section 4(2) of the Act since
the sale was not made in a public offering and was made to individuals who had
access to detailed information about the Company and were buying for their own
account.
In November, 1995 the Company issued 8% convertible debentures in the
principal amount of $3,150,000 and received net proceeds of $1,766,288. The sale
was exempt pursuant to Regulation S as the purchasers were offshore and the
conditions to a Regulation S safe harbor were satisfied.
In February, 1996 the Company issued convertible preferred stock with a
preference of $300,000 and received net proceeds of $214,000. The sale was
exempt pursuant to Regulation S as the purchaser was offshore and the conditions
to a Regulation S safe harbor were satisfied.
In February, 1996 the Company issued 19,167 shares of Common Stock to one
individual as payment for certain assets of the corporation known as "Krogel Air
Freight, Inc." The sale was exempt pursuant to Section 4(2) of the Act since the
sale was not made in a public offering and was made to an individual who had
access to detailed information about the Company and was buying for his own
account.
In September, 1996 the Company issued 300,000 shares of Common Stock to
Consolidated Financial Management, Inc. in payment for the corporation known as
"BancPro-Transportation, Inc. The sale was exempt pursuant to Section 4(2) of
the Act since the sale was not made in a public offering and was made to a
corporation whose principals had access to detailed information about the
Company and were buying for their own account.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
3-a. Articles of Incorporation, as amended to January 13, 1986. (1)
3-a(1) Certificate of Amendment of Certificate of Incorporation - filed as an exhibit to Quarterly Report on Form 10-Q for Quarter
Ended September 30, 1990 and incorporated herein by reference.
3-a(2) Certificate of Amendment of Certificate of Incorporation dated March 7, 1994. (3)
3-b. By-laws. (1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- --------
4-a. Specimen of Common Stock Certificate. (1)
<S> <C>
4-b. Specimen of Class C Warrant. (4)
4-c. Form of Warrant Agreement. (4)
5 Opinion of Bressler, Amery & Ross.
10-a. Employee Stock Option Plan. (1)
10-b. Restricted Stock Grant Program. (2)
10-c(1) Letter of Agreement between the Company and Argent Securities, Inc. dated December 1, 1994. (3)
10-c(2) Letter of Agreement between the Company and Argent Securities, Inc. dated April 11, 1995. (3)
10-d Agreement and Plan of Reorganization dated as of November 16, 1997 (5)
10-e Plan of Liquidation and Dissolution (5)
11-a. Statement re: computation of per share earnings for period ended December 31, 1996 - filed as an Exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.
21. Subsidiaries -
1. Jetport, Inc.
2. Shortway River Rouge, Inc.
3. Transportation Systems Corporation d/b/a Westchester Express
4. BancPro Transportation, Inc.
5. Bus Properties, Inc.
6. US Trucking, Inc.
7. Jay & Jay Transportation, Inc.
8. Translynx Express, Inc.
9. Mencor, Inc.
10. Gulf Northern Transportation, Inc.
23-a Consent of Mahoney Cohen & Company, P.C.
23-b Consent of Ernst & Young LLP
27.1 Financial Data Schedule, for year ended December 31, 1996 and nine months ended September 30, 1997. (6)
</TABLE>
- ------------------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's first S-1 registration statement (File Number 33-1071).
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Registration Statement on Form SB-2 (File Number 33-70862).
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Registration Statement on Form SB-2 (File Number 33-79738).
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Registration Statement on Form SB-2 (File Number 333-4104).
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement on Form S-4 filed by Precept Business
Services, Inc. on December 19, 1997
(6) Previously filed.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
See Item 24 for the undertaking regarding the indemnification of officers,
directors and controlling persons.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendments 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;
(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;
(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.
(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-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Elmsford and the State of New York on the 9th day of
February, 1998.
<TABLE>
<S> <C> <C>
U.S. TRANSPORTATION SYSTEMS, INC.
By: /s/ MICHAEL MARGOLIES
-----------------------------------------
Michael Margolies,
CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on February 9, 1998.
NAME TITLE
- ------------------------------ ----------------------------------------------
/s/ MICHAEL MARGOLIES
- ------------------------------ Chief Executive Officer and Chairman of the
Michael Margolies Board
/s/ JAY OWEN MARGOLIES
- ------------------------------ Director
Jay Owen Margolies
/s/ K. THOMAS WEGERBAUER
- ------------------------------ Director
K. Thomas Wegerbauer
- ------------------------------ Director
Robert Blackman
- ------------------------------ Director
Stanley Chason
/s/ RONALD P. SORCI
- ------------------------------ Chief Financial and Accounting Officer
Ronald P. Sorci
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- --------------------------------------------------------------------------------------------------
<C> <S>
5 Opinion of Bressler, Amery & Ross, P.C.
23-a Consent of Mahoney Cohen & Company, CPA, P.C.
23-b Consent of Ernst & Young LLP
</TABLE>
<PAGE>
EXHIBIT 5
BRESSLER, AMERY & ROSS
17 STATE STREET
NEW YORK, NY 10004
212-425-9300 (PHONE)
212-425-9337 (FAX)
February 9, 1998
U.S. Transportation Systems, Inc.
33 West Main Street
Elmsford, NY 10523
Gentlemen:
We have acted as counsel for U.S. Transportation Systems, Inc., a Nevada
corporation (the "Company") in connection with the registration statement on
Form SB-2 (No. 333-44211) filed by the Company under the Securities Act of 1933
with respect to the offering of 1,815,000 shares of Common Stock, being issued
and sold by the Company as set forth in the Registration Statement.
In connection with the Registration Statement, we have examined such records
and documents and such questions of law as we have deemed necessary or
appropriate for purposes of this opinion, including but not limited to the
following:
(a) Articles of Incorporation, as amended to date, of the Company certified by
the Nevada Secretary of State;
(b) By-Laws of the Company;
(c) Minutes, resolutions and documentary evidence of other actions taken by the
shareholders and Board of Directors of the Company through February 9, 1998;
(d) Specimen of the certificate for the Company's Common Stock and Class C
Warrants;
(e) The Warrant Agreement between the Company and Continental Stock Transfer and
Trust Company relating to the Class C Warrants.
Additionally, we have consulted with officers and directors of the Company
and have obtained such representations from such persons with respect to matters
of fact as we deem necessary or advisable.
Based on the forgoing and on all other instruments, documents and matters
examined and necessary for the rendering of this opinion, we are of the opinion
that:
(1) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Nevada;
(2) The shares registered pursuant to the Registration Statement have been duly
and validly authorized for issuance by action of the Board of Directors of
the Company, and will, when sold, be legally issued, fully paid, and
non-assessable.
(3) A sufficient number of shares of Common Stock has been duly authorized and
has been reserved for issuance upon exercise of the Class C Warrants and,
when issued and paid for, will be duly and validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ BRESSLER, AMERY & ROSS P.C.
<PAGE>
EXHIBIT 23-A
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 26, 1997, except for Note 14 relating to the
sale of ASI, as to which the date is March 28, 1997, with respect to the
financial statements of U.S. Transportation Systems, Inc., included in the
Registration Statement (Form SB-2, No. 333-44211) and related Prospectus of U.S.
Transportation Systems, Inc.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
February 9, 1998
<PAGE>
EXHIBIT 23-B
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 19, 1997 on the Consolidated Financial
Statements of Precept Investors, Inc., in the Registration Statement (Form SB-2
No. 333-44211) and related Prospectus of U.S. Transportation Systems, Inc. dated
February 12, 1998.
/s/ Ernst & Young LLP
Dallas, Texas
February 6, 1998
