-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UXN0q8EMSHOMGbqW09J3Dp2TRr8BeRrdGM9XhV7eJXgwTkHwkXTzEuZR5j2beJQd ACcewcaJlH23olyQg9qsrg== 0001047469-98-004175.txt : 19980210 0001047469-98-004175.hdr.sgml : 19980210 ACCESSION NUMBER: 0001047469-98-004175 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19980209 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECEPT BUSINESS SERVICES INC CENTRAL INDEX KEY: 0001051285 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 752487353 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-42689 FILM NUMBER: 98524766 BUSINESS ADDRESS: STREET 1: 1909 WOODALL ROGERS FREEWAY STREET 2: STE 500 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2147546600 MAIL ADDRESS: STREET 1: PO BOX 219008 CITY: DALLAS STATE: TX ZIP: 75201 S-4/A 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1998. REGISTRATION NO. 333-42689 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PRECEPT BUSINESS SERVICES, INC. (Exact name of registrant as specified in its charter) TEXAS 5112 75-2487353 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) No.)
1909 WOODALL RODGERS FRWY., SUITE 500 DALLAS, TEXAS 75201 TELEPHONE: (214) 754-6600 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DAVID L. NEELY CHIEF EXECUTIVE OFFICER PRECEPT BUSINESS SERVICES, INC. 1909 WOODALL RODGERS FRWY., SUITE 500 DALLAS, TEXAS 75201 TELEPHONE (214) 754-6600 (Name, address, including zip code, and telephone number, including area code, of agent for service for registrant) ------------------------ COPIES TO: RICHARD F. DAHLSON ROBERT BRANTL Jackson Walker L.L.P. Bressler, Amery & Ross, P.C. 901 Main Street, Suite 6000 17 State Street Dallas, Texas 75202 New York, New York 10004 (214) 953-6000 (212) 425-9300 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. /X/ If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / ------------------------ 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 COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRECEPT BUSINESS SERVICES, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
NO. ITEM IN FORM S-4 LOCATION OR HEADING IN PROSPECTUS --- -------------------------------------------------------- -------------------------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Outside Front Facing Page of Registration Statement; Cover Page of Prospectus.............................. Cross-Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page of Proxy Statement/ Prospectus............................................ Prospectus; Available Information; Incorporation of Documents by Reference; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Outside Front Cover Page of Prospectus; Summary; Other Information..................................... Risk Factors; Market Price Data; Consolidated Financial Statements 4. Terms of the Transaction................................ Summary; The Transactions; Certain Differences in the Rights of Shareholders of USTS and Shareholders of Precept 5. Pro Forma Financial Information......................... Summary; Unaudited Pro Forma Consolidated Financial Statements 6. Material Contacts With the Company Being Acquired....... Summary; The Transactions; Risk Factors 7. Additional Information Required For Reoffering by Not applicable Persons and Parties Deemed to be Underwriters......... 8. Interests of Named Experts and Counsel.................. Legal Matters; Experts 9. Disclosure of Commission Position on Indemnification for Certain Differences in the Rights of Shareholders Securities Act Liabilities............................ of USTS and Shareholders of Precept; Part II of the Registration Statement B. INFORMATION ABOUT THE REGISTRANT 10. Information With Respect to S-3 Registrants............. Not applicable 11. Incorporation of Certain Information by Reference....... Not applicable 12. Information With Respect to S-2 or S-3 Registrants...... Not applicable 13. Incorporation of Certain Information by Reference....... Not applicable
NO. ITEM IN FORM S-4 LOCATION OR HEADING IN PROSPECTUS --- -------------------------------------------------------- -------------------------------------------------- 14. Information With Respect to Registrants Other Than S-3 Outside Front Cover Page of Proxy or S-2 Registrants.................................... Statement/Prospectus; Inside Front Cover Page of Proxy Statement/Prospectus; Summary; Risk Factors; Precept Selected Consolidated Financial Information; Business of Precept; Precept Management's Discussion and Analysis of Financial Condition and Results of Operation; Description of Precept Securities C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information With Respect to S-3 Companies............... Not applicable 16. Information With Respect to S-2 or S-3 Companies........ Not applicable 17. Information With Respect to Companies Other Than S-3 or Outside Front Cover Page of Proxy S-2 Companies......................................... Statement/Prospectus; Inside Front Cover Page of Prospectus; Summary; Market Price Data; Risk Factors; USTS Management's Discussion and Analysis of Financial Condition and Results of Operations; Description of USTS Securities; USTS Business D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Authorizations Are Notice of Special Meeting of Shareholders; Outside to Be Solicited....................................... Front Cover Page of Prospectus; Summary; The Meeting; The Transactions; The Plan of Reorganization; Certain Differences in the Rights of Shareholders of USTS and Shareholders of Precept; Officers and Directors of USTS; USTS Security Ownership; USTS Certain Relationships and Related Transactions; USTS Executive Compensations; Officers and Directors of Precept; Precept Executive Compensation; Precept Certain Relationships and Related Transactions; Precept Security Ownership 19. Information if Proxies, Consents or Authorizations Are Not applicable not to Be Solicited or in an Exchange Offer........... 20. Indemnification of Directors and Officers............... Certain Differences in the Rights of Shareholders of USTS and Shareholders of Precept; Part II of the Registration Statement 21. Exhibits and Financial Statement Schedules.............. Financial Statements; Exhibits 22. Undertakings............................................ Part II of the Registration Statement
EXPLANATORY NOTE This Registration Statement covers the registration of (a) up to 9,612,500 shares of Precept Class A Common Stock to be issued by Precept to USTS in connection with the acquisition by a subsidiary of Precept of substantially all of the assets and business as a going concern of USTS (the "USTS Acquisition"), (b) up to 1,815,000 shares of Precept Class A Common Stock issuable upon the exercise of Precept Class A Common Stock Purchase Warrants and (c) an additional 19,887,500 shares of Precept Class A Common Stock to be offered and/or issued from time to time in connection with the future direct and indirect acquisitions of other businesses, properties or securities in one or more business combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities Act of 1933, as amended (the "Securities Act") or as otherwise permitted under the Securities Act (the "Shelf Offering"). The complete form of prospectus relating to the USTS Acquisition (the "Proxy Statement/Prospectus") follows immediately after this explanatory note. The form of prospectus relating to the Shelf Offering (the "Shelf Prospectus") will be identical in all respects to the form of the Proxy Statement/Prospectus, except that the Shelf Prospectus contains (i) different front and back cover pages, (ii) different "Summary" sections, and (iii) sections under the caption "Plan of Distribution" instead of the sections under the captions "The Meeting," "The Transactions," "USTS Business," "USTS Management's Discussion and Analysis of Financial Condition and Results of Operations," "USTS Executive Compensation," "Market Price Data," "Description of USTS Securities," "Officers and Directors of USTS," "USTS Security Ownership," "USTS Certain Relationships and Related Transactions," and "Certain Differences in the Rights of Shareholders of USTS and Shareholders of Precept". The form of the Proxy Statement/ Prospectus included herein is followed by those pages to be used in the Shelf Prospectus which differ from those in the Prospectus. Each of such pages included herein is labeled "Alternate Page for Shelf Prospectus." The number of shares and any other terms in connection with the offering and issuance of Class A Common Stock in respect of which the Shelf Prospectus will be delivered will be set forth in a separate supplement to the Shelf Prospectus. The Shelf Prospectus may not be used to consummate issuance and sales of Precept Class A Common Stock unless accompanied by such a Prospectus Supplement. U.S. TRANSPORTATION SYSTEMS, INC. FEBRUARY 9, 1998 Dear Shareholders of U.S. Transportation Systems, Inc. ("USTS"): Attached is a Notice of Special Meeting of Shareholders of USTS and an accompanying Proxy Statement/Prospectus which describes the matters to be acted upon at a special meeting of the shareholders of USTS (the "Meeting"). At the Meeting, shareholders of USTS will be asked to consider and vote to approve and adopt, as a single proposal (the "Proposal") (i) an Agreement and Plan of Reorganization, dated as of November 16, 1997 (the "Plan of Reorganization"), by and among USTS, Precept Business Services, Inc., a Texas corporation ("Precept"), and Precept Acquisition Company, L.L.C., a Nevada limited liability company and wholly-owned subsidiary of Precept ("Acquisition"), pursuant to which USTS will transfer its business and substantially all of its assets to Acquisition in exchange for 9,612,500 Shares (subject to increase if warrants for USTS shares are exercised prior to the closing of the Transfer) of Precept Class A Common Stock, par value $0.01 per share (the "Shares"), and Acquisition will assume certain liabilities of USTS (the "Transfer"), and (ii) a Plan of Liquidation and Dissolution pursuant to which USTS shall cease operations and effect the liquidation and dissolution of USTS in accordance with Nevada law (the "Plan of Liquidation"). Shareholders are urged to review carefully the attached Proxy Statement/Prospectus. This document contains a detailed description of the Plan of Reorganization and the Plan of Liquidation. If the Transfer is approved and consummated, an aggregate of 9,612,500 Shares will be issued to USTS. Upon receipt of the Shares by USTS, USTS will distribute the Shares to the holders of the outstanding shares of USTS Common and Preferred Stock (the "Liquidating Distribution"); provided, however, that a number of the Shares (the "Contingency Shares") will be held back by USTS and placed in a liquidating trust to satisfy contingent liabilities of USTS. The Board of Directors contemplates that approximately 600,000 Shares will be placed in the liquidating trust. However, events between the date of this Proxy Statement/Prospectus and the closing of the Transfer may cause the Board to increase or decrease the number of Contingency Shares, but not below 500,000 shares. Any Contingency Shares and any other assets remaining in the liquidating trust after three years or the earlier satisfaction of all tax and other obligations and liabilities of USTS will be distributed to the USTS shareholders. Based on the number of shares of USTS Common and Preferred Stock outstanding on February 4, 1998, and assuming that 600,000 Shares are placed in the liquidating trust as Contingency Shares, each outstanding share of USTS Common and Preferred Stock would be entitled to receive approximately one share of Precept Class A Common Stock in the Liquidating Distribution. The Board of Directors of USTS has carefully reviewed and considered the terms and conditions of the Plan of Reorganization. In addition, the Board of Directors has received a written opinion from M.H. Meyerson & Co., Inc., its financial advisor, to the effect that, as of the date hereof, the Transactions are fair, from a financial point of view, to the common shareholders of USTS. THE USTS BOARD OF DIRECTORS HAS DETERMINED THAT THE TRANSACTIONS ARE FAIR TO, AND IN THE BEST INTERESTS OF, USTS AND ITS SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PLAN OF REORGANIZATION AND THE PLAN OF LIQUIDATION, AND RECOMMENDS THAT THE USTS SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PROPOSALS TO BE CONSIDERED AT THE MEETING. The affirmative vote of the holders of a majority of the outstanding shares of USTS Common Stock is required in order for the Plan of Reorganization to be approved. IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING, YOU ARE URGED TO PROMPTLY COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD TO US. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote in favor of the Plan of Reorganization and the Plan of Liquidation. If you fail to return your card, the effect will be a vote against the Plan of Reorganization and the Plan of Liquidation. Even if you plan to attend the meeting, please complete, sign and date your proxy and return it promptly in the enclosed envelope that has been provided for your convenience. This will not limit your right to vote in person or to attend the meeting. You may revoke your proxy by following the procedures set forth in the accompanying Proxy Statement/Prospectus. Sincerely yours, Michael Margolies, CHAIRMAN U.S. Transportation Systems, Inc. U.S. TRANSPORTATION SYSTEMS, INC. 33 WEST MAIN STREET ELMSFORD, NEW YORK 10523 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON MARCH 12, 1998 To the Shareholders of U.S. Transportation Systems, Inc.: NOTICE IS HEREBY GIVEN that a special meeting of shareholders of U.S. Transportation Systems, Inc., a Nevada corporation ("USTS"), will be held on March 12, 1998, commencing at 4:00 p.m., local time, at the Westchester Marriott, located at 670 White Plains Road, Tarrytown, New York 10591, to consider and act upon the following matters which are described in more detail in the accompanying Proxy Statement/Prospectus: 1. To consider and vote, as a single proposal, upon the proposal (the "Proposal") (1) to approve and adopt (a) the Agreement and Plan of Reorganization, dated as of November 16, 1997 (the "Plan of Reorganization"), by and among USTS, Precept Business Services, Inc., a Texas corporation ("Precept"), and Precept Acquisition Company, L.L.C., a Nevada limited liability company and wholly-owned subsidiary of Precept ("Acquisition"), pursuant to which USTS will transfer its business and substantially all of its assets to Acquisition in exchange for 9,612,500 shares of Precept Class A Common Stock, par value $0.01 per share, of Precept, and Acquisition will assume certain liabilities of USTS (the "Transfer"), and (b) the Plan of Liquidation and Dissolution (the "Plan of Liquidation") pursuant to which USTS will distribute Precept Class A Common Stock received in the Transfer (subject to the holdback of at least 500,000 of the shares to satisfy certain contingent liabilities) to the USTS shareholders in complete liquidation of USTS and USTS will dissolve, and (2) to change the name of USTS to Transportation Equities, Inc. 2. To consider and act upon such other business as may properly be brought before the meeting or any adjournment or postponement thereof. The close of business on February 4, 1998 has been fixed as the record date for the determination of shareholders entitled to notice of, and to vote at, the meeting and any adjournment or postponement thereof. Neither holders of USTS Common Stock nor holders of USTS Preferred Stock are entitled to dissenters' appraisal rights under the Nevada General Corporation Law in respect of the Proposal. When the proxies are returned properly executed, the shares represented thereby will be voted in accordance with the indicated instructions. However, if no instructions have been specified on the returned proxy, the shares represented thereby will be voted "FOR" approval of the Proposal. Any shareholder giving a proxy has the right to revoke it at any time before it is voted by filing, with the Secretary of USTS, either an instrument revoking the proxy or a duly executed proxy bearing a later date. Proxies also may be revoked by attending the meeting and voting in person. By Order of the Board of Directors U.S. Transportation Systems, Inc. SECRETARY February 9, 1998 YOUR VOTE IS IMPORTANT NO MATTER HOW LARGE OR SMALL YOUR HOLDINGS MAY BE. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE THE ENCLOSED PROXY CARD, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS OF USTS, SIGN EXACTLY AS YOUR NAME APPEARS THEREON AND RETURN IMMEDIATELY IN THE ENVELOPE SUPPLIED. U.S. TRANSPORTATION SYSTEMS, INC. PROXY STATEMENT --------------------- PRECEPT BUSINESS SERVICES, INC. PROSPECTUS This Proxy Statement/Prospectus is being furnished by the management of U.S. Transportation Systems, Inc., a Nevada corporation ("USTS") to holders of common stock, par value $0.01 per share ("USTS Common Stock"), of U.S. Transportation Systems, Inc., a Nevada corporation ("USTS"), in connection with the solicitation of proxies by the Board of Directors of USTS for use at a special meeting of shareholders of USTS (the "Meeting") to be held on March 12, 1998, at the Westchester Marriott, located at 670 White Plains Road, Tarrytown, New York 10591, commencing at 4:00 p.m., local time, and at any adjournment or postponement thereof. At the Meeting, the shareholders of USTS will vote upon the transactions contemplated by (a) the Agreement and Plan of Reorganization, dated as of November 16, 1997 (the "Plan of Reorganization"), by and among USTS, Precept Business Services, Inc., a Texas corporation ("Precept") and Precept Acquisition Company, L.L.C., a Nevada limited liability company and wholly-owned subsidiary of Precept ("Acquisition"), pursuant to which USTS will transfer its business and substantially all of its assets to Acquisition in exchange for 9,612,500 shares (subject to increase on a share-for-share basis if outstanding warrants for the purchase of USTS shares are exercised prior to the closing of the Transfer) of Precept Class A Common Stock, par value $0.01 per share (the "Shares"), and Acquisition will assume certain liabilities of USTS (the "Transfer"), and (b) a Plan of Liquidation and Dissolution pursuant to which USTS shall cease operations and effect the liquidation and dissolution of USTS in accordance with Nevada law (the "Plan of Liquidation"), as well as on the proposal to change the name of USTS after the Transfer to Transportation Equities, Inc. (the "Name Change"). Upon completion of the Transfer, the entire outstanding capital stock of Precept will consist of an aggregate of 45,612,500 shares of Precept Class A and Class B Common Stock (collectively, the "Precept Common Stock"). After the Transfer, USTS will distribute the Shares (subject to the holdback by USTS of a number of Shares (currently estimated to be 600,000) to satisfy certain contingent liabilities and obligations) to the USTS shareholders in liquidation of USTS (the "Liquidating Distribution") and USTS will dissolve, in accordance with the terms of a Plan of Liquidation. The remaining Shares (the "Contingency Shares") will be retained by USTS and placed in a liquidating trust to satisfy contingent liabilities of USTS, in accordance with the terms of the Plan of Liquidation. The Board of Directors of USTS shall determine the number of Contingency Shares, which number shall not be less than 500,000 nor more than 1,000,000, as shall in its sole discretion be sufficient for the satisfaction of any remaining taxes, expenses and contingent liabilities of USTS after the consummation of the transactions contemplated in the Plan of Reorganization and Plan of Liquidation. Any of the Contingency Shares and any other assets remaining in the liquidating trust after the earlier of (a) the date on which all liabilities of USTS have been satisfied or settled or (b) three years, will be distributed to the USTS shareholders at that time. Based on the number of shares of common stock $0.01 par value per share of USTS ("USTS Common Stock") and the preferred stock of USTS $0.01 par value per share ("USTS Preferred Stock") (collectively, "USTS Stock") outstanding on February 4, 1998 and the estimate of 600,000 Contingency Shares, each outstanding share of USTS Stock would be entitled to receive approximately one share of Precept Class A Common Stock in the Liquidating Distribution. Throughout this Prospectus/Proxy Statement, the Plan of Reorganization, the Plan of Liquidation, and all of the transactions contemplated by either of them are referred to collectively as the "Transactions." Holders of USTS Stock do not have dissenters' appraisal rights in respect of the Transactions. This Proxy Statement/Prospectus also constitutes a prospectus of Precept with respect to the shares of Precept Class A Common Stock to be issued to USTS in the Transfer, and the Precept Class A Warrants to acquire shares of Precept Class A Common Stock to be issued by Precept to the holders of outstanding USTS Class C Warrants to purchase USTS Common Stock, as provided in the Plan of Reorganization. Precept has applied for approval for listing of the Shares to be issued in connection with the Transfer on the Nasdaq SmallCap Market ("Nasdaq"), subject to notice of issuance and requisite approval of the Transactions by the USTS shareholders. FOR A DISCUSSION OF CERTAIN CONSIDERATIONS REGARDING THE BUSINESSES AND OPERATIONS OF USTS AND PRECEPT THAT SHOULD BE EVALUATED BEFORE VOTING ON THE PROPOSALS DESCRIBED HEREIN AT THE MEETING, SEE "RISK FACTORS" ON PAGE . -------------------------- THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/ PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ This Proxy Statement/Prospectus and accompanying forms of proxy are first being mailed to stockholders of USTS on or about February 10, 1998. THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS FEBRUARY 9, 1998. 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. Precept will be subject to the informational requirements of the Exchange Act and in accordance therewith will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission described above. Precept intends to furnish to its shareholders annual reports containing financial statements audited by independent certified public accountants following the end of each fiscal year. Precept has filed with the Commission a Registration Statement on Form S-4 (together with any amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities to be issued pursuant to the Plan of Reorganization. This Proxy Statement/Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements contained in this Proxy Statement/Prospectus or in any document incorporated by reference in this Proxy Statement/Prospectus as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. The Registration Statement, including exhibits filed as a part thereof, are available for inspection and copying at the Commission's offices as described above. NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS IN CONNECTION WITH THE SOLICITATIONS OF PROXIES OR 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, PRECEPT OR ANY OTHER PERSON. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, 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 SUMMARY THE FOLLOWING IS ONLY A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT/ 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 PROXY STATEMENT/PROSPECTUS. AS USED IN THIS PROXY STATEMENT/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 PROXY STATEMENT/PROSPECTUS HAS BEEN FURNISHED BY USTS, AND ALL INFORMATION CONCERNING PRECEPT AND ACQUISITION INCLUDED IN THIS PROXY STATEMENT/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 PROXY STATEMENT/PROSPECTUS. PRECEPT EXPECTS TO EFFECT A 3.15438 TO 1 STOCK SPLIT ON THE PRECEPT COMMON STOCK PRIOR TO THE EFFECTIVE DATE OF THIS PROXY STATEMENT/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 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. SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES ATTACHED HERETO IN THEIR ENTIRETY. GENERAL At the Meeting, holders of USTS Common Stock will be asked to act upon and vote, as a single proposal, on the adoption and approval of the transfer of the business and substantially all of the assets of USTS to Acquisition, and the assumption by Acquisition of certain liabilities of USTS, pursuant to the terms of the Plan of Reorganization, and the subsequent liquidation and dissolution of USTS pursuant to the Plan of Liquidation, which are more particularly described herein. A copy of each of the Plan of Reorganization and the Plan of Liquidation is attached hereto and incorporated herein by reference as Annex A and Annex B, respectively. For a description of certain important federal income tax consequences of the Transactions, see "Summary--The Transfer"; "--Certain Material Federal Income Tax Consequences"; and "The Transactions--Certain Material Federal Income Tax Consequences." 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. 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. 3 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' 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 4 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. RECOMMENDATION OF THE USTS BOARD OF DIRECTORS The USTS Board of Directors has determined that the Plan of Reorganization and the Plan of Liquidation are fair to, and in the best interests of, the shareholders of USTS. Accordingly, the USTS Board has unanimously approved the Transactions and recommends that the shareholders of USTS vote in favor of the proposal to approve and adopt the Plan of Reorganization and the Plan of Liquidation. The recommendation of the USTS Board is based on a number of strategic, operating and financial factors described in "The Transactions--USTS Reasons for the Transactions; Recommendations of the USTS Board." Among the factors on which the recommendation of the USTS Board is based are: - improved access to financing for the combined entities; - economies of scale of the combined entities; - increase in management resources available to the combined entities; and - difficulties historically encountered by USTS in achieving growth as an independent entity. RECOMMENDATION OF THE FINANCIAL ADVISOR M.H. Meyerson & Co., Inc. ("Meyerson") has delivered its opinion dated October 16, 1997, which it has confirmed as of the date of this Proxy Statement/Prospectus, to the USTS Board, to the effect that, as of such dates, the Transactions are fair, from a financial point of view, to the common shareholders of USTS. See "The Transactions--Opinion of USTS Financial Advisor." A copy of the opinion of Meyerson which sets forth the assumptions made, procedures followed, matters considered and limitations on the scope of the review by Meyerson in rendering its opinion, is attached as Annex C to this Proxy Statement/ Prospectus. THE MEETING PURPOSES OF THE MEETING The purpose of the Meeting is to consider and vote to approve and adopt, as a single proposal, the Plan of Reorganization, the Plan of Liquidation in connection with the consummation of the Transfer, and the change of name of USTS required by the Plan of Reorganization. 5 DATE, TIME AND PLACE The Meeting will be held on March 12, 1998, at the Westchester Marriott, located at 670 White Plains Road, Tarrytown, New York 10591 at 4:00 p.m., local time. RECORD DATE; SHARES ENTITLED TO VOTE The USTS Board has established February 4, 1998, as the record date for the determination of shareholders entitled to notice of and to vote at the Meeting. Only holders of record of USTS Common Stock at the close of business on such date are entitled to vote at the Meeting. On such date, there were approximately 8,979,187 shares of USTS Common Stock outstanding, each of which will be entitled to vote on each matter to be acted upon or which may properly be brought before the Meeting. Discretionary authority granted by proxies voted against the Transactions will not be used to adjourn the meeting to solicit additional votes. VOTE REQUIRED The affirmative vote of the holders of a majority of the issued and outstanding shares of USTS Common Stock is required to approve the Plan of Reorganization, the Plan of Liquidation, and the Name Change. For additional information concerning the special meeting, see "The Meeting." For information concerning the security ownership of USTS and Precept management and certain other persons, see "The Transactions--Interests of Certain Persons in the Transactions" and "Security Ownership." THE PLAN OF REORGANIZATION TRANSFER At the closing of the Transfer, 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 6 by their respective Boards of Directors; provided that, after shareholder approval is obtained as described 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 7 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 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 material federal income tax considerations in connection with the Transfer, see "The Transactions--Certain Material 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 Meeting" and "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. For example, if the Precept Board of Directors were to approve a 1 for 2 reverse stock split, each shareholder would receive one share of Precept Class A Common Stock in exchange for every two shares previously held. See "Risk Factors-- Nasdaq Listing Application; Contingent Reverse Stock Split" and "The Transactions--Reverse Stock Split." 8 INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS USTS MANAGEMENT Pursuant to the Plan of Reorganization, Precept will enter into Employment Agreements with each of Michael Margolies and Ron Sorci, who are the Chairman and the President of USTS, respectively. Precept has also agreed with Mr. Margolies that he will serve as Vice Chairman of the Board of Precept after the Transfer and agreed with Robert Blackman, a member of the USTS Board, that Mr. Blackman will serve on the Board of Directors of Precept after the Transfer. See "The Plan of Reorganization--Terms of the Plan of Reorganization--Additional Conditions to the Obligations of USTS" and "The Transactions-- Interests of Certain Persons in the Transactions." SECURITY OWNERSHIP OF THE MARGOLIES FAMILY Michael Margolies, the Chairman of USTS, is the record owner of 1,835,116 shares of USTS Common Stock. Jay Owen Margolies, a son of Michael Margolies and a member of the USTS Board, is the record owner of 286,054 shares of USTS Common Stock. The Margolies Family Trust, the beneficiaries of which are the children of Michael Margolies, is the owner of 855,000 shares of USTS Common Stock. In total, the Margolies family owns an aggregate of 2,976,170 shares of USTS Common Stock, or 33.1% of the outstanding USTS Common Stock. Accordingly, approximately one-third of the benefit of the Transactions will inure to members of the Margolies family. Because Michael Margolies is an affiliate of USTS and will be an affiliate of Precept after the Transfer, the Shares received by him through the Transactions would be restricted shares, which could be sold only in limited circumstances. Therefore, in order to induce Mr. Margolies to enter into an employment agreement with Precept, Precept has agreed to enter into a Registration Rights Agreement with Michael Margolies granting Mr. Margolies and the Margolies Family Trust certain rights to register with the Securities and Exchange Commission sales of the Shares received by them in connection with the Transactions. See "The Plan of Reorganization--Terms of the Plan of Reorganization-Additional Conditions to the Obligations of USTS" and "The Transactions--Interests of Certain Persons in the Transactions." PAYMENT OF MARGOLIES NOTE Since the inception of USTS, Michael Margolies and members of his family have provided loans to finance the operations of USTS, when needed. In 1994, the outstanding balance of those 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 continued to borrow from the Margolies family. On July 7, 1997, a replacement note was issued in the principal amount owed by USTS on that date, $1,039,794. As of September 30, 1997, the remaining unpaid balance of the note was $998,569. The Plan of Reorganization provides that within ten days after the closing of the Transfer, Percept will cause Acquisition to repay the principal balance and all accrued interest on the note, unless Precept and Mr. Margolies have agreed to restructure the note on mutually agreeable terms. See "The Plan of Reorganization--Terms of the Plan of Reorganization--Post Closing Obligations" and "The Transactions--Interests of Certain Persons in the Transactions." 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. 9 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 February , 1998, the last full trading day for which quotations were available prior to the date of this Proxy Statement/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 Proxy Statement/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 10 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 comparable terminology. Although Precept 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. The safe harbor for forward looking statements provided in Section 27A of the Securities Act and Section 21E of the Exchange Act do not apply to initial public offerings such as the offering of securities described herein. 11 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
THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, ------------------------------------------------------------------ -------------------- HISTORICAL PRO FORMA HISTORICAL ----------------------------------------------------- ----------- -------------------- 1993 1994 1995 1996 1997 1997 1996 1997 --------- --------- --------- --------- --------- ----------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS INFORMATION: Revenues................................. $ 40,459 $ 50,968 $ 59,075 $ 72,432 $ 77,344 $ 111,583 $ 19,813 $ 18,935 Income (loss) from continuing operations............................. (1,321) 350 617 (266) 532 (4,717) 134 135 Income (loss) from continuing operations per share(1)........................... (0.13) 0.03 0.05 (0.02) 0.05 (0.10) 0.01 0.01 Weighted average common outstanding shares(1).............................. 10,457 11,667 11,625 11,524 11,516 45,937 11,516 11,516 FINANCIAL POSITION (AT PERIOD END): Total assets............................. 16,510 24,951 25,627 32,691 29,291 50,828 31,835 30,477 Working capital.......................... 2,523 5,860 7,458 14,476 12,343 8,823 13,078 12,011 Long-term obligations.................... 663 707 543 5,260 7,502 13,575 5,307 7,955 Shareholders' equity(2).................. 729 17,537 17,032 16,582 13,305 17,623 16,803 13,275 PRO FORMA ----------- 1997 ----------- STATEMENT OF OPERATIONS INFORMATION: Revenues................................. $ 26,958 Income (loss) from continuing operations............................. (2,570) Income (loss) from continuing operations per share(1)........................... (0.06) Weighted average common outstanding shares(1).............................. 45,937 FINANCIAL POSITION (AT PERIOD END): Total assets............................. 52,554 Working capital.......................... 8,976 Long-term obligations.................... 13,996 Shareholders' equity(2).................. 17,594
- ------------------------------ (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. 12 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
AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1996 SEPTEMBER 30, 1997 ----------------- --------------------- HISTORICAL USTS Loss from continuing operations per share............ $ (1.04) $ (0.44) Book value per share................................. $ 2.50 $ 1.44 AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED JUNE THREE MONTHS ENDED 30, 1997 SEPTEMBER 30, 1997 ----------------- --------------------- HISTORICAL PRECEPT Income from continuing operations per share.......... $ 0.05 $ 0.01 Book value per share................................. $ 1.17 $ 1.17 AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED JUNE THREE MONTHS ENDED 30, 1997 SEPTEMBER 30, 1997 ----------------- --------------------- 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 AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED JUNE THREE MONTHS ENDED 30, 1997 SEPTEMBER 30, 1997 ----------------- --------------------- USTS PRO FORMA EQUIVALENTS(1) Loss from continuing operations per share............ $ (0.11) $ (0.06) Book value per share................................. $ 0.42 $ 0.42
- ------------------------ (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. 13 RISK FACTORS THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY THE SHAREHOLDERS OF USTS IN CONNECTION WITH VOTING UPON THE PLAN OF REORGANIZATION AND RELATED TRANSACTIONS. THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS ABOUT THE BUSINESS, OPERATIONS AND FINANCIAL CONDITION OF USTS AND PRECEPT, INCLUDING VARIOUS STATEMENTS CONTAINED IN "SUMMARY--THE PARTIES"; "USTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"; AND "PRECEPT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". THE ACTUAL RESULTS OF USTS AND PRECEPT COULD DIFFER MATERIALLY FROM THOSE FORWARD LOOKING STATEMENTS. THE FOLLOWING INFORMATION SETS FORTH CERTAIN FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF EACH OF USTS AND PRECEPT (AND USTS AND PRECEPT AS A COMBINED COMPANY) TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD LOOKING STATEMENTS. 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 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% 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. 14 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. 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. 15 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. 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. 16 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. 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 17 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 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 18 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 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 19 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 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. THE MEETING This Proxy Statement/Prospectus is being furnished to the holders of USTS Common Stock in connection with the solicitation of proxies by the USTS Board for use at the USTS Meeting to be held on March 12, 1998, at the Westchester Marriott located at 670 White Plains Road, Tarrytown, New York 10591, commencing at 10:00 a.m. local time, and at any adjournment or postponement thereof. MATTERS TO BE CONSIDERED AT THE MEETING At the Meeting, shareholders of USTS will consider and vote, as a single proposal, upon the proposal to approve and adopt the Plan of Reorganization and the Plan of Liquidation, and to change the name of USTS to Transportation Equities, Inc. The shareholders of USTS will also vote on such other matters as may be properly brought before the USTS Meeting. Discretionary authority granted by proxies voted against the Transactions will not be used to adjourn the meeting to solicit additional votes. THE USTS BOARD HAS APPROVED THE PLAN OF REORGANIZATION, THE PLAN OF LIQUIDATION, AND THE NAME CHANGE, AND RECOMMENDS THAT USTS' SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MATTERS SUBMITTED TO USTS SHAREHOLDERS AS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS. VOTING AT MEETING; RECORD DATE The USTS Board has established February 4, 1998, as the record date for the determination of shareholders entitled to notice of and to vote at the Meeting. Only holders of record of USTS Common Stock at the close of business on such date are entitled to vote at the USTS Meeting. On such date, there were approximately 8,979,187 shares of USTS Common Stock outstanding, each of which will be entitled to vote on each matter to be acted upon or which may properly be brought before the USTS Meeting. 20 In determining whether the proposals have received the requisite number of affirmative votes, abstentions and broker non-votes will have the same effect as a vote against the proposal. As of February 4, 1998, directors and executive officers of USTS and their affiliates beneficially owned approximately 34.3% of the outstanding shares of USTS Common Stock. Each of the directors and executive officers has advised USTS that he intends to vote or direct the vote of all shares of USTS Common Stock over which he has voting control for approval of the Transactions. USTS PROXIES Shares of USTS Common Stock represented by proxies received by USTS prior to or at the Meeting will be voted in accordance with the instructions contained therein. Shares of USTS Common Stock represented by proxies for which no instruction is given will be voted "FOR" the Plan of Reorganization, the Plan of Liquidation and the Name Change. Holders of USTS Common Stock are requested to complete, sign and date the enclosed proxy card and promptly return it in the postage paid envelope provided for this purpose in order to ensure that the shares are voted. A proxy may be revoked at any time prior to the exercise of the authority granted thereunder. Revocation may be accomplished by the granting of a later proxy with respect to the same shares or by giving notice thereof to USTS in writing at the Meeting at any time prior to the vote on the matters to be considered. Presence at the Meeting of a shareholder who signed a proxy does not in itself revoke the proxy. The USTS Board is aware of no matters to be presented at the Meeting other than those described in this Proxy Statement/Prospectus. If other matters are properly brought before the Meeting, it is the intention of the persons named in the proxies to vote the shares to which said proxies relate in accordance with their judgment. SOLICITATION OF PROXIES USTS will bear the cost of the solicitation of proxies from the USTS shareholders. Officers and regular employees of USTS, who will receive no compensation in excess of their regular salaries for their services, may solicit proxies from the USTS shareholders by telephone, telegram or otherwise. USTS will also reimburse brokers and other nominees for their reasonable expenses in communicating with the persons for whom they hold USTS Common Stock. THE TRANSACTIONS BACKGROUND OF TRANSACTIONS The acquisition discussions were initiated by Precept through First Southwest Company ("First Southwest") by a telephone conference between First Southwest and USTS during the week of January 6, 1997. On January 11, 1997, representatives of each of USTS, including Michael Margolies, Chairman of USTS, Ron Sorci, Controller of USTS, and Terry Watkins, Chief Financial Officer of USTS. Precept, including David Neely, Chairman and Chief Executive Officer of Precept, and Scott Walker, Chief Financial Officer of Precept, and representatives of First Southwest met in Tampa, Florida to discuss a possible business combination. Shortly thereafter, confidentiality agreements were executed. During January and February, USTS and Precept negotiated the terms for, and entered into, a letter of intent, which was signed on March 7, 1997 (the "Letter of Intent"). The Letter of Intent provided for the merger of Precept into USTS and the issuance of 36,000,000 shares of USTS common stock to the shareholders of Precept. Thereafter, the parties commenced due diligence investigations of their respective business, operations and financial information. After conducting its due diligence investigation, Precept concluded, in July, that it was unwilling to proceed with the transaction as set forth in the Letter of Intent. Precept proposed an alternative structure 21 in which Precept would acquire substantially all of the assets of USTS and assume certain USTS liabilities in exchange for 9,000,000 shares of Precept Class A Common Stock in a transaction intended to qualify as a "tax free" reorganization. When negotiating the revised transaction with USTS, Precept determined a net value for the assets of USTS being acquired. Precept then evaluated its implied equity value in order to determine the number of shares of common stock Precept was willing to issue in the transaction. Based upon advice from its financial advisors, Precept arrived at its implied equity value by utilizing both a comparable company analysis and a discounted cash flow analysis. Based on these analyses, Precept concluded that the issuance of approximately 20% of its common stock reflected fair consideration for the acquisition of the USTS assets. Representatives of USTS and Precept continued arm's-length negotiations and ultimately, in August, agreed in principle that Precept would issue 9,500,000 shares of Precept Class A Common Stock and assume certain warrants and options to purchase USTS Common Stock (converted into the right to purchase Precept Class A Common Stock on a share-for-share basis) in consideration for the acquisition of substantially all of the assets of USTS and the assumption of certain USTS liabilities. The parties continued to negotiate the specific terms and structure of a definitive agreement. On November 16, 1997, the Plan of Reorganization was executed by USTS, Precept and Acquisition. USTS REASONS FOR THE TRANSACTIONS; RECOMMENDATIONS OF THE USTS BOARD The USTS Board has approved the Plan of Reorganization and the Plan of Liquidation and the other Transactions and has recommended that the USTS stockholders vote "FOR" approval of the matters described in this Proxy Statement/Prospectus for the following reasons: - USTS has, historically, found it difficult and expensive to obtain the debt and equity financing required to expand and enhance its operations. The combined entity is expected to have greater revenues and operating cash flows than either USTS or Precept on a stand-alone basis, which is expected to result in enhanced financial flexibility and improved access to financing on more favorable terms than are currently available to either company on a stand-alone basis. - USTS has only two executive officers: its Chairman, Michael Margolies, and its President, Ronald P. Sorci. Were USTS to expand independently, it would be necessary to retain additional skilled executives, which could be very difficult. The combination of USTS with Precept will immediately expand the management resources available to chart the growth of the combined entities. - USTS is involved in a highly competitive industry, i.e. ground transportation. Although USTS has made acquisitions of businesses in industries that generally offer higher gross margin than ground transportation, it has not successfully established itself in any of those areas, and relies generally on business which is relatively stable but which generates relatively low profit margins. The combined Precept/USTS will be involved in a range of business areas, some of which offer opportunities for increased profit margins. - There is expected to be marketing synergy between the existing operations of USTS and the existing operations of Precept. In particular, management intends to market the Precept business product services to the USTS transportation customers, and vice versa. This synergy should result in expansion of both operations with a relatively low increase in marketing and administrative expenses. - The Transfer presents opportunities to realize economies of scale and operating efficiencies. Operating efficiencies may result from the integration of certain operations and the elimination of facilities' costs. The extent to which these possible economies of scale and operating efficiencies may be realized is uncertain, and no assurances can be made with respect thereto. In reaching these conclusions, the USTS Board considered, among other things, (i) expected operating and financial characteristics of a combined entity, and the operating efficiencies and economies of scale associated with the combination, (ii) the experience and performance of Precept management, (iii) the 22 capital structure and financial performance of Precept, and (iv) the opinion of Meyerson, financial advisor to USTS for the Transfer, that, as of the date of such opinion, the Transactions are fair, from a financial point of view, to the common shareholders of USTS. At the same time, the USTS Board also considered each of the negative factors which are described in this Proxy Statement/Prospectus under the heading "Risk Factors," giving special attention to the loss of voting control and the dilution which USTS shareholders will suffer as a result of the Transactions. The USTS Board determined, however, that the perceived advantages to the USTS shareholders of the Transactions outweighed the negative factors, and, accordingly, voted to recommend the Transactions to the USTS shareholders. PRECEPT REASONS FOR THE TRANSACTIONS On October 27, 1997, the Precept Board met to consider the advisability of the proposed Transactions and the terms of the proposed Plan of Reorganization. The Precept Board concluded that the Transactions were advisable and in the best interests of Precept and its shareholders because the Precept Board believes that the Transactions will further Precept's long term strategic objectives. The Precept Board's conclusions are based on (i) the advantages of having publicly traded shares that will enable Precept to execute the consolidation component of its business strategy, (ii) the judgment, advice and analysis of its management, (iii) the synergies, cost reductions, and operating efficiencies that should become available to the combined enterprise as a result of the Transactions, (iv) the strategic benefits of the Transactions, (v) the express terms and conditions of the Plan of Reorganization, which were viewed as providing an equitable basis of the Transactions from the standpoint of Precept and (vi) the significant enhancement of the market position of the combined enterprise. With respect to the synergies, cost reductions and operating efficiencies that should become available, Precept believes that its management experience, philosophy and extensive corporate resources, when applied to USTS' current operating businesses, will result in measurable cost reductions and operating efficiencies. Furthermore, Precept believes that its lower cost of capital and expected ability to acquire profitable operating entities for long-term investment will eliminate the substantial expense USTS has incurred in its constant turnover of businesses. In addition, personnel and system redundancies will be eliminated by Precept as part of the overall integration process. Precept believes that the strategic benefits of the Transactions arise from Precept's business strategy to capitalize on the current trend of commercial outsourcing of business services. Precept believes that it has offered and will continue to offer its customers various "mission critical" services that can be outsourced. Precept has interests in business products, chauffeured vehicle and package delivery operations, with business products being the dominant segment of Precept's operations. Combining USTS' transportation operations with those of Precept not only enhances the transportation segment of Precept's operations but brings a relative balance to the business services offered by Precept. Since Precept's transportation services are currently focused in the southwest United States, Precept believes that adding a presence in the eastern United States, particularly New York City, will give Precept's transportation services component enhanced credibility and service offerings as a national rather than regional provider in this business segment. Because of the strategic benefits explained above, Precept expects that it will be able to offer a more complete selection of business services on a more enhanced geographical basis. Precept believes that having operations in the southwest and eastern United States will enable Precept to not only offer better service to its customers, but also provide a more complete platform on which to build or consolidate the business products and transportation services segments of its business and ultimately enhance the market position of the combined enterprise. The foregoing discussion of the information and factors considered and given weight by the Precept Board is not intended to be exhaustive. In view of the variety of factors considered in connection with its evaluation of the Transactions, the Precept Board did not find it practicable to and did not quantify or otherwise assign relative weights to the specific factors and information considered in reaching its 23 determination. Further, individual members of the Precept Board may have given different weights to different factors. In addition, there can be no assurance that any of the expectations set forth in the preceding paragraphs will be fulfilled or that any of the expected benefits of the Transactions will be realized. NO DISSENTERS' RIGHTS OF APPRAISAL Neither holders of USTS Common Stock nor holders of USTS Preferred Stock are entitled to dissenters' appraisal rights under the NGCL in connection with the matters to be considered at the Meeting. ACCOUNTING TREATMENT The acquisition of substantially all of the assets of USTS in the Transfer will be accounted for using the purchase method of accounting. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES This section is a summary of the tax opinion of USTS' legal counsel, BA&R, as to certain of the material federal income tax consequences of the Transactions, and of certain other material federal income tax consequences relevant to holders of USTS Common Stock, USTS Preferred Stock (collectively, the "USTS Stock") and USTS Warrants which are expected to result from the Transactions and the issuance of the securities offered by this Proxy Statement/Prospectus. It is impracticable to comment on all aspects of federal, state, local and foreign laws that may affect the tax consequences of the transactions contemplated hereby as they relate to the particular circumstances of each shareholder or potential shareholder or holder or potential holder of warrants. The federal income tax discussion set forth below applies only to holders of shares of USTS Stock and USTS Warrants who hold such securities as capital assets. The federal income tax consequences to any particular shareholder or warrant holder may be affected by matters not discussed below. For example, certain types of holders (including foreign persons, life insurance companies, tax exempt organizations and taxpayers who may be subject to the alternative minimum tax) may be subject to special rules not addressed herein. Furthermore, the discussion may not be applicable with respect to shares received pursuant to the exercise of employee stock options or otherwise as compensation. This summary is based on the current provisions of the Code, existing and proposed regulations thereunder and current administrative rulings and court decisions, all of which are subject to changes that may or may not be retroactively applied. Many of the provisions of the Code which have been recently enacted or amended have not been interpreted by the courts or the IRS. No ruling has been requested from the IRS with respect to any of the matters discussed herein and thus no assurance can be provided that opinions and statements set forth herein (which do not bind the IRS or the courts) will not be challenged by the IRS or would be sustained by a court if so challenged. THE DISCUSSION SET FORTH BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF GENERAL APPLICABILITY WHICH ARE EXPECTED TO RESULT FROM THE TRANSACTIONS. SHAREHOLDERS AND WARRANT HOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES OF THE TRANSACTIONS, HOLDING AND DISPOSITION OF THE SECURITIES OFFERED HEREBY, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES. 24 TAX OPINION USTS has obtained the Tax Opinion of its legal counsel, BA&R, as to certain of the material federal income tax consequences of the Transactions, a copy of which is attached as an exhibit to the Registration Statement. The Tax Opinion is subject to certain assumptions and qualifications, including the present and continuing accuracy of (i) the description of the facts relating to the Transactions contained in this Proxy Statement/Prospectus, (ii) the factual representations contained in the Plan of Reorganization and related documents, and (iii) certain factual matters addressed by representations made by certain executive officers of USTS and Precept, as further described in the Tax Opinion. The Tax Opinion does not address the tax consequences that are expected to result from the Transactions to holders of USTS Warrants. The following discussion represents a summary of the Tax Opinion, a copy of which is filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus is a part. Subject to the conditions, qualifications and assumptions contained herein, in the representation letters provided to BA&R by USTS and Precept, and in the Tax Opinion, BA&R has opined that the material federal income tax consequences associated with the Transactions are as follows: (i) Holders of USTS Stock generally will not recognize gain or loss upon their receipt solely of Precept Class A Common Stock in exchange for USTS Stock in the Liquidating Distribution. As described more fully below, however, gain may be recognized to the extent that a USTS shareholder receives or is deemed to receive property other than Precept Class A Common Stock in the Liquidating Distribution, including as a consequence of receiving cash in lieu of a fractional share of Precept Class A Common Stock. (ii) The aggregate tax basis of the Precept Class A Common Stock received by USTS shareholders in the Liquidating Distribution generally will be the same as the aggregate tax basis of the USTS Common Stock delivered in exchange therefor, increased by the amount of any gain that is recognized on the exchange (as described above), and decreased by the amount of any cash or property other than Precept Class A Common Stock received in the Liquidating Distribution. (iii) The holding period of the Precept Class A Common Stock received by the USTS shareholders in the Liquidating Distribution will include the period for which the USTS Stock was held, provided that the USTS Common Stock is held as a capital asset at the time of the Liquidating Distribution. (iv) Neither Precept nor USTS will recognize gain solely as a result of the Transactions. (v) USTS will not recognize gain solely as a result of the Liquidating Distribution except to the extent that (i) in conjunction with the Liquidating Distribution, USTS transfers any appreciated assets (other than Precept Class A Common Stock) to its shareholders or (ii) USTS sells Precept Class A Common Stock to satisfy certain of its liabilities. The Tax Opinion represents only such counsel's best judgment as to the material federal income tax consequences of the Transactions and are not binding on the IRS. The IRS may challenge the conclusions stated therein and USTS and shareholders of Precept may incur the cost and expense of defending positions taken by them with respect to the Transactions. HOLDERS OF USTS WARRANTS Pursuant to Treasury Regulations released on January 6, 1998, gain or loss will not be recognized on the exchange of rights to acquire stock in certain reorganizations. The effective date of the regulations is March 9, 1998. Therefore, because the closing of the Transfer will take place on or after March 9, 1998, holders of USTS Warrants will not recognize gain or loss upon their receipt solely of Precept Class A Warrants in the Reorganization. Holders of the USTS Warrants should consult their tax advisors to determine the tax consequences of the Transactions with respect to their own particular circumstances. 25 CASH IN LIEU OF FRACTIONAL SHARES USTS shareholders who receive cash in lieu of fractional shares of Precept Class A Common Stock generally will recognize capital gain or loss with respect to those fractional shares in an amount equal to the differences between the tax basis allocated to such fractional shares (as determined above) and the cash received in respect thereof. Any such gain or loss will be capital gain or loss if such fractional shares are held as capital assets. TAX CONSEQUENCES ATTRIBUTABLE TO THE LIQUIDATING TRUST Some of the Precept Class A Common Stock received by USTS in the Transactions, and some amount of cash, may be placed into the Liquidating Trust to provide for any liabilities, including any contingent liabilities, of USTS. For federal income tax purposes, a pro rata share of such assets will be deemed to have been distributed to each USTS shareholder and contributed by such shareholder to the Liquidating Trust. The Liquidating Trust will not itself be subject to tax; rather, each holder of a beneficial interest in the Liquidating Trust will be treated as owning a pro rata share of the assets of the Liquidating Trust, and will be required to take into account the holder's proportionate share of each of the Liquidating Trust's items of income or deduction. Since the Transactions and the Liquidating Distribution will constitute a tax-free reorganization, as described above, USTS shareholders will not recognize any gain or loss to the extent that the assets deemed distributed to them, and contributed by them to the Liquidating Trust, consist solely of Precept Class A Common Stock. If a USTS shareholder, however, realizes gain in the Liquidation, (i.e., if the total value of all the consideration received by such shareholder in the Liquidation, including Precept Class A Common Stock, exceeds the holder's adjusted basis in the holder's shares of USTS Stock), the holder must recognize such gain to the extent that cash is actually distributed to the holder and to the extent that the holder's pro rata share of the assets of the Liquidating Trust are deemed to have been distributed to the holder. In determining the amount of gain or loss realized and recognized as a result of the Liquidation, the amount of any fixed or contingent liabilities assumed by the Liquidating Trust will not be treated as decreasing the amount of boot that a USTS shareholder is deemed to receive as a result of the receipt of an interest in the Liquidating Trust. OTHER TAX MATTERS The Plan of Reorganization provides that either USTS or Precept may waive any condition to Closing that is contained therein. The USTS Board has determined, however, that if it is advised, by BA&R or otherwise, that the material federal income tax consequences associated with the Transactions would be other than as set forth above, the USTS Board will not approve or authorize any such waiver. USTS has available for federal income tax purposes certain net operating loss ("NOL") carryforwards. The availability and future use of these NOLs by the combined entity will be limited by the Code, including the requirement that operations of USTS acquired by Precept generate future taxable income on a stand alone basis. Due to the uncertainty of the future availability of these NOLs, no value will be assigned to them by Precept for financial accounting purposes. REGULATORY APPROVALS Under the HSR Act and the rules promulgated thereunder by 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 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. 26 FEDERAL SECURITIES LAWS CONSEQUENCES All Shares received or held by USTS shareholders in connection with the Transfer will be freely transferable under the federal securities laws, except that Shares received or held by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of USTS prior to the Transfer may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144 in the case of such persons who become affiliates of Precept) or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of USTS or Precept generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal stockholders of such party. The Plan of Reorganization requires USTS to cause each of its affiliates to execute a written agreement to the effect that such person will not offer or sell or otherwise dispose of any shares of Precept Class A Common Stock issued to such person in or pursuant to the Transfer in violation of the Securities Act or the rules and regulations promulgated thereunder by the Commission. INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS EMPLOYMENT AGREEMENT WITH MICHAEL MARGOLIES AND RONALD SORCI At or prior to the closing of the Transfer, Precept will enter into a five-year employment agreement with Michael Margolies, pursuant to which Mr. Margolies will serve as Vice Chairman of the Board of Precept. Under the terms of the employment agreement, Mr. Margolies will receive an annual salary of $240,000, to be increased annually in accordance with Precept's overall compensation pool and in accordance with Mr. Margolies performance. Mr. Margolies will be entitled to receive performance-based cash bonuses, and such health, medical, disability and life-insurance benefits as are made available to senior executive management of Precept. In addition, Precept will pay the premiums (previously paid by USTS) with respect to Mr. Margolies current personal life insurance policy (approximately $50,000 per year for two years), and thereafter Precept will pay for and maintain during the term of his employment agreement an additional insurance policy on the life of Mr. Margolies with coverage equal to one year's annual base salary, as such salary may exist from year to year. Precept will also provide Mr. Margolies with the use of an automobile, and pay all maintenance, repair, insurance, and other costs associated with the use of such automobile. At or prior to the closing of the Transfer, Precept will enter into a five-year employment agreement with Ronald Sorci, pursuant to which Mr. Sorci will serve as President of the Transportation Division of Precept. Under the terms of the employment agreement, Mr. Sorci will receive an annual salary of $170,000, to be increased annually in accordance with Precept's overall compensation pool and in accordance with Mr. Sorci's performance. Mr. Sorci will be entitled to receive performance-based cash bonuses, and such health, medical, disability and life insurance benefits as are made available to senior executive management of Precept. REGISTRATION RIGHTS AGREEMENT OF MICHAEL MARGOLIES Because Michael Margolies will be an affiliate of Precept, Vice Chairman, after the Transfer, shares of Precept Class A Common Stock received by him through the Transactions would be restricted shares, which could be sold only in limited circumstances. Therefore, in order to induce Mr. Margolies to enter into an employment agreement with Precept, Precept has agreed to enter into a Registration Rights Agreement with Michael Margolies granting Mr. Margolies certain rights to register with the Securities and Exchange Commission the Shares received by Mr. Margolies and the Margolies Family Trust (collectively, the "Stockholder") in connection with Transactions (the "Registrable Shares"). At any time from the date of the Registration Rights Agreement (the closing date of the Transfer) through the eighteen month anniversary thereof (the "Piggyback Expiration Date"), if Precept proposes to register any Precept Class A Common Stock for its own or others' account under the Securities Act of 1933, as amended (the 27 "Securities Act"), in a public offering for cash (an "Offering"), the Stockholder will have certain "piggyback rights" to participate on the same terms and conditions as Precept in the public offering (subject to limitations imposed by the underwriter, if any). In addition, the Stockholder will have a "demand right" to request that Precept cause a registration statement covering the sale of the Registrable Shares to be declared effective by the SEC on or before the Piggyback Expiration Date. In the event that the Stockholder makes such a request and Precept fails to cause such a registration statement to be declared effective by such date, then the Stockholder will have a ninety day option to require Precept to purchase all or any portion of any Registrable Shares then held by the Stockholder at a price per share equal to the average closing price for Precept Class A Common Stock over the 30 trading days ending three (3) trading days prior to the date Precept receives notice of the exercise of such right. Both the "piggyback" and "demand" registration rights granted pursuant to the Registration Rights Agreement would expire if, at any time after the eight (8) month anniversary of the date of the Agreement, the Stockholder failed to include all of the Registrable Shares in any Offering with respect to which the Stockholder was entitled to include all such shares. SECURITY OWNERSHIP OF THE MARGOLIES FAMILY Michael Margolies, the Chairman of USTS, is the record owner of 1,835,116 shares of USTS Common Stock. Jay Owen Margolies, a son of Michael Margolies and a member of the USTS Board, is the record owner of 286,054 shares of USTS Common Stock. The Margolies Family Trust, the beneficiaries of which are the children of Michael Margolies, is the owner of 855,000 shares of USTS Common Stock. In total, the Margolies family owns an aggregate of 2,976,170 shares of USTS Common Stock, or 33.1% of the outstanding USTS Common Stock. Accordingly, approximately one-third of the benefit of the Transactions will flow to members of the Margolies family. As a result of the Transactions, the Margolies family will own an aggregate of 2,976,170 shares of Precept Class A Common Stock, or 2.1% of the total voting power of Precept. PAYMENT OF MARGOLIES NOTE Throughout the life of USTS, Michael Margolies and members of his family have provided loans to finance the operations of USTS, when needed. In 1994 the outstanding balance of those 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 continued to borrow from the Margolies family. On July 7, 1997, a replacement note was issued in the principal amount owed by USTS on that date, $1,039,794. As of September 30, 1997, the remaining unpaid balance of the note was $998,569. The Plan of Reorganization provides that within ten days after the closing of the Transfer, Percept will cause Acquisition to repay the principal balance and all accrued interest on the note, unless Precept and Mr. Margolies have agreed to restructure the note on mutually agreeable terms. OPINION OF USTS FINANCIAL ADVISOR M.H. Meyerson & Co., Inc. ("Meyerson"), an investment banking firm and member of the National Association of Securities Dealers since 1960 was retained by USTS on September 9, 1997 to evaluate the fairness of the Transactions from a financial point of view to the common shareholders of USTS. The full text of the written opinion of Meyerson dated October 16, 1997, which sets forth assumptions made, factors considered and limitations on the review undertaken by Meyerson, is included as Appendix C to this Proxy Statement/Prospectus. USTS shareholders are urged to read such opinion carefully and in its entirety. No limitations were imposed by USTS on the scope of Meyerson's investigation or the procedures to be followed by Meyerson in rendering its opinion. In arriving at its opinion, Meyerson made its determination as to the fairness of the Transfer, from a financial point of view, on the basis of the financial and 28 comparative analysis referred to below. Meyerson was not required to opine as to, and its opinion does not address, USTS' underlying business decision to proceed with or effect the Transfer. In arriving at its opinion, Meyerson reviewed and analyzed: (i) the Plan of Reorganization; (ii) the Plan of Liquidation; (iii) the Registration Statement on Form S-4 of Precept Business Services, Inc.; (iv) the Registration Rights Agreement; (v) audited financial statements for Precept for the years ended June 30, 1996 and 1997; (vi) certain operating and financial information, including projections relating to the business, operations and prospects of Precept, furnished by Precept; (vii) meetings with certain members of Precept's management at which the historical and current operations, financial conditions and future prospects of Precept were discussed as were the benefits expected to result from the Transfer; (viii) the pro forma financial results of the companies after the Transfer; (ix) the relative financial conditions of each of the companies to the combined entity after the Transfer; (x) certain operating and financial information including publicly available disclosure information, projections relating to the business, operations and prospects of USTS, furnished by USTS; (xi) meetings with certain members of USTS' management at which the historical and current operations, financial conditions, and future prospects of USTS were discussed as were the benefits expected to result from the Transfer; (xii) comparisons of historical financial results of Precept with those of publicly traded companies which Meyerson believed to be relevant; and (xiii) results of such other studies, analysis, inquiries and investigations of Meyerson deemed appropriate. Meyerson did not analyze the comparative cash flow of USTS and Precept on a relative basis because USTS had negative cash flow from operations in fiscal years 1995 and 1996. Meyerson also did not consider the USTS Common Stock market value in the fairness analysis because Precept did not have any publicly traded equity securities. In addition, Meyerson considered that the relatively high contemporaneous market valuation of the USTS Common Stock most likely resulted from the expected consummation of the Transactions and that the market value of USTS Common Stock, absent that expectation, would most likely be much lower. Accordingly, Meyerson did not believe that either the cash flow or market value analysis was appropriate or necessary to render the opinion under the circumstances. In connection with its review, Meyerson relied upon and assumed, without independent verification, the accuracy of the information supplied by Precept's and USTS' respective management. Meyerson further relied upon the assurances of the managements of Precept and USTS that they are not aware of any facts that would make such information incomplete or misleading. On October 16, 1997, Meyerson delivered its opinion, which has been confirmed as of the date of this Proxy Statement/Prospectus, to the Board of Directors of USTS, to the effect that, as of such date, that the Transactions are fair, from a financial point of view, to the common shareholders of USTS. RELATIVE CONTRIBUTION ANALYSIS Meyerson analyzed the relative contribution of Precept and USTS to the revenues, gross profit, and total net income of the combined entity for the period ended June 30, 1997. Meyerson assumed that Precept will issue 9,612,500 shares of its Precept Class A Common Stock (at least 500,000 of which will be held back in a trust to satisfy contingent liabilities of USTS) to the USTS shareholders for the transfer of its business and substantially all of its assets. Following the Transfer there will be 45,612,500 shares of Precept Common Stock outstanding. Based on the twelve months ended June 30, 1997, Precept's revenue and gross profit represent 78% and 57% respectively of the combined total. Only Precept had an operating profit. The shares of Precept Class A Common Stock issued in the Transfer and immediately issued to USTS shareholders (not more than 9,112,500 shares) will represent approximately 21% of the 45,612,500 total shares of Precept Common Stock outstanding following this transaction, which corresponds approximately to the relative contributions of Precept and USTS to the historical revenues of the combined entities. 29 BALANCE SHEET ANALYSIS As of June 30, 1997, USTS had shareholders' equity of $16,794,138. On the same date, the shareholders equity of Precept was $13,304,967. Meyerson noted that $6,093,320 of the assets of USTS are notes receivable and that intangible assets include $1,909,214 of goodwill and $1,054,131 represents other intangible assets. Shareholders' equity of USTS net of these items is $7,737,473. These USTS notes receivable arise principally from the sale of unprofitable or non-strategic business units and the collection of these notes may be principally dependant upon the commercial success of those units. As a condition of the Transfer, Precept has agreed to repay certain notes owed to the family of Michael Margolies and to assume all other USTS debt. On the basis of the relative balance sheets as presented, USTS shareholders' equity represents 56% of the combined $30,099,105 in shareholders' equity as of June 30, 1997. On the basis of removing notes receivable, goodwill and other intangible assets from the USTS balance sheet, USTS shareholders' equity represents 37% of the combined $21,042,440 in shareholders' equity. This ratio of 63 to 37 of the relative contributions of Precept and USTS to the shareholders' equity of the combined entity does not independently justify allocating to USTS shareholders 21% of the shares in the combined entity. However, the historical and projected return on shareholders' equity of Precept far exceeds that of USTS, which supports a disproportionate allocation of shares in the combined entity. PRECEPT COMPARABLE COMPANY ANALYSIS The business products and office supply industry is very competitive. According to Sarkans and Associates, a consulting service for printing and document management, the production of forms and products distributed by products industry participants reached a retail value of $20.4 billion in 1996. Meyerson compared four publicly traded companies, Corporate Express, U.S. Office Products, BT Office Products International and Boise Cascade Office Products, that distribute and in some cases manufacture business forms and office products. The companies in Precept's peer group ranged in revenue from $1.4 billion to $3.1 billion for fiscal 1996. For each company Meyerson reviewed publicly available financial data for the fiscal year 1996 and for the six months ended June 30, 1997. Meyerson looked particularly at revenue, net income, return on equity, earnings per share for the trailing twelve months and the price to earnings ratio for the trailing twelve months. After comparing the business plan of Precept, which anticipates growth through acquisition and consolidation of individual business products distributors, with those of its peer group, Meyerson determined that the Precept business plan most closely resembled those of Corporate Express and U.S. Office Products Company, which have also grown through acquisitions. The average price earnings multiple for these two companies is 53 times trailing earnings. Given the current financial difficulties of USTS and its historic problems in attracting adequate financing, Meyerson found no reason to anticipate that the market value of USTS would increase over the next five years if USTS continued to operate independently. SUMMARY ANALYSIS In summary, the three methods of analysis utilized by Meyerson led to the conclusion that the allocation of 79% of the equity of the combined entity to Precept and 21% to USTS was justifiable on the basis of the relative contributions of each to the combined entity. Based on these analyses, as well as on a comparison of the benefits and risks to USTS of the Transactions as described above (see "USTS Reasons For The Transactions," "Precept Reasons For The Transactions," and "Risk Factors"), Meyerson concluded that the Transactions are fair, from a financial point of view, to the common shareholders of USTS. 30 RECENT MARKET DEVELOPMENTS When confirming its opinion as of the date of this Proxy Statement/Prospectus, Meyerson noted to USTS that, with respect to the Precept comparable company analysis, the average price earnings multiple for Corporate Express and U.S. Office Products Company declined to approximately 27 times trailing earnings. Notwithstanding this decrease, Meyerson confirmed its opinion that the Transactions are fair, from a financial point of view, to the common shareholders of USTS. Meyerson, when confirming its opinion, noted that the USTS Common Stock market price had increased significantly after the announcement of the Transactions, and that the implied market valuation most likely reflected the expected consummation thereof. Notwithstanding this sustained increase in USTS Common Stock market price, USTS continued to experience negative earnings and negative cash flow which Meyerson believed would otherwise result in a continued decrease in the market price of USTS Common Stock on a stand alone basis. Thus, Meyerson was able to confirm its opinion. TERMS OF THE PLAN OF REORGANIZATION THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE PLAN OF REORGANIZATION, THE FULL TEXT OF WHICH IS ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE AS ANNEX A. THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO 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. 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 31 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. 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 32 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, and (vi) the adversary proceeding (the "Litigation") filed in the United States Bankruptcy Court for the Southern District of New York (White Plans Division) (the "Court") and styled UNITED ACQUISITION II CORPORATION V. MID AMERICA TRANSPORTERS GROUP, INC., ET. AL., and naming USTS as a defendant, must be settled by the parties thereto and the settlement thereof must, among other things, (a) provide that United Acquisition II Corporation has no interest in the capital stock of each of Gulf Northern Transport, Inc. and Mencor, Inc., two subsidiaries of USTS, and (b) be approved by the bankruptcy court in connection with the bankruptcy case styled IN RE UNITED ACQUISITION II CORP., Case No. 97-B-20503 ASH, Chapter 11, relating to United Acquisition II Corporation. 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. 33 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 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 "USTS Business--Legal Proceedings"), 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. 34 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 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 THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE PLAN OF LIQUIDATION, THE FULL TEXT OF WHICH IS ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE AS ANNEX B. THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF REORGANIZATION. 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 35 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 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 AND USTS CLASS C WARRANTHOLDERS 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. In addition, as of 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 36 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. 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 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. 37 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. 38 PRECEPT UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997
HISTORICAL -------------------------- 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) ------------ ------------ ------------ -------------- ------------- ------------ ------------ ------------ -------------- ------------- 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 ------------- -------------
See accompanying notes to unaudited pro forma consolidated balance sheet. 39 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: 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
(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: 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)
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. 40 (b) To record estimated purchase price, as follows: 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 --------- ---------
(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. 41 PRECEPT UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997
A HISTORICAL BLACK & -------------------------- A WHITE CAB PRO FORMA PRO FORMA PRECEPT USTS BANCPRO COMPANY ADJUSTMENTS FOOTNOTE CONSOLIDATED ------------ ------------ ---------- ----------- ----------- ------------- ------------ 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 ------------ ------------ ------------ ------------
See accompanying notes to unaudited pro forma consolidated statement of operations. 42 PRECEPT UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1997
HISTORICAL ------------------------------------- A GULF BLACK & NORTHERN/ A WHITE CAB A PRO FORMA PRECEPT USTS MENCOR BANCPRO COMPANY ATAB ADJUSTMENTS ----------- ----------- ----------- ----------- ----------- ------------ ------------ 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 ----------- ----------- PRO FORMA FOOTNOTE CONSOLIDATED ------------- ------------- 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 ------------- -------------
See accompanying notes to unaudited pro forma consolidated statement of operations. 43 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:
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1997 JUNE 30, 1997 ------------------- ------------- 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).
(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. 44 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 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.
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 Rapids, Wisconsin, Kansas City, Missouri, Cincinnati, Ohio and Syracuse, New York. In all of its locations, 45 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 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. 46 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. 47 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.
TERM AND ANNUAL COMPANY LESSOR PREMISES RENTAL - --------------------------- ---------------------------------- -------------------------- ------------------- 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
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. 48 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. 49 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. 50 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 51 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' NOLs. Based upon the substantial losses incurred in 1996 and the elimination of revenues from ATAB, management determined that the realization of value from its NOLs 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 the operations of the discontinued operations were added in, USTS had recorded a net loss for 1996 of $6,694,451. 52 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' 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
NINE THREE MONTHS MONTHS YEAR ENDING ENDING ENDED 09-30-96 12-31-96 12-31-96 ---------- ---------- ---------- (UNAUDITED) (UNAUDITED) (AUDITED) 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) ---------- ---------- ---------- ---------- ---------- ----------
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 53 phase-out period. The fourth quarter loss is also attributable to a number of factors impacting continuing operations, as listed below. 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 --------- ---------
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 NOLs 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 NOLs and tax credit carryforwards to reduce or offset future taxable income and tax liability of USTS is subject to various limitations under 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 NOLs to offset future earnings, USTS does not anticipate realizing any material benefit from its tax credits. Further, USTS's ability to utilize the NOLs 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 NOLs (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 accumulated NOLs will be 54 thereby limited to approximately $605,000 per year. As a result, USTS believes that it may not utilize its full NOLs. 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. 55 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
(A) (D) NAME AND (B) (C) RESTRICTED (E) PRINCIPAL POSITION YEAR SALARY STOCK AWARD(1) OTHER ------------------ --------- ---------- --------------- ------------ 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)
- ------------------------ (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. 56 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 57 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.
QUARTER ENDING HIGH LOW - ---------------------------------------------------------------------------- --------- --------- 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
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. 58 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"). 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:
CUMULATIVE BANCPRO SHARES OF COMMON REVENUES STOCK ISSUABLE - ------------- ----------------- $ 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
59 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 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 26, 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. 60 OFFICERS AND DIRECTORS OF USTS The following table sets forth certain information regarding the officers and directors of USTS as of February 4, 1998:
NAME POSITION - -------------------------------------------------- ----------------------------------------- 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
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. 61 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.
NUMBER OF SHARES NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE OF BENEFICIAL OWNER OWNED TOTAL - ------------------------------------------------------ ----------------- ------------- 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%
- ------------------------ (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. 62 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. The Margolies family members who held the stock agreed with the USTS Board that the date on which the Series M Preferred Stock could be converted into common stock would be accelerated. 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. 63 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.
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) 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
- ------------------------ (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. 64 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 65 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. 66 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. 67 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. 68 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 69 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. 70 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 71 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. 72 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. 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 73 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. 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. 74 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 January , 1998, there were 25,928,559 shares of Precept Class A Common Stock held by 67 shareholders of record, 10,071,441 shares 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 75 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 . 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 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 76 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 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 77 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 9, 2008, (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed by Precept, in each case, as described below. The Purchase Price payable and the number of shares of 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 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. 78 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. 79 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 of the Transfer. DIRECTORS AND EXECUTIVE OFFICERS
NAME POSITION - ------------------------------------------ ----------------------------------------------------------- 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**
- ------------------------ * 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. 80 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." 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 81 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
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) - ------------------------------------ --------- --------- --------- --------------------- --------------- --------------- 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 -- -- -- PAYOUTS --------------- PAYOUTS LTIP ALL OTHER NAME AND PRINCIPAL POSITION PAYOUTS(2) COMPENSATION - ------------------------------------ --------------- ------------------- David Neely ........................ -- -- Chairman and Chief Executive -- -- Officer -- -- Douglas R. Deason .................. -- -- President -- -- -- -- Glenn R. Smith ..................... -- -- Executive Vice President -- -- -- -- D. Paul Cabra ...................... -- -- Executive Vice President -- -- -- --
- -------------------------- (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 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. 82 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
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%($) - ------------------------------- ------------------- ------------------------- ------------------- ---------- ----------- David Neely.................... 211,150 16.3% 0.20 1/02/07 -- Douglas R. Deason.............. 211,150 16.3% 0.20 1/02/07 -- Glenn R. Smith................. 103,000 7.9% 0.20 1/02/07 -- D. Paul Cabra.................. 154,500 11.9% 0.20 1/02/07 -- NAME 10%($) - ------------------------------- ----------- David Neely.................... -- Douglas R. Deason.............. -- Glenn R. Smith................. -- D. Paul Cabra.................. --
- ------------------------ (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
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 - ----------------------------------------- ----------- --------------- --------------- ----------------- --------------- David Neely.............................. 211,150 -- -- -- -- Douglas R. Deason........................ 211,150 -- -- -- -- Glenn R. Smith........................... 103,000 -- -- -- -- Paul Cabra............................... 154,500 -- -- -- -- NAME UNEXERCISABLE - ----------------------------------------- ----------------- David Neely.............................. -- Douglas R. Deason........................ -- Glenn R. Smith........................... -- Paul Cabra............................... --
- ------------------------ (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. 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 83 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 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. 84 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 Stock 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 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. 85 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). 86 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 87 (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. 88 PRECEPT SECURITY OWNERSHIP The following table sets forth certain information, with respect to the beneficial ownership of Precept Common Stock, as of February 9, 1998 (after giving effect to the 3.15438 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.
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) - ------------------------------- -------------- ----------- ------------ ----------------- --------------- ----------- 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% PERCENT OF TOTAL VOTING DIRECTORS AND EXECUTIVE POWER AFTER THE OFFICERS TRANSACTIONS - ------------------------------- --------------- Darwin Deason(2)............... 83.32% David L. Neely................. 3.77% Douglas R. Deason(3)........... 3.77% Glenn R. Smith................. .64% D. Paul Cabra.................. .76% All Executive Officers and Directors as a Group (7 persons)(2).................. 83.32% Beneficial Owners of More than First Nationwide Bank, F.S.B........................ 2.41% Charles M. Young, Jr........... 1.41%
- ------------------------------ (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 February 9, 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 February 9, 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 89 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 NGCL, THE USTS ARTICLES OF INCORPORATION AND USTS BYLAWS, AND THE TBCA, 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. 90 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 91 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 92 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 93 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 94 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%). 95 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. 96 SECURITIES COVERED BY THIS PROSPECTUS In addition to the Shares to be issued in the Transfer, the 19,887,500 shares of Precept Class A Common Stock covered by this Proxy Statement/Prospectus are available for use by Precept in future acquisitions of assets or securities of companies. The consideration offered by Precept in such acquisitions in addition to the shares of Precept Class A Common Stock offered by this Proxy Statement/Prospectus may include such cash, debt or other securities (which may be convertible into shares of Precept Class A Common Stock covered by this Proxy Statement/Prospectus), or assumption by Precept of liabilities of the business being acquired, or a combination thereof. It is contemplated that the terms of acquisitions will be determined by negotiations between Precept and the management or the owners of the assets to be acquired or the owners of the securities (including newly issued securities) to be acquired, with Precept taking into account the quality of management, the past and potential earning power and growth of the assets or securities to be acquired, and other relevant factors. It is anticipated that the shares of Precept Class A Common Stock issued in acquisitions will be valued at a price reasonably related to the market value of the Precept Class A Common Stock either at the time the terms of the acquisition are tentatively agreed upon or at or about the time or times of delivery of the shares. None of the 19,887,500 shares of Precept Class A Common Stock covered by this Proxy Statement/ Prospectus will be subject to restrictions on transfer under the Securities Act of 1933, as amended (the "Securities Act"), except that shares of Precept Class A Common Stock to be received by persons who are deemed to be "affiliates" (as such term is defined in Rule 144 under the Securities Act) of an acquired company or business may be resold by them only pursuant to an effective registration statement under the Securities Act covering such shares, in transactions permitted by the resale provisions of Rule 145(d) under the Securities Act or Regulation S under the Securities Act (or, in the case of any such persons who become affiliates of Precept, Rule 144 under the Securities Act) or as otherwise permitted under the Securities Act. This Proxy Statement/Prospectus will not be used by such affiliates in connection with any resale of their shares of Precept Class A Common Stock. In addition to the Shares to be issued in the Transfer and the shares issuable in future acquisitions, this Proxy Statement/Prospectus covers the issuance of up to 1,815,000 Precept Class A Warrants to the holders of record of the USTS Class C Warrants as of 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 at such time 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. LEGAL MATTERS Certain legal matters with respect to the validity of the Precept Class A Common Stock to be issued in connection with the Transfer will be passed upon for Precept by Jackson Walker L.L.P. Certain legal matters with respect to certain federal income tax consequences of the Transactions will be passed upon by Bressler, Amery & Ross, P.C. EXPERTS The Consolidated Financial Statements of U.S. Transportation, Inc. included in this Proxy Statement/ 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 97 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 Proxy Statement/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. 98 INDEX TO FINANCIAL STATEMENTS
PAGE --------- 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
F-1 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 PRECEPT INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30 ---------------------------- 1996 1997 ------------- ------------- 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 ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES. F-3 PRECEPT INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30 ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- 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 ------------- ------------- ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES. F-4 PRECEPT INVESTORS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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 ----------- ----------- ---------- ------------ --------- -------------- ------------- 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 ----------- ----------- ---------- ------------ --------- -------------- ------------- ----------- ----------- ---------- ------------ --------- -------------- -------------
SEE ACCOMPANYING NOTES. F-5 PRECEPT INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30 ------------------------------------- 1995 1996 1997 ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- -----------
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 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 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 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 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.
YEAR ENDED JUNE 30 --------------------------- 1996 1997 ------------- ------------ 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 ------------- ------------ ------------- ------------
YEAR ENDED JUNE 30 ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- 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) ---------- ---------- ---------- ---------- ---------- ----------
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 PRECEPT INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment comprises:
JUNE 30 -------------------------- ESTIMATED LIVES 1996 1997 ---------------- ------------ ------------ 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 ------------ ------------ ------------ ------------
4. LONG-TERM DEBT Long-term debt at June 30 comprises:
1996 1997 ------------ ------------ 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 ------------ ------------ ------------ ------------
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: 1998............................................................ $ 58,160 1999............................................................ 22,584 2000............................................................ 6,299,616 2001............................................................ 26,832 2002............................................................ 29,246 Thereafter...................................................... 606,366 --------- $7,042,804 --------- ---------
F-11 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:
1995 1996 1997 ----------- ----------- ----------- Current................................................ $ 482,534 $ 408,992 $ 541,612 Deferred............................................... (271,968) (529,668) (160,728) ----------- ----------- ----------- $ 210,566 $ (120,676) $ 380,884 ----------- ----------- ----------- ----------- ----------- -----------
The tax effects of temporary differences that give rise to significant portions of deferred tax assets consist of the following:
JUNE -------------------------- 1996 1997 ------------ ------------ 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 ------------ ------------ ------------ ------------
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 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:
1995 1996 1997 ---------- ----------- ---------- 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 ---------- ----------- ---------- ---------- ----------- ----------
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 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 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:
CAPITAL OPERATING LEASES LEASE ---------- ------------ 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 ---------- ----------
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 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.
JUNE 30 ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- (UNAUDITED) 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) ------------- ------------- ------------- ------------- ------------- -------------
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 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:
1995 1996 1997 ------------- ------------- ------------- 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 ------------- ------------- ------------- ------------- ------------- -------------
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 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 PRECEPT INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 ------------ SEPTEMBER 30, 1997 ------------- (UNAUDITED) 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 ------------ ------------- ------------ -------------
SEE ACCOMPANYING NOTES. F-19 PRECEPT INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 ---------------------------- 1996 1997 ------------- ------------- 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 ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES. F-20 PRECEPT INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 ---------------------------- 1996 1997 ------------- ------------- 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 ------------- ------------- ------------- -------------
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 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 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 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 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 ASSETS 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 ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-25 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ------------ ------------ 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 ------------ ------------ ------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-26 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996 AND 1995
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK SUB- DEFERRED --------------------- ----------------------- PAID-IN SCRIPTION COMPEN- SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE SATION ---------- --------- --------- ------------ ------------ ----------- ---------- 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) ---------- --------- --------- ------------ ------------ ----------- ---------- ---------- --------- --------- ------------ ------------ ----------- ---------- RETAINED EARNINGS (DEFICIT) TOTAL ------------- ------------ 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 ------------- ------------ ------------- ------------
F-27 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ------------- ------------- 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 ------------- ------------- ------------- -------------
F-28 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
1996 1995 ---------- ---------- Cash paid during the year for: Interest................................................................................ $ 744,200 $ 484,600 ---------- ---------- ---------- ---------- Taxes................................................................................... $ -0- $ -0- ---------- ---------- ---------- ----------
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 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 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 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: Parts............................................................. $ 192,549 Raw materials..................................................... 169,400 Work in Process................................................... 220,088 Sundry............................................................ 12,238 --------- Total............................................................. $ 594,275 --------- ---------
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 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: Total Minimum Lease Payments Receivable................................. $3,046,000 Less: Unearned Income................................................... 685,263 --------- Net Investment in Sales Type Leases..................................... $2,360,737 --------- ---------
F-33 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: 1997............................................................ $1,199,000 1998............................................................ 750,000 1999............................................................ 545,000 2000............................................................ 323,000 2001............................................................ 229,000 --------- Total........................................................... $3,046,000 --------- ---------
[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 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: 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 --------- ---------
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 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:
(NON- OPERATING LEASES RELATED) - ------------------------------------------------------------------------------------------ ------------ 1997...................................................................................... $ 444,000 1998...................................................................................... 390,000 1999...................................................................................... 390,000 2000...................................................................................... 368,000 2001...................................................................................... 312,000 ------------ Total Minimum Lease Payments.............................................................. $ 1,904,000 ------------ ------------
[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 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:
1996 INCOME 1995 INCOME TAXES % TAXES % ---------- --------- ----------- --------- 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)% ---------- --- ----------- --------- ---------- --- ----------- ---------
The components of deferred taxes are as follows as of December 31, 1996:
ASSETS LIABILITIES ------------- ---------- 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 ------------- ---------- ------------- ----------
F-37 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.
1996 1995 ------------- ------------- 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 ------------- ------------- ------------- -------------
[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 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: 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 --------- ---------
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 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 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the plans are as follows:
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 ------------- ----------- ----------- ----------- ------------- ------------- 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 ------------- ----------- ----- --- ------------- ------------- ------------- ----------- ----- --- ------------- -------------
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:
1996 1995 ------------- ---------- 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
The fair value of each option grant is calculated using the following weighted average assumptions:
1996 1995 ------------- ---------- Expected life (in years)............................................................... 3 3 Interest rate.......................................................................... 5.4% 5.4% Volatility............................................................................. 75.2% 75.2% Dividend yield......................................................................... 0.0% 0.0%
The weighted average fair value of the stock options granted in 1995 was $3.88. F-41 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 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 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: 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
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 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:
1996 1995 ----------- ------------ 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 ----------- ------------ ----------- ------------
F-45 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.
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 -------------- ------------- ----------- ----------- ----------- ---------- 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 ---------- ----------
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 -------------- ------------- ----------- ----------- ----------- ---------- 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) ---------- ----------
F-46 [13] ACQUISITIONS (CONTINUED) The proforma adjustments for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ---------- ---------- Amortization of goodwill.............................................. $ 110,000 $ 30,000 Interest expense on note issued....................................... 90,000 90,000 ---------- ---------- Total proforma adjustments............................................ $ 200,000 $ 120,000 ---------- ---------- ---------- ----------
[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 [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 [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: 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 --------- ---------
[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:
ESTIMATED FAIR CARRYING AMOUNT VALUE ---------------- ------------------- 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
[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 were to occur, the Company could become subject to actions by the Commission which could result in an F-49 [17] CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED STOCK (CONTINUED) 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 [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 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED) 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 --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-52 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1997 ------------- ------------- 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) ------------- -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-53 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1997 ------------ ------------- 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 ------------ ------------- ------------ -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-54 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1997 ------------ ------------- 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) ------------ -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-55 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1997 ------------ ------------- 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 ------------ ------------- ------------ -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-56 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
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK ----------------------- ---------------------- PAID-IN SUBSCRIPTION DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION ---------- ----------- --------- ----------- ------------ ------------- -------------- 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) ---------- ----------- --------- ----------- ------------ ------------- -------------- ---------- ----------- --------- ----------- ------------ ------------- -------------- RETAINED EARNINGS (DEFICIT) TOTAL ------------- ------------- 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 ------------- ------------- ------------- -------------
F-57 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
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK ----------------------- ---------------------- PAID-IN SUBSCRIPTION DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION ---------- ----------- --------- ----------- ------------ ------------- -------------- 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) ---------- ----------- --------- ----------- ------------ ------------- -------------- ---------- ----------- --------- ----------- ------------ ------------- -------------- RETAINED EARNINGS (DEFICIT) TOTAL ------------- ------------- 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 ------------- ------------- ------------- -------------
F-58 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1997 ------------- ------------- 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) ------------- -------------
F-59 U.S. TRANSPORTATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1997 ------------- ------------- 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 ------------- ------------- ------------- -------------
F-60 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
1996 1997 ---------- ---------- Cash paid for: Interest............................................................ $ 454,000 $ 742,000 ---------- ---------- ---------- ---------- Taxes............................................................... (0) $ 75,000 ---------- ---------- ---------- ----------
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 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 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 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 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 [ALTERNATE PAGE FOR SHELF PROSPECTUS] PROSPECTUS 19,887,500 SHARES PRECEPT BUSINESS SERVICES, INC. CLASS A COMMON STOCK --------------- This Prospectus constitutes a prospectus of Precept Business Services, Inc., a Texas corporation (the "Company" or "Precept"), with respect to up to 19,887,500 shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), which may be offered and issued by the Company from time to time in connection with the future direct and indirect acquisitions of other businesses, properties or securities in one or more business combination transactions in accordance with Rule 415(a)(l)(viii) of Regulation C under the Securities Act of 1933, as amended (the "Securities Act") or as otherwise permitted under the Securities Act. The consideration for the acquisition of such assets or securities may consist of cash, the assumption of liabilities and the shares of Class A Common Stock being registered hereby, or any combination thereof, as determined pursuant to arms-length negotiations between the Company and the sellers of the assets or securities to be acquired. It is anticipated that the shares of the Class A Common Stock issued in any such acquisition will be valued at a price reasonably related to the then current market value of the Class A Common Stock. The number of shares and any other terms in connection with the offering and issuance of Class A Common Stock in respect of which this Prospectus is being delivered are set forth in a separate supplement to this Prospectus (a "Prospectus Supplement"). Any statement contained in this Prospectus will be deemed to be modified or superseded by any inconsistent statement contained in any Prospectus Supplement delivered herewith. The Class A Common Stock has been approved for listing on the Nasdaq SmallCap Market under the symbol " ." ------------------------ INVESTORS SHOULD CONSIDER THE INFORMATION UNDER "RISK FACTORS" IN EVALUATING AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ This Prospectus, under a different cover page, is also being used in connection with the issuance on March , 1998 of 9,612,500 shares of the Company's Class A Common Stock in connection with the acquisition by a subsidiary of the Company of substantially all of the assets and business as a going concern of U.S. Transportation Systems, Inc. (the "USTS Acquisition"). Therefore, certain information contained in this Prospectus is not directly related to the issuance of shares by the Company hereunder. This Prospectus may not be used to consummate issuance and sales of Class A Common Stock unless accompanied by a Prospectus Supplement. ------------------------ March , 1998 [ALTERNATE PAGE FOR SHELF PROSPECTUS] AVAILABLE INFORMATION Precept will be subject to the informational requirements of the Exchange Act and in accordance therewith will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of these materials can also be obtained from the Commission at prescribed rates by writing to the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission and that is located at http://www.sec.gov. The Company intends to furnish to its shareholders annual reports containing financial statements audited by independent certified public accountants following the end of each fiscal year. Precept has filed with the Commission a Registration Statement on Form S-4 (together with any amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities to be issued pursuant to the USTS Acquisition. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements contained in this Prospectus or in any document incorporated by reference in this Prospectus as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. The Registration Statement, including exhibits filed as part thereof, are available for inspection and copying at the Commission's offices as described above. NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PRECEPT OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL OR TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. [ALTERNATE PAGE FOR SHELF PROSPECTUS] THE OFFERING Number of shares of Class A Common Stock offered See applicable Prospectus hereby.................................................. Supplement Class A Common Stock to be outstanding after the See applicable Prospectus Offering................................................ Supplement Total Common Stock to be outstanding after the See applicable Prospectus Offering................................................ Supplement See applicable Prospectus Nasdaq SmallCap Market Symbol........................... Supplement
[ALTERNATE PAGE FOR SHELF PROSPECTUS] PLAN OF DISTRIBUTION THE OFFERING The Company may issue the Class A Common Stock in connection with the future direct and indirect acquisitions of other businesses, properties or securities in one or more business combination transactions in accordance with Rule 415(a)(l)(viii) of Regulation C under the Securities Act, or as otherwise permitted under the Securities Act. The Company expects that the terms upon which it may issue the shares will be determined through negotiations with the securityholders or principal owners of the businesses whose securities or assets are acquired. It is expected that the shares that are issued will be valued at prices reasonably related to market prices for the Class A Common Stock prevailing either at the time an acquisition agreement is executed or at the time an acquisition is consummated. GENERAL All expenses of this Offering will be paid by the Company. No underwriting discounts or commissions will be paid in connection with the issuance of shares by the Company in business combination transactions, although finder's fees may be paid with respect to specific acquisitions. Any person receiving a finder's fee may be deemed to be an Underwriter within the meaning of the Securities Act. The shares of the Company's Class A Common Stock offered hereunder will be listed for trading on the Nasdaq SmallCap Market. VALIDITY OF SHARES Unless otherwise indicated in an applicable Prospectus Supplement, the validity of the Class A Common Stock will be passed upon for the Company by Jackson Walker L.L.P., Dallas, Texas. [ALTERNATE PAGE FOR SHELF PROPSECTUS] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF CLASS A COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF CLASS A COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ The Company............................................................... Risk Factors.............................................................. Recent Developments....................................................... Plan of Distribution...................................................... Validity of Shares........................................................ Experts................................................................... Available Information.....................................................
19,887,500 SHARES PRECEPT BUSINESS SERVICES, INC. CLASS A COMMON STOCK --------------------- PROSPECTUS --------------------- MARCH , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANNEX A AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION, dated as of November 16, 1997 is made by and between U.S. Transportation Systems, Inc., a Nevada corporation ("USTS"), Precept Investors, Inc., a Texas corporation ("Precept") and Precept Acquisition Company, L.L.C., a Nevada limited liability company and wholly owned subsidiary of Precept ("Acquisition"). RECITALS: WHEREAS, USTS wishes to transfer its business and substantially all of its assets to Acquisition solely in exchange for voting shares of Precept and the assumption by Acquisition of certain liabilities of USTS (the "Transfer"); and WHEREAS, the Transfer is intended to qualify as a reorganization with the meaning of Section 368(a) of the Code; and WHEREAS, after the Closing of the Transfer USTS will, as an integral part of the transaction, distribute most of the shares of Precept to USTS's shareholders in complete liquidation of USTS and USTS will dissolve; and WHEREAS, Precept has formed Acquisition to acquire the Business and substantially all of the assets of USTS on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein, and for other good, valid and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. The following terms have the following meanings when used herein: "Acquisition Proposal" means any proposal or offer, for a tender or exchange offer, a merger, consolidation or other business combination involving USTS or any USTS Subsidiary thereof or any proposal to acquire in any manner a substantial equity interest in, or substantially all of the assets of, USTS or any USTS Subsidiary. "Affiliate" means with respect to any Person, any other Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such Person. "Affiliate of USTS" has the meaning set forth in SECTION 8.12. "Agreement" means this Agreement and Plan of Reorganization, including all Schedules and Exhibits hereto, as it may be amended from time to time in accordance with its terms. "Assets" has the meaning set forth in SECTION 2.1. "Assumed Contracts" has the meaning set forth in SECTION 2.1(H). "Assignment and Assumption Agreement" means the Assignment and Assumption Agreement and Bill of Sale in the form attached hereto as EXHIBIT B. "Assumed Liabilities" has the meaning set forth in SECTION 2.3. A-1 "Balance Sheet" has the meaning set forth in SECTION 5.6. "Balance Sheet Date" has the meaning set forth in SECTION 5.6. "Business" means the business presently conducted by USTS, including, but not limited to, providing ground transportation of passengers and cargo and ground transportation related services, both directly and through its subsidiaries. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. SectionSection 9601 ET SEQ. "Closing" means the closing of the transactions contemplated by this Agreement. "Closing Date" means January 31, 1998 assuming the satisfaction of all conditions set forth in Article 9, or, if such conditions are not satisfied on such date, on such date three business days after satisfaction thereof or such other date as mutually agreed in writing by the parties hereto. "Code" means the Internal Revenue Code of 1986, as amended. "December USTS Financials" has the meaning set forth in SECTION 5.6. "E&Y" means Ernst & Young, L.L.P., independent auditors. "Environmental Laws" means all federal, state and local laws, rules and regulations applicable to USTS and its properties relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws and regulations relating to Releases or threatened Releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use treatment, storage, disposal, transport or handling of Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any business or entity which is a member of the same "controlled group of corporations," is under "common control" or is a member of an "affiliated service group" with an entity within the meanings of Sections 414(b), (c) or (m) of the Code, or required to be aggregated with the entity under Section 414(o) of the Code, or is under "common control" with the entity, within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Assets" has the meaning set forth in SECTION 2.2. "Excluded Liabilities" has the meaning set forth in SECTION 2.4. "Facilities" shall mean the land and related facilities owned or leased by USTS and used in the Business, as set forth on SCHEDULE 2.1(D). "Final Closing Balance Sheet" means a balance sheet of USTS as of the Closing Date, prepared in accordance with GAAP and delivered to Acquisition pursuant to Section 11.4. "Ford Contract" means that certain Purchase Order, last amendment dated July 12, 1996, by and between Shortway River Rouge, Inc. and Ford Motor Company. "FTC" means the Federal Trade Commission. "GAAP" means generally accepted accounting principles consistently applied. A-2 "Hazardous Materials" means chemicals, materials or substances which are defined as or included in the definition of "hazardous substances," "hazardous wastes," "toxic pollutants," "pollutants," "contaminants," or words of similar import under any Environmental Law; or other chemical, material, substance or waste, exposure to which is prohibited, limited or regulated under any Environmental Law. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "IDB" has the meaning set forth in SECTION 11.7. "IDB Loan Agreement" means that certain Loan and Security Agreement, dated October 7, 1996, as amended, by and between USTS and IDB. "Independent Accounting Firm" shall mean a "Big Six" accounting firm, other than E&Y or such other nationally recognized firm of independent public accountants as Precept and USTS may agree upon. "Intellectual Property Rights" has the meaning set forth in SECTION 5.15. "Inventory" has the meaning set forth in SECTION 2.1(C). "IRS" means the Internal Revenue Service. "June 30 Balance Sheet" has the meaning set forth in SECTION 6.6. "Liquidating Trust" has the meaning set forth in SECTION 12.1. "Margolies" means Michael Margolies. "Margolies Term Note" means that certain promissory note, dated July 7, 1997 made by USTS and payable to Margolies in the original principal amount of $1,039,794.37. "Material Adverse Effect" means, with respect to any entity, a material adverse effect on the financial condition, properties, business, results of operations or prospects of such entity and its subsidiaries taken as a whole, or on the ability of such entity to perform its obligations hereunder or to consummate the transactions contemplated hereby, whether or not caused by management of such entity. "Permitted Encumbrances" means: (a) Liens for real estate taxes, assessments or governmental charges or construction lien claims not delinquent or being contested in good faith by appropriate proceedings; (b) Liens or deposits in connection with worker's compensation or other insurance or to secure the performance of bids, trade contracts, leases, public or statutory obligations, surety or appeal bonds or other obligations of like nature incurred in the ordinary course of business not yet due and payable; (c) Easements, restrictions, minor title irregularities and similar matters which have no Material Adverse Effect as a practical matter upon the ownership or use of property; (d) Liens of mechanics, materialmen, carriers, warehousemen or other like statutory or common law liens securing obligations incurred in good faith in the ordinary course of business that are not yet due and payable; (e) Liens identified on EXHIBIT A attached hereto; (f) Liens for rentals not yet due and payable pursuant to capitalized leases; and (g) Specific customer work-in process liens. "Person" means any individual, corporation, partnership, limited liability company, joint venture, trust or unincorporated organization or government or any agency or political subdivision thereof. "Plan of Liquidation and Dissolution" means the plan whereby USTS will liquidate and dissolve USTS in accordance with Section 11.2 of this Agreement, which plan is attached hereto as EXHIBIT C. A-3 "Precept Benefit Plans" has the meaning set forth in SECTION 6.18. "Precept Common Stock" shall mean the Class A Common Stock of Precept, par value $0.01 per share. "Precept Disclosure Schedules" has the meaning set forth in SECTION 6.2. "Precept Financial Statements" has the meaning set forth in SECTION 6.6. "Precept Leases" has the meaning set forth in SECTION 6.9(B). "Precept Material Agreements" has the meaning set forth in SECTION 6.12(A). "Precept Personal Property" has the meaning set forth in SECTION 6.11(A). "Precept Real Property" has the meaning set forth in SECTION 6.9(A). "Precept Shareholder Information" has the meaning set forth in SECTION 6.21. "Precept Subsidiary" has the meaning set forth in SECTION 6.3. "Preliminary Closing Balance Sheet" has the meaning set forth in SECTION 9.2(K). "Purchase Price" has the meaning set forth in SECTION 3.1. "RCRA" means the Resource Conservation and Recovery Act, as amended, 42 U.S.C. SectionSection 6901 ET SEQ. "Receivables" has the meaning set forth in SECTION 2.1(B). "Registration Rights Agreement" means a Registration Rights Agreement to be entered into by and between Margolies and Precept in the form attached as EXHIBIT D. "Releases" means any release, spill, emission, leaking, injection, deposit, disposal, discharge, dispersal, leaching or migration into the atmosphere, soil surface water, groundwater or property in violation of Environmental Law. "Representatives" has the meaning set forth in SECTION 8.8. "SEC" means the Securities Exchange Commission. "Shares" has the meaning set forth in Section 3.1. "Subsequent USTS Financials" has the meaning set forth in SECTION 5.6. "Taxes" means all taxes, fees, assessments, levies, duties and similar charges imposed by any federal, state, local or foreign governmental authority, together with all interest, penalties, fines and other additions imposed in respect thereof; including, without limitation, all income, gains, real property gains, profits, gross receipts, payroll, employment, social security (and similar), disability, health, hospitalization, unemployment compensation, worker's compensation, Pension Benefit Guaranty Corporation, severance, windfall profits, environmental, license, occupation, customs, imposts, capital stock, franchise, ad valorem, excise, sales, use, transfer, registration, value added, alternative minimum, add-on minimum, successor, withholding and estimated taxes or other charges. "Tax Returns" means all original and amended returns, declarations, certifications, statements, notices, elections, estimates, reports, claims for refund and information returns relating to or required to be filed or maintained in connection with any Tax, together with all schedules and attachments thereto. "Transfer" has the meaning set forth in the recitals hereto. "USTS" has the meaning set forth in the recitals hereto. "USTS Affiliate Letter" has the meaning set forth in SECTION 8.12. A-4 "USTS Benefit Plan" has the meaning set forth in SECTION 5.18. "USTS Common Stock" has the meaning set forth in SECTION 5.2. "USTS Disclosure Schedules" has the meaning set forth in SECTION 5.2. "USTS Financial Statements" has the meaning set forth in SECTION 5.6. "USTS Leases" has the meaning set forth in SECTION 5.9(B). "USTS Material Agreement" has the meaning set forth in SECTION 5.12(A). "USTS Preferred Stock" has the meaning set forth in SECTION 5.2. "USTS Real Property" has the meaning set forth in SECTION 5.9(A). "USTS Reports" has the meaning set forth in SECTION 5.6. "USTS Stockholder Information" has the meaning set forth in SECTION 5.19. "USTS Subsidiary" has the meaning set forth in SECTION 5.3. ARTICLE 2 EXCHANGE OF ASSETS 2.1 THE ASSETS. Subject to the terms and conditions and upon the basis of the agreements, representations and warranties contained herein, at the Closing USTS shall transfer, convey, assign and deliver to Acquisition, and Acquisition shall accept from USTS, all right, title, and interest of USTS in (a) the Business as a going concern and (b) all of the assets of USTS (excluding the Excluded Assets) free and clear of all liens, mortgages, pledges, security interests, conditional sales agreements, charges, encumbrances and other adverse claims or interests of any nature (except for Permitted Encumbrances), including without limitation the following (collectively, the "Assets"): (a) All assets reflected in the Closing Balance Sheet; (b) All accounts, notes and other receivables and prepaid expenses and credits of USTS ("Receivables"); (c) All inventory, stock in trade, finished products, work-in-process, and raw materials, including supplies inventory ("Inventory"); (d) The Facilities including but not limited to all real property, buildings, structures and improvements thereon and all fixtures and fittings attached thereto and contained therein set forth on SCHEDULE 2.1(D); (e) All machinery equipment, business machines, furniture, tools, dies, molds, parts and other tangible property; (f) All sales order files, engineering order files, purchase order files, manufacturing records, product quality qualifications, customer lists and business files of USTS; (g) The Intellectual Property Rights of USTS and all licenses and other rights related thereto; (h) All rights and interest of USTS to or in all agreements, options, contracts, distributor agreements, leases, instruments, purchase orders and all sales orders and bids including all USTS Material Agreements listed on SCHEDULE 5.12 (the "Assumed Contracts"); (i) All licenses, approvals, certificates, permits, franchises, or other evidence of authority issued by a Federal, state, local or foreign governmental agency or authority to the extent assignable; A-5 (j) All computer programs, hardware and software (including documentation and related object and source codes) and like property, and all records thereof, used in the wherever located to the extent assignable; (k) All interests in and to the name U.S. Transportation Systems, Inc. and all variations thereof and all rights to the use of such name and variations thereto as trademarks; all listings pertaining to USTS in all telephone books and directories; and stationery, forms, labels, shipping materials, catalogs, brochures, art work, photographs and advertising and promotional materials; (l) All cars, trucks, tractors, trailers, vans, other motorized vehicles and car phones owned or leased including those set forth on SCHEDULE 2.1(L) and any and all assignable warranties covering such motor vehicles and car phones; (m) Subject to SECTION 2.2(C), all cash and cash equivalents, cash deposits and escrows, bank accounts, money market accounts, other accounts, certificates of deposit and other investments of USTS; (n) To the extent assignable by USTS, all warranties (express or implied) and rights and claims related to the Assets or the operation of the Business including all rights to causes of action, lawsuits, judgments, claims and demands being pursued or pursuable by USTS; (o) All guarantees, warranties, indemnities and other similar rights in favor of USTS and all rights to proceeds under insurance policies; (p) All operating manuals, policies, procedure manuals, training manuals, personnel records of USTS's employees hired by Acquisition and other books and records used by corporate USTS in connection with the Assets and the Business, including customer, policy and financial information and records; (q) All going concern value and goodwill of USTS, its trade name(s) or personnel; (r) All ownership interests in USTS Subsidiaries; and (s) All other assets, including computers and computer data stored on magnetic or other media of USTS (excluding the Excluded Assets). 2.2 EXCLUDED ASSETS. USTS shall not transfer, convey or assign, and Acquisition shall not acquire, the following assets (such assets being collectively referred to hereinafter as the "Excluded Assets"): (a) All rights of USTS arising under this Agreement and the consummation of the transactions contemplated hereby; (b) All corporate minute books and stock records of USTS and such other similar corporate books and records of USTS as may exist on the Closing Date; PROVIDED, however, that Acquisition shall be entitled to obtain copies of such other records of USTS relating to the Assets as Acquisition may reasonably require in connection with the operation of the Business or use of the Assets subsequent to the Closing; (c) An amount of cash equal to $175,000.00 to permit USTS to pay its liabilities for the expenses and costs incurred by it in connection with this Agreement and the transactions contemplated herein, including the Plan of Liquidation and Dissolution; and (d) All of the capital stock of Bancpro Transportation, Inc. and other assets all as set forth on SCHEDULE 2.2(D). 2.3 ASSUMED LIABILITIES. On the Closing Date, subject to the provisions of SECTION 2.4 hereof, Acquisition shall assume the following liabilities of USTS relating to the Business (collectively, the "Assumed Liabilities"): A-6 (a) All the obligations of USTS under the Assumed Contracts and any other agreements, contracts, instruments, purchase orders, sales orders, and commitments of USTS relating to the operation of the Business after the Closing Date; (b) The obligations of USTS under the warrants, stock options and other obligations specifically set forth in SCHEDULE 2.3(B) by issuance of warrants, options and commitments which shall afford the holder thereof the rights to purchase the number of shares at the purchase price on SCHEDULE 2.3(B) together with such other terms in such instruments as Precept shall reasonably determine; and (c) The liabilities set forth on the Closing Balance Sheet. 2.4 EXCLUDED LIABILITIES. It is expressly agreed and understood by the parties to this Agreement that Acquisition does not assume and will not become liable or responsible for any of the following liabilities and obligations of USTS (collectively, the "Excluded Liabilities"): (a) Any intercompany payable balances owed by USTS, or any USTS Subsidiaries, to any Affiliate of USTS (other than the Margolies Term Note which shall be an Assumed Liability); (b) Any liability related to the matters set forth on SCHEDULE 5.13; (c) Any liability or obligation arising out of or relating to the Excluded Assets; (d) Any liability or obligation arising out of or relating to the breach of, default under, or failure to perform with respect to, the Assumed Contracts prior to and including the Closing Date; provided, however, that Precept shall agree to assume up to $20,000 of liabilities or obligations, in the aggregate, arising out of or relating to the breach of, default under, or failure to perform with respect to, the Assumed Contracts prior to and including the Closing Date, which liabilities shall be Assumed Liabilities; (e) Any contingent liabilities and liabilities that are not set forth in the Closing Balance Sheet; (f) Any liabilities arising out of the violation of or in connection with Environmental Laws, Releases or Releases of Hazardous Materials; (g) Any and all liabilities arising out of claims for injury (including death) or claims for damages, direct or consequential, resulting from or connected with finished products or services of the Business or USTS (whenever manufactured) and shipped on or before the Closing Date; (h) Any liability of USTS for unpaid Taxes for periods before the Closing Date other than those liabilities reflected on Final Closing Balance Sheet; (i) Any liability of USTS for Taxes (including, without limitation, income and transfer Taxes) resulting from the consummation of the transactions contemplated by this Agreement other than those liabilities reflected on Final Closing Balance Sheet; (j) Any liability of USTS for the unpaid Taxes of any Person other than USTS under Treasury Regulation Section 1.1502-6 (or any similar provision of sate, local or foreign law), as transferee or successor, by contract, or otherwise; (k) Any liability or obligation arising out of or incurred in connection with the administration of any USTS Benefit Plan other than those liabilities reflected on Final Closing Balance Sheet; (l) Any liability or obligation of USTS under or with respect to the Series E, F, G, H, I, J, K or L USTS Preferred Stock; (m) Any liability or obligation of USTS under that certain promissory note dated September 6, 1997, issued by USTS payable to Consolidated Financial Management, Inc.; and (n) All other liabilities of USTS (other than Assumed Liabilities). A-7 ARTICLE 3 CONSIDERATION 3.1 CONSIDERATION. The consideration for the Assets shall be (a) the delivery by Precept to USTS of 9,500,000 shares of Precept Common Stock plus one additional share of Precept Common Stock for each share of USTS Common Stock issued between the date hereof and the Closing Date upon the exercise of stock options or warrants set forth on SCHEDULE 2.3(B) (the "Shares"), together with (b) the assumption by Acquisition of the Assumed Liabilities (collectively, the "Purchase Price"). ARTICLE 4 CLOSING 4.1 CLOSING DATE. The Closing hereunder shall take place at the offices of Jackson Walker L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202, at 10:00 a.m. Dallas time, on the Closing Date, assuming the satisfaction of all conditions set forth in ARTICLE 9, or at such other place, time or date as USTS and Precept may agree. 4.2 TRANSACTIONS AT CLOSING. At the Closing, and on the basis of the representations, warranties, covenants and agreements made herein and in the exhibits, certificates and other instruments delivered pursuant hereto, and subject to the terms and conditions hereof: (a) TRANSFER OF ASSETS. USTS shall transfer and convey or cause to be transferred and conveyed to Acquisition all of the Assets, shall deliver to Acquisition the Assignment and Assumption Agreement, the conveyance documents relating to the Intellectual Property Rights, the warranty deeds referred to in SECTION 9.2(H), the certificates of title of the motor vehicles and such other good and sufficient instruments of transfer and conveyance as shall be necessary to vest in Acquisition good and valid title to all of the Assets. (b) PAYMENT OF CONSIDERATION AND ASSUMPTION OF ASSUMED LIABILITIES. In consideration for the transfer of the Assets (i) Precept shall cause Acquisition to deliver to USTS a certificate representing the Shares and (ii) Acquisition shall deliver to USTS the Assignment and Assumption Agreement, whereby Acquisition shall assume the Assumed Liabilities. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF USTS USTS represents and warrants to Acquisition and Precept as follows: 5.1 ORGANIZATION, GOOD STANDING, POWER, ETC. (a) USTS is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada, and has the requisite corporate power and authority to carry on its business as now conducted. USTS is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect on USTS. A-8 (b) USTS has the requisite corporate power and authority to enter into this Agreement and, subject to obtaining stockholder approval of this Agreement, the Transfer and the Plan of Liquidation and Dissolution, to perform its obligations hereunder. The execution and delivery of this Agreement by USTS and the consummation by USTS of the transactions contemplated hereby have been duly authorized by the Board of Directors of USTS and no other corporate proceedings on the part of USTS are necessary for the execution and delivery of this Agreement by USTS, and, subject to obtaining stockholder approval of this Agreement, the Transfer and the Plan of Liquidation and Dissolution, the consummation by USTS of the transactions contemplated hereby. This Agreement has been duly executed and delivered by USTS and, subject to obtaining stockholder approval of this Agreement, the Transfer and the Plan of Liquidation and Dissolution and assuming that it has been duly executed and delivered by Precept, constitutes a legal, valid and binding obligation of USTS, enforceable against USTS in accordance with its terms except as enforcement thereof may be limited by liquidation, conservatorship, bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally from time to time in effect and except that equitable remedies are subject to judicial discretion. 5.2 AUTHORIZED CAPITALIZATION OF USTS. The authorized capital stock of USTS consists of 50,000,000 shares of USTS common stock, par value $0.01 per share (the "USTS Common Stock"), and 10,000,000 shares of preferred stock, par value $0.01 per share (the "USTS Preferred Stock"). As of October 10, 1997, there were 7,186,141 shares of USTS Common Stock and 285,000 shares of USTS Preferred Stock issued and outstanding. USTS has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of USTS on any matter. All issued and outstanding shares of USTS Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Except as disclosed in SCHEDULE 5.2 of the disclosure schedules delivered herewith by USTS (the "USTS Disclosure Schedules"), (i) there are no outstanding or authorized subscriptions, options, warrants, calls, rights (including any preemptive rights), commitments, or other agreements of any character whatsoever which obligate or may obligate USTS to issue or sell any additional shares of its capital stock or any securities convertible into or evidencing the right to subscribe for any shares of its capital stock or securities convertible into or exchangeable for such shares, (ii) there are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar plans or contracts or rights with respect to USTS or USTS Subsidiaries which are effective as of the date hereof or which have been executed or agreed to as of the date hereof with an effective date after the date hereof, and (iii) there are no stockholders' agreements, voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of USTS or any USTS Subsidiaries to which USTS or any USTS Subsidiary is or are a party which are presently effective or have been executed or agreed to as of the date hereof and provide for an effective date after the date hereof or to which any officer or director of USTS or any stockholder owned or controlled by such officer or director is or will be a party in accordance with the terms hereof. 5.3 SUBSIDIARIES. USTS owns, directly or indirectly, the equity and debt interests of each corporation, partnership, joint venture, limited liability company or other legal entity (each a "USTS Subsidiary"), in the amounts and the identities of which are disclosed in the USTS Reports and in SCHEDULE 5.3 of the USTS Disclosure Schedules. For each USTS Subsidiary that is a corporation, each of the outstanding shares of capital stock of each of the USTS Subsidiaries is duly authorized, validly issued, fully paid and nonassessable, and all such outstanding shares or other ownership interests are owned, directly or indirectly, by USTS free and clear of all liens, pledges, security interests, claims or other encumbrances other than liens imposed by local law which are not material. 5.4 OTHER INTERESTS. Except for interests in USTS Subsidiaries and as set forth in SCHEDULE 5.4 of the USTS Disclosure Schedules, neither USTS nor any USTS Subsidiary owns, directly or indirectly, any A-9 interest or investment (whether equity or debt) in any corporation, partnership, joint venture, business, trust or entity other than investments in short term investment securities. 5.5 EFFECT OF AGREEMENT. The execution, delivery and performance of this Agreement by USTS and the consummation by USTS of the transactions contemplated hereby will not require any notice to, filing with, or the consent, approval or authorization of any person or governmental authority, except for filings required under the HSR Act, the Securities Act, the Exchange Act and state "Blue Sky" filings. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in the acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any material indenture, contract, lease, sublease, loan agreement, note or other obligation or liability to which USTS is a party or is bound or to which any of its assets are subject which would have a Material Adverse Effect on USTS, (ii) conflict with, violate or result in a breach of any provision of the charter documents or bylaws of USTS, (iii) conflict with or violate any law, rule, regulation, ordinance, order, writ, injunction or decree applicable to USTS or by which any of its properties or assets is bound or affected which conflict or violation would result in a Material Adverse Effect on USTS or (iv) conflict with or result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or result in the creation of any lien, charge or encumbrance on any of the properties or assets of USTS pursuant to any of the terms, conditions or provisions of any indenture, contract, lease, sublease, loan agreement, note, permit, license, franchise, agreement or other instrument, obligation or liability to which USTS is a party or by which USTS or any of its assets is bound or affected which would have a Material Adverse Effect on USTS. 5.6 SEC DOCUMENTS. USTS has filed each report, proxy statement or information statement (as defined in Regulation 14C under the Exchange Act) required of it since January 1, 1990 (including exhibits and any amendments thereto) with the SEC (collectively, the "USTS Reports"). Except as set forth in SCHEDULE 5.6 of the USTS Disclosure Schedules, as of their respective dates, (i) the USTS Reports complied as to form in all material respects with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations thereunder, and (ii) the USTS Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each of the consolidated balance sheets of USTS included in the USTS Reports (including the related notes and schedules) has been prepared in accordance with GAAP, or, if unaudited, in accordance with applicable published accounting requirements of the SEC, and fairly presents the consolidated financial position of USTS and the USTS Subsidiaries as of its date, and each of the consolidated statements of income, changes in stockholders' equity and cash flows of USTS included in the USTS Reports (including any related notes and schedules, and together with the consolidated balance sheets of USTS, the "USTS Financial Statements") has been prepared in accordance with GAAP, or, if unaudited, in accordance with applicable published accounting requirements of the SEC, and fairly presents the results of operations, changes in stockholders' equity or cash flows, as the case may be, of USTS and USTS Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments which would not cause a Material Adverse Effect on USTS). Neither USTS nor any of the USTS Subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of USTS or in the notes thereto, prepared in accordance with GAAP, except liabilities reflected on the balance sheet contained in the USTS December Financials and liabilities arising in the ordinary course of business since December 31, 1996 (the "Balance Sheet Date"). The balance sheet of USTS for December 31, 1996 (the "Balance Sheet") and the related consolidated statements of income for the period ended December 31, 1996 are hereafter referred to as the "December USTS Financials". All material agreements, contracts and other documents required to be filed as exhibits to any of the USTS Reports have been so filed. USTS has filed all reports and other filings required to be filed with the SEC under the rules and regulations of the SEC. Any financial statements prepared for filing with the SEC by USTS subsequent to the date of the December USTS Financials or the A-10 date hereof, including but not limited to its year ended December 31, 1996 audited financial statements (but only to the extent the same are required to be filed with the SEC prior to the Closing date) (the "Subsequent USTS Financials"), have been, or if not yet filed, will be, prepared in accordance with GAAP (in the case of audited statements) and in accordance with applicable published accounting requirements of the SEC (in the case of unaudited statements), consistently applied, will fairly represent the financial condition, and will accurately set forth in all material respects the results of the combined operations, of USTS and the USTS Subsidiaries for the periods covered thereby. 5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the USTS Reports and SCHEDULE 5.7 of the USTS Disclosure Schedules, and except for changes arising from the public announcement of the transactions contemplated by this Agreement, since December 31, 1996, USTS has conducted its Business only in the ordinary course of business and there has not been (i) any material change in USTS or any development or combination of developments which has resulted or is reasonably likely to result in a Material Adverse Effect on USTS; (ii) any declaration, setting aside or payment of any dividend or other distribution with respect to its capital stock; (iii) any material change in its accounting principles, practices or methods; (iv) any termination by USTS of the employment of any department head or officer of USTS, or has USTS entered into (A) any written employment agreement or (B) any oral employment agreement not terminable without penalty by any party thereto upon 60 days notice; (v) any material increase in the rate of compensation or bonus payments payable or to become payable to any of USTS's officers or directors (including, without limitation, any payment of or promise to pay any bonus or special compensation); (vi) any purchase, redemption, issuance, sale or other acquisition or disposition of any of its shares of capital stock or other equity securities, or agreement to do so, or any grant of any options, warrants or other rights to purchase or convert any obligation into any shares of USTS's capital stock or any evidence of indebtedness or other securities; (vii) any transaction between USTS and any Affiliate (as defined in Rule 12b-2 under the Exchange Act) of USTS; and (viii) any agreement entered into by USTS to do any of the things set out in (i)-(vii) above. 5.8 TAXES. Except as set forth in SCHEDULE 5.8 of the USTS Disclosure Schedules: (a) All Tax Returns required to have been filed by USTS and the USTS Subsidiaries have been timely filed (taking into account duly granted extensions) and are true, correct and complete in all respects. Except as disclosed in SCHEDULE 5.8(a) to the USTS Disclosure Schedules, (i) USTS is not currently the beneficiary of any extension of time within which to file any Tax Return, and (ii) no claim has ever been made by any governmental authority in a jurisdiction where USTS does not file Tax Returns that USTS or any USTS Subsidiary is or may be subject to taxation by that jurisdiction. All persons characterized as independent contractors, and not as employees, were properly characterized for all purposes under applicable laws (including, without limitation, their characterization as independent contractors for income and employment tax withholdings and payments. (b) All Taxes of USTS which have become due (without regard to any extension of the time for payment and whether or not shown on any Tax Return) have been paid. USTS has withheld and paid over all Taxes required to have been withheld and paid over and has complied with all information reporting and back-up withholding requirements relating to Taxes. There are no liens with respect to Taxes on any of the assets of USTS, other than liens for Taxes not yet due and payable or for Taxes disclosed in SCHEDULE 5.8(b) to the USTS Disclosure Schedules that are being contested in good faith through appropriate proceedings and for which adequate reserves have been established in the USTS Financial Statements. (c) The unpaid Taxes of USTS for all periods ending on or before the Balance Sheet Date did not exceed the amount of the current liability accruals for Taxes (exclusive of reserves for deferred Taxes established to reflect timing differences) reflected on the face of the Balance Sheet, and the unpaid Taxes of USTS for all periods ending on or before the Closing Date will not exceed the amount of such current liability accruals reflected on the Closing Balance Sheet as adjusted for USTS operations A-11 in the ordinary course of business through the Closing Date in accordance with GAAP and, to the extent consistent therewith, the most recent custom and practices of USTS. (d) No deficiencies exist or have been asserted or are expected to be asserted (verbally or in writing) with respect to Taxes of USTS and USTS has not received notice nor does it expect to receive notice (verbally or in writing) that it has not filed a Tax Return or paid any Taxes required to be filed or paid by it. No audit, examination, investigation, action, suit, claim or proceeding relating to the determination, assessment or collection of any Tax of USTS is currently in process, pending or threatened (verbally or in writing). Except as disclosed in SCHEDULE 5.8(d) of the USTS Disclosure Schedules, no waiver or extension of any statute of limitations relating to the assessment or collection of any Tax of USTS is in effect. There are no outstanding requests for rulings with any Tax authority relating to Taxes of USTS. (e) Except as disclosed in SCHEDULE 5.8(e) of the USTS Disclosure Schedules, USTS is not and has never been a party to any tax sharing agreement or arrangement (formal or informal, verbal or in writing). (f) USTS has delivered to Precept true and complete copies of all federal, state, local and foreign income Tax Returns filed by USTS for its five (5) most recently ended taxable years, together with all related examination reports, statements of deficiencies and closing and other agreements. SCHEDULE 5.8(f) of the USTS Disclosure Schedules indicates which, if any, of such returns have been, or currently are, the subject of any audit, examination or other Tax proceeding. (g) USTS (i) has not filed a consent under Code Section 341(f) concerning collapsible corporations; (ii) has not made any payments, obligated itself to make any payments or become a party to any agreement that under any circumstance could obligate it or any successor or assignee of it to make any payments that are not or will not be deductible under Code Section 280G, or that would be subject to excise Tax under Code Section 4999; (iii) is not a "foreign person" as defined in Code Section 1445(f)(3); (iv) is not and has not been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii); (v) does not own and has not owned any interest in any "controlled foreign corporation" as defined in Code Section 957 or "passive foreign investment company" as defined in Code Section 1296; (vi) is not and has not been a party to any agreement or arrangement for which partnership Tax Returns are required to be filed; (vii) does not own any asset that is subject to a "safe harbor lease" within the meaning of Code Section 168(f)(8), as in effect prior to amendment by the Tax Equity and Fiscal Responsibility Act of 1982; (viii) does not own any "tax-exempt use property" within the meaning of Code Section 168(h) or "tax exempt bond financed property" within the meaning of Code Section 168(g)(5); and (ix) has not agreed to and is not required to make any adjustment under Code Section 481(a) by reason of a change in accounting method or otherwise. 5.9 REAL PROPERTY. (a) SCHEDULE 5.9(a) of the USTS Disclosure Schedules contain a complete and accurate list of all real property owned or, to the extent material, leased by USTS (the "USTS Real Property"). Except as otherwise disclosed in SCHEDULE 5.9(a) of the USTS Disclosure Schedules and except for liens for taxes not yet due and payable, the USTS Real Property owned by USTS is free and clear of all liens, mortgages, pledges, security interests, conditional sales agreements, charges, encumbrances (except to the extent that the existence of such encumbrance would not materially affect the use of such property by Acquisition) and other adverse claims or interests of any nature whatsoever. All improvements on the USTS Real Property are in good condition and repair, reasonable wear and tear excepted. (b) Except as disclosed in SCHEDULE 5.9(b) of the USTS Disclosure Schedules, there are no material existing leases, subleases, tenancies, licenses, contracts or other agreements ("USTS Leases") relating to the USTS Real Property to which USTS is a party. A-12 (c) Except as disclosed in SCHEDULE 5.9(c) of the USTS Disclosure Schedules, (i) each of the USTS Leases to USTS of the USTS Real Property is valid, and neither USTS nor, to the knowledge of USTS, any other party thereto is in default or non-compliance thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder by USTS or, to the knowledge of USTS, any other party thereto except where such default would not result in a Material Adverse Effect on USTS and (ii) USTS has not received notice that any party to any Lease intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. 5.10 ENVIRONMENTAL. Except for those matters that (i) would not have a Material Adverse Effect on USTS, (ii) are in compliance with applicable law, or (iii) are disclosed in SCHEDULE 5.10 of the USTS Disclosure Schedules: (a) USTS has not used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials on, under, at, or from, any of the owned, leased or operated properties or assets described in the USTS Disclosure Schedules, or otherwise, in any manner which violated any applicable Environmental Law and to USTS's knowledge no prior owner or operator of such property or asset of any tenant, subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials on, from or affecting such property or asset, or otherwise, in any manner which violated any applicable Environmental Law. (b) To the knowledge of USTS, there have been no Releases of any Hazardous Material on, under, at, or from any of the owned, leased or operated properties or assets described in the USTS Disclosure Schedules or otherwise. (c) USTS does not have any liabilities assessed, no written claims have been received by USTS and no currently outstanding citations or notices of violation have been received by USTS, which in the case of any of the foregoing have been or are imposed by reason of or based upon any alleged violation of any applicable Environmental Laws, including, but not limited to, any such liabilities relating to or arising out of or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, presence or handling of any Hazardous Materials by USTS at any of the USTS Real Property or otherwise. (d) There are no actions by any governmental authority or third party pending under any Environmental Laws to which USTS is a party alleging a violation of Environmental Law, nor are there any decrees, or orders, or other administrative or judicial requirements, outstanding under any Environmental Law with respect to USTS. (e) The real property currently used, owned or leased by USTS contains no regulated underground storage tanks, or regulated underground piping associated with underground storage tanks, used currently or in the past as such tanks are defined in RCRA or comparable state law. (f) To the knowledge of USTS, USTS has obtained and is in compliance with all permits and licenses that are required under Environmental Laws, and is in compliance with all terms and conditions of such permits and licenses. 5.11 PERSONAL PROPERTY. (a) Except as otherwise described in SCHEDULE 5.11(a) of the USTS Disclosure Schedules, all of USTS's personal property (the "USTS Personal Property") is (i) free and clear of all liens, other than liens for taxes not yet due and payable, mortgages, pledges, security interests, conditional sales agreements, charges, encumbrances and other adverse claims or interests of any nature whatsoever, and (ii) is in good operating condition and repair, reasonable wear and tear excepted. The USTS Personal Property, taken as a whole, is reasonably fit and usable for the purposes for which it is being used, reasonably sufficient for all current operations and business of USTS and conforms with all A-13 applicable ordinances, regulations and laws except where the failure to conform would not have a Material Adverse Effect on USTS. (b) The inventory of USTS as reflected by the December USTS Financials and the inventory as the same shall exist on the date hereof, other than the reserve established for the inventory reflected in the December USTS Financials, consisted and will consist of items which were and will be of the usual quality and quantity necessary for the normal conduct of the business of USTS and is reasonably expected to be usable or saleable within a reasonable period of time in the ordinary course of the business of USTS. With respect to inventory in the hands of suppliers for which USTS is committed as of the Closing date, such inventory is reasonably expected to be usable in the ordinary course of the business of USTS as presently being conducted. 5.12 MATERIAL AGREEMENTS. (a) SCHEDULE 5.12 of the USTS Disclosure Schedules lists each agreement and arrangement (whether written or oral and including all amendments thereto) to which USTS is a party or a beneficiary or by which USTS or any of its Assets is bound and that is material to USTS (collectively, the "USTS Material Agreements"), including without limitation (i) any real estate leases; (ii) any contracts for the provision of goods or services by USTS; (iii) any agreement evidencing, securing or otherwise relating to any indebtedness for which USTS is liable; (iv) any capital or operating leases, value-added reseller, reseller, or conditional sales agreements relating to vehicles, equipment or other assets of USTS or agreements pursuant to which USTS is entitled or obligated to acquire any assets from a third party; (v) any insurance policies; (vi) any employment, consulting, noncompetition, separation, collective bargaining, union or labor agreements or arrangements; (vii) any agreement with any stockholder, director, officer or employee of USTS, or any affiliate or family member thereof; (viii) any joint marketing or similar agreement or arrangement; and (ix) any other agreement or arrangement pursuant to which, based on historical or projected volume, USTS will be required to make or entitled to receive aggregate payments in excess of $50,000 during any calendar year. (b) USTS has performed all obligations required to be performed by it in connection with the agreements and arrangements required to be disclosed pursuant to this SECTION 5.12 and is not in receipt of any claim of default under any agreement or arrangement required to be disclosed by this SECTION 5.12; USTS has no present expectation or intention of not fully performing any material obligation pursuant to any agreement or arrangement required to be disclosed in the USTS Disclosure Schedules pursuant to this SECTION 5.12 and except as set forth in SCHEDULE 5.12(b) of the USTS Disclosure Schedules, USTS has no knowledge of any breach or anticipated breach by any other party to any agreement or arrangement required to be disclosed in the USTS Disclosure Schedules pursuant to this SECTION 5.12. (c) USTS has delivered to Acquisition a copy of the agreements and arrangements required to be disclosed in the USTS Disclosure Schedules pursuant to this Section 5.12. (d) Except as disclosed in USTS Reports or SCHEDULE 5.12(d) of the USTS Disclosure Schedules, all the USTS Material Agreements to which USTS is a party are valid and enforceable, USTS has performed all obligations imposed upon them thereunder, and USTS nor, to the knowledge of USTS, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default or non-compliance thereunder by USTS or, to the knowledge of USTS, any other party thereto. A-14 5.13 LEGAL PROCEEDINGS. Except as set forth in SCHEDULE 5.13 of the USTS Disclosure Schedules, there are no claims, actions, suits, arbitrations, grievances, proceedings or investigations pending or, to the best knowledge of USTS, threatened against USTS, at law, in equity, or before any federal, state, municipal or other governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and there are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which USTS is a party, which involve the transactions contemplated herein or which would have a Material Adverse Effect upon USTS. USTS is not currently engaged in or contemplating any legal action to recover moneys due to them or damages sustained by them. USTS is not in violation of or in default with respect to any applicable judgment, order, writ, injunction or decree, which would have a Material Adverse Effect upon USTS. 5.14 LABOR MATTERS. Except as disclosed in SCHEDULE 5.14 of the USTS Disclosure Schedules, neither USTS nor any of the USTS Subsidiaries is a party to, or is bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization. To the knowledge of USTS, there is no unfair labor practice or labor arbitration proceeding pending. Except as disclosed in SCHEDULE 5.14 of the USTS Disclosure Schedules, to the knowledge of USTS, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of USTS or any of the USTS Subsidiaries. 5.15 PATENTS, TRADEMARKS, FRANCHISES, ETC. Except as set forth in SCHEDULE 5.15 of the USTS Disclosure Schedules, all agreements and applications related to any patents, trademarks, copyrights, trade names, trade secrets, service marks, other intellectual property rights (including, without limitation, rights with respect to computer software), franchises and other similar rights (the "Intellectual Property Rights") which are listed in SCHEDULE 5.15 of the USTS Disclosure Schedules are valid and enforceable, USTS has performed all obligations imposed upon it thereunder, and USTS is not in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder by USTS or, to the knowledge of USTS, any other party thereto. Except as set forth in SCHEDULE 5.15 of the USTS Disclosure Schedules, USTS has not received notice that any party to any such agreement intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. Each of USTS and the USTS Subsidiaries has all right, title and interest in, or has a valid and enforceable license to use, the Intellectual Property Rights presently being used in the business, and the current use of the Intellectual Property Rights by USTS and the USTS Subsidiaries does not infringe upon the rights of any third person. 5.16 INSURANCE. SCHEDULE 5.16 of the USTS Disclosure Schedules contains a list of all policies of insurance maintained as of the date of this Agreement by USTS, or maintained by any USTS Subsidiary, in respect of the Business and Assets of USTS and the USTS Subsidiaries, including without limitation insurance providing benefits for employees. The insurance policies set forth in SCHEDULE 5.16 of the USTS Disclosure Schedules provide adequate coverage against the risks involved in the Business and operation of USTS. Neither USTS nor any USTS Subsidiary has received notice from any insurance carrier of the intention of such carrier to discontinue any insurance policy set forth in SCHEDULE 5.16 of the USTS Disclosure Schedules, or any coverage currently provided by any such policy. Since January 1, 1997, neither USTS nor any of the USTS Subsidiaries has been denied coverage by any insurance carrier or has failed or currently fails to maintain any insurance coverage which may be required by the laws of the states in which USTS or USTS Subsidiaries do business. The premiums due on the insurance which covers calendar year 1996 have been paid in full (or are not delinquent) and the premiums due for the period from January 1, 1997 to the Closing Date have been or will be paid in full as and when due. All such insurance complies in all material respects with the terms of each of its leases and each of the mortgages, deeds of trust, service agreements with third parties and/or loan agreements to which USTS or any of the USTS Subsidiaries is a party. 5.17 EMPLOYEES. Except as disclosed in SCHEDULE 5.17 of the USTS Disclosure Schedules and as reflected in USTS Financial Statements, USTS is not a party to any: A-15 (i) management, employment or other contract providing for the employment or rendition of executive services; (ii) contract for the employment of any employee which is not terminable by USTS on 30 days notice; (iii) bonus, incentive, deferred compensation, severance pay, pension, profit-sharing, retirement, stock purchase, stock option, employee benefit or similar plan, agreement or arrangement (including without limitation Christmas bonuses and similar year end bonuses); or (iv) any other employment contract or other compensation agreement or arrangement affecting or relating to current or former employees of USTS. 5.18 EMPLOYEE BENEFIT PLANS. All material employee benefit plans, as defined in Section 3(3) of ERISA, all arrangements providing compensation, severance or other benefits (excluding any employment agreement or arrangement which may be terminated with no more than 30 days prior written notice and which provides no severance or termination benefits greater than those described in USTS's employee manuals) to any employee or director or former employee or director of USTS, the USTS Subsidiaries or ERISA Affiliate (as defined below) of USTS (the "USTS Benefit Plans") are set forth in SCHEDULE 5.18 of the USTS Disclosure Schedules. Unless otherwise disclosed in SCHEDULE 5.18 of the USTS Disclosure Schedules, to the extent applicable, the USTS Benefit Plans comply, in all material respects, with the requirements of ERISA and the Code, and any USTS Benefit Plan intended to be qualified under Section 401(a) of the Code has been determined by the IRS to be so qualified or USTS has submitted or is in the process of submitting a timely determination letter request to the IRS with respect to any such USTS Benefit Plan. Neither USTS nor any ERISA Affiliate of USTS (during the period of its affiliated status and prior thereto, to its knowledge) maintains, contributes to or has in the past maintained or contributed to any benefit plan which is covered by Title IV of ERISA or Section 412 of the Code. Neither any USTS Benefit Plan nor USTS has incurred any liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA. Each USTS Benefit Plan has been maintained and administered in all material respects in compliance with its terms and with ERISA and the Code to the extent applicable thereto. There are no pending or anticipated claims against or otherwise involving any of USTS Benefit Plans and no suit, action or other liability (excluding claims for benefits incurred in the ordinary course of USTS Benefit Plan activities) has been brought against or with respect to any such USTS Benefit Plan, except for any of the foregoing which would not have a Material Adverse Effect on USTS. All contributions required to be made as of the date hereof to USTS Benefit Plans have been made or provided for. All required contributions to USTS Benefit Plans have been timely made. Neither USTS nor any ERISA Affiliate of USTS has contributed to, or been required to contribute to, any "multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA). Except for benefits as may be required to be provided under applicable provisions of federal or state law, there are no plans or arrangements which provides or has any liability to provide life insurance or medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any USTS Benefit Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee. The only severance agreements or severance policies applicable to USTS or any of the USTS Subsidiaries are the agreements and policies specifically referred to in the USTS Disclosure Schedules (and, in the case of such agreements, the form of which is attached to the USTS Disclosure Schedules). 5.19 STOCKHOLDER INFORMATION. None of the information to be distributed to stockholders of USTS in connection with the Transfer nor any amendments or supplements of or to any of the foregoing which is provided by USTS (collectively, the "USTS Stockholder Information"), will between the date the USTS Stockholder Information is first mailed to stockholders and the Closing Date, contain any statement which, A-16 at such time and in light of the circumstances under which it is made, will be false or misleading with respect to any fact, or will omit to state any fact necessary in order to make the statements therein not false or misleading. 5.20 FULL DISCLOSURE. No information furnished, or to be furnished, by USTS or its representatives pursuant to this Agreement (including, but not limited to, the USTS Reports and all information in the USTS Disclosure Schedules) is, or will be, false or misleading and such information includes all facts required to be stated therein or necessary to make the statements therein not misleading. No representation or warranty by or on behalf of USTS or the USTS Subsidiaries contained in this Agreement, and no statement contained in any certificate, list, exhibit, or other instrument furnished or to be furnished by USTS pursuant hereto (including the USTS Disclosure Schedules) contains or will contain any untrue statement of a material fact, or omits or will omit to state any material facts which are necessary in order to make the statement contained herein or therein, in light of the circumstances under which they are made, not misleading. 5.21 TRANSACTIONS WITH RELATED PARTIES. Except for transactions disclosed in SCHEDULE 5.21 of the USTS Disclosure Schedules, there have been no loans or other transactions between USTS and any officer, director or stockholder, or any affiliate thereof, of USTS. Except as disclosed in SCHEDULE 5.21 of the USTS Disclosure Schedules, neither USTS, any officer or director of USTS nor any spouse or child of any such person owns or has any interest in, directly or indirectly, any real or personal property owned by or leased to USTS or any Intellectual Property Rights licensed by USTS. 5.22 LAWS. Except for Environmental Laws, which are covered in SECTION 5.10 hereof, and as specifically set forth in SCHEDULE 5.22 of the USTS Disclosure Schedules, USTS has complied in all material respects with all laws, rules, regulations, ordinances, codes, licenses, clearances, permits, franchises, grants, authorizations, easements, consents, certificates and orders relating to any of its properties or applicable to its business, including, but not limited to, labor, equal employment opportunity, occupational safety and health, consumer protection, environmental, securities and antitrust laws and regulations except where the failure to be in compliance would not have a Material Adverse Effect on USTS. USTS has all contractors licenses required for it to conduct its business except where the failure to be in compliance would not have a Material Adverse Effect on USTS. USTS is not in material violation of any applicable zoning, building or environmental regulation, ordinance or other law, order, regulation, restriction or requirement relating to its operations or properties, whether such properties are owned or leased, and no governmental body or other person has claimed that any such violation exists, or called attention to the need for any work, repairs, construction, alterations or installation on or in connection with the properties of USTS, except for such violations that would not have a Material Adverse Effect on USTS. As of the date hereof, the Board of Directors of USTS has approved the Transfer pursuant to the relevant provisions of Nevada law. 5.23 BROKERAGE. Except as set forth in SECTION 5.23 of the USTS Disclosure Schedules, USTS has not retained any broker or finder in connection with the transactions contemplated by this Agreement. 5.24 PRODUCT WARRANTIES. Except as set forth in SECTION 5.24 of the USTS Disclosure Schedules, there is no claim against or liability of USTS or any USTS Subsidiary on account of product warranties or with respect to the manufacture, sale or rental of defective products and there is no basis for any such claim on account of defective products heretofore manufactured, sold or rented that is not fully covered by insurance. 5.25 FORD CONTRACT. USTS is not aware, so far as USTS can reasonably foresee, of any reason why the Ford Contract would not be renewed by Ford Motor Company on substantially the same terms and conditions for a period of at least one year beyond the current June 30, 1998 expiration date. A-17 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PRECEPT AND ACQUISITION Acquisition and Precept represent and warrant to USTS, at the time of execution hereof and at the Closing Date, the following: 6.1 ORGANIZATION, GOOD STANDING, POWER, ETC. (a) (i) Precept is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, and has the requisite corporate power and authority to carry on its business as now conducted. Precept is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect on Precept. Copies of the Articles of Incorporation and Bylaws of Precept heretofore delivered to USTS or its representatives are true and complete as of the date hereof. Such Articles of Incorporation and Bylaws are in full-force and effect, and Precept is not in violation or breach of any provisions of its Articles of Incorporation or Bylaws. (ii) Acquisition is a newly formed limited liability company duly organized, validly existing and in good standing under the laws of the State of Nevada, and has the requisite limited liability company power and authority to carry on its business as now conducted. (b) Each of Acquisition and Precept have the requisite power and authority to enter into this Agreement and, to perform their respective obligations hereunder. The execution and delivery of this Agreement by Acquisition and Precept and the consummation by Acquisition and Precept of the transactions contemplated hereby have been duly authorized by the Board of Directors of Precept and the sole member of Acquisition and except for shareholder approval of the amendment to the Articles of Incorporation of Precept to increase the number of shares of Precept Common Stock to an amount not in excess of 100,000,000 shares and the split of the Precept Class A Common Stock, and the Precept Class B Common Stock, no other corporate proceedings on the part of Acquisition and Precept are necessary for the execution and delivery of this Agreement by Acquisition and Precept, and the consummation by Acquisition and Precept of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Acquisition and Precept and assuming that it has been duly executed and delivered by USTS, constitutes a legal, valid and binding obligation of each of Acquisition and Precept, enforceable against Acquisition and Precept in accordance with its terms except as enforcement thereof may be limited by liquidation, conservatorship, bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally from time to time in effect and except that equitable remedies are subject to judicial discretion. 6.2 AUTHORIZED CAPITALIZATION OF PRECEPT. The authorized capital stock of Precept consists of 17,195,742 authorized shares of Class A Common Stock, 8,361,647 of which were issued and outstanding as of June 30, 1997, and 3,202,843 authorized shares of Class B Common Stock, 3,202,843 of which were issued and outstanding as of June 30, 1997. Precept has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the shareholders of Precept on any matter. All issued and outstanding shares of Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Except as disclosed in SCHEDULE 6.2 of the disclosure schedules delivered herewith by Precept (the "Precept Disclosure Schedules"), (i) there are no outstanding or authorized subscriptions, options, warrants, calls, rights (including any preemptive rights), commitments, or other agreements of any character whatsoever which obligate or may obligate Precept to issue or sell any additional shares of its capital stock or any securities convertible into or evidencing the right to subscribe for any shares of its capital stock or securities convertible into or exchangeable for such shares, (ii) there are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar plans or contracts or rights A-18 with respect to Precept or any of its subsidiaries which are effective as of the date hereof or which have been executed or agreed to as of the date hereof with an effective date after the date hereof, and (iii) there are no shareholders' agreements, voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of Precept or any of its subsidiaries to which Precept or any of its subsidiaries is or are a party which are presently effective or have been executed or agreed to as of the date hereof and provide for an effective date after the date hereof or to which any officer or director of Precept or any shareholder owned or controlled by such officer or director is or will be a party in accordance with the terms hereof. Set forth in the Precept Disclosure Schedules is a list of all such options, warrants or other convertible securities, identifying the holder thereof, the number of shares of Precept Common Stock into which the security is convertible, and the purchase price payable upon exercise or the conversion ratio, as applicable. 6.3 SUBSIDIARIES. Except as set forth in SCHEDULE 6.3 of the Precept Disclosure Schedules, Precept owns directly or indirectly each of the outstanding shares of capital stock of each of Precept's direct or indirect subsidiaries (each a "Precept Subsidiary"), the identities of which are set forth in the Precept Disclosure Schedules. Each of the outstanding shares of capital stock of each Precept Subsidiary (that are corporations) is duly authorized, validly issued, fully paid and nonassessable, and all such outstanding shares or other ownership interests are owned, directly or indirectly, by Precept free and clear of all liens, pledges, security interests, claims or other encumbrances other than liens imposed by local law which are not material. Acquisition does not own directly or indirectly any Subsidiaries. 6.4 OTHER INTERESTS. Except as set forth in SCHEDULE 6.3 of the Precept Disclosure Schedules with respect to Precept's interests in the Precept Subsidiaries, neither Precept nor any Subsidiary owns, directly or indirectly, any material interest or investment (whether equity or debt) in any corporation (including but not limited to USTS), partnership, joint venture, business, trust or entity other than investments in short term investment securities. 6.5 EFFECT OF AGREEMENT. The execution, delivery and performance of this Agreement by Acquisition and Precept and the consummation by Acquisition and Precept of the transactions contemplated hereby will not require any notice to, filing with, or the consent, approval or authorization of any person or governmental authority, except for filings required under (a) the Securities Act, (b) the HSR Act, (c) the Exchange Act and (d) state "Blue Sky" laws. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) except as set forth in the Precept Disclosure Schedules, result in the acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any indenture, contract, lease, sublease, loan agreement, note or other obligation or liability to which Acquisition or Precept is a party or is bound or to which any of their respective assets are subject which event would have a Material Adverse Effect on Precept, (ii) conflict with, violate or result in a breach of any provision of the charter or organization documents or bylaws (or similar document) of Acquisition or Precept, (iii) conflict with or violate any law, rule, regulation, ordinance, order, writ, injunction or decree applicable to Acquisition or Precept or to any other Precept Subsidiary by which any of their respective properties or assets is bound or affected which conflict or violation would result in a Material Adverse Effect on Precept or (iv) conflict with or result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or result in the creation of any lien, charge or encumbrance on any of the properties or assets of Acquisition or Precept pursuant to any of the terms, conditions or provisions of any indenture, contract, lease, sublease, loan agreement, note, permit, license, franchise, agreement or other instrument, obligation or liability to which Acquisition or Precept is a party or by which Acquisition or Precept, a Precept Subsidiary or any of their respective assets is bound or affected which would have a Material Adverse Effect on Acquisition or Precept. 6.6 FINANCIAL INFORMATION. Precept has delivered to USTS the audited balance sheet of Precept as of June 30, 1997 (the "June 30 Balance Sheet") and the related audited statements of operations, of shareholders' equity and of cash flows for the one-year period ended June 30, 1997 (together with related A-19 notes and schedules), which financial statements contain a report of E&Y, reporting thereon (the "Precept Financial Statements"). The Precept Financial Statements have been prepared in accordance with GAAP, and fairly present the results of operations, changes in shareholders' equity and of cash flows for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end adjustments which would not cause a Material Adverse Effect on Precept). Neither Precept nor any Precept Subsidiary has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Precept or in the notes thereto, prepared in accordance with GAAP, except liabilities reflected on the June 30 Balance Sheet and liabilities arising in the ordinary course of business since June 30, 1997. 6.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Precept Financial Statements or SCHEDULE 6.7 of the Precept Disclosure Schedules, and except for changes arising from the public announcement of the transactions contemplated by this Agreement, since July 1, 1997, Precept has conducted its business only in the ordinary course of business and there has not been (i) any material change in Precept or any development or combination of developments which has resulted or is reasonably likely to result in a Material Adverse Effect on Precept or the prospects of Precept; (ii) any declaration, setting aside or payment of any dividend or other distribution with respect to its capital stock; (iii) any material change in its accounting principles, practices or methods; (iv) any termination by Precept of the employment of any department head or officer of Precept or entered into (A) any written employment agreement or (B) any oral employment agreement not terminable without penalty by any party thereto upon 60 days notice; (v) any material increase in the rate of compensation or bonus payments payable or to become payable to any of Precept's officers or directors (including, without limitation, any payment of or promise to pay any bonus or special compensation); (vi) any purchase, redemption, issuance, sale or other acquisition or disposition of any of its shares of capital stock or other equity securities, or agreement to do so, or any grant of any options, warrants or other rights to purchase or convert any obligation into any shares of Precept's capital stock or any evidence of indebtedness or other securities; (vii) any transaction between Precept and any Affiliate (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of Precept; and (viii) any agreement entered into by Precept to do any of the things set out in (i)-(vii) above. 6.8 TAXES. (a) All Tax Returns required to have been filed by Precept have been timely filed (taking into account duly granted extensions) and are true, correct and complete in all respects. Except as disclosed in SCHEDULE 6.8(a) of the Precept Disclosure Schedules (i) Precept is not currently the beneficiary of any extension of time within which to file any Tax Return, and (ii) no claim has ever been made by any governmental authority in a jurisdiction where Precept does not file Tax Returns that Precept is or may be subject to taxation by that jurisdiction. (b) All Taxes of Precept which have become due (without regard to any extension of the time for payment and whether or not shown on any Tax Return) have been paid. Precept has withheld and paid over all Taxes required to have been withheld and paid over and has complied with all information reporting and back-up withholding requirements relating to Taxes. There are no liens with respect to Taxes on any of the assets of Precept, other than liens for Taxes not yet due and payable or for Taxes disclosed in SCHEDULE 6.8(b) of the Precept Disclosure Schedules that are being contested in good faith through appropriate proceedings and for which adequate reserves have been established in the Precept Financial Statements. (c) No deficiencies exist or have been asserted or are expected to be asserted (verbally or in writing) with respect to Taxes of Precept and Precept has not received notice nor does it expect to receive notice (verbally or in writing) that it has not filed a Tax Return or paid any Taxes required to be filed or paid by it. No audit, examination, investigation, action, suit, claim or proceeding relating to A-20 the determination, assessment or collection of any Tax of Precept is currently in process, pending or threatened (verbally or in writing). Except as disclosed in SCHEDULE 6.8(c) to the Precept Disclosure Schedules, no waiver or extension of any statute of limitations relating to the assessment or collection of any Tax of Precept is in effect. There are no outstanding requests for rulings with any Tax authority relating to Taxes of Precept. 6.9 REAL PROPERTY. (a) SCHEDULE 6.9(a) of the Precept Disclosure Schedules contains a complete and accurate list of all real property owned or, to the extent material, leased by Precept (the "Precept Real Property"). Except as otherwise disclosed in SCHEDULE 6.9(a) of the Precept Disclosure Schedules and except for liens for taxes not yet due and payable, the Precept Property owned by Precept is free and clear of all liens, mortgages, pledges, security interests, conditional sales agreements, charges, encumbrances (except to the extent that the existence of such encumbrance would not materially affect Precept's use of such property) and other adverse claims or interests of any nature whatsoever. All improvements on the Precept Real Property are in good condition and repair, reasonable wear and tear excepted. (b) Except as disclosed in SCHEDULE 6.9(b) of the Precept Disclosure Schedules, there are no material existing leases, subleases, tenancies, licenses, contracts or other agreements ("Precept Leases") relating to the Precept Real Property to which Precept is a party. (c) Except as disclosed in SCHEDULE 6.9(c) of the Precept Disclosure Schedules, (i) each of the Leases to Precept of the Precept Real Property is valid, and neither Precept nor, to the knowledge of Precept, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder by Precept or, to the knowledge of Precept, any other party thereto except where such default would not result in a Material Adverse Effect on Precept and (ii) Precept has not received notice that any party to any Lease intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. 6.10 ENVIRONMENTAL. Except for those matters that (i) would not have a Material Adverse Effect on Precept, (ii) are in compliance with applicable law or (iii) are disclosed in SCHEDULE 6.10 of the Precept Disclosure Schedules: (a) Precept has not used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials on, under, at, or from, any of the owned, leased or operated properties or assets described in the Precept Disclosure Schedules, or otherwise, in any manner which violated any applicable Environmental Law and to Precept's knowledge no prior owner or operator of such property or asset of any tenant, subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials on, from or affecting such property or asset, or otherwise, in any manner which violated any applicable Environmental Law. (b) To Precept's knowledge, there have been no Releases of any Hazardous Material on, under, at, or from any of the owned, leased or operated properties or assets described in the Precept Disclosure Schedules or otherwise. (c) Precept has no liabilities assessed, no written claims have been received by Precept and no currently outstanding citations or notices of violation have been received by Precept, which in the case of any of the foregoing have been or are imposed by reason of or based upon any alleged violation of any applicable Environmental Laws, including, but not limited to, any such liabilities relating to or arising out of or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, presence or handling of any Hazardous Materials by Precept at any of the Precept Real Property or otherwise. A-21 (d) There are no actions by any governmental authority or third party pending under any Environmental Laws to which Precept is a party alleging a violation of Environmental Law, nor are there any decrees, or orders, or other administrative or judicial requirements, outstanding under any Environmental Law with respect to Precept. (e) The real property currently used, owned or leased by Precept contains no regulated underground storage tanks, or regulated underground piping associated with underground storage tanks, used currently or in the past as such tanks are defined in RCRA or comparable state law. (f) To the knowledge of Precept, Precept has obtained and is in compliance with all material permits and licenses that are required under Environmental Laws, and is in material compliance with all terms and conditions of such permits and licenses. 6.11 PERSONAL PROPERTY. (a) Except as otherwise described in SCHEDULE 6.11(a) of the Precept Disclosure Schedules, all of Precept's personal property (the "Precept Personal Property") is (i) free and clear of all liens, other than liens for taxes not yet due and payable, mortgages, pledges, security interests, conditional sales agreements, charges, encumbrances and other adverse claims or interests of any nature whatsoever, and (ii) is in good operating condition and repair, reasonable wear and tear excepted. The Precept Personal Property, taken as a whole, is reasonably fit and usable for the purposes for which it is being used, reasonably sufficient for all current operations and business of Precept and conforms with all applicable ordinances, regulations and laws except where the failure to conform would not have a Material Adverse Effect on Precept. (b) The inventory of Precept as reflected by the June 30, 1997 Precept Financials and the inventory as the same shall exist on the date hereof, other than the reserve established for the inventory reflected in the June 30, 1997 Precept Financials, consisted and will consist of items which were and will be of the usual quality and quantity necessary for the normal conduct of the business of Precept and is reasonably expected to be usable or saleable within a reasonable period of time in the ordinary course of the business of Precept. With respect to inventory in the hands of suppliers for which Precept is committed as of the date hereof, such inventory is reasonably expected to be usable in the ordinary course of the business of Precept as presently being conducted. 6.12 MATERIAL AGREEMENTS. (a) SCHEDULE 6.12 of the Precept Disclosure Schedules lists each agreement and arrangement (whether written or oral and including all amendments thereto) to which Precept is a party or a beneficiary or by which Precept or any of its assets is bound and that is material to Precept (collectively, the "Precept Material Agreements"), including without limitation (i) any real estate leases; (ii) any contracts for the provision of goods or services by Precept; (iii) any agreement evidencing, securing or otherwise relating to any indebtedness for which Precept is liable; (iv) any capital or operating leases, value-added reseller, reseller, or conditional sales agreements relating to vehicles, equipment or other assets of Precept or agreements pursuant to which Precept is entitled or obligated to acquire any assets from a third party; (v) any insurance policies; (vi) any employment, consulting, noncompetition, separation, collective bargaining, union or labor agreements or arrangements; (vii) any agreement with any stockholder, director, officer or employee of Precept, or any affiliate or family member thereof; (viii) any joint marketing or similar agreement or arrangement; and (ix) any other agreement or arrangement pursuant to which, based on historical or projected volume, Precept will be required to make or entitled to receive aggregate payments in excess of $50,000 during any calendar year. (b) Precept has performed all obligations required to be performed by it in connection with the agreements and arrangements required to be disclosed pursuant to this Section 6.12 and is not in receipt of any claim of default under any agreement or arrangement required to be disclosed by this A-22 Section 6.12; Precept has no present expectation or intention of not fully performing any material obligation pursuant to any agreement or arrangement required to be disclosed in the Precept Disclosure Schedules pursuant to this Section 6.12 and Precept has no knowledge of any breach or anticipated breach by any other party to any agreement or arrangement required to be disclosed in the Precept Disclosure Schedules pursuant to this Section 6.12. (c) Precept has delivered to USTS a copy of the agreements and arrangements required to be disclosed in the Precept Disclosure Schedules pursuant to this Section 6.12. (d) Except as disclosed in the Precept Disclosure Schedules, all the Precept Material Agreements referred to in the Precept Disclosure Schedules are valid and enforceable, Precept has performed all obligations imposed upon them thereunder, and Precept nor, to the knowledge of Precept, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder by Precept or, to the knowledge of Precept, any other party thereto. 6.13 LEGAL PROCEEDINGS. Except as set forth in the Precept Disclosure Schedules, there are no claims, actions, suits, arbitrations, grievances, proceedings or investigations pending or, to the best knowledge of Precept, threatened against Precept, at law, in equity, or before any federal, state, municipal or other governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, and there are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which Precept is a party, which involve the transactions contemplated herein or which would have a Material Adverse Effect upon Precept. Except as set forth in SCHEDULE 6.13 of the Precept Disclosure Schedules, Precept is not presently engaged in or contemplating any legal action to recover moneys due to them or damages sustained by them. Precept is not in violation of or in default with respect to any applicable judgment, order, writ, injunction or decree, which would have a Material Adverse Effect upon Precept. 6.14 LABOR MATTERS. Except as set forth in SCHEDULE 6.14 of the Precept Disclosure Schedules, neither Precept nor any of Precept Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization. To the knowledge of Precept, there is no unfair labor practice or labor arbitration proceeding pending. To the knowledge of Precept and except as set forth in SCHEDULE 6.14 of the Precept Disclosure Schedules, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Precept or any of Precept Subsidiaries. 6.15 PATENTS, TRADEMARKS, FRANCHISES, ETC. All patents and trademarks owned by Precept and registered in the U.S. Patent and Trademark Office have been duly issued or registered therein, all such registrations have been validly issued and all are in full force and effect. Precept in its operations does not infringe any valid patent, trademark, trade name, service mark or copyright of any other person or entity. All agreements related to Intellectual Property Rights listed in SCHEDULE 6.15 of the Precept Disclosure Schedules are valid and enforceable, Precept has performed all obligations imposed upon it thereunder, and Precept is not in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder by Precept or, to the knowledge of Precept, any other party thereto. Except as set forth in SCHEDULE 6.15 of the Precept Disclosure Schedules, Precept has not received notice that any party to any such agreement intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. 6.16 INSURANCE. SCHEDULE 6.16 of the Precept Disclosure Schedules contains a list of all policies of insurance maintained as of the date of this Agreement by Precept, or maintained by any Precept Subsidiary, in respect of the business and assets of Precept and the Precept Subsidiaries, including without limitation insurance providing benefits for employees. The insurance policies set forth in SCHEDULE 6.16 of the Precept Disclosure Schedules provide adequate coverage against the risks involved in the business and operation of Precept. Neither Precept nor any Precept Subsidiary has received notice from any insurance A-23 carrier of the intention of such carrier to discontinue any insurance policy set forth in SCHEDULE 6.16 of the Precept Disclosure Schedules, or any coverage currently provided by any such policy. Since January 1, 1997, neither Precept nor any of the Precept Subsidiary has been denied coverage by any insurance carrier or has failed or currently fails to maintain any insurance coverage which may be required by the laws of the states in which Precept or Precept Subsidiaries do business. The premiums due on the insurance which covers calendar year 1996 have been paid in full (or are not delinquent) and the premiums due for the period from January 1, 1997 to the Closing Date have been or will be paid in full as and when due. All such insurance complies in all material respects with the terms of each of its leases and each of the mortgages, deeds of trust, service agreements with third parties and/or loan agreements to which Precept or any of the Precept Subsidiaries is a party. 6.17 EMPLOYEES. Except as disclosed in SCHEDULE 6.17 of the Precept Disclosure Schedules and as reflected in Precept Financial Statements, Precept is not a party to any: (i) management, employment or other contract providing for the employment or rendition of executive services; (ii) contract for the employment of any employee which is not terminable by Precept on 30 days' notice; (iii) bonus, incentive, deferred compensation, severance pay, pension, profit-sharing, retirement, stock purchase, stock option, employee benefit or similar plan, agreement or arrangement (including without limitation Christmas bonuses and similar year end bonuses); or (iv) any other employment contract or other compensation agreement or arrangement affecting or relating to current or former employees of Precept. 6.18 EMPLOYEE BENEFIT PLANS. All material employee benefit plans, as defined in Section 3(3) of ERISA, all arrangements providing compensation, severance or other benefits (excluding any employment agreement or arrangement which may be terminated with no more than 30 days' prior written notice and which provides no severance or termination benefits greater than those described in Precept's employee manuals) to any employee or director or former employee or director of Precept, the Precept Subsidiaries or ERISA Affiliate of Precept (the "Precept Benefit Plans") are listed in SCHEDULE 6.18 of the Precept Disclosure Schedules. Unless otherwise disclosed in the Precept Disclosure Schedules, to the extent applicable, Precept Benefit Plans comply, in all material respects, with the requirements of ERISA and the Code, and any Precept Benefit Plan intended to be qualified under Section 401(a) of the Code has been determined by the IRS to be so qualified or Precept has submitted or is in the process of submitting a timely determination letter request to the IRS with respect to any such Precept Benefit Plan. Except as set forth in the Precept Disclosure Schedules, neither Precept nor any ERISA Affiliate of Precept (during the period of its affiliated status and prior thereto, to its knowledge) maintains, contributes to or has in the past maintained or contributed to any benefit plan which is covered by Title IV of ERISA or Section 412 of the Code. Neither any Precept Benefit Plan nor Precept has incurred any liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA. Each Precept Benefit Plan has been maintained and administered in all material respects in compliance with its terms and with ERISA and the Code to the extent applicable thereto. There are no pending or anticipated claims against or otherwise involving any of Precept Benefit Plans and no suit, action or other liability (excluding claims for benefits incurred in the ordinary course of Precept Benefit Plan activities) has been brought against or with respect to any such Precept Benefit Plan, except for any of the foregoing which would not have a Material Adverse Effect on Precept. All contributions required to be made as of the date hereof to Precept Benefit Plans have been made or provided for. All required contributions to Precept Benefit Plans have been timely made. Neither Precept nor any ERISA Affiliate of Precept has contributed to, or been required to contribute to, any "multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA). Except for benefits as may be required to be provided under applicable provisions of federal or state law and except as set forth in Schedule 6.18 of the Precept Disclosure Schedules, there are no plans or arrangements which provides or A-24 has any liability to provide life insurance or medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Precept Benefit Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee. The only severance agreements or severance policies applicable to Precept or any of the Precept Subsidiaries are the agreements and policies specifically referred to in the Precept Disclosure Schedules. 6.19 TRANSACTIONS WITH RELATED PARTIES. Except for transactions disclosed in SCHEDULE 6.19 of the Precept Disclosure Schedules there have been no loans or other transactions between Precept and any officer, director or shareholder, or any affiliate thereof, of Precept. Except as disclosed in SCHEDULE 6.19 of the Precept Disclosure Schedules, neither Precept, any officer or director of Precept nor any spouse or child of any such person owns or has any interest in, directly or indirectly, any real or personal property owned by or leased to Precept or any copyrights, patents, trademarks, service marks, trade names or trade secrets licensed by Precept. 6.20 BROKERAGE. Except as set forth in SCHEDULE 6.20 of the Precept Disclosure Schedules, Acquisition and Precept have not retained any broker, investment banking firm or finder in connection with the transactions contemplated by this Agreement. 6.21 SHAREHOLDER INFORMATION. None of the information to be distributed to stockholders of USTS in connection with the Transfer nor any amendments or supplements of or to any of the foregoing which is provided by Acquisition and Precept (collectively, the "Precept Shareholder Information"), will between the date the Precept Shareholder Information is first mailed to USTS shareholders and the Closing Date, contain any statement which, at such time and in light of the circumstances under which it is made, will be false or misleading with respect to any fact, or will omit to state any fact necessary in order to make the statements therein not false or misleading. 6.22 LAWS. Except for environmental laws, which are covered in Section 6.10 hereof, and as specifically set forth in the Precept Disclosure Schedules, Precept has complied in all material respects with all laws, rules, regulations, ordinances, codes, licenses, clearances, permits, franchises, grants, authorizations, easements, consents, certificates and orders relating to any of its properties or applicable to its business, including, but not limited to, labor, equal employment opportunity, occupational safety and health, consumer protection, environmental, securities and antitrust laws and regulations except where the failure to be in compliance would not have a Material Adverse Effect on Precept. Precept has all contractors licenses required for it to conduct its business except where the failure to be in compliance would not have a Material Adverse Effect on Precept. Precept is not in material violation of any applicable zoning, building or environmental regulation, ordinance or other law, order, regulation, restriction or requirement relating to its operations or properties, whether such properties are owned or leased, and no governmental body or other person has claimed that any such violation exists, or called attention to the need for any work, repairs, construction, alterations or installation on or in connection with the properties of Precept, except for such violations that would not have a Material Adverse Effect on Precept. As of the date hereof, the Board of Directors of Precept has approved the Transfer pursuant to the relevant provisions of applicable law. 6.23 FULL DISCLOSURE. No information furnished, or to be furnished, by Acquisition, Precept or any of Precept's shareholders to USTS or its representatives pursuant to this Agreement (including, but not limited to, the Precept Disclosure Schedules and all information in this Agreement and the Exhibits and Schedules hereto) is, or will be, false or misleading and such information includes all facts required to be stated therein or necessary to make the statements therein not misleading. No representation or warranty by or on behalf of Acquisition, Precept or the Precept Subsidiaries contained in this Agreement, and no statement contained in any certificate, list, exhibit, or other instrument furnished or to be furnished by A-25 Precept pursuant hereto contains or will contain any untrue statement of a material fact, or omits or will omit to state any material facts which are necessary in order to make the statement contained herein or therein, in light of the circumstances under which they are made, not misleading. 6.24 PRODUCT WARRANTIES. Except as set forth in SCHEDULE 6.24 of the Precept Disclosure Schedules, there is no claim against or liability of Precept or any Precept Acquisition on account of product warranties or with respect to the manufacture, sale or rental of defective products and there is no basis for any such claim on account of defective products heretofore manufactured, sold or rented that is not fully covered by insurance. ARTICLE 7 CONDUCT OF BUSINESS PENDING THE TRANSFER 7.1 CONDUCT OF BUSINESS BY ACQUISITION AND PRECEPT PENDING THE TRANSFER. Acquisition and Precept covenant and agree that, prior to the Closing Date, unless USTS shall otherwise agree in writing or as otherwise expressly contemplated by this Agreement: (a) To the extent reasonably practicable and taking into account any operational matters that may arise that are attributable to the pendency of the Transfer, the business of Precept shall be conducted only in, and Precept shall not take any action except 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 the Precept Subsidiaries to, conduct its and their business in the ordinary course, consistent with past practice, between the date of this Agreement and the Closing. Precept agrees that the following actions are outside the ordinary course of business and will not, and will not permit the Precept Subsidiaries, without the prior written consent of USTS to (a) declare, pay or make any dividends or distributions on its capital stock; (b) enter into any agreement (oral or written) with its directors, officers, or salaried employees (except for employees in the ordinary course of business); (c) increase the compensation of its directors, officers, or employees (except for employees in the ordinary course of business); (d) make capital expenditures (or enter into commitments to make capital expenditures) in excess of $100,000 (either individually or in the aggregate); (e) issue any capital stock or any securities or other instruments convertible, exercisable or exchangeable for shares of its capital stock; (f) incur indebtedness or other liabilities other than in the ordinary course of business and consistent with past practice; (g) redeem any capital stock or pay any principal of any indebtedness to any director, executive officer or shareholder; (h) 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 (i) enter into any agreement or arrangement to purchase any securities or assets of any entity or to merge or otherwise combine with any entity. 7.2 INTERIM OPERATIONS OF USTS. USTS covenants and agrees as to itself and the USTS Subsidiaries that, from and after the date hereof and until the Closing Date (except as Acquisition and Precept shall otherwise agree in writing or except as otherwise contemplated by this Agreement): (a) To the extent reasonably practicable and taking into account any operational matters that may arise that are attributable to the pendency of the Transfer, the business of USTS shall be conducted only in, and USTS shall not take any action except 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. A-26 (b) USTS will, and will cause the USTS Subsidiaries to, conduct its and their business in the ordinary course, consistent with past practice, between the date of this Agreement and the Closing. USTS agrees that the following actions are outside the ordinary course of business and will not, and will not permit the USTS Subsidiaries, without the prior written consent of Acquisition, to (a) declare, pay or make any dividends or distributions on its capital stock; (b) enter into any agreement (oral or written) with its directors, officers, or salaried employees (except for employees in the ordinary course of business); (c) increase the compensation of its directors, officers, or employees (except for employees in the ordinary course of business); (d) make capital expenditures (or enter into commitments to make capital expenditures) in excess of $100,000 (either individually or in the aggregate); (e) issue any capital stock or any securities or other instruments convertible, exercisable or exchangeable for shares of its capital stock; (f) incur indebtedness or other liabilities other than in the ordinary course of business and consistent with past practice; (g) redeem any capital stock or pay any principal of any indebtedness to any director, executive officer or stockholder; (h) 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 (i) enter into any agreement or arrangement to purchase any securities or assets of any entity or to merge or otherwise combine with any entity. ARTICLE 8 ADDITIONAL AGREEMENTS 8.1 REGISTRATION STATEMENT AND PROXIES. (a) USTS and Precept shall cooperate and promptly prepare and Precept shall file with the SEC as soon as practicable a Joint Proxy and Registration Statement on Form S-4 (the "Form S-4") under the Securities Act, with respect to the Precept Common Stock issuable in the Transfer, a portion of which Joint Proxy and Registration Statement shall serve as the proxy statement with respect to the meeting of the stockholders of USTS in connection with the approval of the Agreement, the Transfer and the Plan of Liquidation and Dissolution (the "Joint Proxy Statement/Prospectus"). The respective parties will cause the Proxy Statement/Prospectus and the Form S-4 to comply as to form in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations thereunder. Precept shall use all reasonable efforts, and USTS will cooperate with Precept, to have the Form S-4 declared effective by the SEC as promptly as practicable. Precept shall use its best efforts to obtain, prior to the effective date of the Form S-4, all necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement and will pay all expenses incident thereto. (b) Precept agrees that the Joint Proxy Statement/Prospectus and each amendment or supplement thereto at the time of mailing thereof and at the time of the meeting of stockholders of USTS, or, in the case of the Form S-4 and each amendment or supplement thereto, at the time it is filed or becomes effective, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing shall not apply to the extent that any such untrue statement of a material fact or omission to state a material fact was made by Precept in reliance upon and in conformity with written information concerning USTS furnished to Precept by USTS specifically for use in the Joint Proxy Statement/ Prospectus. (c) USTS agrees that the written information concerning USTS provided by it for inclusion in the Joint Proxy Statement/Prospectus and each amendment or supplement thereto, at the time of mailing thereof and at the time of the meeting of the stockholders of USTS, or, in the case of written information concerning USTS provided by USTS for inclusion in the Form S-4 or any amendment or supplement thereto, at the time it is filed or becomes effective, will not include an untrue statement of A-27 a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. No amendment or supplement to the Joint Proxy Statement/Prospectus or the Form S-4 nor any request for acceleration thereof will be made by USTS or Precept without the approval of the other party, except as required by law. Precept will advise USTS, promptly after its receives notice, of the time when the Form S-4 or any post effective supplement or amendment thereto has become effective the issuance of any stop order, the suspension of the qualification of the Precept Common Stock issuable in connection with the Transfer for offering or sale in any jurisdiction, any request by the SEC for amendment of the Joint Proxy Statement/Prospectus or the Form S-4 or requests by the SEC for additional information and will promptly provide USTS with copies of any responses filed by Precept to SEC comments on the Form S-4. (d) Precept agrees to prepare and file a Notification Form for the Listing of Shares with the NASDAQ Small Cap Market to list the Shares. 8.2 LETTER OF PRECEPT'S ACCOUNTANTS. Precept shall cause to be delivered to USTS a letter of Ernst & Young, L.L.P., Precept's independent public accountants, dated a date within two business days before the date on which the Form S-4 shall become effective and addressed to USTS and Precept, in form and substance reasonably satisfactory to USTS and customary in scope and substance of letters delivered by independent public accountants in connection with registration statements similar to the Form S-4. 8.3 LETTER OF USTS'S ACCOUNTANTS. USTS shall cause to be delivered to Precept a letter of Mahoney Cohen Rashba & Pokart, CPA, USTS's independent public accountants, dated a date within two business days before the date on which the Form S-4 shall become effective and addressed to USTS and Precept, in form and substance reasonably satisfactory to Precept and customary in scope and substance of letters delivered by independent public accountants in connection with registration statements similar to the Form S-4. 8.4 USTS STOCKHOLDER MEETING; USTS BOARD RECOMMENDATION. USTS shall call a special meeting of its stockholders to be held as soon as practicable after the effective date of the Form S-4 for the purpose of voting to approve this Agreement and the transactions contemplated hereby and the Plan of Liquidation and Dissolution. Subject to Section 8.10 hereof, the Joint Proxy Statement/Prospectus and the USTS Stockholder Information shall contain, among other things, the recommendation of the Board of Directors of USTS in favor of the Agreement, Transfer, and the adoption of the Agreement and the adoption of the Plan of Liquidation and Dissolution, it being understood that the failure of the Board of Directors of USTS to make such recommendations shall not be deemed a breach of this Agreement if the Board of Directors of USTS determines, after consultation with and advice from counsel, that it cannot, consistent with its fiduciary duties, make such recommendations. 8.5 CONSENT OF STOCKHOLDERS OF USTS. Subject to Section 8.9 hereof, USTS shall transmit the Joint Proxy Statement/Prospectus to its stockholders and shall use its best efforts to take all action necessary to obtain its stockholders' approval of the Agreement, the Transfer and the Plan of Liquidation and Dissolution. 8.6 EXPENSES. All expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses whether or not the Transfer is consummated. 8.7 ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein provided, each of the parties hereto agrees (i) to use all reasonable efforts to take, or cause to be taken, all actions and (ii) to use all reasonable efforts to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to cooperate with each other in connection with the foregoing, (iii) to use all reasonable efforts to obtain all necessary waivers, consents and approvals from other parties to material loan agreements, leases and other A-28 contracts and to notify each of the other parties hereto of any request for prepayment with respect thereto; provided however, all reasonable efforts with respect to obtaining waivers, consents and approvals under loan agreements does not obligate the parties hereto to make any prepayment on any such loan, (iv) to use all reasonable efforts to obtain all necessary consents, approvals and authorizations as are required to be obtained under any federal, state, local or foreign law or regulations, (v) to defend all lawsuits or other legal proceedings challenging this Agreement or the consummation of the transactions contemplated hereby, (vi) to use all reasonable efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby and (vii) to use all reasonable efforts to effect all necessary registrations and filings and submissions of information required or requested by governmental authorities. 8.8 NO SOLICITATION. From and after the date hereof, USTS agrees that it will not, and will not permit any of its officers, directors, employees, agents and other representatives or those of any of its Subsidiaries (collectively, the "Representatives") to, directly or indirectly, solicit or initiate any prospective buyer or the making of any proposal that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal from any person; provided, however, that, notwithstanding any other provision of this Agreement, (i) USTS may engage in discussions or negotiations with any third party who (without any solicitation or initiation, directly or indirectly, by or with USTS or any Representative thereof after the date of this Agreement) seeks to initiate such discussions or negotiations and may furnish such third party information concerning USTS and its Business, properties and assets, (ii) USTS's Board of Directors may take and disclose to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act and (iii) following receipt of an Acquisition Proposal that is financially superior to the Transfer and reasonably capable of being financed (as determined in each case in good faith by USTS's Board of Directors after consultation with USTS's financial advisors), the Board of Directors of USTS may withdraw, modify or not make its recommendation referred to in Section 8.4 or 8.5 (as the case may be) or terminate this Agreement in accordance with Section 10.1(d), but in each case referred to in the foregoing clauses (i) through (iii) only to the extent that the Board of Directors of USTS shall conclude in good faith based upon written advice from legal counsel that such action is necessary in order for the Board of Directors of USTS to act in a manner that is consistent with its fiduciary obligations under applicable law. USTS shall immediately cease and cause to be terminated any existing solicitation, initiation, encouragement, activity, discussion or negotiation with any parties conducted heretofore by USTS or its Representatives with respect to any Acquisition Proposal existing on the date hereof. USTS will promptly notify the other of any inquiries or developments related to any of the above or any such requests for such information or the receipt of any Acquisition Proposal, including the identity of the person or group engaging in such discussions or negotiations, requesting such information or making such Acquisition Proposal, and (unless the Board of Directors of USTS conclude such disclosure is inconsistent with its fiduciary obligations under applicable law based upon written advice from legal counsel) the material terms and conditions of any Acquisition Proposal. 8.9 NOTIFICATION OF CERTAIN MATTERS. Each party will promptly give written notice to the other parties upon becoming aware of the occurrence or failure to occur, or impending or threatened occurrence or failure to occur, of any event that would cause or constitute, or would be likely to cause or constitute, a breach of any of its representations, warranties or covenants contained in this Agreement and will use all reasonable efforts to prevent or promptly remedy the occurrence or failure. No such notification shall limit or affect the representations, warranties, covenants or conditions or remedies of the parties hereunder. 8.10 ACCESS TO INFORMATION. Acquisition, Precept and USTS and their respective officers, directors, employees and agents shall afford the officers, employees and agents of the other parties hereto complete access at all reasonable times to their respective officers, employees, agents, properties, facilities, books, records and contracts and those of their respective subsidiaries and shall furnish the other parties hereto all financial, operating and other data and information as the other parties hereto through their officers, employees or agents, may reasonably request. For a period of 24 months from the date of this Agreement, A-29 each party hereto shall hold and will cause their respective representatives to hold in strict confidence all documents and information concerning the other parties hereto furnished to other parties hereto in connection with the transactions contemplated by this Agreement (except to the extent that such information can be shown to have been (i) previously known by the party to whom the information was disclosed (or their respective Affiliates) prior to its disclosure to the party to whom the information was disclosed, (ii) in the public domain through no fault of the party to whom the information was disclosed or (iii) later lawfully acquired by the party to whom the information was disclosed (or their respective affiliates) from other sources, and will not release or disclose such information to any other person, except in connection with this Agreement to (a) their respective auditors, attorneys, financial advisors and other consultants or advisors or (b) responsible financial institutions, partnerships and individuals after the disclosing party, has made reasonable efforts to cause such financial institutions, partnerships and individuals to agree to be bound by the provisions of this Section 8.10 as if the reference to the disclosing party herein were to them (it being understood that such persons shall be informed by the disclosing party of the confidential nature of such information and shall be directed by the disclosing party to treat such information confidentially); provided that the disclosing party and their respective representatives may provide such documents and information in response to judicial or administrative process or applicable governmental laws, rules, regulations, orders or ordinances, but only that portion of the documents or information which, on the advice of counsel, is legally required to be furnished, and provided that the disclosing party notifies the non-disclosing party of its obligation to provide such information prior to such disclosure and fully cooperates with the non-disclosing party to protect the confidentiality of such documents and information under applicable law. If the transactions contemplated by this Agreement are not consummated, the parties shall return to each other all copies of written information furnished to them by the other parties hereto or their respective affiliates, agents, representatives or advisers. 8.11 INFORMATION FOR OTHER FILINGS. The parties represent to each other that the information provided and to be provided by USTS, Acquisition and Precept, respectively, for use in any document to be filed with any other governmental agency or authority in connection with the transactions contemplated hereby shall, at the respective times such documents are filed with the governmental agency or authority and on the Closing Date be true and correct in all material respects and shall not omit to state any material fact required to be stated therein or necessary in order to make such information not false or misleading, and Acquisition, Precept, and USTS each agree to so correct any such information provided by it for use in such documents that shall have become false or misleading. 8.12 AFFILIATE LETTERS. Prior to the Closing Date, USTS shall deliver to Precept a list (the "USTS Affiliate List") of names and addresses of those persons who, as of the date of this Agreement, were in the reasonable judgment of USTS, "affiliates" (each such person, an "Affiliate of USTS") of USTS within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act and under the SEC guidelines. The USTS Affiliate List will be updated as appropriate from time to time, up to and including the Closing Date. USTS shall provide Precept such information and documents as Precept shall reasonably request for purposes of reviewing such list. USTS shall deliver or cause to be delivered to Precept, concurrently with the execution of this Agreement and when necessary from time to time between the date hereof and the Closing Date, from each Affiliate of USTS identified in the USTS Affiliate List, an Affiliate Letter in the form attached hereto as EXHIBIT F (the "USTS Affiliate Letter"). USTS shall be entitled to place legends as specified in such Affiliate Letters on the certificates evidencing any Precept Common Stock to be received by each Affiliate of USTS, pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the Precept Common Stock, consistent with the terms of such USTS Affiliate Letters. 8.13 PUBLIC ANNOUNCEMENTS. USTS, on the one hand, and Precept, on the other hand, will consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement without the prior written consent of the other, except as may be required by A-30 applicable law or by obligations pursuant to any listing agreement with any national securities exchange or transaction reporting system. USTS and Precept agree to issue a joint press release upon execution of this Agreement, which press release shall be mutually acceptable to both parties. 8.14 HART-SCOTT-RODINO FILING. USTS and Precept shall cooperate in the preparation and filing of any required notification and documentation under Title II of the HSR Act and the rules of the FTC promulgated thereunder. USTS shall pay to the FTC the appropriate filing fee in the full amount required to be paid under the HSR Act and the rules of the FTC. ARTICLE 9 CONDITIONS 9.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE TRANSFER. The obligations of each party to effect the Transfer shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) The Agreement and the Plan of Reorganization shall have been approved and adopted by the requisite consent of the stockholders of USTS required by applicable law or by the applicable regulations of any stock exchange; (b) USTS shall have received an opinion from Bressler, Amery & Ross, P.C., addressed to USTS, and Precept, stating that the Transfer will be treated as a tax free reorganization within the meaning of Section 368(a) of the Code; (c) Any waiting period (and any extension thereof) applicable to the consummation of the Transfer under the HSR Act shall have expired or been terminated; (d) No preliminary or permanent injunction or other 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 directly or indirectly by USTS of the Shares illegal or otherwise prevent the consummation of the Transfer. In the event any such order or injunction shall have been issued, each party agrees to use its reasonable efforts to have any such injunction lifted or order reversed; (e) The Form S-4 shall have been declared effective under the Securities Act and the Exchange Act and shall be effective at the Closing Date, and no stop order suspending effectiveness of the Form S-4 shall have been issued under the Securities Act or under the proxy rules of the SEC pursuant to the Exchange Act, and all state securities laws shall have been complied with in connection with the issuance of the Shares, and no stop order suspending the effectiveness of any qualification or registration of such Shares under such state securities laws shall have been issued; (f) The Shares to be issued pursuant to the Transfer shall have been approved for listing on the NASDAQ Small Cap Market, subject only to official notice of issuance by Precept; (g) All consents, authorizations, orders and approvals of (or filings or registrations with) any governmental commission, board or other regulatory body required in connection with the execution, delivery and performance of this Agreement 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, approval, filing or registration would not have a Material Adverse Effect on Precept; (h) M. H. Meyerson & Co., Inc. shall have advised USTS in writing that the Transfer is fair from a financial point of view; and A-31 (i) No action shall be pending which has been filed by any state or federal authority or any other party seeking to enjoin consummation of the transactions contemplated by this Agreement, including, but not limited to, the Transfer and no injunction shall have been issued and shall be effective or enforceable or under appeal if the effectiveness or enforceability thereof has been lifted or stayed by a court or other authority of competent jurisdiction, preventing the Transfer, or imposing conditions on, the Transfer which are materially adverse to USTS, Precept or any of their respective stockholders or shareholders, as the case may be. 9.2 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 the following conditions (unless waived): (a) USTS shall in all material respects have performed each obligation and agreement and complied with each covenant to be performed and complied with by it hereunder on or prior to the Closing Date; (b) The representations and warranties of USTS in this Agreement 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, except as affected by the transactions contemplated hereby; (c) USTS shall have furnished to Acquisition a certificate, dated the Closing Date, signed by a responsible officer of USTS, to the effect that all conditions set forth in Section 9.2(a) and (b) have been satisfied; (d) 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; (e) Acquisition shall have received a copy of the resolutions of the Board of Directors of USTS authorizing the execution, delivery and performance of the Agreement and the consummation of the transactions contemplated hereby and a copy of the resolutions or other consent of the stockholders of USTS approving the Agreement and the Plan of Liquidation and Dissolution, all certified by the Secretary of USTS on the Closing Date. Such certificates shall state that the resolutions set forth therein have not been amended, modified, revoked or rescinded as of the date of such certificates; (f) Acquisition shall have received a certificate of the Secretary of USTS dated the Closing Date, as to the incumbency and signature of the officers of USTS executing this Agreement and any certificate, agreement or other documents to be delivered pursuant hereto, together with evidence of the incumbency of such Secretary; (g) The Series M USTS Preferred Stock shall have been exchanged and converted into 1,710,000 shares of USTS Common Stock; (h) USTS shall have delivered to Acquisition special warranty deeds conveying USTS's interests in the Facilities together with the standard form owner's title insurance policy for each item of real property insuring Acquisition that good, valid and indefeasible title to such item of real property is vested in Acquisition, subject only to standard form exclusions and other exclusions set forth in such policies; (i) An assignment of the leases with respect to the Facilities to Precept; (j) USTS shall have delivered to Acquisition and Precept all necessary consents, waivers, authorizations and approvals, so that neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in the acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any indenture, contract, lease, sublease, loan agreement, note or other obligation or liability to which USTS is a party or is bound or to which any of their assets are subject, (ii) conflict with, violate or A-32 result in a breach of any provision of the Articles of Incorporation or Bylaws of USTS or any stockholder thereof, (iii) conflict with or violate any law, rule, regulation, ordinance, order, writ, injunction or decree applicable to USTS or by which any of its properties or assets is bound or affected or (iv) conflict with or result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or result in the creation of any lien, charge or encumbrance on any of the properties or assets of USTS pursuant to any of the terms, conditions or provisions of any indenture, contract, lease, sublease, loan agreement, note, permit, license, franchise, agreement or other instrument, obligation or liability to which USTS is a party or by which USTS or any of its Assets is bound or affected; (k) 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 (the "Preliminary Closing Balance Sheet"); and (l) The adversary proceeding (the "Litigation") filed in the United States Bankruptcy Court for the Southern District of New York (White Plains Division) (the "Court") and styled UNITED ACQUISITION II CORPORATION V. MID AMERICA TRANSPORTERS GROUP, INC., ET. AL., and naming USTS as a defendant, must be settled by the parties thereto and the settlement thereof must: (i) either (A) be not materially more disadvantageous to U.S. Trucking, Inc. than the draft settlement previously delivered to Precept (as determined by Precept in its reasonable discretion) or (B) be on terms reasonably satisfactory to Precept and Acquisition; (ii) provide that UACQ has no interest in the capital stock of each of Gulf Northern Transport, Inc. and Mencor, Inc. (the "Disputed Shares"); (iii) release USTS, Mid America Transporters Group, Inc., and the other defendants named in the Lawsuit from any and all claims to the Disputed Shares and any and all claims and liabilities described in the Lawsuit or arising out of the transactions and matters described in the Lawsuit; and (iv) be approved by the Court in connection with the bankruptcy case styled IN RE UNITED ACQUISITION II CORP., Case No. 97-B-20503 ASH, Chapter 11, relating to United Acquisition II Corporation. In addition, USTS shall deliver estoppel certificates addressed to Precept and Acquisition from each of the signatories to the settlement agreement other than UACQ and stating that each such signatory has no interest in the Disputed Shares. 9.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF USTS. The obligations of USTS to effect the Transfer are also subject to the fulfillment at or prior to the Closing Date of the following conditions (unless waived): (a) Acquisition and Precept shall in all material respects have performed each obligation and agreement and complied with each covenant to be performed and complied with by it hereunder on or prior to the Closing Date; (b) The representations and warranties of Acquisition and Precept in this Agreement 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, except as affected by the transactions contemplated hereby; (c) Acquisition and Precept shall have furnished to USTS a certificate, dated the Closing Date, signed by a responsible officer of Acquisition and Precept, respectively, to the effect that all conditions set forth in Section 9.3(a) and (b) have been satisfied; (d) 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; (e) USTS shall have received a copy of the resolutions of the Boards of Directors of each of Acquisition and Precept authorizing the execution, delivery and performance of the Agreement and the consummation of the transactions contemplated hereby, certified by the Secretary of Precept on the Closing Date. Such certificates shall state that the resolutions set forth therein have not been amended, modified, revoked or rescinded as of the date of such certificates; A-33 (f) USTS shall have received a certificate of the Secretary of each of Acquisition and Precept dated the Closing Date, as to the incumbency and signature of the officers of Acquisition and Precept, respectively, executing this Agreement and any certificate, agreement or other documents to be delivered pursuant hereto, together with evidence of the incumbency of each such Secretary; (g) Precept shall have entered into the Registration Rights Agreement with Margolies in the form attached hereto as Exhibit D; (h) Acquisition shall have entered into Employment Agreements with Margolies and Ron Sorci in the form attached hereto as EXHIBIT E-1 and E-2; (i) The total outstanding shares of Precept Common Stock shall not exceed 36,000,000 shares and the outstanding warrants, options or other derivative securities representing the right to purchase shares of Precept Common Stock set forth on SCHEDULE 6.2 to the Precept Disclosure Schedules; and (j) Precept shall either pay IDB all of the outstanding obligations under the IDB Loan Agreement or provide IDB with 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. ARTICLE 10 TERMINATION, AMENDMENT AND WAIVER 10.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing Date whether before or after approval of the Agreement and Plan of Liquidation and Dissolution by the stockholders: (a) by mutual written consent of the Boards of Directors of USTS and Precept; (b) at any time prior to the Closing Date by Acquisition or Precept if any representation or warranty of USTS contained in this Agreement or any certificate or other document executed and delivered by USTS pursuant to this Agreement is or becomes untrue or breached in any material respect or if USTS fails to comply in any material respect with any covenant contained herein, and the cumulative effect of all thereof results in a Material Adverse Effect on USTS, and any such misrepresentation, noncompliance or breach is not cured (if curable), waived or eliminated within five business days after receipt by USTS of written notice thereof; (c) at any time prior to the Closing Date by USTS if any representation or warranty of Acquisition or Precept contained in this Agreement or any certificate or other document executed and delivered by Acquisition or Precept pursuant to this Agreement is or becomes untrue or breached in any material respect or if Acquisition or Precept fails to comply in any material respect with any covenant contained herein, and the cumulative effect of all thereof results in a Material Adverse Effect on Acquisition or Precept, and any such misrepresentation, noncompliance or breach is not cured (if curable), waived or eliminated within five business days after receipt by Acquisition or Precept of written notice thereof; (d) by any of the Boards of Directors of USTS, Acquisition or Precept if the Closing Date shall not have occurred on or before January 31, 1998; provided, however, that the right to terminate under this Section 10.1(d) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing Date to occur on or before such date; (e) if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action (which order, decree or ruling the parties hereto shall use all reasonable efforts to lift), in each case permanently A-34 restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable; (f) by the Board of Directors of USTS, upon delivery of written notice to Precept from USTS that USTS has received an Acquisition Proposal and intends either to (i) withdraw, modify or not make a recommendation referred to in Section 8.4 or 8.5, as applicable, or (ii) terminate this Agreement, subject in each case to the provisions of Sections 8.10 and 10.3; or (g) by either Precept or USTS upon delivery of written notice to USTS if the closing sale price of USTS Common Stock falls below $1.65 for more than ten consecutive trading days at any time prior to the Closing. The date on which this Agreement is terminated pursuant to any of the foregoing subsections of this Section 10.1 is herein referred to as the "Termination Date." 10.2 EFFECT OF TERMINATION. In the event this Agreement is terminated such that the provisions of Section 10.3 do not apply, USTS, Acquisition and Precept shall each be entitled to pursue, exercise and enforce any and all remedies, rights, powers and privileges available at law or in equity. In the event of a termination of this Agreement such that the provisions of Section 10.3 do not apply, a party not then in material breach of this Agreement shall stand fully released and discharged of any and all obligations under this Agreement. 10.3 FEES AND EXPENSES. (a) Except as otherwise provided in this Section, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such costs or expenses. (b) USTS agrees to pay Precept a fee in immediately available funds equal to $1 million promptly, but in no event later than sixty (60) business days, after the termination of this Agreement as a result of the occurrence of any of the events set forth below: (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 Acquisition Proposal which the Board of Directors has determined is more favorable to USTSs' stockholders than the transactions contemplated by this Agreement, or the Board of Directors of USTS shall have withdrawn or materially modified in any manner adverse to Precept the Board's approval or recommendation of the Transfer; (ii) any person or group (as defined in Section 13(d)(3) of the Exchange Act) (other than Acquisition or Precept or any affiliate thereof) shall have become the beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of a majority of the outstanding USTS Common Stock; or (iii) the failure to consummate the Transfer by January 31, 1998 as a result of USTS's breach or failure to perform in any material respect any of its covenants or agreements under this Agreement other than a breach or failure to perform resulting from strikes, fire or other casualties, acts of God or other similar causes beyond the control of USTS. (c) Precept agrees to pay USTS a fee in immediately available funds equal to $1 million promptly, but in no event later than sixty (60) business days, after the termination of this Agreement as a result of the occurrence of any of the events set forth below: (i) any person or group (as defined in Section 13(d)(3) of the Exchange Act) (other than USTS or any affiliate thereof) other than any existing shareholders of Acquisition or Precept shall have become the beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of a majority of the outstanding Precept Common Stock; or A-35 (ii) the failure to consummate the Transfer by January 31, 1998 as a result of Acquisition's breach or failure to perform in any material respect any of its covenants or agreements under this Agreement. 10.4 AMENDMENT. This Agreement may be amended by the parties hereto, at any time before or after approval of the Agreement, the Transfer and the Plan of Liquidation and Dissolution by the shareholders of USTS, but, after any such approval, no amendment shall be made that changes the form or reduces the amount of consideration to be paid to USTS or that in any other way materially adversely affects the rights of such shareholders (other than a termination of this Agreement in accordance with the provisions hereof) without the further approval of such shareholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 10.5 WAIVER. At any time prior to the Closing Date, any term, provision or condition of this Agreement may be waived in writing (or the time for performance of any of the obligations or other acts of the parties hereto may be extended) by the party that is entitled to the benefits thereof. ARTICLE 11 POST CLOSING OBLIGATIONS 11.1 CHANGE OF NAME. On or immediately after the Closing Date USTS will amend its Articles of Incorporation so as to change its corporate name to a name significantly different from "U.S. Transportation Systems, Inc." and will thereafter take such action as may reasonably be requested by Precept or Acquisition to make the present corporate name of USTS available to them. 11.2 DISSOLUTION. From and after the Closing Date, USTS will not engage in any business, will promptly, liquidate and dissolve as a corporation in accordance with the Plan of Liquidation and Dissolution. 11.3 USTS'S CORPORATE RECORDS. USTS will make available to inspection and copying all books and records retained by it pursuant to Section 2.2(b) hereof to Acquisition or Precept upon reasonable request for access thereto, and if at any time USTS proposes to discard to destroy such books and records, it will first offer to transfer them without charge to Precept or Acquisition. 11.4 PREPARATION AND DELIVERY OF CLOSING BALANCE SHEET. (a) As promptly as practicable after the Closing Date, but in no event later than 45 days after the Closing Date, USTS shall prepare and deliver to Acquisition the Final Closing Balance Sheet which shall update the Preliminary Closing Balance Sheet. Acquisition shall have the opportunity to observe and consult with USTS during the preparation of the Final Closing Balance Sheet. (b) 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 (specifying each disputed item and, if applicable, specifying the amount thereof in dispute, and setting forth, in reasonable detail, the basis for such dispute) within 15 days after Acquisition receives the Final Closing Balance Sheet. In the event of such a dispute, Acquisition and USTS shall attempt in good faith to reconcile their differences with respect to the differences which are in excess of $900,000, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. 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 the Independent Accounting Firm, which shall act as arbitrator and shall promptly as practicable after submission, 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. Acquisition and USTS A-36 shall provide the Independent Accounting Firm with such information, and shall afford such accountants such access to Acquisition's and USTS's books and records, as such accountants may reasonably request in connection with their determination of the disputed item or amount. The fees of the Independent Accounting Firm in connection with such determination shall be shared equally by Acquisition and USTS. 11.5 MARGOLIES NOTE. 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. 11.6 SETTLEMENT OF CLAIMS. Neither Precept nor Acquisition will settle any cause of action, lawsuit, claim or demand acquired hereunder and involving USTS without the approval of USTS which shall not be unreasonably withheld. If such approval is withheld USTS shall indemnify and hold Precept and Acquisition harmless with respect to such proposed settlement from the shares of Precept Common Stock held by USTS for contingent claims pursuant to the Plan of Liquidation and Dissolution, and, upon USTS fulfilling such indemnification obligation, Precept and Acquisition shall assign such cause of action, lawsuit, claim or demand to USTS. 11.7 ISRAEL DISCOUNT BANK. Precept shall, within 120 days of the Closing Date use commercially reasonable efforts to cause Israel Discount Bank ("IDB") to release guarantees delivered by Margolies in favor of IDB with respect to the indebtedness owed to IDB by USTS and reflected in the USTS Financial Statements. ARTICLE 12 INDEMNIFICATION 12.1 INDEMNIFICATION BY USTS. USTS (or the Liquidating Trust established pursuant to the Plan of Liquidation and Dissolution (the "Liquidating Trust")) agrees to indemnify and hold Precept, Acquisition, and their respective officers, directors, shareholders, Affiliates, employees and agents ("Precept Indemnitees") harmless from any and all damages, losses (which shall include any diminution in value), shortages, liabilities (joint or several), payments, obligations, penalties, claims, response costs, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses (including, without limitation, fees, disbursements and expenses of attorneys, accountants and other professional advisors and of expert witnesses and costs of investigation and preparation) of any kind or nature whatsoever (collectively, "Damages"), directly or indirectly resulting from, relating to or arising out of: (a) any breach of or inaccuracy in any representation or warranty of USTS contained in this Agreement (including, without limitation, those representations and warranties contained in Article 5) or in any other agreement, instrument, certificate or other document executed by or on behalf of USTS at or in contemplation of the Closing pursuant to or in connection with this Agreement (an "Operative Document"); provided, however, that (i) the Preliminary Closing Balance Sheet is not an Operative Document, and (ii) no Damages shall be deemed to have arisen by reason of the uncollectability of accounts receivable included in the Assets except to the extent that the amount of uncollected receivables exceeds $2,000,000 (for purposes of indemnification, accounts receivable shall be deemed uncollectible if such receivables have not been collected, using commercially reasonable efforts, within one year of the Closing Date); provided, however, that at the time of payment in full with respect to any claim by Precept Indemnitees for indemnification by reason of the uncollectability of accounts receivable, Acquisition shall assign to USTS (or the Liquidating Trust) those accounts receivable acquired hereunder, which Acquisition identifies as uncollectible and with respect to which it has received payment from USTS (or the Liquidating Trust); A-37 (b) any breach or non-performance, partial or total, by USTS of any covenant or agreement of USTS (or any Affiliate thereof or any USTS Subsidiary) contained in this Agreement or in any Operative Document, including, without limitation, the covenants and obligations of USTS under Section 7.2; (c) any violation of or non-compliance with or remedial obligation arising under, any Environmental Laws arising from any event, condition, circumstances, activity, practice, incident, action or plan existing or occurring prior to the Closing relating in any way to the Assets or the Business (including, without limitation, the ownership, operation or use of the Assets and the conduct of the Business of USTS prior to the Closing, the presence of any underground storage tanks or any Hazardous Materials on, in, under or affecting all or any portion of USTS's properties or any surrounding areas, and any Releases or threatened Releases with respect to such underground storage tanks or Hazardous Materials; and the storage, disposal or treatment, or transportation for storage, disposal or treatment, of Hazardous Materials; but excluding any violation of or non-compliance with, or remedial obligation arising under, any Environmental Laws that is attributable solely to a change by USTS or Acquisition in the structure, use or condition of any of the Assets after the Closing); (d) all contracts, agreements, obligations, commitment and liabilities of USTS of every kind and character relating in any way to the assets or the business of USTS other than the Assumed Liabilities; (e) any and all Damages incurred by the Precept Indemnitees, U.S. Trucking, Inc., or any of other USTS Subsidiaries acquired by Acquisition under this Agreement in connection with or arising out of the litigation styled WILLIAM ORR V. U.S. TRANSPORTATION SYSTEMS, INC., JAY AND JAY TRANSPORTATION, INC. AND MICHAEL MARGOLIES, Index No. 604365197 filed on August 20, 1997; (f) all of the Excluded Liabilities. 12.2 INDEMNIFICATION IF NEGLIGENCE OF PRECEPT INDEMNITEE. THE INDEMNIFICATION PROVIDED IN THIS ARTICLE 12 SHALL BE APPLICABLE WHETHER OR NOT NEGLIGENCE OF ANY PRECEPT INDEMNITEE IS ALLEGED OR PROVEN. 12.3 OFFSET. A Precept Indemnitee shall have the right to offset any amounts for which it is entitled to indemnification under this Article 12 against any amounts payable by the Precept Indemnitee to USTS pursuant to any Operative Document or otherwise. The rights of offset set forth in this Section 12.3 are not subject to the limitation set forth in Section 12.7 or elsewhere in this Article 12. 12.4 INDEMNIFICATION BY PRECEPT AND ACQUISITION. Precept and Acquisition, jointly and severally, agree to indemnify and hold USTS and the Liquidating Trust and their respective officers, directors, shareholders, trustees, Affiliates, employees and agents ("USTS Indemnitees") harmless from and against any and all Damages, directly or indirectly resulting from, relating to or arising out of any breach of or inaccuracy in any representation or warranty of Precept contained in this Agreement. 12.5 NO THIRD PARTY BENEFICIARIES. The indemnification provided in Sections 12.1 and 12.4 is given solely for the purpose of protecting the Precept Indemnitees and the USTS Indemnities, respectively, and shall not be deemed extended to, or interpreted in a manner to confer any benefit, right or cause of action upon, any other Person. 12.6 CONDITIONS OF INDEMNIFICATION. The respective obligations and liabilities of each of USTS, Precept and Acquisition (the "indemnitor") to the other (the "indemnitee") under Sections 12.1 and 12.4 with respect to claims resulting from the assertion of liability by third parties shall be subject to the following terms and conditions. A-38 (a) In the event that a legal proceeding or action is commenced against an indemnitee with respect to any indemnified matter, that indemnitee will provide written notice thereof to the indemnitor, together with a copy of any claim, process or other legal pleading, within twenty (20) days (or such earlier date as is necessary to avoid prejudice to the indemnitor) after receipt of notice. Failure to provide notice within such time frame shall not excuse the performance of the indemnitor unless such failure materially adversely prejudices the ability of the indemnitor to defend the claim. The indemnitor will undertake the defense thereof, at its expense, by counsel of its own choosing and reasonably acceptable to the indemnitee; provided that the indemnitee may participate in all aspects of the defense with, or without, counsel of its own choice. In the event that the indemnitee elects to retain additional counsel of its own choice, the fees and expenses of said counsel shall be the exclusive responsibility of the indemnitee unless (i) the indemnitor has agreed to pay such fees and expenses, (ii) the indemnitor has failed to undertake the defense of such action by promptly retaining counsel reasonably acceptable to indemnitee to represent the interests of indemnitee, or (iii) the nature of any such action presents a conflict between the interests of the indemnitor and the indemnitee, or the indemnitee has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the indemnitee (in which case, if the indemnitee informs the indemnitor in writing that it elects to employ separate counsel at the expense of indemnitor, the indemnitor shall have no further right to participate in or undertake the defense of such action on behalf of the indemnitor except with respect to payment of legal fees, costs, expenses and full indemnification for any Damages), it being understood, however that the indemnitor shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the indemnitee, which firm shall be designated in writing by the indemnitee. (b) In the event that the indemnitor, on or before the 30th day after receipt of notice of any such action, or, if applicable and earlier, on or before the tenth day preceding the day on which an answer, appearance or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim or other prejudice to the indemnitee, fails to undertake the defense of such action, the indemnitee will have the right to retain counsel of its own choosing and undertake the defense, compromise or settlement of such claim for the account and risk of the indemnitor without waiving the indemnitee's right to full indemnification from the indemnitor and at the indemnitor's expense, subject to the right of the indemnitor to assume the defense of such claims at any time prior to settlement, compromise or final determination thereof with counsel reasonably acceptable to the indemnitee. (c) Notwithstanding the foregoing, the indemnitor shall not settle any claim asserted against the indemnitee without the prior written consent of the indemnitee unless such settlement involves only the payment of money and the claimant provides the indemnitee with a release from all liability in respect of such claim. If the settlement of any claim involves more than the payment of money, the indemnitor shall not settle the claim without the prior written consent of the indemnitee, which consent shall not be unreasonably withheld. In the event the indemnitor has not undertaken the defense, as described above, with respect to any claim resulting from the assertion of liability by third parties, the indemnitee may settle any claim without prior notice to and consent of the indemnifying party, and indemnitee agrees to promptly, and in any event withing thirty days after receipt of written demand, reimburse indemnitee of all Damages, including without limitation all amounts paid or incurred in connection with such settlement, together with attorneys' fees, costs, and expenses and other costs incurred in connection with defense of the claim. (d) The indemnitee and indemnitor will each cooperate with all reasonable requests of the other. A-39 12.7 INDEMNIFICATION LIMITATIONS. Notwithstanding the provisions of Section 12.1, (i) USTS (or the Liquidating Trust) shall only be required to indemnify the Precept Indemnitees out of and to the extent of shares of Precept Common Stock held in the Contingency Reserve (as defined in Article 5 of the Plan of Liquidation and Dissolution), (ii) notwithstanding the timing of a claim for indemnification by a Precept Indemnitee, USTS (or the Liquidating Trust) shall only be required to satisfy claims of Precept Indemnities no earlier than the date (a) of the one year anniversary of the Closing Date and (b) after all other pending claims against USTS (or the Liquidating Trust) have been disposed of, (iii) USTS (or the Liquidating Trust) shall only be required to indemnify the Precept Indemnities for claims made on or before the two year anniversary of the Closing Date, and (iv) notwithstanding any of the foregoing, subsection (ii) of this Section 12.7 shall not apply to any claims by any Precept Indemnities, U.S. Trucking, Inc., or any USTS Subsidiaries acquired by Acquisition under this Agreement pursuant to Section 12.1(e). 12.8 USTS DISTRIBUTIONS TO USTS SHAREHOLDERS. Neither USTS nor the Liquidating Trust shall make any distribution (other than the initial distribution) to any shareholders of USTS while there is pending any claim of Precept or Acquisition for Damages pursuant to this Article 12. ARTICLE 13 GENERAL PROVISIONS 13.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall be deemed to the extent expressly provided herein to be conditions to the Transfer and with respect to representations and warranties of USTS shall survive the Transfer for a period of two (2) years and with respect to representations and warranties of Precept and Acquisition shall survive the Transfer for a period of one (1) year. Each party covenants with the other not to make any claim with respect to any such matter after the date on which such survival period has terminated. 13.2 NOTICES. All notices and other communications hereunder shall be in writing and, except where notice is specifically required to be given by telecopier or facsimile shall be deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by cable, telegram, telecopier or telex to the parties at the following addresses or at such other addresses as shall be specified by the parties by like notice: (a) if to USTS to: U.S. Transportation Systems, Inc. 33 West Main Street Elmsford, New York 10523 Fax No. (914) 347-8102 Attn: Chairman with a copy to: Bressler, Amery & Ross, P.C. 17 State Street New York, New York 10004 Fax No. (212) 425-9337 Attn: Robert Brantl (b) if to Acquisition or Precept to: Precept Investors, Inc. 1909 Woodall Rodgers Frwy., Suite 500 Dallas, Texas 75201 A-40 Fax No. (214) 220-1082 Attn: General Counsel with a copy to: Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, Texas 75202 Fax No. (214) 953-5822 Attn: Richard F. Dahlson Notice so given shall (in the case of notice so given by mail) be deemed to be given and received in the fourth calendar day after posting and (in the case of notice so given by cable, telegram, telecopier, telex or personal delivery) on the date of actual transmission or (as the case may be) personal delivery. 13.3 MISCELLANEOUS. This Agreement (including the documents and instruments referred to herein): (i) constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof; (ii) shall not be assignable by any party hereto without the prior written consent of the other parties hereto; and (iii) shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the State of Texas without giving effect, to the principles of conflict of laws thereof. This Agreement may be executed in one or more counterparts which together shall constitute a single agreement. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable under any applicable law, then such contravention or invalidity shall not invalidate the entire Agreement. Such provision shall be deemed to be modified to the extent necessary to render it legal, valid and enforceable, and if no such modification shall render it legal, valid and enforceable, then this Agreement shall be construed as if not containing the provision held to be invalid, and the rights and obligations of the parties shall be construed and enforced accordingly. A-41 AGREEMENT AND PLAN OF REORGANIZATION SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above. U. S. TRANSPORTATION SYSTEMS, INC. By: /s/ MICHAEL MARGOLIES ----------------------------------------- Michael Margolies, CHIEF EXECUTIVE OFFICER PRECEPT ACQUISITION COMPANY, L.L.C. By: /s/ DAVID L. NEELY ----------------------------------------- PRECEPT INVESTORS, INC. By: /s/ DAVID L. NEELY ----------------------------------------- David L. Neely, CHIEF EXECUTIVE OFFICER
A-42 INDEX OF EXHIBITS Exhibit A Permitted Encumbrances Exhibit B Assignment and Assumption Agreement Exhibit C Plan of Liquidation and Dissolution Exhibit D Registration Rights Agreement Exhibit E-1 Employment Agreement--Michael Margolies Exhibit E-2 Employment Agreement--Ron Sorci Exhibit F Affiliate Letter Form
A-43 ANNEX B U.S. TRANSPORTATION SYSTEMS, INC. PLAN OF LIQUIDATION AND DISSOLUTION This Plan of Liquidation and Dissolution (the "PLAN") is for the purpose of effecting the dissolution and liquidation of U.S. Transportation Systems, Inc., a Nevada corporation (the "COMPANY"), in accordance with and pursuant to the provisions of the Nevada General Corporation Law and Section 368(a) of the Internal Revenue Code of 1986, as amended, in substantially the following manner: 1. EFFECTIVE. The Plan 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 outstanding shares of the Common Stock of the Company at a special meeting (the "SPECIAL MEETING") of the Company's shareholders called for such purpose pursuant to a Notice and Joint Proxy/Registration Statement on Form S-4 filed with the Securities and Exchange Commission, subject to consummation of the transfer by the Company to Precept Acquisition Corp. ("ACQUISITION CORP.") of substantially all of the Company's assets pursuant to the Agreement and Plan of Reorganization dated as of November 16, 1997 by and among the Company, Precept Investors, Inc. ("PRECEPT") and Acquisition Corp. (the "PRECEPT AGREEMENT"). 2. CESSATION OF BUSINESS. After the Effective Date, the Company shall not engage in any business activities except for the purposes of (i) prosecuting or defending lawsuits by or against the Company, (ii) disposing of and conveying its remaining properties, discharging its liabilities and winding up its business affairs and (iii) making the Liquidating Distribution (as hereinafter defined) and distributing its remaining assets, if any, in accordance with the Plan. The Board of Directors of the Company (the "BOARD") and, at their pleasure, the officers, shall continue in office solely for these purposes. After the Certificate of Dissolution is filed with the Nevada Department of State, the Company will not plan to hold any further meetings of its Shareholders. 3. DISSOLUTION. As promptly as practicable after the Effective Date, and in any event no later than one year after the Effective Date, the Company shall file a Certificate of Dissolution with the Nevada Secretary of State, after which the Secretary of State shall issue a certificate that the Company is dissolved pursuant to Subchapter 580 of Chapter 78 of the Nevada General Corporation Law ("SUBCHAPTER 580"). 4. SALE OF ASSETS. As part of the overall Plan, the Company has entered into the Precept Agreement providing for the transfer of substantially all of the assets of the Company in exchange for shares of Precept Common Stock (the "PRECEPT SHARES") and the assumption by Acquisition Corp. of certain liabilities of the Company (including the substitution of certain warrants and options to purchase Precept Common Stock for certain warrants and options to purchase securities of the Company (the "PRECEPT ACQUISITION"). After the Effective Date, the Company shall have continuing authority to sell, lease, exchange or otherwise convert all or any part of its assets as contemplated by the terms and provisions of the Plan, including, if the requisite approval of the Shareholders is received, the consummation of the Precept Acquisition pursuant to the Precept Agreement. 5. PAYMENT OF DEBTS. The Company shall pay or make proper provision for the payment of all known or ascertainable liabilities of the Company, including all amounts estimated by the Board to be necessary, appropriate or desirable, in its absolute discretion, for the payment of estimated expenses, taxes and contingent liabilities (including expenses of dissolution, liquidation and termination of existence) (the "CONTINGENCY RESERVE"), all as provided in Chapter 78 of the Nevada General Corporation Law. The Contingency Reserve will consist of a portion of the Precept Shares (but initially not less than 500,000 Precept Shares), cash or other property, if any. The Company may, if deemed necessary, sell Precept Shares and apply the proceeds of the sale to the payment of liabilities. 6. SHAREHOLDERS. For purposes hereof, the term "Shareholders" shall mean the holders of the Company's outstanding Common Shares and the holders of the Company's outstanding Preferred Shares. The rights of the holders of Preferred Shares shall be PARI PASSU with the rights of holders of Common Shares on a per share basis. B-1 7. LIQUIDATING DISTRIBUTION. As promptly as practicable after the Effective Date, and in any event no later than one year after the Effective Date, the Company shall distribute pro rata to the Shareholders that portion of the Precept Shares and any other assets of the Company remaining after making provision for the Contingency Reserve (the "LIQUIDATING DISTRIBUTION"). The Liquidating Distribution may be made in a series of distributions and is intended to be made in Precept Shares but may be in cash or kind, in such manner and, subject to the preceding sentence, at such time or times as the Board, in its absolute discretion, may determine; provided, however, that in no event shall cash be distributed if such distribution would affect the tax-free nature of the Precept Acquisition. If the Company is legally precluded from making all or part of the Liquidating Distribution within one year after the Effective Date or the Board otherwise determines that it is impractical or inadvisable to make all or part of the Liquidating Distribution within such time, such Liquidating Distribution or part thereof shall be made instead to the Liquidating Trust (defined in Section 12). 8. CANCELLATION OF OUTSTANDING STOCK. The Liquidating Distribution shall be in complete redemption and cancellation of all of the outstanding Common Stock and Preferred Stock of the Company. The Board may direct that the Company's stock transfer books be closed at the close of business on the record date fixed by the Board for the first or any subsequent installment of any Liquidating Distribution as the Board, in its absolute discretion, may determine (the "RECORD DATE") and thereafter certificates representing Common Stock or Preferred Stock shall not be assignable or transferable on the books of the Company except by will, intestate succession or operation of law. 9. MISSING SHAREHOLDERS. If any Liquidating Distribution to a Shareholder cannot be made, whether because the Shareholder cannot be located or for any other reason, then the distribution to which such Shareholder is entitled shall (unless transferred to the trust established pursuant to Section 12 hereof) be transferred to and deposited in an account maintained by a bank, brokerage firm, law firm, or similar fiduciary, which account shall be designated for the benefit of such shareholders. The proceeds of such distribution shall thereafter be held solely for the benefit of and for ultimate distribution to such Shareholder as the sole equitable owner thereof and shall escheat to the State of Nevada or be treated as abandoned property in accordance with the laws of the State of Nevada. In no event shall the proceeds of any such distribution revert to or become the property of the Company. 10. AMENDMENTS. Notwithstanding the adoption of the Plan by the Company's Shareholders, the Board may modify or amend the Plan and, prior to the filing of the Certificate of Dissolution with the Secretary of State of the State of Nevada, may abandon the Plan, without further action by the Shareholders to the extent permitted by Nevada law. 11. INDEMNIFICATION. The Company shall continue to indemnify its officers, directors, employees and agents in accordance with applicable law, its articles and bylaws and any contractual arrangements for actions taken in connection with the Plan and the winding up of the affairs of the Company and shall indemnify any liquidating trustees and their agents on similar terms. The Company's obligation to indemnify such persons may be satisfied out of the assets of the Liquidating Trust (as defined below). The Board and the trustees, in their absolute discretion, are authorized to obtain and maintain insurance for the benefit of such officers, directors, employees, agents and trustees to the extent permitted by law. 12. LIQUIDATING TRUST. At such time as it shall choose (but in any event no later than one year after the Effective Date), the Board shall transfer to a liquidating trust (the "LIQUIDATING TRUST") under a Liquidating Trust Agreement substantially in the form attached hereto as Appendix 1, any remaining assets of the Company, including the Contingency Reserve and any portion of the Liquidating Distribution withheld by the Board of Directors pursuant to Section 7 hereof. The Liquidating Trust will succeed to all of the then remaining assets of the Company, including the Contingency Reserve, and any liabilities of the Company. The sole purpose of the Liquidating Trust will be to liquidate on terms satisfactory to the liquidating trustee(s) and to distribute to the Shareholders the assets formerly owned by the Company, if any, after paying any remaining liabilities of the Company. Michael Margolies is hereby selected by the Board and the Shareholders to act as Trustee of the Liquidating Trust for the benefit of the Company's B-2 shareholders, and Robert Brantl, Esq. is hereby selected as successor Trustee in the event that Mr. Margolies becomes unable to serve as Trustee. 13. POWER OF BOARD OF DIRECTORS. The Board and, if authorized by the Board, the officers, shall have authority to do or authorize any and all acts and things as provided for in the Plan and any and all such further acts and things as they may consider desirable to carry out the purposes of the Plan, including the execution and filing of a Form 966 with the Internal Revenue Service within 30 days from the Effective Date and all such other certificates, documents, information returns, tax returns, and other documents which may be necessary or appropriate to implement the Plan. The Board may authorize such variations from or amendments to the provisions of the Plan as may be necessary or appropriate to effectuate the complete liquidation and dissolution of the Company and the distribution of its assets to its Shareholders in accordance with the Nevada General Corporation Law. The death, resignation, or other disability of any director or officer of the Company shall not impair the authority of the surviving or remaining director(s) or officer(s) to exercise any of the powers provided for in the Plan. Upon such death, resignation or other disability, the surviving or remaining director(s), or, if there be none, to the extent permitted by law the surviving or remaining officer(s) shall have authority to fill the vacancy or vacancies so created, but the failure to fill such vacancy or vacancies shall not impair the authority of the surviving or remaining director(s) or officer(s) to exercise any of the powers provided for in the Plan. In connection with and for the purpose of implementing and assuring completion of the Plan, the Company may, in the absolute discretion of the Board, pay to the Company's officers, directors and employees, or any of them, compensation or additional compensation above their regular compensation, in money or property, in recognition of the extraordinary efforts they, or any of them, will be required to undertake or actually undertake, in successful implementation of the Plan. Adoption of the Plan by the Shareholders shall constitute the approval of the Shareholders of the payment of any such compensation. APPENDIX 1 LIQUIDATING TRUST AGREEMENT This AGREEMENT AND DECLARATION OF TRUST is made by and between U.S. TRANSPORTATION SYSTEMS, INC., a Nevada corporation (the "COMPANY"), and MICHAEL MARGOLIES (the "TRUSTEE"). WHEREAS, the Company is in the process of liquidation and dissolution pursuant to a Plan of Liquidation and Dissolution (the "PLAN") adopted by the Company's shareholders on , 1997; WHEREAS, pursuant to the aforesaid Plan, the Company is to complete its liquidation by , 1998; WHEREAS, pursuant to the terms of the Agreement and Plan of Reorganization dated as of November 16, 1997 (the "PRECEPT AGREEMENT") by and among the Company, Precept Investors, Inc. ("PRECEPT") and Precept Acquisition Corp. ("ACQUISITION CORP."), the Company has transferred substantially all of its assets to Acquisition Corp. on , 1998 in exchange for shares of Precept Common Stock and the assumption of certain liabilities as provided in the Precept Agreement; WHEREAS, the transfer of the assets contemplated by the Precept Agreement, in conjunction with the Liquidation, is intended to qualify as a reorganization pursuant to Sections 368(a)(1)(C) and 368(a)(2)(G) of the Internal Revenue Code of 1986, as amended (the "CODE"); WHEREAS, the Company has distributed a portion of the shares of Precept Common Stock received by the Company pursuant to the Precept Agreement to its shareholders and has retained the balance as a contingency reserve to satisfy any remaining liabilities of the Company; WHEREAS, the common shareholders of the Company have approved this Agreement and have authorized the Company to make distributions, on behalf of all of the shareholders, to the Trustee, as trustee of this Trust; B-3 NOW, THEREFORE, in consideration of the foregoing and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company hereby grants, releases, assigns, transfers, conveys and delivers to the Trustee all of the Company's right, title and interest in and to all assets it currently owns, holds or in which it otherwise possesses any interest, subject to the assumption by the Trustee of all of the Company's liabilities and obligations, whether ascertained, unascertained or contingent, IN TRUST for the uses and purposes stated herein and subject to the terms and provisions set out below, and the Trustee hereby accepts such assets and such Trust and hereby assumes such liabilities and obligations of the Company subject to the terms and provisions set out below. ARTICLE 1 NAMES AND DEFINITIONS 1.1 NAME. This Trust shall be known as the USTS Liquidating Trust (the "TRUST"). 1.2 DEFINITIONS. (a) "Agreement" or "Agreement of Trust" shall mean this instrument as originally executed or as it may from time to time hereafter be amended pursuant to the terms hereof. (b) "Shareholders" shall mean the holders of the Company's Common Shares and the Company's Preferred Shares. (c) "Beneficiaries" shall mean the Shareholders of the Company as they appear in the records of the Trust on the Record Date (as defined in the Plan). (d) "Trust Corpus" shall mean the property held from time to time by the Trustee, subject to all of the liabilities and obligations assumed by the Trustee, under this Trust. (e) "Trustee" shall mean Michael Margolies. Upon the termination, resignation or total disability or death of the Trustee, Robert Brantl, Esq. shall act as successor Trustee, or his successor, appointed in accordance with Section 10.3 hereof. ARTICLE 2 NATURE OF TRANSFER 2.1 NATURE AND PURPOSE OF TRUST. The Trust exists solely for the purposes of holding, liquidating and disposing of any assets received by it and paying or settling the ascertained, unascertained and contingent liabilities and obligations of the Company and thereafter distributing the remaining Trust Corpus to the Beneficiaries. In connection with such purpose, it is intended that the Trust serve as a vehicle for the preservation and maintenance of the Trust Corpus, with a view to its liquidation and not the conduct of a continuing business. This Agreement is intended to create a trust, and to be governed and construed in all respects as a trust. The Trust is not intended to be, shall not be deemed to be and shall not be treated as a general partnership, limited partnership, joint venture, corporation, joint stock company or association, nor shall the Trustee or the Beneficiaries, or any of them, for any purpose be, or be deemed to be or treated in any way whatsoever to be, liable or responsible hereunder as partners or joint venturers. The relationship of the Beneficiaries to the Trustee shall be solely that of beneficiaries of a trust, and their rights shall be limited to those conferred upon them by this Agreement. In no event shall any part of the Trust Corpus revert or be distributed to the Company. Notwithstanding any other provision hereof, the Trustee is authorized and empowered to take only such action as is necessary or advisable to preserve the Trust Corpus pending its distribution to the Beneficiaries, and the Trustee shall have no power or authority to enter into or engage in the conduct of any trade or business in respect of the Trust Corpus. 2.2 INSTRUMENTS OF FURTHER ASSURANCE. The Company and such persons as shall have the right and power after the dissolution of the Company will, upon request of the Trustee, execute, acknowledge, and deliver such further instruments and do such further acts as may be necessary or proper to effectively carry out the purposes of this Agreement, to confirm the transfer to the Trustee of any property covered or B-4 intended to be covered hereby and the assumption of all liabilities pertaining thereto, and to vest in the Trustee, his successors and assigns, the estate, powers, instruments or funds in trust hereunder. 2.3 UNKNOWN PROPERTY AND LIABILITIES. The Trustee shall be responsible for only the property delivered to him or registered in his names and shall have no duty to make, nor incur any liability for failing to make, any search for unknown property. The Trustee shall be responsible for only those liabilities and obligations of which he is informed and shall have no duty to make, nor any liability for failing to make, any search for unknown liabilities. 2.4 TRANSFEREE LIABILITY. In the event that any liability of the Company is asserted against the Trustee as a successor to the Company, the Trustee may use such part of the Trust Corpus as may be reasonable for contesting any such liability and in payment thereof, including reasonable attorneys' fees incurred in connection therewith. 2.5 LIMITATION OF LIABILITY. No personal liability shall attach to the Trustee or the Beneficiaries with respect to any liabilities or obligations arising under this Agreement, and all persons dealing with the Trust must look solely to the Trust Corpus for the enforcement of any claims against the Trust. 2.6 ASSIGNMENT FOR BENEFIT OF BENEFICIARIES. The Trustee hereby assigns to the Beneficiaries the beneficial interest in all the Trust Corpus, and retains only such incidents of ownership therein as are necessary to undertake the actions and transactions authorized herein. ARTICLE 3 BENEFICIARIES 3.1 BENEFICIAL INTERESTS. The beneficial interests of the Beneficiaries shall be recorded by the Trustee or his agent on the books of the Trust. The beneficial interests of the Beneficiaries will be evidenced only by the Trust's records and there will be no certificates or other tangible evidence of such interests. The beneficial interests of the Beneficiaries will not be transferable except pursuant to the laws of descent and distribution or by operation of law. If any conflicting claims or demands are made or asserted with respect to beneficial interests herein, or if there should be any disagreement among the transferees, assignees, heirs, representatives or legatees succeeding to all or a part of the interest of any Beneficiary resulting in adverse claims or demands being made in connection with such interest, then, in any of such events, the Trustee shall be entitled, at his sole election, to refuse to comply with any such conflicting claims or demands. In so refusing, the Trustee may elect to make no payment or distribution in respect of the beneficial interest involved, or any part thereof, and in so doing the Trustee shall not be or become liable to any of such parties for his failure or refusal to comply with any of such conflicting claims or demands, nor shall the Trustee be liable for interest on any funds which he may so withhold. The Trustee shall be entitled to refrain and refuse to act until (i) the rights of the adverse claimants have been adjudicated by a final judgment of a court of competent jurisdiction from which there is no appeal pending and the applicable appeal period shall have expired, (ii) all differences have been adjusted by valid written agreement between all of such parties, and the Trustee shall have been furnished with an executed counterpart of such agreement, or (iii) there is furnished to the Trustee a surety bond or other security satisfactory to the Trustee, as he shall deem appropriate, to fully indemnify him as between all conflicting claims or demands. 3.2 RIGHTS OF BENEFICIARIES. The Beneficiaries shall take and hold their beneficial interests subject to all the terms and provisions of this Agreement of Trust. The interest of the Beneficiaries is hereby declared to, and shall be in all respects, personal property. The Beneficiaries shall have no title to, possession of, management of, or control of, the Trust Corpus except as herein expressly provided. The whole title to all the Trust Corpus shall be vested in the Trustee and the sole interest of the Beneficiaries shall be the rights and benefits given to them under this Agreement of Trust. B-5 3.3 APPLICABLE LAW. As to matters affecting the title, ownership, transferability, or attachment of the interest of the Beneficiaries in the Trust, the laws from time to time in force in the State of Nevada shall govern except as otherwise herein specifically provided. ARTICLE 4 DURATION AND TERMINATION OF TRUST 4.1 DURATION. The existence of this Trust shall terminate three years from the date of the transfer of the Company's assets to the Trust, unless earlier terminated by the distribution of all of the Trust Corpus; provided, however, that if the Trust holds installment obligations that are payable over a period that ends more than two years after the date of transfer of the Company's assets to the Trust, the term of the Trust with respect to those obligations only shall extend for such longer period as is reasonably necessary to collect and distribute all payments made on such obligations; and, further provided that the Trustee will not unduly prolong the duration of the Trust. 4.2 CONTINUANCE OF TRUST FOR WINDING UP. After the termination of the Trust and for the purpose of liquidating and winding up the affairs of the Trust, the Trustee shall continue to act as such until his duties have been fully performed. Upon distribution of all of the Trust Corpus, the Trustee shall retain the books, records, shareholder lists, Beneficiary lists, and certificates and other documents and files which shall have been delivered to or created by the Trustee. At the Trustee's discretion, all of such records and documents may, but need not, be destroyed at any time after six years from the completion and winding up of the affairs of the Trust. Except as otherwise specifically provided herein, upon the discharge of all liabilities of the Trust and final distribution of all of the Trust Corpus, the Trustee shall have no further duties or obligations hereunder except to account as provided in Section 5.4 hereof. 4.3 PERPETUITIES RULE. If the provisions of this Trust shall be violative of the rule against perpetuities, then such Trust shall terminate, if it has not previously terminated, twenty-one (21) years after the death of the survivor of all of the Shareholders. ARTICLE 5 ADMINISTRATION OF TRUST ESTATE 5.1 PAYMENT OF CLAIMS, EXPENSES AND LIABILITIES. The Trustee shall pay from the Trust Corpus all claims, expenses, charges, liabilities, and obligations of the Trust and all liabilities and obligations which the Trustee specifically assumes and agrees to pay pursuant to this Agreement and such transferee liabilities as the Trustee may be obligated to pay as transferee of the assets comprising the Trust Corpus, and the costs, charges, and expenses connected with or growing out of the execution or administration of the Trust and such other payments and disbursements as are provided in this Agreement or as may be determined to be a proper charge against the Trust Corpus by the Trustee. 5.2 INTERIM DISTRIBUTIONS. The Trust shall distribute at least annually to the Beneficiaries its net income plus all net proceeds from the sale of 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. 5.3 FINAL DISTRIBUTION. If 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, or if the existence of the Trust shall terminate pursuant to Section 4.1 hereof, the Trustee shall, as expeditiously as is consistent with the conservation and protection of the Trust Corpus, distribute the Trust Corpus to the Beneficiaries of record on the close of business on such record date as the Trustee may determine. B-6 5.4 REPORTS TO BENEFICIARIES. As soon as practicable after the end of each fiscal year of the Trust and after termination of the Trust, the Trustee shall submit a written report to the Beneficiaries (which report shall constitute the accounting of the Trust for such period) showing (i) the assets and liabilities of the Trust at the end of such fiscal year or upon termination and the receipts and disbursements of the Trustee for such fiscal year or period, (ii) any changes in the Trust Corpus which he have not previously reported, and (iii) any action taken by the Trustee in the performance of his duties under this Agreement of Trust which he has not previously reported and which, in his opinion, materially affects the Trust Corpus. The fiscal year of the Trust shall end on December 31 of each year unless the Trustee deems it advisable to establish some other date as the date on which the fiscal year of the Trust shall end. 5.5 FEDERAL INCOME TAX INFORMATION. As soon as practicable after the close of each fiscal year, the Trustee shall mail to the Beneficiaries a statement showing the dates and amounts of all distributions made by the Trustee, if any, and such other information as is reasonably available to the Trustee which may be helpful in determining the amount and character of items of income, deductions and credits of the Trust that the Beneficiaries should include in their federal income tax returns for the preceding year. ARTICLE 6 POWERS OF AND LIMITATIONS UPON THE TRUSTEE 6.1 TRUSTEE. The Shareholders appoint Michael Margolies as Trustee under this Agreement of Trust. In doing so, the Shareholders acknowledge that Michael Margolies is a shareholder, officer and director of the Company. The Shareholders recognize that Michael Margolies is not "independent" for the reason that he owns a beneficial interest in the Trust. However, the Shareholders have determined that it is essential to the orderly liquidation of the Company that he serve, given Mr. Margolies' knowledge of the business and affairs of the Company. This selection in no way indicates a desire to continue the business of the Company. 6.2 GENERAL POWERS OF AND LIMITATIONS UPON TRUSTEE. The Trustee, subject only to the specific limitations contained in this Agreement, shall have, without further or other authorization, and free from any power or control on the part of the Beneficiaries, full, absolute and exclusive power, control and authority over the Trust Corpus and over the affairs of the Trust to the same extent as if the Trustee were the sole owner thereof in his own right, provided, however, that such power, control and authority shall only be exercised to do such acts and things as in his sole judgment and discretion are necessary or incidental to, or desirable for, the carrying out of any of the purposes of the Trust. Any determination made in good faith by the Trustee of the purposes of the Trust or the existence of any power or authority hereunder shall be conclusive and binding upon the Beneficiaries. In construing the provisions of this Agreement, a presumption shall exist in favor of the grant of powers and authority to the Trustee, except insofar as the existence or exercise of any such power or authority would jeopardize the status of the Trust as a grantor trust for federal income tax purposes. The enumeration of any specific power or authority herein shall not be construed as limiting the general powers or authority or any other specified power or authority conferred herein upon the Trustee. As set forth in Section 2.1 hereof, the Trustee shall not at any time, on behalf of the Trust or the Beneficiaries, enter into or engage in any trade or business, and no part of the Trust Corpus shall be used or disposed of by the Trustee in furtherance of any trade or business. This limitation shall apply irrespective of whether the conduct of any such business activities is deemed by the Trustee to be necessary or proper for the conservation and protection of the Trust Corpus. The Trustee shall invest the funds of the Trust Corpus in demand and time deposits in banks or savings institutions, or temporary investments such as short-term certificates of deposit or Treasury bills. The sole purpose of the Trust shall be to liquidate the Trust Corpus and discharge the liabilities transferred to it with no objective to continue or engage in the conduct of any trade or business. In no event shall the Trustee receive any property, make any distribution, satisfy or discharge any obligation, claim, liability, or expense or otherwise take any action which is inconsistent with a complete liquidation of the Company as that term B-7 is used and interpreted by Sections 368(a)(1)(C) and 368(a)(2)(G) of the Code, the Treasury Regulations promulgated thereunder, and rulings, decisions and determinations of the Internal Revenue Service or any court of competent jurisdiction, or take any action that would jeopardize the status of the Trust as a "LIQUIDATING TRUST" for federal income tax purposes within the meaning of Treasury Regulation Section 301.7701-4(d). The Trust does not, and will not, receive or retain cash in excess of a reasonable amount to meet claims and contingent liabilities. In addition, the Trust does not, and will not, receive transfers of any unlisted stock of a single issuer that represents 80 percent or more of the stock of such issuer, and the Trust does not, and will not, receive transfers of any general or limited partnership interests. 6.3 SPECIFIC POWERS OF TRUSTEE. Subject to the provisions of Section 6.2 hereof, the Trustee shall have the following specific powers in addition to any powers conferred upon him by any other Section or provision of this Agreement of Trust or by virtue of any present or future statute or rule of law, in all instances without any action or consent required by the Beneficiaries; provided, however, that the enumeration of the following powers shall not be considered in any way to limit or control the power of the Trustee to act as specifically authorized by any other Section or provision of this Agreement and to act in such a manner as the Trustee may deem necessary or appropriate, in his sole discretion, to conserve, protect, and administer the Trust Corpus or otherwise to confer upon the Beneficiaries the benefits intended to be conferred upon him by this Agreement. (a) To retain and set aside such funds out of the Trust Corpus as the Trustee shall deem necessary or expedient to pay, or provide for the payment of, (i) unpaid claims, liabilities, debts or obligations of the Trust, (ii) contingencies, and (iii) the expenses of administering the Trust Corpus; (b) To do and perform any acts or things necessary or appropriate for the conservation and protection of the Trust Corpus, and in connection therewith to employ any agents or representatives as the Trustee deem expedient and to pay reasonable compensation therefor; (c) To sell, transfer, assign, borrow against, pledge, hypothecate or deal in any other manner with any of the Trust Corpus, including the shares of Precept Common Stock, in such manner as the Trustee may deem advisable for any Trust purpose; (d) To engage in, intervene in, prosecute, join, defend, compound, settle, compromise, abandon or adjust by arbitration or otherwise, any actions, suits, proceedings, disputes, claims, controversies, demands or other litigation to enforce any instruments, contracts, agreements, claims or causes of action relating to the Trust, the Trust Corpus or the Trust's affairs, to enter into agreements relating to the foregoing, whether or not any suit is commenced or claim accrued or asserted and, in advance of any controversy, to enter into agreements regarding arbitration, adjudication or settlement thereof, all in the name of the Trust or of the Company if otherwise required; (e) To file any and all documents and take any and all such other action as the Trustee, in his sole judgment, may deem necessary in order that the Trust may lawfully carry out its purposes in any jurisdiction; (f) To change the name of the Trust; (g) To prepare and file, or assist in the preparation and filing of, federal and state tax returns and reports required to be filed on behalf of the Trust or the Trustee. ARTICLE 7 LIABILITY OF TRUSTEE AND BENEFICIARIES AND OTHER MATTERS 7.1 GENERALLY. The Trustee shall not be liable to the Trust or to any Beneficiary for any act or omission of any other Trustee, Beneficiary, or agent of the Trust, or be held to any personal liability whatsoever in tort, contract, or otherwise in connection with the affairs of the Trust, except only that B-8 arising from his own bad faith, wilful misfeasance, gross negligence, or reckless disregard of duty. The Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this agreement against the Trustee. The Trustee shall not be liable with respect to any action taken or omitted to be taken by him in good faith, in accordance with the direction of Beneficiaries having an aggregate beneficial interest of more than 50% of the total beneficial interests in the Trust. In addition to, and not in limitation of, the foregoing, no successor Trustee shall be in any way liable for the acts or omissions of any Trustee or agent of the Trust occurring prior to the date on which he or she became Trustee. 7.2 RELIANCE BY TRUSTEE. The Trustee may consult with counsel, auditors or other experts, and the advice or opinion of such counsel, auditors, or other experts shall be full and complete personal protection to the Trustee in respect of any action taken or suffered by him in good faith and in reliance upon or in accordance with such advice or opinion. In discharging his duties, the Trustee may rely upon financial statements of the Trust represented to him to be correct by the person having charge of its books of account. The Trustee may rely, and shall be personally protected in acting, upon any instrument or other document of any sort whatsoever reasonably believed by him to be genuine. 7.3 LIMITATION OF LIABILITY OF TRUSTEE AND BENEFICIARIES. The Trustee, in incurring any debts, liabilities, or obligations, or in taking or omitting any other actions for or in connection with the Trust, is, and shall be deemed to be, acting as Trustee of the Trust and not in his own individual capacity. Except to the extent provided in Section 7.1 hereof, no Trustee shall, nor shall any Beneficiary, be liable for any debt, claim, demand, judgment, decree, liability, or obligation of any kind of, against, or with respect to the Trust, arising out of any action taken or omitted for or on behalf of the Trust, and the Trust shall be solely liable therefor, and resort shall be had solely to the Trust Corpus for the payment or performance thereof. A Beneficiary shall be entitled to pro rata indemnity from the Trust Corpus, if, contrary to the provisions hereof, the Beneficiary shall be held to any such personal liability. 7.4 EXPRESS EXCULPATORY CLAUSES IN INSTRUMENTS. As far as practicable, the Trustee shall cause any written instrument creating an obligation of the Trust to include a reference to this Agreement and to provide that neither the Beneficiaries nor the Trustee shall be liable thereunder and that the other parties to such instrument shall look solely to the Trust Corpus for the payment of any claim thereunder or the performance thereof; provided, however, that the omission of such provision from any such instrument shall not render the Beneficiaries or the Trustee liable nor shall the Trustee be liable to anyone for such omission. 7.5 INDEMNIFICATION OF TRUSTEE. (a) The Trustee shall be indemnified from the Trust Corpus against any loss, liability, expense (including attorney's fees and costs), or damage which such Trustee may incur or sustain by reason of being or having been a Trustee of the Trust or for performing any functions incidental to such service; provided, however, that the foregoing shall not relieve such person of liability for breach of such duties of care and good faith as are imposed upon trustees by the laws of the State of Nevada. (b) Indemnification under paragraph (a) of this Section 7.5 shall be made by the Trust as authorized in the specific case unless a determination has been made that indemnification of the Trustee is improper in the circumstances because he has not met the applicable standards of conduct. Such determination shall be made by independent legal counsel (who may be counsel to the Trust) in a written opinion. (c) Expenses incurred in connection with a civil, criminal, administrative, or investigative action, suit, or proceeding, or threat thereof, may be paid by the Trust in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of the Trustee to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Trust as authorized herein. B-9 (d) The indemnification provided in this Section 7.5 shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any other agreement or otherwise, both as to action as Trustee and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Trustee and shall inure to the benefit of the heirs, executors, and administrators of such person. (e) The Trust shall have the power to purchase and maintain at the expense of the Trust insurance on behalf and for the benefit of any person who is or was a Trustee of the Trust against claims or liabilities arising from the service of such person as Trustee, whether or not the Trust would have the power to indemnify such person against such liability under the provisions of this Section 7.5. ARTICLE 8 PROTECTION OF PERSONS DEALING WITH THE TRUSTEE 8.1 RELIANCE UPON ACTS OF TRUSTEE. Any act of a Trustee purporting to be done in his capacity as such shall, as to any persons dealing with such Trustee, be conclusively deemed to be within the purpose of this Trust and within the powers of the Trustee. As to any matter requiring or involving action by the Beneficiaries, any person dealing with a Trustee shall be fully protected in relying upon the Trustee's certificate setting forth the facts concerning the calling of any meeting of the Beneficiaries, the giving of notice thereof, and the action taken at such meeting, including the aggregate beneficial interests of the Beneficiaries taking such action. ARTICLE 9 COMPENSATION OF TRUSTEE 9.1 AMOUNT OF COMPENSATION. The Trustee shall be entitled to receive as compensation for his services as Trustee a fee during each calendar year equal to three percent of the market value of the Trust Corpus on January 1 of that year (or, in the year of formation, the date of formation of the Trust). During any partial year in which the Trustee serves, the fee shall be apportioned appropriately. The fee may be paid from time to time at the discretion of the Trustee. 9.2 EXPENSES. The Trustee shall be reimbursed from the Trust Corpus for all expenses reasonably incurred in accordance with this Agreement. ARTICLE 10 CONCERNING THE TRUSTEE 10.1 NUMBER AND QUALIFICATION. Subject to the provisions of Section 10.3 hereof relating to the period pending the appointment of a successor Trustee, there shall be at least one Trustee of the Trust. 10.2 RESIGNATION AND REMOVAL. Any Trustee may resign and be discharged from the Trust hereby created by giving written notice thereof to the Beneficiaries. Such resignation shall become effective on the day specified in such notice (which shall be no less than 30 days after the date of the notice) or upon the appointment of such Trustee's successor and such successor's acceptance of such appointment, whichever is earlier, without need for prior accounting. Any Trustee may be removed at any time, with or without cause, by vote of Beneficiaries holding more than 50% of the total beneficial interests in the Trust. 10.3 APPOINTMENT OF SUCCESSOR. Should at any time a Trustee resign or be removed, or die or become incapable of action, or be adjudged a bankruptcy or insolvent, a vacancy shall be deemed to exist. If no successor Trustee is named in this Agreement of Trust, the Beneficiaries may, pursuant to Article 12 hereof, appoint a successor Trustee. If the Beneficiaries have not filled all vacancies to be filled by them B-10 within 60 days after they have the authority to do so pursuant to this Section 10.3, a Beneficiary may apply to a court of competent jurisdiction in accordance with Nevada law to fill such vacancies. 10.4 ACCEPTANCE OF APPOINTMENTS BY SUCCESSOR TRUSTEE. Any successor Trustee appointed hereunder shall execute an instrument accepting such appointment hereunder and shall, in case of a resignation, deliver one copy thereof to the retiring Trustee. Thereupon such successor Trustee shall, without any further act, become vested with all the estates, properties, rights, powers, trusts, and duties of his or her predecessor in the Trust hereunder with like effect as if originally named herein. 10.5 BONDS. Unless a bond is required by law, no bond shall be required of the original Trustee hereunder or of any successor Trustee hereunder. If a bond is required by law, no surety or security with respect to such bond shall be required unless required by law. ARTICLE 11 CONCERNING THE BENEFICIARIES 11.1 EVIDENCE OF ACTION BY BENEFICIARIES. Whenever in this Agreement it is provided that a Beneficiary may take any action (including the making of any demand or request, the giving of any notice, consent, or waiver, the removal of a Trustee, the appointment of a successor Trustee, or the taking of any other action), the fact of at the time of taking any such action such Beneficiary having joined therein may be evidenced (i) by any instrument or any number of instruments of similar tenor executed by a Beneficiary in person or by agent or attorney appointed in writing, or (ii) by the record of the Beneficiary voting in favor thereof at any meeting of Beneficiaries duly called and held in accordance with the provisions of Article 12 hereof. 11.2 LIMITATION UPON SUITS BY BENEFICIARIES. No Beneficiary shall have any right by virtue of any provision of this Agreement to institute any action or proceeding at law or in equity against any party other than the Trustee upon or under or with respect to the Trust Corpus or the assets relating to or forming part of the Trust Corpus and the Beneficiaries do hereby waive any such right, unless Beneficiaries having an aggregate beneficial interest of more than 50% of the total beneficial interests in the Trust shall have made written request upon the Trustee to institute such action or proceeding in his own name as Trustee hereunder and shall have offered to the Trustee reasonable indemnity against the costs and expenses to be incurred therein or thereby, and the Trustee for 30 days after his receipt of such notice, request, and offer of indemnity shall have failed to institute any such action or proceeding. 11.3 REQUIREMENT OF UNDERTAKING. The Trustee may request any court to require, and any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Agreement, or in any suit against the Trustee for any action taken or omitted by him as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and such court may in its discretion assess reasonable costs, including reasonable attorney's fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, that the provisions of this Section 11.3 shall not apply to any suit by the Trustee and such undertaking shall not be requested by the Trustee or otherwise required in any suit by any Beneficiary or group of Beneficiaries having an aggregate beneficial interest of more than 25% of the total beneficial interests of the Trust. B-11 ARTICLE 12 MEETING OF BENEFICIARIES 12.1 PURPOSE OF MEETINGS. A meeting of the Beneficiaries may be called at any time and from time to time pursuant to the provisions of this Article 12 for the purpose of taking any action which the terms of this Agreement permit Beneficiaries having a specified aggregate beneficial interest to take either acting alone or with the Trustee or with any other Beneficiary or Beneficiaries. 12.2 MEETING CALLED BY TRUSTEE. The Trustee may at any time call a meeting of the Beneficiaries to be held at such time and at such place within the State of Nevada (or elsewhere if so determined by the Trustee) as the Trustee shall determine. Written notice of every meeting of the Beneficiaries shall be given by the Trustee (except as provided in Section 12.3 hereof), which written notice shall set forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, and shall be mailed not more than 60 nor less than ten days before such meeting is to be held to all of the Beneficiaries of record not more than 60 days before the date of such meeting, such record date to be fixed by the Trustee. The notice shall be directed to the Beneficiaries at their respective addresses as they appear in the records of the Trust. 12.3 MEETING CALLED UPON REQUEST OF BENEFICIARY. Except as hereinafter provided in this Section 12.3, within 30 days after written request to the Trustee by Beneficiaries having an aggregate beneficial interest of more than 50% of the total beneficial interests in the Trust to call a meeting of all the Beneficiaries, which written request shall specify in reasonable detail the action proposed to be taken, the Trustee shall proceed under the provisions of Section 12.2 hereof to call a meeting of the Beneficiaries, and if the Trustee fails to call such a meeting within such 30 day period then such meeting may be called by Beneficiaries having an aggregate beneficial interest of more than 50% of the total beneficial interests in the Trust or by his designated representative or representatives. If the purpose of the meeting is to fill a vacancy in accordance with Section 10.3 hereof, any Beneficiary may call such a meeting. If the purpose of the meeting is other than to fill a vacancy and if there is no Trustee, Beneficiaries having an aggregate beneficial interest of more than 50% of the total beneficial interests in the Trust, or his designated representative or representatives, may call such meeting without first applying to the Trustee or waiting the 30-day period provided for in the first sentence of this Section 12.3. Any meeting called by one or more Beneficiaries shall be subject to the same notice requirements as are set forth in Section 12.2 hereof, and the Beneficiary or Beneficiaries calling the meeting shall fix the record date therefor. 12.4 PERSONS ENTITLED TO VOTE AT MEETING OF BENEFICIARIES. Each Beneficiary on the record date shall be entitled to vote at a meeting of the Beneficiaries either in person or by proxy duly authorized in writing and shall have one vote for each share of Common Stock of the Company previously registered on the books of the Trust in the name of such Beneficiary. The signature of the Beneficiary on such written authorization need not be witnessed or notarized. 12.5 QUORUM. At any meeting of Beneficiaries, the presence of Beneficiaries having an aggregate beneficial interest sufficient to take action on any matter for which such meeting was called shall be necessary to constitute a quorum. 12.6 CONDUCT OF MEETINGS. The Trustee shall appoint the Chairman and the Secretary of the meeting. The vote upon any resolution submitted to any meeting of Beneficiaries shall be by written ballot. 12.7 RECORD OF MEETING. A record of the proceedings of each meeting of Beneficiaries shall be prepared by the Secretary of the meeting. The record shall be signed and verified by the Secretary of the meeting and shall be delivered to the Trustee to be preserved by him. Any record so signed and verified shall be conclusive evidence of all the matters therein stated. B-12 ARTICLE 13 AMENDMENTS 13.1 WITH CONSENT OF BENEFICIARIES. At the direction or with the consent (evidenced in the manner provided in Section 11.1 hereof) of Beneficiaries having an aggregate beneficial interest of more than 50% of the total beneficial interests in the Trust, the Trustee shall promptly make and execute a declaration amending this Agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or amendments hereto; provided, however, that no such amendment shall permit the Trustee hereunder to engage in any activity prohibited by Section 2.1 or 6.2 hereof, or adversely affect the Beneficiaries' right to receive their pro rata shares of the Trust Corpus at the time of distribution. 13.2 WITHOUT CONSENT OF BENEFICIARIES. The Trustee may from time to time and at any time make or execute a declaration amending this Agreement without the consent of the Beneficiaries pursuant to Section 13.1 hereof for the purpose of (a) curing any ambiguity or correcting or supplementing any provision contained herein or in any amendment to this Agreement which may be defective or inconsistent with any other provision contained herein or in any amendment to this Agreement, (b) making such other provisions or modifications in regard to matters or questions relating to this Agreement or any amendment hereto, provided the same shall not adversely affect the interests of the Beneficiaries, or (c) having the Trust continue to qualify as a "LIQUIDATING TRUST" for federal income tax purposes. 13.3 NOTICE AND EFFECT OF AMENDMENT. Promptly after the execution by the Trustee of any such declaration of amendment, the Trustee shall send a summary or copy of the amendment to each Beneficiary. Upon the execution of any such declaration of amendment by the Trustee, this Agreement shall be deemed to be modified and amended in accordance therewith. ARTICLE 14 MISCELLANEOUS PROVISIONS 14.1 FILING DOCUMENTS. This Agreement shall be filed in such governmental office or offices, if any, and in such other office or offices as the Trustee may determine to be necessary or desirable. A copy of this Agreement and all amendments thereof shall be filed in the office of the Trustee and shall be available during regular business hours upon reasonable notice for inspection by any Beneficiary or his or her duly authorized representative. The Trustee shall file or record any amendment of this Agreement in the same places where the original Agreement is filed or recorded. The Trustee shall file or record any instrument which relates to any change in the office of Trustee in the same places where the original Agreement is filed or recorded. 14.2 LAWS AS TO CONSTRUCTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. 14.3 SEPARABILITY. In the event any provision of this Agreement or the application thereof to any person or circumstances shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. 14.4 NOTICES. Any notice or other communication by the Trustee to any Beneficiary shall be deemed to have been sufficiently given, for all purposes, if given by being deposited, postage prepaid, in a post office or letter box and being addressed to such Beneficiary at its address as shown in the records of the Trust. B-13 14.5 NO COURT SUPERVISION. The Trust shall not be administered under the direction or jurisdiction of any court except as provided in Section 10.3 hereof, nor shall there be any duty of the Trustee to account to any court with respect to his administration of the Trust or the Trust Corpus. 14.6 IRREVOCABLE TRUST. This Trust is irrevocable except to the extent contemplated by Article 13 hereof. IN WITNESS WHEREOF, U.S. Transportation Systems, Inc. has caused this Agreement to be signed by its Chairman or President and the Trustee has signed this Agreement, effective this day of , 1997. U.S. TRANSPORTATION SYSTEMS, INC. By: ----------------------------------------- Michael Margolies, TRUSTEE B-14 ANNEX C M.H. MEYERSON & CO., INC. FOUNDED 1960 BROKERS & DEALERS IN SECURITIES UNDERWRITERS NEWPORT OFFICE TOWER 525 WASHINGTON BLVD. - P.O. BOX 260 - JERSEY CITY, NJ 07303-0260 201-459-9500 - 800-888-8118 - FAX 201-459-9521 - www.mhmeyerson.com October 16, 1997 Board of Directors U.S. Transportation Systems, Inc. 33 West Main Street Elmsford, New York 10523 Dear Sirs: We understand that Precept Investors, Inc. has agreed in principle for U.S. Transportation Systems, Inc. (USTS) to transfer its business and substantially all of its assets to Precept in exchange for an aggregate of 9,500,000 shares of Precept's Class A Common Stock, (500,000 shares of which will be held back to satisfy certain contingent liabilities of USTS). Precept's Class A Common Stock will be listed on and trade on the Nasdaq SmallCap Market. You have asked us to render an opinion as to the fairness of the transaction, from a financial point of view to the common shareholders of USTS. In the course of our review of the transaction, we have: 1. Reviewed the draft Agreement and Plan of Reorganization between Precept and USTS. 2. Reviewed the unaudited financial statements for USTS for the six months ended June 30, 1997 and the three months ended March 31, 1997. 3. Reviewed the audited financial statements for USTS for the year ended December 30, 1996. 4. Reviewed financial information, including publicly available disclosure information, projections, relating to the business, operations and prospects of USTS, furnished by USTS. 5. Met with certain members of USTS management to discuss historical and current operations, financial condition, and future prospects of USTS and Precept as well as the benefits to result from the Transfer of USTS and Precept and future growth strategies for the combined companies, post Transfer. 6. Reviewed the potential pro forma financial results of the companies after the Transfer. 7. Analyzed the relative financial contribution of each of the companies to the combined company after the Transfer. 8. Reviewed the draft financial statements of Precept for the years ended June 30, 1997, and June 30, 1996. 9. Reviewed certain non-public operating and financial information, including projections, relating to the business, operations and the draft S-4 Registration Statement of Precept, furnished by Precept. 10. Met with certain members of Precept's management to discuss historical and current operations, financial condition, and future prospects of Precept and USTS as well as the benefits resulting from the Transfer of Precept and USTS. 11. Compared historical financial results of Precept with those of other publicly traded companies which we believed to be relevant. 12. Conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. In the course of our review, we have relied upon and assumed, without independent verification of the accuracy of the information supplied by Precept's and USTS' management. We have also relied upon the assurances of the management of Precept and USTS that they are not aware of any facts that would make such information incomplete or misleading. Based on the foregoing, it is our opinion that the transactions are fair, from a financial point of view, to the common shareholders of USTS. Respectfully yours, /s/ ERIC RAINER BASHFORD - ------------------------------ Eric Rainer Bashford, C.F.A. M.H. MEYERSON & CO., INC.
PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under the Texas Business Corporation Act (the "TBCA"), a Texas corporation may in general indemnify a director or officer who was, is or is threatened to be made a named defendant or respondent in a proceeding by virtue of his position in the corporation if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, in the case of criminal proceedings, had no reasonable cause to believe his conduct was unlawful. Further, a Texas corporation may indemnify a director or officer in an action brought by or in the right of the corporation only if such director or officer was not found liable to the corporation, unless or only to the extent that a court finds him to be fairly and reasonably entitled to indemnity for such expenses as the court deems proper, within statutory limits. The Registrant's Restated Articles of Incorporation, as amended, provide that each person who (i) is or was a director, officer, employee or agent of Registrant or (ii) is or was serving at the request of Registrant as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust, or other enterprise or employee benefit plan (including the heirs, executors, administrators or estate of such person) shall be indemnified by the Registrant to the fullest extent that a corporation is required or permitted to grant indemnification to such person under the TBCA. Reasonable expenses incurred by a director, officer, employee or agent of the Registrant, who was, is or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the Registrant, in advance of the final disposition of the proceeding, to the maximum extent permitted under the TBCA. Additionally, Registrant's Restated Articles of Incorporation, as amended, eliminate in certain circumstances the monetary liability of directors of Registrant for an act or omission in the director's capacity as a director. This provision does not eliminate or limit the liability for (i) a breach of a director's duty of loyalty to Registrant or its shareholders; (ii) an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; (iv) an act or omission for which the liability of the director is expressly provided for by statute; or (v) an act related to an unlawful stock repurchase or payment of a dividend. The above discussion of the Registrant's Restated Articles of Incorporation, as amended, and Bylaws and of the TBCA is not intended to be exhaustive and is qualified in its entirety by the Restated Articles of Incorporation, as amended, and Bylaws and the TBCA. Registrant carries directors' and officers' liability insurance which insures Registrant's directors and officers against liability for any "wrongful act" arising out of their position, and which is not reimbursable under the Registrant's Bylaws or which, if reimbursable, Registrant has not paid or is unable to pay. These provisions of the policy pertaining to officers and directors are also subject to several exclusions, including losses covered under other forms of insurance, losses occasioned by violations of governmental regulations and ordinances, losses for which insurance would be against public policy and others recited therein. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - --------- ------------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization dated as of November 16, 1997 by and among U.S. Transportation Systems, Inc., Precept Investors, Inc. and Precept Acquisition Company, L.L.C. (2) 2.2 Plan of Liquidation and Dissolution (2) 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Bylaws (1) 4.1 Warrant Agent Agreement (1) 4.2 Form of Precept Class A Warrant Certificate (1) 4.3 Form of Precept Class A Common Stock Certificate (1) 4.4 Form of Rights Agreement between Precept and Continental Stock Transfer & Trust Co. (1) 4.5 Form of Irrevocable Proxy granted to Darwin Deason by various Precept shareholders (1) 5 Opinion of Jackson Walker L.L.P. (1) 8.1 Opinion of Bressler, Amery & Ross re: Tax Matters (1) 10.1 Form of Registration Rights Agreement by and among Precept Investors, Inc., Michael Margolies and The Margolies Family Trust (4) 10.2 Form of Employment Agreement by and between Precept Investors, Inc. and Michael Margolies (4) 10.3 Form of Employment Agreement by and between Precept Investors, Inc. and Ron Sorci (4) 10.4 Reciprocal Services Agreement, dated June 30, 1994, between Precept and ACS (4) 10.5 Form of Directors Indemnification Agreement (4) 10.6 Precept 1996 Stock Option Plan (1) 10.7 Precept 1998 Stock Incentive Plan (1) 10.8 Credit Agreement and Line of Credit Note, dated as of July 1, 1997, between Precept and Wells Fargo Bank (Texas), National Association (4) 11.1 Statement re Computation of U.S. Transportation Systems, Inc. Per Share Earnings (4) 21 Subsidiaries (1) 23.1 Consent of Ernst & Young LLP (1) 23.2 Consent of Mahoney Cohen & Company, CPA, P.C. (1) 23.3 Consent of Bressler, Amery & Ross (to be included in its opinion filed as Exhibit 8.1) (4) 23.4 Consent of Jackson Walker L.L.P. (to be included in its opinion filed as Exhibit 5) (3) 23.5 Consent of M.H. Meyerson & Co., Inc. (4) 24 Power of Attorney (contained on signature page of this Registration Statement) 27.1 Financial Data Schedule (4) 99.1 Form of Proxy (2) 99.2 Consent of Michael Margolies (4) 99.3 Consent of Robert Blackman (4) 99.4 Consent of Scott B. Walker (4) 99.5 Consent of Layne A. Deutscher (4) 99.6 Consent of Sheldon I. Stein (1) 99.7 Consent of J. Livingston Kosberg (1)
- ------------------------ (1) Filed herewith (2) Previously filed as an Annex to the Proxy Statement/Prospectus included in the Registration Statement (3) To be filed by Amendment (4) Previously filed II-2 ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or 15(d) of the Exchange Act that are incorporated by reference in this registration statement; (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 29th day of January, 1998. PRECEPT BUSINESS SERVICES, INC. By: /s/ DAVID L. NEELY ----------------------------------------- David L. Neely, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following directors and officers of Precept Business Services, Inc., in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- * Director and Chairman of - ------------------------------ the Executive Committee January 29, 1998 Darwin Deason of the Board /s/ DAVID L. NEELY Chairman and Chief - ------------------------------ Executive Officer and January 29, 1998 David L. Neely Director * President & Chief - ------------------------------ Operating Officer and January 29, 1998 Douglas R. Deason Director * Executive Vice President, - ------------------------------ Chief Administrative January 29, 1998 Glenn R. Smith Officer and Director Senior Vice President and * Chief Financial Officer - ------------------------------ (Principal Accounting January 29, 1998 Scott B. Walker Officer) *By: /s/ DAVID L. NEELY ------------------------- David L. Neely ATTORNEY-IN-FACT II-4 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ---------- ------------------------------------------------------------------------------------------------ 2.1 Agreement and Plan of Reorganization dated as of November 16, 1997 by and among U.S. Transportation Systems, Inc., Precept Investors, Inc. and Precept Acquisition Company, L.L.C. (2) 2.2 Plan of Liquidation and Dissolution (2) 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Bylaws (1) 4.1 Warrant Agent Agreement (1) 4.2 Form of Precept Class A Warrant Certificate (1) 4.3 Form of Precept Class A Common Stock Certificate (1) 4.4 Form of Rights Agreement between Precept and Continental Stock Transfer & Trust Co. (1) 4.5 Form of Irrevocable Proxy granted to Darwin Deason by various Precept shareholders (1) 5 Opinion of Jackson Walker L.L.P. (1) 8.1 Opinion of Bressler, Amery & Ross re: Tax Matters (1) 10.1 Form of Registration Rights Agreement by and among Precept Investors, Inc., Michael Margolies and The Margolies Family Trust (4) 10.2 Form of Employment Agreement by and between Precept Investors, Inc. and Michael Margolies (4) 10.3 Form of Employment Agreement by and between Precept Investors, Inc. and Ron Sorci (4) 10.4 Reciprocal Services Agreement, dated June 30, 1994, between Precept and ACS (4) 10.5 Form of Directors Indemnification Agreement (4) 10.6 Precept 1996 Stock Option Plan (1) 10.7 Precept 1998 Stock Incentive Plan (1) 10.8 Credit Agreement and Line of Credit Note, dated as of July 1, 1997, between Precept and Wells Fargo Bank (Texas), National Association (4) 11.1 Statement re Computation of U.S. Transportation Systems, Inc. Per Share Earnings (4) 21 Subsidiaries (1) 23.1 Consent of Ernst & Young LLP (1) 23.2 Consent of Mahoney Cohen & Company, CPA, P.C. (1) 23.3 Consent of Bressler, Amery & Ross (to be included in its opinion filed as Exhibit 8.1) (4) 23.4 Consent of Jackson Walker L.L.P. (to be included in its opinion filed as Exhibit 5) (3) 23.5 Consent of M.H. Meyerson & Co., Inc. (4) 24 Power of Attorney (contained on signature page of this Registration Statement) 27.1 Financial Data Schedule (4) 99.1 Form of Proxy (2) 99.2 Consent of Michael Margolies (4) 99.3 Consent of Robert Blackman (4) 99.4 Consent of Scott B. Walker (4) 99.5 Consent of Layne A. Deutscher (4) 99.6 Consent of Sheldon I. Stein (1) 99.7 Consent of J. Livingston Kosberg (1)
- ------------------------ (1) Filed herewith (2) Previously filed as an Annex to the Proxy Statement/Prospectus included in the Registration Statement (3) To be filed by Amendment (4) Previously filed EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION (WITH AMENDMENTS) OF PRECEPT INVESTORS, INC. SECTION ONE PRECEPT INVESTORS, INC., pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act (the "Act"), hereby adopts these Restated Articles of Incorporation which accurately copy the Articles of Incorporation and all amendments thereto that are in effect to date (the "Old Articles") and as further amended by such Restated Articles of Incorporation as hereinafter set forth and which contain no other change in any provision thereof. SECTION TWO The Old Articles of the corporation are amended by the Restated Articles of Incorporation as follows: Article One of the Old Articles will be amended to change the name of the Corporation to "Precept Business Services, Inc." Article Four of the Old Articles will be amended to increase the number of authorized shares and to delete subsections 1 (regarding a prior reclassification of the shares of the Corporation's stock) and 5 (regarding restrictions on transfer of certain restricted stock); and Article Ten of the Old Articles will be amended to provide that the Board of Directors are to be divided into three classes as of equal size as possible, with the term of each class expiring in consecutive years with approximately one-third of the Board of Directors being elected each year. The full text of each of the amended provisions as so amended is set forth below in Section Six of these Restated Articles of Incorporation. SECTION THREE Each such amendment made by these Restated Articles of Incorporation has been effected in conformity with the provisions of the Act and such Restated Articles of Incorporation and each such amendment made by the Restated Articles of Incorporation were duly recommended by the board of directors and adopted by the shareholders of the Corporation on the 3rd day of February, 1998. SECTION FOUR 11,412,687 shares of Common Stock of the Corporation are currently outstanding, of which 8,209,844 shares are Class A Common Stock and 3,202,843 shares are Class B Common Stock. No shares of Preferred Stock of the Corporation are outstanding. The holders of the shares of each of Class A Common Stock and the Class B Common Stock, respectively, were each entitled to vote on the Restated Articles of Incorporation as a separate class. All 11,412,687 shares of Common Stock outstanding were entitled to vote on the Restated Articles of Incorporation and all amendments contained therein. SECTION FIVE Written consent to these Restated Articles of Incorporation and the amendments effected hereby has been given in accordance with the provisions of Article 9.10A of the Act, and all such written notice as required by Article 9.10A of the Act has been given. SECTION SIX The Old Articles are hereby superseded by the following Restated Articles of Incorporation which accurately copy the entire text thereof as further amended as set forth: ARTICLE ONE The name of the Corporation is PRECEPT BUSINESS SERVICES, INC. ARTICLE TWO The period of its duration is perpetual. ARTICLE THREE The purpose for which the Corporation is organized is the transaction of any and all lawful business for which a corporation may be incorporated under the Texas Business Corporation Act. ARTICLE FOUR Section 1. AUTHORIZED CAPITAL STOCK. The total number of shares of all classes of capital stock that the Corporation shall have authority to issue is 113,500,000 shares, consisting of (a) 100,000,000 shares of Class A Common Stock, par value $0.01 per share ("Class A Common Stock"), (b) 10,500,000 shares of Class B Common Stock, par value $0.01 per share ("Class B Common Stock" and together with Class A Common Stock, "Common Stock"), and (c) 3,000,000 shares of Preferred Stock, par value $1.00 per share ("Preferred Stock"). 2 The number of authorized shares of any class or classes of capital stock of the Corporation may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of each class of the Corporation, respectively, entitled to vote thereon voting as a class. The Board of Directors shall 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 the corporation; provided, however, that in no case shall the powers, preferences and rights of the Class A Common Stock be greater than those provided herein. Except as otherwise required by law or expressly provided for herein, the rights, powers, and preferences of the shares of Common Stock and the qualifications, limitations, or restrictions thereof, shall be in all respects identical. Section 2. COMMON STOCK. The relative rights, powers, preferences, qualifications, limitations and restrictions of the Class A Common Stock and Class B Common Stock from and after the Effective Time shall be as follows: (a) VOTING RIGHTS. Each share of Class A Common Stock shall be entitled to one vote, and each share of Class B Common Stock shall be entitled to ten votes, on all matters submitted to a vote of the shareholders. Except as otherwise provided herein or by law or in any resolution or resolutions of the Board of Directors of the Corporation providing for the issuance of Preferred Stock, all actions submitted to a vote of the shareholders of the Corporation shall be voted on by the holders of the Class A Common Stock and Class B Common Stock (as well as the holders of any series of Preferred Stock, if any, entitled to vote thereon), voting together as a single class. (b) CONVERSION. The Class A Common Stock has no conversion rights. Each share of Class B Common Stock is convertible at any time, and from time to time, at the option of and without cost to the holder thereof, into one fully paid and nonassessable share of Class A Common Stock on and subject to the terms and conditions set forth herein; provided however, that for a period of one year from the Effective Time shares of Class B Common Stock may only be converted into Class A Common Stock 90 days after the delivery to the Corporation of a Conversion Notice (as hereinafter defined); and provided further, however, that shares of Class B Common Stock shall be automatically converted, without any action on the part of the holder thereof, into share of Class A Common Stock on the occurrence of the events described in subsection (c) of this Section 2. If any record owner of any shares of Class B Common Stock (a "Class B Holder") desires to convert any of such shares into shares of Class A Common Stock, such Class B Holder shall present and surrender the certificate or certificates representing such shares during usual business hours at any office or agency of the Corporation maintained for the transfer of Class B Common Stock and shall deliver a written notice ("Conversion Notice") of the election of such Class B holder to convert the shares represented by such certificate or any portion thereof as specified in the Conversion Notice. The Conversion Notice shall state the name or names (with addresses) in which the certificate or certificates representing 3 shares of Class A Common Stock issuable on such conversion shall be registered. If so required by the Corporation, any certificate representing shares of Class B Common Stock surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder of such shares or his authorized representative. Each conversion of shares of Class B Common Stock shall be deemed to have been effected on the date (the "conversion rate") on which the certificate or certificates representing such shares shall have been surrendered and such notice and any required instruments of transfer shall have been received as aforesaid (or if the date of such surrender and receipt falls within the period of one year from the Effective Time, then the conversion date shall be 90 days after the date of such surrender and receipt). The person or persons in whose name or names any certificate or certificates representing shares of Class A Common Stock issuable upon such conversion shall be, for the purpose of receiving dividends and for all other corporate purposes whatsoever, deemed to have become the holder or holders of record of the shares of Class A Common Stock represented thereby on the conversion date. As promptly as practicable after the conversion date, the Corporation shall issue and deliver at such office or agency, to or upon the written order of the holder thereof, certificates for the number of shares of Class A Common Stock issuable upon such conversion. Subject to the provisions of subsection (c) of this Section 2, in the event any certificate representing shares of Class B Common Stock shall be surrendered for conversion of a part only of the shares represented thereby, the Corporation shall deliver at such office or agency, to or upon the written order of the holder thereof, a certificate or certificates for the number of shares of Class B Common Stock represented by such surrendered certificate which are not being converted. The issuance of certificates representing shares of Class A Common Stock issuable upon the conversion of shares of Class B Common Stock by the registered holder thereof shall be made without charge to the converting holder for any tax imposed on the Corporation in respect of the issue thereof. The Corporation shall not, however, be required to pay any tax which may be payable with respect to any transfer involved in the issue and delivery of any certificate in a name other than that of the registered holder of the shares being converted, and the corporation shall not be required to issue or deliver any such certificate unless and until the person requesting the issue thereof shall have paid to the Corporation the amount of such tax or has established to the satisfaction of the Corporation that such tax has been paid. Upon any conversion of shares of Class B Common Stock into shares of Class A Common Stock pursuant hereto, no adjustment with respect to dividends shall be made; only those dividends shall be payable on the shares so converted as may be declared and are payable to holders of record of shares of Class B Common Stock on a date prior to the conversion date with respect to the shares so converted; and only those dividends shall be payable on shares of Class A Common Stock issued upon such conversion as may be declared and are payable to holders of record of shares of Class A Common Stock on or after such conversion date. 4 In case of any consolidation or merger of the Corporation as a result of which the holders of Class A Common Stock shall be entitled to receive cash, stock, other securities, or other property with respect to or in exchange for Class A Common Stock or in case of any sale or conveyance of all or substantially all of the property or business of the Corporation as an entirety, each holder of any share of Class B Common Stock shall have the right thereafter, so long as the conversion right hereunder shall exist, to convert such share into the kind and amount of cash, shares of stock, and other securities and properties as are receivable upon such consolidation, merger, sale or conveyance by each holder of one share of Class A Common Stock and shall have no other conversion rights with regard to such share. The provisions of this paragraph shall similarly apply to successive consolidations, mergers, sales or conveyances. Shares of Class B Common Stock converted into Class A Common Stock as provided in this subsection (b) shall be retired and shall resume the status of authorized but unissued shares of Class B Common Stock. Such number of shares of Class A Common Stock as may from time to time be required for such purpose shall be reserved for issuance upon conversion of outstanding shares of Class B Common Stock and for issuance upon exercise of options, if any. (c) RESTRICTIONS ON TRANSFER OF CLASS B COMMON STOCK. No Class B Holder may transfer, and the Corporation shall not register the transfer of, any shares of Class B Common Stock, whether by sale, assignment, gift, bequest, appointment or otherwise, except to a Permitted Transferee (as hereinafter defined). In the case of a Class B Holder who is a natural person and the beneficial owner of shares of Class B Common Stock proposed to be transferred, a Permitted Transferee consists only of: (i) such Class B Holder's spouse; provided, however, that upon divorce any Class B Common Stock held by such spouse shall immediately and automatically be converted into Class A Common Stock; (ii) any lineal descendant of any great-grandparent of such Class B Holder, including adopted children, and any such descendant's spouse (such descendants and their spouses, together with such Class B Holder's spouse, are referred to herein as "family members"); (iii) the trustee or trustees of a trust (including a voting trust) for the sole benefit of such Class B Holder and/or any of such Class B Holder's family members, except that such trust may also grant a general or special power of appointment to one or more of such Class B Holder's family members and may permit trust assets to be used to pay taxes, legacies, and other obligations of the trust or the estates of 5 one or more of such Class B Holder's family members payable by reason of the death of any such family members; provided, however, that if at any time such trust fails to meet the requirements of this subparagraph (iii), all shares of Class B Common Stock then held by such trustee or trustees shall immediately and automatically be converted into Class A Common Stock on a share-for-share basis, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent a like number of shares of Class A Common Stock; (iv) any organization established by a Class B Holder or any of such Class B Holder's family members, contributions to which are deductible for federal income, estate, or gift tax purposes (a "charitable organization") and a majority of whose governing board at all times consists of such Class B Holder and/or one or more of the Permitted Transferees of such Class B Holder, or any successor to such charitable organization meeting the requirements of this subparagraph (iv); provided that, if there is any change in the composition of the governing board of such charitable organization that would cause such charitable organization no longer to qualify as a Permitted Transferee of such Class B Holder, all shares of Class B Common Stock then held by such charitable organization shall immediately and automatically be converted into Class A Common Stock on a share-for-share basis, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent a like number of shares of Class A Common Stock; and (v) any partnership in which all of the partners are, and all of the partnership interests are owned by, such Class B Holder and/or any of such Class B Holder's family members, or any corporation wholly-owned by such Class B Holder and/or any of such Class B Holder's family members; provided that, if there is any change in the partners of or owners of partnership interests in such partnership or in the shareholders of such corporation that would cause such partnership or corporation no longer to qualify as a Permitted Transferee of such Class B Holder, any Class B Common Stock then held by such partnership or corporation shall immediately and automatically be converted into Class A Common Stock on a share-for-share basis, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent a like number of shares of Class A Common Stock. In the case of a Class B Holder that is a partnership or a corporation and the beneficial owner of the shares of Class B Common Stock proposed to be transferred, a Permitted Transferee consists only of: (i) any partner of such partnership who was a partner thereof on the record date of the initial distribution of Class B Common Stock; 6 (ii) any shareholder of such corporation who held any share thereof on the record date of the initial distribution of Class B Common Stock and who receives shares of Class B Common Stock pro rata to his stock ownership in such corporation through a dividend or through a distribution made upon liquidation of such corporation; (iii) any person transferring shares of Class B Common Stock to such partnership or corporation after the record date of the initial distribution of Class B Common Stock; provided, however, that such transferor may not receive shares of Class B Common Stock in excess of the shares of Class B Common Stock transferred by the transferor to such partnership or corporation; (iv) any Permitted Transferee of any person meeting the requirements set forth in subparagraph (i), (ii) or (iii) of this paragraph, but not in excess of the number of shares such shareholder or person is entitled to receive pursuant to this paragraph; and (v) the survivor of a merger or consolidation of such corporation if those persons who owned beneficially sufficient shares entitled to elect at least a majority of the entire board of directors of such constituent corporation immediately prior to the merger or consolidation own beneficially sufficient shares entitled to elect at least a majority of the entire board of directors of the surviving corporation, provided that if by reason of any change in the ownership of such stock of the surviving corporation such surviving corporation would no longer qualify as a Permitted Transferee of such Class B Holder, all shares of Class B Common Stock then held by such surviving corporation shall immediately and automatically be converted into Class A Common Stock on a share-for-share basis, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent a like number of shares of Class A Common Stock. In the case of a Class B Holder holding such shares of Class B Common Stock as trustee pursuant to a trust that is an irrevocable trust on the record date of the initial distribution of Class B Common Stock, a Permitted Transferee consists only of: (i) any successor trustee of such trust who meets the requirements set forth in subsection (ii) or (iii) of this paragraph; (ii) any person to whom or for whose benefit the principal or income may be distributed under the terms of such trust or any person to whom such trust may be obligated to make future transfers, provided such obligation exists prior to the date such trust becomes a holder of Class B Common Stock; and (iii) any family member of the creator of such trust. 7 In the case of a Class B Holder holding such shares of Class B Common Stock as trustee pursuant to a trust that is any trust other than an irrevocable trust described in the immediately preceding paragraph on the date of the initial distribution of Class B Common Stock, a Permitted Transferee consists only of: (i) any successor trustee of such trust who meets the requirements set forth in subsection (ii) of this paragraph; and (ii) the person who established such trust and any Permitted Transferee of such person. In the case of a record (but not beneficial) owner of Class B Common Stock as nominee for the person who is the beneficial owner thereof on the record date of the initial distribution of Class B Common Stock, a Permitted Transferee consists only of such beneficial owner and any Permitted Transferee of such beneficial owner. Upon the death or permanent incapacity of any Class B Holder, such Class B Holder's Class B Common Stock shall immediately and automatically be converted into Class A Common Stock on a share-for-share basis, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent a like number of shares of Class A Common Stock. Upon the expiration of 90 days after the death or permanent incapacity of Darwin Deason or upon the conversion by The Deason International Trust of all of the shares of Class B Common Stock beneficially owned by Mr. Deason into shares of Class A Common Stock, any and all shares of Class B Common Stock shall immediately and automatically be converted into Class A Common Stock on a share-for-share basis, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent a like number of shares of Class A Common Stock. Shares of Class B Common Stock are freely transferrable among Permitted Transferees, but any other transfer of any share of Class B Common Stock will result in the automatic conversion of such share into Class A Common Stock. (d) DIVIDENDS AND LIQUIDATION RIGHTS. After dividends have been declared and set aside for payment or paid on any series of Preferred Stock having a preference over the Common Stock with respect to payment of such dividends, the holders of Common Stock shall be entitled to receive and to share equally in, when, as and if declared by the Board of Directors of the Corporation (the "Board of Directors"), dividends per share, out of the funds legally available therefor, in such amounts as the Board of Directors may from time to time fix and determine, in its sole and absolute discretion. Upon the liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, after there have been paid or set apart for the holders of any series of Preferred Stock having a 8 preference over the Common Stock with respect to distributions upon liquidation the full amount to which they are entitled, the holders of Common Stock are entitled to receive and to share equally in all assets of the Corporation available for distribution to shareholders. (e) OTHER RIGHTS. The holders of Common Stock are not entitled to any preemptive right to subscribe for, purchase or receive any part of any new or additional issue of stock of any class, whether now or hereafter authorized, or of bonds, debentures or other securities convertible into or exchangeable for stock, and all such additional shares of stock of any class, or bonds, debentures, or other securities convertible into or exchangeable for stock, may be issued and disposed of by the Corporation on such terms and for such consideration, so far as may be permitted by law, and to such persons as the Board of Directors in its sole and absolute discretion may deem advisable. Section 3. PREFERRED STOCK. Preferred Stock may be issued in one or more series. The Board of Directors is hereby authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any such series and the designation, relative powers, preferences, and rights and qualifications, limitations, or restrictions of all shares of such series. The authority of the Board of Directors with respect to each such series will include, without limiting the generality of the foregoing, the determination of any or all of the following: (a) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; (b) the voting powers, if any, and whether such voting powers are full or limited in such series; (c) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (d) whether dividends, if any, will be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (e) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (f) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation or other entity, and the price or prices or the rates of exchange applicable thereto; 9 (g) the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation or other entity; (h) the provisions, if any, of a sinking fund applicable to such series; and (i) any other relative, participating, optional, or other special powers, preferences, rights, qualifications, limitations, or restrictions thereof. ARTICLE FIVE The Corporation will not commence business until it has received for the issuance of its shares consideration of the value of $1,000,000. ARTICLE SIX The street address of its initial Registered Office, and the name of its initial Registered Agent at this address are as follows: CT Corporation System 350 North St. Paul, Suite 2900 Dallas, Texas 75201 ARTICLE SEVEN The number of current Directors is four (4). The names and addresses of the current Directors are: Darwin Deason 1909 Woodall Rodgers Frwy., Suite 500 Dallas, Texas 75201 David Neely 1909 Woodall Rodgers Frwy., Suite 500 Dallas, Texas 75201 Douglas R. Deason 1909 Woodall Rodgers Frwy., Suite 500 Dallas, Texas 75201 Glenn R. Smith 1909 Woodall Rodgers Frwy., Suite 500 Dallas, Texas 75201 10 ARTICLE EIGHT The Board of Directors may make, amend, and repeal the Bylaws of the Corporation (the "Bylaws"). Any Bylaw made by the Board of Directors under the powers conferred hereby may be amended or repealed by the Board of Directors (except as specified in any such Bylaw so made or amended) or by the shareholders in the manner provided in the Bylaws of the Corporation. Notwithstanding the foregoing and anything contained in these Articles of Incorporation to the contrary, Bylaws 1, 3, 8, 10, 11, 12, 13, 33 and 39 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 the holders of at least 80% of the Voting Stock, voting together as a single class. For the purposes of these Articles of Incorporation, "Voting Stock" means stock of the Corporation of any class or series entitled to vote generally in the election of Directors. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the Voting Stock, voting together as a single class, is required to amend or repeal, or to adopt any provisions inconsistent with, this Article Eight. ARTICLE NINE Subject to the rights of the holders of any series of Preferred Stock, special meetings of the shareholders of the Corporation may be called only by (i) the Chairman of the Board of Directors (the "Chairman of the Board of Directors"), (ii) the President of the Corporation (the "President"), (iii) the Secretary of the Corporation (the "Secretary") within 10 calendar days after receipt of the written request of a majority of the total number of Directors that the Corporation would have if there were no vacancies (the "Whole Board of Directors"), and (iv) as provided in Bylaw 3 by the holders of at least 50% of the Voting Stock, voting together as a single class. At any annual meeting or special meeting of shareholders of the Corporation, only such business will be conducted or considered as has been brought before such meeting in the manner provided in the Bylaws of the Corporation. Notwithstanding anything contained in theses Articles of Incorporation to the contrary, the affirmative vote of at least 80% of the Voting Stock, voting together as a single class, will be required to amend or repeal, or adopt any provision inconsistent with, this Article Nine. ARTICLE TEN Section 1. NUMBER, ELECTION, AND TERMS OF DIRECTORS. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, the number of the Directors of the Corporation will not be less than three nor more than fifteen and will be fixed from time to time in the manner described in the Bylaws of the Corporation. The Directors will 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 stand for election for the following initial terms: Class I directors will be elected for a three-year term; Class II directors will be elected for a two-year term; and Class III directors 11 will be elected for a one-year term. At each following annual shareholders' meeting, commencing with the 1999 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. Election of Directors of the Corporation need not be by written ballot unless requested by the Chairman of the Board of Directors, the President, or the holders of a majority of the Voting Stock present in person or represented by proxy at a meeting of the shareholders at which Directors are to be elected. Section 2. NOMINATION OF DIRECTOR CANDIDATES. Advances notice of shareholder nominations for the election of Directors must be given in the manner provided in the Bylaws of the Corporation. Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other cause will be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining Director. No decrease in the number of Directors constituting the Board of Directors may shorten the term of any incumbent Director. Section 4. REMOVAL. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, any Director may be removed from office by the shareholders in the manner provided int this Section 4. At any annual meeting or special meeting of the shareholders, the notice of which states that the removal of a Director or Directors is among the purposes of the meeting, the affirmative vote of the holders of at least 80% of the Voting Stock, voting together as a single class, may remove such Director or Directors with or without cause. Section 5. AMENDMENT, REPEAL, ETC. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of at least 80% of the Voting Stock, voting together as a single class, is required to amend or repeal, or adopt any provision inconsistent with, this Article Ten. ARTICLE ELEVEN No shareholder of the Corporation or other person shall have a preemptive right to acquire shares of the Corporation. ARTICLE TWELVE Cumulative voting shall not be permitted. 12 ARTICLE THIRTEEN No director of the Corporation shall be liable to the Corporation or its shareholders for monetary damages for an act or omission in such director's capacity as a director of the Corporation, except that this Article Thirteen does not eliminate or limit the liability of a director of the Corporation for: 1. a breach of such director's duty of loyalty to the Corporation 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 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. ARTICLE FOURTEEN Each person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust or other enterprise or employee benefit plan (including the heirs, executors, administrators or estate of such person) shall be indemnified by the Corporation to the fullest extent that a corporation is required or permitted to grant indemnification to such person under the Texas Business Corporation Act, as the same exists or may hereafter be amended. Reasonable expenses incurred by a director, officer, employee or agent of the Corporation, who was, is or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the Corporation, in advance of the final disposition of the proceeding to the maximum extent permitted under the Texas Business Corporation Act, as the same exists or may hereafter be amended. The right to indemnification under this Article Fourteen shall be a contract right. In the event of the death of any person having a right of indemnification under this Article Fourteen, such right will inure to the benefit of his or her heirs, executors, administrators and personal representatives. The rights under this Article Fourteen will not be exclusive of any other right which any person may have or hereinafter acquire under any statute, bylaw, resolution of shareholders or directors, agreement or otherwise. 13 ARTICLE FIFTEEN Any action required or permitted to be taken at any meeting of the shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall have been signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. DATED February 6, 1998. PRECEPT INVESTORS, INC. By /s/ David L. Neely David L. Neely Its Chairman and Chief Executive Officer 14 EX-3.2 3 EXHIBIT 3.2 Exhibit 3.2 - ------------------------------------------------------------------------------- BYLAWS OF PRECEPT BUSINESS SERVICES, INC. As Amended Through February 2, 1998 TABLE OF CONTENTS PAGE ---- SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1. TIME AND PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . .1 2. ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . .1 4. NOTICE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . .1 5. INSPECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 6. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 7. VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 8. ORDER OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . .2 DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 9. FUNCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 10. NUMBER, ELECTION AND TERM . . . . . . . . . . . . . . . . . . . . .4 11. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. . . . . . . . . . . . . .4 12. REMOVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 13. NOMINATIONS OF DIRECTORS; ELECTION . . . . . . . . . . . . . . . . .4 14. RESIGNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 15. REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . .5 16. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . .6 17. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 18. PARTICIPATION IN MEETING BY TELEPHONE CONFERENCE . . . . . . . . . .6 19. COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 20. COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 21. RULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 22. GENERALLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 23. WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 24. GENERALLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 25. COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 26. SUCCESSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 27. AUTHORITY; DUTIES. . . . . . . . . . . . . . . . . . . . . . . . . .8 STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 28. CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 29. CLASSES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . .8 30. TRANSFERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 31. LOST, STOLEN OR DESTROYED CERTIFICATES . . . . . . . . . . . . . . .9 32. RECORD DATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 i PAGE ---- INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 33. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . .9 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 34. FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 35. SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 36. RELIANCE UPON BOOKS, REPORTS AND RECORDS . . . . . . . . . . . . . 10 37. DISTRIBUTIONS; SHARE DIVIDENDS . . . . . . . . . . . . . . . . . . 10 38. RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 39. CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 40. TIME PERIODS . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 41. PRINCIPAL OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . 10 42. OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 43. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 44. CERTAIN DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . 11 ii SHAREHOLDERS' MEETINGS 1. TIME AND PLACE OF MEETINGS. All meetings of the shareholders for the election of directors or for any other purpose will be held at such time and place, within or without the State of Texas, as may be designated by the Board of Directors or, in the absence of a designation by the Board of Directors, the Chairman of the Board of Directors, the President, or the Secretary, and stated in the notice of meeting. The Board of Directors may postpone and reschedule any previously scheduled annual or special meeting of the shareholders. 2. ANNUAL MEETING. An annual meeting of the shareholders be held at such date and time as may be designated from time to time by the Board of Directors, at which meeting the shareholders will elect by a plurality vote the Directors to succeed those whose terms expire at such meeting and will transact such other business as may property be brought before the meeting in accordance with Bylaw 8. 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called by the Chairman of the Board of Directors or the President, and will be called by the President or Secretary at the request in writing of a majority of the directors in office or the holder or holders of at least fifty percent (50%) of all shares entitled to vote at the meeting. Any such request by the directors or shareholders must be sent to the Chairman of the Board of Directors and the Secretary and must state the purpose or purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock if any, may be called in the manner and for the purposes provided in the applicable Preferred Stock Designation. 4. NOTICE OF MEETINGS. Written or printed notice of every meeting of the shareholders, stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, will be delivered not less than 10 calendar days (20 calendar days in the case of a meeting to approve a plan of merger or consolidation) nor more than 60 calendar days before the date of meeting, by or at the direction of the President, the Secretary or the officer or person calling the meeting, to each shareholder of record entitled to vote at such meeting, except as otherwise provided herein or by statute, in accordance with Bylaw 22. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 calendar days, or if after the adjournment a new record date is fixed for the adjourned meeting in accordance with Bylaw 32, written notice of the place, date and time of the adjourned meeting must be given in conformity herewith. At any adjourned meeting, any business may be transacted which properly could have been transacted at the original meeting. 5. INSPECTORS. The Board of Directors may appoint one or more inspectors of election to act as judges of the voting and to determine those entitled to vote at any meeting of the shareholders, or any adjournment thereof, in advance of such meeting. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of shareholders, the presiding officer of the meeting may appoint one or more substitute inspectors. 6. QUORUM. Except as otherwise provided by statute or in a Preferred Stock Designation, the holders of shares issued and outstanding and entitled to vote thereat representing a majority of the votes entitled to be cast thereat, present in person or represented by proxy, will constitute a quorum at all meetings of the shareholders for the transaction of business thereat. If, however, such quorum is not present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person 1 or represented by proxy, will have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting until a quorum is present or represented. 7. VOTING. Except as otherwise provided by statute, by the articles of incorporation of the Corporation, as amended (the "Articles of Incorporation"), or in a Preferred Stock Designation, each shareholder will be entitled at every meeting of the shareholders to one vote for each share of stock having voting power standing in the name of such shareholder on the books of the Corporation on the record date for the meeting and such votes may be cast either in person or by written proxy. Every proxy must be duly executed and filed with the Secretary. A shareholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing with the Secretary an instrument in writing revoking the proxy or another duly executed proxy bearing a later date. The vote upon any question brought before a meeting of the shareholders may be by voice vote, unless otherwise required by the Articles of Incorporation or these Bylaws or unless the Chairman of the Board of Directors or the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting otherwise determine. Every vote taken by written ballot will be counted by the inspectors of election. When a quorum is present at any meeting, the affirmative vote of the holders of shares representing a majority of the votes present, in person or represented by proxy at the meeting and entitled to be voted on the subject matter and which has actually been voted will be the act of the shareholders, except in the election of directors or as otherwise provided in these Bylaws, the Articles of Incorporation, a Preferred Stock Designation or by statute, in which case the express provision will control. (b) Unless otherwise provided in the Articles of Incorporation, any action required or permitted to be taken at any meeting of the shareholders may be taken without meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall have been signed by the holder or holders of all of the shares entitled to vote with respect to the action that is the subject of the consent. 8. ORDER OF BUSINESS. (a) The Chairman of the Board of Directors, or such other officer of the Corporation designated by a majority of the total number of directors that the Corporation would have if there were no vacancies (the "Whole Board of Directors"), will call meetings of the shareholders to order and will act as presiding officer thereof. Unless otherwise determined by the Board of Directors prior to the meeting, the presiding officer of the meeting of the shareholders will also determine the order of business and have the authority in his or her sole discretion to regulate the conduct of any such meeting, including without limitation by imposing restrictions on the persons (other than shareholders of the Corporation or their duly appointed proxies) who may attend any such shareholders meeting, by ascertaining whether any shareholder or his proxy may be excluded from any meeting of the shareholders based upon any determination by the presiding officer, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and by determining the circumstances in which any person may make a statement or ask questions at any meeting of the shareholders. (b) At an annual meeting of the shareholders, only such business will be conducted or considered as is properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors in accordance with Bylaw 4, (ii) otherwise properly brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board of Directors, or (iii) otherwise properly requested to be brought before the meeting by a shareholder in accordance with subsection (c) of this Bylaw 8. 2 (c) In order to properly submit any business to an annual meeting of shareholders, a shareholder must give timely notice in writing to the secretary of the Company. To be considered timely, a shareholder's notice must be delivered either in person or by United States certified mail, postage prepaid, and received at the principal executive offices of the Company (a) not less than 120 days nor more than 150 days before the first anniversary date of the Company's proxy statement in connection with the last annual meeting of shareholders or (b) if no annual meeting has been called after the expiration of more than 30 days from the date for such meeting contemplated at the time of the previous year's proxy statement, not less than a reasonable time, as determined by the board of directors, prior to the date of the applicable annual meeting. The secretary of the Company will deliver any shareholder proposals and nominations received in a timely manner for review by the board of directors or a committee designated by the board of directors. A shareholder's notice to submit business to an annual meeting of shareholders will set forth (i) the name and address of the shareholder, (ii) the class and number of shares of stock beneficially owned by such shareholder, (iii) the name in which such shares are registered on the stock transfer books of the Company, (iv) a representation that the shareholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) any material interest of the shareholder in the business to be submitted, and (vi) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting. In addition, the shareholder making such proposal will promptly provide any other information reasonably requested by the Company. Notwithstanding the foregoing provisions of this Bylaw 8(c), a shareholder who seeks to have any proposal included in the Company's proxy statement will comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended. (d) At a special meeting of shareholders, only such business may be conducted or considered as is properly brought before the meeting. To be properly brought before a special meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Chairman of the Board of Directors or a majority of the Whole Board of Directors in accordance with Bylaw 4, or (ii) otherwise properly brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board of Directors. (e) The determination of whether any business sought to be brought before any annual or special meeting of the shareholders is properly brought before such meeting in accordance with this Bylaw 8 will be made by the presiding officer of such meeting. If the presiding officer determines that any business is not properly brought before such meeting, he or she will so declare to the meeting and any such business will not be conducted or considered. DIRECTORS 9. FUNCTION. The business and affairs of the Corporation will be managed under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Articles of Incorporation or the Bylaws directed or required to be exercised or done by the shareholders. The Board of Directors will keep regular minutes of its meetings, and will place the same in the minute book of the Corporation. 3 10. NUMBER, ELECTION AND TERM. (a) Subject to the rights, if any, of any series of Preferred Stock to elect additional directors under circumstances specified in a Preferred Stock Designation, the authorized number of directors (which number shall in no event be less than three nor more than fifteen) shall be determined from time to time only by a vote of a majority of the Whole Board of Directors. However, no decrease in the number of directors will have the effect of shortening the term of an incumbent director. (b) The Directors will 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 stand for election at the 1998 annual shareholders' meeting for the following initial terms: Class I directors will be elected for a three-year term; Class II directors will be elected for a two-year term; and Class III directors will be elected for a one-year term. At each following annual shareholders' meeting, commencing with the 1999 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. Election of Directors of the Corporation need not be by written ballot unless requested by the Chairman of the Board of Directors, the President, or the holders of a majority of the Voting Stock present in person or represented by proxy at a meeting of the shareholders at which Directors are to be elected. (c) Each director will hold office until his successor is elected and qualified. However, notwithstanding anything contained in the Articles of Incorporation or the Bylaws to the contrary, the term of any director who is also an officer of the Corporation will terminate automatically, without any further action on the part of the Board of Directors or such director, upon the termination for any reason of such director in his or her capacity as an officer of the Corporation. Notwithstanding anything contained in the Articles of Incorporation or these Bylaws to the contrary, the affirmative vote of at least 80% of the directors then in office will be required to amend, repeal or adopt any provision inconsistent with this Bylaw 10. 11. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to rights, if any, of the holders of any series of Preferred Stock to elect additional directors under circumstances specified in a Preferred Stock Designation, any vacancy occurring in the Board of Directors (by death, resignation, removal with or without cause or otherwise) may be filled by the affirmative vote of a majority of the remaining directors then in office, though less than a quorum, or by a sole remaining director, and each director so chosen will hold office for the unexpired term of his predecessor in office. If there are no directors in office, then an election of directors may be held at an annual or special meeting of shareholders called for that purpose. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional directors under circumstances specified in a Preferred Stock Designation, any directorship to be filled by reason of an increase in the number of directors will be filled by the Board of Directors, for a term of office continuing until the next election of one or more directors by the shareholders; provided, however, that the Board of Directors may not fill more two such directorships during the period between any two successive annual meetings of shareholders. 12. REMOVAL. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional directors under circumstances specified in a Preferred Stock Designation, at any annual meeting or any meeting of shareholders called expressly for that purpose, any director or the entire Board of Directors may be removed from office with or without cause by the affirmative vote of the holder or holders of at least 80% of the shares then entitled to vote at an election of directors, voting together as a single class. 13. NOMINATIONS OF DIRECTORS; ELECTION. (a) Directors will be elected at the annual meeting of the shareholders, except as provided in Bylaw 11, and need not be residents of the State of Texas or 4 shareholders of the Corporation. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional directors under circumstances specified in a Preferred Stock Designation, only persons who are nominated in accordance with the following procedures will be eligible for election at a meeting of shareholders as directors of the Corporation. (b) Nominations of persons for election as directors of the Corporation may be made only at an annual meeting of shareholders (i) by or at the direction of the Board of Directors or (ii) by any shareholder who is a shareholder of record at the time of giving of notice provided for in this Bylaw 13, who is entitled to vote for the election of directors at such meeting, and who complies with the procedures set forth in this Bylaw 13. All nominations by shareholders must be made pursuant to timely notice in proper written form to the Secretary. (c) Nominations by shareholders will be made pursuant to timely notice in writing to the Secretary of the Company. To be timely, a shareholder's notice will be delivered to or mailed and received at the principal executive offices of the Company (a) with respect to an election to be held at the annual meeting of the shareholders of the Company, not less than 120 nor more than 150 days prior to the anniversary date of the immediately preceding annual meeting of shareholders of the Company, and (b) with respect to an election to be held at the special meeting of shareholders of the Company for the election of directors not later than the close of business on the tenth day following the date on which notice of the date of the special meeting was mailed to shareholders of the Company or public disclosure of the date of the special meeting was made, whichever first occurs. Such shareholder's notice to the Secretary will set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected), and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the Company's books, of such shareholder and (ii) the class and number of shares of voting stock of the Company which are beneficially owned by such shareholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director will furnish to the Secretary of the Company that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. In the event that a person is validly designated as a nominee to the Board of Directors in accordance with the procedures set forth in this Bylaw 13(c) and will thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. The presiding officer of the meeting of shareholders will, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he will so declare to the meeting and the defective nomination will be disregarded. Notwithstanding the foregoing provisions of this Bylaw 13(c), a shareholder will also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Bylaw 13(c). 5 14. RESIGNATION. Any director may resign at any time by giving written notice of his resignation to the Chairman of the Board of Directors or the Secretary. Any resignation will be effective upon actual receipt by any such person or, if later, as of the date and time specified in such written notice. 15. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held immediately after the annual meeting of the shareholders and at such other time and place either within or without the State of Texas as may from time to time be determined by the Board of Directors. Notice of regular meetings of the Board of Directors need not be given. 16. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors or the President on one day's notice to each director by whom such notice is not waived, given either personally or by mail, telephone, telegram, telex, facsimile or similar mum of communication, and be called by the Chairman of the Board of Directors or the President in like manner and on like notice on the written request of two or more directors. Special meetings of the Board of Directors may be held at such time and place either within or without the State of Texas as is determined by the Board of Directors or specified in the notice of any such meeting. 17. QUORUM. At all meetings of the Board of Directors, a majority of the total number of directors then in office will constitute a quorum for the transaction of business. Except for the designation of committees as hereinafter provided and except for actions required by these Bylaws or the Articles of Incorporation to be taken by a majority of the Whole Board of Directors, the act of a majority of the directors present at any meeting at which there is a quorum will be the act of the Board of Directors. If a quorum is not present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time to another place, time or date, without notice other than announcement at the meeting, until a quorum is present. 18. PARTICIPATION IN MEETINGS BY TELEPHONE CONFERENCE. Members of the Board of Directors or any committee designated by the Board of Directors may participate in and hold a meeting of the Board of Directors or any such committee, as the case may be, by means of telephone conference or similar means by which all persons participating in the meeting can hear each other, and such participation in a meeting will constitute presence in person at the meeting except where a person participates in a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 19. COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the Whole Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any committee. In absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors , shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have such power or authority in reference to amending the articles of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix any of the preferences 6 or rights of such shares relating to dividends, redemption, dissolution and distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation) adopting an agreement providing for a merger or consolidation under Articles 5.01 and 5.02 of the Texas Business Corporation Act, recommending to the shareholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the shareholders a dissolution of the Corporation, or amending the bylaws of the Corporation; and unless the Board of Directors by resolution expressly so provides, no such committee shall have the power and authority to declare a dividend, to authorize the issuance of stock, or to adopt articles of merger pursuant to Article 5.04 of the Texas Business Corporation Act. 20. COMPENSATION. The Board of Directors may establish the compensation for, and reimbursement of the expenses of, directors for membership on the Board of Directors and on committees of the Board of Directors, attendance at meetings of the Board of Directors or committees of Board of Directors, and for other services by directors of the Corporation or any of its majority-owned subsidiaries. 21. COMMITTEE RULES; QUORUM. Each committee may adopt rules governing the method of calling and time and place of holding its meetings. Unless otherwise provided by the Board of Directors, a majority of any committee constitute a quorum for the transaction of business, and the act of a majority of the members such committee present at which a quorum is present shall be the act of such committee. NOTICES 22. GENERALLY. Except as otherwise provided by statute, these Bylaws or the Articles of Incorporation, whenever by statute or under the provisions of the Articles of Incorporation or these Bylaws notice is required to be delivered to any director or shareholder, it will not be construed to require personal notice, but such notice may be delivered in writing, by mail (in case of overseas, by airmail). If mailed, such notice will be deemed to be delivered when deposited in the United States mail addressed to the director or shareholder at his or its address as it appears on the records of the Corporation, with postage thereon prepaid. Notice to directors may also be given by telephone, telegram, telex, facsimile, or similar medium of communication or as otherwise may be permitted by the Bylaws. 23. WAIVER. Whenever by statute or under the provisions of the Articles of Incorporation or these Bylaws any notice is required to be delivered a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time of the event for which notice is to be given, will be deemed equivalent to such notice. Attendance of a person at a meeting will constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 7 OFFICERS 24. GENERALLY. The officers of the Corporation will be elected by the Board of Directors and will consist of a Chairman of the Board of Directors (who, if the Board of Directors so specifies, may but will not be required to be also the Chief Executive Officer), a President (who may also be the Chief Executive Officer), a Secretary and a Treasurer. The Board of Directors may also choose any or all of the following: one or more Assistants to the Chairman of the Board of Directors, one or more Vice Presidents (who may be given particular designations with respect to authority, function or seniority), and such other officers as the Board of Directors may from time to time determine. Notwithstanding the foregoing, by specific action the Board of Directors may authorize the Chairman of the Board of Directors or the President to appoint any person to any office other than Chairman, President, Secretary or Treasurer. Any number of offices may be held by the same person. Any of the offices may be left vacant from time to time as the Board of Directors may determine. In the case of the absence or disability of any officer of the Corporation or for any other reason deemed sufficient by a majority of the Board of Directors, the Board of Directors may delegate the absent or disabled officer's powers or duties to any other officer or to any director. In addition Board of Directors may appoint one or more Vice Chairmen of the Board of Directors, who shall not be officers of the Corporation solely by reason of their holding such position, and who shall otherwise have such authority and duties as the Board of Directors may from time to time determine. 25. COMPENSATION. The compensation of all officers and agents of the Corporation who are also directors of the Corporation will be fixed by the Board of Directors or by a committee of the Board of Directors. The Board of Directors may fix, or delegate the power to fix, the compensation of other officers and agents of the Corporation to an officer of the Corporation. 26. SUCCESSION. The officers of the Corporation will hold office until their successors are elected and qualified. Any officer may be removed at any time by the Chairman of the Board of Directors or the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors or by the Chairman of the Board of Directors as provided in Bylaw 24. 27. AUTHORITY; DUTIES. The officers of the Corporation will have such authority and will perform all duties as are customarily incident to their respective offices or as may be specified from time to time by the Board of Directors. STOCK 28. CERTIFICATES. Certificates representing shares of stock of the Corporation will be in such form as may from time to time be determined by the Board of Directors, subject to applicable legal requirements. Each such certificate will be numbered and its issuance recorded in the books of the Corporation, and such certificate will exhibit the holder's name and the number of shares and will be signed by, or in the name of, the Corporation by the Chairman of the Board of Directors and the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, and will also be signed by, or bear the facsimile signature of, a duly authorized officer or agent of any property designated transfer agent of the Corporation. Any or all of the signatures and the seal of the Corporation, if any, upon such certificates may be facsimiles, engraved or printed. Such certificates may be issued and delivered notwithstanding that the person whose facsimile 8 signature appears thereon may have ceased to be such officer at the time the certificates are issued and delivered. 29. CLASSES OF STOCK. The designations, preferences and relative participating, optional or other special rights of the various of stock or series thereof, and the qualifications, limitations or restrictions thereof, will be set forth in full or summarized on the face or back of the certificates which the Corporation issues to represent its shares of stock or, in lieu thereof, such certificates will set forth the office of the Corporation from the holders of certificates may obtain a copy of such information. 30. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it will be the duty of the Corporation to issue, or to cause its transfer agent to issue, a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 31. LOST, STOLEN OR DESTROYED CERTIFICATES. The Secretary may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have lost, stolen or destroyed, upon the making of an affidavit of that fact, satisfactory to the Secretary, by the person claiming the certificate of stock to be lost, stolen or destroyed. As a condition precedent to the issuance of a new certificate or certificates, the Secretary may require the owner of such lost, stolen or destroyed certificate or certificates to give the Corporation a bond in such sum and with such surety or sureties as the Secretary may direct as indemnity against any claims that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of the new certificate. 32. RECORD DATES. (a) In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, the Board of Directors may fix a record date, which will not be more than 60 nor less 10 calendar days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining shareholders will be at the close of business on the day on which notice of the meeting is mailed, or, if notice is waived, at the close of business on the calendar day next preceding the day on which the meeting is held. A determination of shareholders of record entitled to notice of or to vote at a meeting of the shareholders apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which not be more than 60 calendar days prior to such action. If no record date is fixed, the record date for determining shareholders for any such purpose will be at the close of business on the calendar day on which the Board of Directors adopts the resolution relating thereto. (c) The Corporation will be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes, and will not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation has notice thereof, except as expressly provided by applicable statute. 9 INDEMNIFICATION 33. INDEMNIFICATION. Each person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at request of the Corporation 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) will be indemnified by the Corporation to the fullest extent permitted or authorized by the Texas Business Corporation Act. The Corporation may, but will not be obligated to, enter into agreements, trusts and other arrangements, or may maintain insurance at its expense for its benefit, in respect of such indemnification and for the benefit of any such person whether or not the Corporation would otherwise have the power to indemnify such person. GENERAL 34. FISCAL YEAR. The fiscal year of the Corporation will end on June 30 of each year or such other date as may from time to time be fixed by the Board of Directors. 35. SEAL. The Board of Directors may adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 36. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director each member of a committee designated by the Board of Directors and each officer of Corporation will, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors or by any other person or entity as to matters the director, committee member or officer believes are within such other person's professional or expert competence and who has been selected with reasonable are by or on behalf of the Corporation. 37. DISTRIBUTIONS; SHARE DIVIDENDS. Subject to statute and any provision of the Articles of Incorporation, distributions (in the form of cash or property) or share dividends may be declared by the Board of Directors at any regular or special meeting. 38. RESERVES. By resolution, the Board of Directors may create such reserve or reserves out of the surplus of the Corporation, may designate or allocate any part or all of the surplus, as the directors from time to time, in their absolute discretion, determine to be proper as a reserve or reserves to meeting contingencies, or for equalizing distributions, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors will determine to be beneficial to the interest of the Corporation. The Board of Directors may increase, decrease or abolish any such reserve in the manner in which it was created. 39. CHECKS. All checks, demands for money and notes of the Corporation will be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 40. TIME PERIODS. In applying any provision of these Bylaws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a 10 specified number of days prior to an event, calendar days will be used unless otherwise specified, the day of the doing of the fact will be excluded, and the day of the event will be included. 41. PRINCIPAL OFFICE. The principal office of the Corporation will be located in the City of Dallas, County of Dallas, State of Texas. 42. OTHER OFFICES. The Corporation may also have offices at such other places, within or without the State of Texas, as the Board of Directors may from time to time determine, or as the business of the Corporation may require. 43. AMENDMENTS. Except as otherwise provided by statute or by the Articles of Incorporation or these Bylaws, these bylaws or any of them may be amended in any respect or repealed at any time either (i) at any meeting of shareholder provided that any amendment or supplement proposed to be acted upon at any such meeting has been described or referred to in the notice of such meeting, or (ii) at any meeting of the Board of Directors, provided that no amendment adopted by the Board of Directors may vary or conflict with any amendment adopted by the shareholders. 44. CERTAIN DEFINED TERMS. used herein with initial capital letters that are not otherwise defined are used herein as defined in the Articles of Incorporation. 11 EX-4.1 4 EXHIBIT 4.1 EXHIBIT 4.1 WARRANT AGENT AGREEMENT CLASS A WARRANTS OF PRECEPT BUSINESS SERVICES, INC. FEBRUARY ___, 1998 PRECEPT BUSINESS SERVICES, INC. A TEXAS CORPORATION AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY Page 2 WARRANT AGENT AGREEMENT THIS WARRANT AGENT AGREEMENT (this "Agreement"), dated as of February __, 1998, among PRECEPT BUSINESS SERVICES, INC., a Texas corporation (the "Company"), and CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as warrant agent (hereinafter called the "Warrant Agent"). RECITALS: WHEREAS, the Company proposes to issue an aggregate of up to 1,815,000 warrants ("Warrants"), each Warrant will entitle the holder to purchase one share of Class A Common Stock, par value $.01 per share (the "Class A Common Stock") of the Company; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and exercise of the Warrants; NOW THEREFORE, in consideration of the premises and the mutual agreements herein set forth, and for the purposes of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant Agent to act as Warrant Agent for the Company in accordance with the instructions hereinafter set forth in this Agreement, and the Warrant Agent hereby accepted such appointment. Upon the execution of this Agreement, certificates representing 1,815,000 Warrants to purchase up to an aggregate of 1,815,000 shares of Class A Common Stock (subject to modification and adjustment as provided in Section 9 hereof) shall be executed by the Company and delivered to the Warrant Agent. Section 2. FORM OF WARRANT. The text of the Warrants and of the form of election to purchase Class A Common Stock shall be substantially as set forth in EXHIBIT A attached hereto (the provisions of which are hereby incorporated herein). All of the certificates for the Warrants may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or Page 3 regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. Each Warrant shall initially entitle the registered holder thereof to purchase one share of Class A Common Stock at a purchase price of Three Dollars and 82/100ths Dollars ($3.82) (the "Warrant Price"), at any time during the period (the "Exercise Period") commencing on the date hereof and expiring at 5:00 p.m. New York time, on August 26, 1999. The Warrant Price and the number of shares of Class A Common Stock issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chief Executive Officer, President or Vice President of the Company, and attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrants shall be dated as of the date of issuance by the Warrant Agent either upon initial issuance or upon transfer or exchange. In the event the aforesaid expiration date of the Warrants falls on a day that is not a business day, then the Warrants shall expire at 5:00 p.m. New York time on the next succeeding business day. For purposes hereof, the term "business day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in New York City, New York, are authorized or obligated by law to be closed. Section 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall maintain books for the transfer and registration of the Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue and register the Warrants in the names of the respective holders thereof. The Warrants shall be countersigned manually or by facsimile by the Warrant Agent (or by any successor to the Warrant Agent then acting as warrant agent under this Agreement) and shall not be valid for any purpose unless so countersigned. The Warrants may, however, be so countersigned by the Warrant Agent (or by its successor as Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the persons whose manual or facsimile signatures appear thereon as proper officers of the Company shall have ceased to be such officers at the time of such countersignature or delivery. Section 4. TRANSFERS AND EXCHANGES. The Warrant Agent shall transfer, from time to time, any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender thereof for transfer properly endorsed or accompanied by appropriate instructions for transfer. Upon any such transfer, a new Warrant shall be issued to the transferee and the surrendered Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be delivered by the Warrant Agent to the Company from time to time upon request. Warrants may be exchanged at the option of the holder thereof, when surrendered at the office of the Warrant Agent, for another Warrant, or other Warrants of different denominations of like tenor and representing in the aggregate the right to purchase a like number of shares of Page 4 Class A Common Stock. No certificates for Warrants shall be issued except for (i) Warrants initially issued hereunder in accordance with Section 1 hereof, (ii) Warrants issued upon any transfer or exchange of Warrants, (ii) Warrants issued in replacement of lost, stolen, destroyed or mutilated certificates for Warrants pursuant to Section 7 hereof, and (iv) at the option of the Board of Directors of the Company, Warrants in such form as may be approved by the Company's Board of Directors, to reflect any adjustment or change in the exercise price or the number of shares of Class A Common Stock of the Company purchasable upon exercise of the Warrants made pursuant to Section 9 hereof. Section 5. EXERCISE OF WARRANTS. Subject to the provisions of this Agreement, each registered holder of Warrants shall have the right, at any time during the Exercise Period, to exercise such Warrants and purchase the number of fully paid and non-assessable shares of Class A Common Stock of the Company specified in such Warrants upon presentation and surrender of such Warrants to the Company at the corporate office of the Warrant Agent, with the exercise form on the reverse thereof duly executed, and upon payment to the Company of the Warrant Price, determined in accordance with the provisions of Section 2, 9 and 10 of this Agreement, for the number of shares of Class A Common Stock of the Company in respect of which such Warrants are then exercised. Payment of such Warrant Price shall be made in cash or by certified or bank check payable to the Company. Subject to Section 6 hereof, upon such surrender of Warrants and payment of the Warrant Price, the Warrant Agent on behalf of the Company shall cause to be delivered with all reasonable dispatch to or upon the written order of the registered holder of such Warrants and in such name or names as such registered holder may designate, a certificate or certificates for the number of full shares of Class A Common Stock so purchased upon the exercise of such Warrants. Such certificate or certificates shall be deemed to be delivered on the date of the surrender of such Warrants and payment of the Warrant Price as aforesaid. The rights of purchase represented by the Warrants shall be exercisable during the Exercise Period, at the election of the registered holders thereof, either as an entirety or from time to time for a portion of the shares specified therein and, in the event that any Warrant is exercised in respect of less than all of the shares of Class A Common Stock specified therein at any time prior to the date of expiration of the Warrants, a new Warrant or Warrants will be issued to the registered holder for the remaining number of shares of Class A Common Stock specified in the Warrant so surrendered, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Warrants pursuant to the provisions of this Section and of Section 3 of this Agreement and the Company, whenever requested by the Warrant Agent, will supply the Warrant Agent with Warrants duly executed on behalf of the Company for such purpose. Upon the exercise of any one or more Warrants, the Warrant Agents shall promptly notify the Company in writing of such fact and of the number of securities delivered upon such exercise and, subject to the provisions below, shall cause all payments of an amount, in cash or by check made payable to the order of the Company, equal to the aggregate Warrant Price for such Warrants to be deposited Page 5 promptly in the Company's bank account. The Company and Warrant Agent shall determine, in their sole and absolute discretion, whether a Warrant certificate has been properly completed for exercise by the registered holder thereof. Anything in the foregoing to the contrary notwithstanding, no Warrant will be exercisable and the Company shall not be obligated to deliver any securities pursuant to the exercise of any Warrant unless at the time of exercise the Company has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 (the "Act") covering the securities issuable upon exercise of such Warrant and such registration statement shall have been declared and shall remain effective and shall be current, and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state or other jurisdiction of residence of the holder of such Warrant and the exercise of such Warrant in any state or other jurisdiction shall not otherwise be unlawful. Section 6. PAYMENT OF TAXES. The Company will pay any documentary stamp taxes attributable to the delivery of Class A of Common Stock deliverable upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of any certificates of shares of Class A Common Stock in a name other than that of the registered holder of Warrants in respect of which such shares are issued, and in such case neither the Company nor the Warrant Agent shall be required to deliver any certificate for shares of Class A Common Stock or any Warrant until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's satisfaction that such tax has been paid. Section 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue and the Warrant Agent shall countersign and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction and, in case of a lost, stolen or destroyed Warrant, indemnity, if requested, also satisfactory to them. Applicants for such substitute Warrants shall also comply with such other reasonable regulations and pay such reasonable charges as the Company or the Warrant Agent may prescribe. Section 8. RESERVATION OF COMPANY CLASS A COMMON STOCK. There have been reserved, and the Company shall at all times keep reserved, a number of shares of Class A Common Stock sufficient to provide for the exercise of the rights of purchase represented by the Warrants, and the designated transfer agent for the shares of Class A Common Stock and every subsequent transfer agent for any shares of Class A Common Stock issuable upon the exercise of any of the aforesaid rights of purchase Page 6 are irrevocably authorized and directed at all times to reserve such number of authorized shares of Class A Common Stock as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the designated transfer agent for the shares of the Class A Common Stock (which may be the Warrant Agent) and with every subsequent transfer agent for any shares of the Class A Common Stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is irrevocably authorized to requisition from time to time from such designated transfer agent stock certificates required to honor outstanding Warrants. The Company will supply such designated transfer agent with Class A Common Stock for that purpose. All Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company, and such cancelled Warrants shall constitute sufficient evidence of the number of shares of Class A Common Stock which have been issued upon the exercise of such Warrants. Promptly after the date of expiration of the Warrants, the Warrant Agent shall certify to the Company the total aggregate amount of Warrants then outstanding, and thereafter no shares of Class A Common Stock shall be subject to delivery in respect of such Warrants which shall have expired. Section 9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES. (a) SUBDIVISION AND COMBINATION. In the case that the Company shall at any time subdivide or combine the outstanding shares of the Class A Common Stock, the Warrant Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. (b) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Warrant Price pursuant to the provisions of this Section 9, the number of shares of Class A Common Stock issuable upon the exercise of the Warrants shall be adjusted to the nearest full whole number by multiplying a number equal to the Warrant Price in effect immediately prior to such adjustment by the number of shares of Class A Common Stock issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Warrant Price. (c) RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of any reclassification or change of the outstanding shares of the Class A Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding shares of Class A Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holder shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such Page 7 reclassification, change, consolidation, merger, sale or conveyance as if the Holder were the owner of the shares of Class A Common Stock underlying the Warrants immediately prior to any such events at a price equal to the product of (x) the number of shares issuable upon exercise of the Warrants and (y) the Warrant Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holder had exercised the Warrant. (d) NOTICE IN EVENT OF DISSOLUTION. In case of the dissolution, liquidation or winding-up of the Company, all rights under the Warrants shall terminate on a date fixed by the Company, such date to be no earlier than ten (10) days prior to the effectiveness of such dissolution, liquidation or winding-up and not later than five (5) days prior to such effectiveness. Notice of such termination of purchase rights shall be given to the last registered holder of the Warrants, as the same shall appear on the books of the Company maintained by the Warrant Agent, by registered mail at least thirty (30) days prior to such termination date. (e) COMPUTATIONS. The Company may retain a firm of independent public accountants (who may be any such firm regularly employed by the Company) to make any computation required under this Section 9, and any certificate setting forth such computation signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 9. Section 10. FRACTIONAL INTERESTS. The Warrants may only be exercised to purchase full shares of Class A Common Stock and the Company shall not be required to issue fractions of shares of Class A Common Stock on the exercise of Warrants. However, if a Warrantholder exercises all Warrants then owned of record by him and such exercise would result in the issuance of a fractional share, the Company will pay to such Warrantholder, in lieu of the issuance of any fractional share otherwise issuable, an amount of cash based on the Market Price on the last trading day prior to the exercise date. Section 11. NOTICES TO WARRANTHOLDERS. (a) Upon any adjustment of the Warrant Price and the number of shares of Class A Common Stock issuable upon exercise of a Warrant, then and in each such case, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company shall also mail such notice to the holders of the Warrants at their respective addresses appearing in the Warrant register. Failure to give or mail such notice, or any defect therein, shall not affect the validity of the adjustments. (b) In case at any time after the Closing Date: Page 8 (i) the Company shall pay dividends payable in stock upon its Class A Common Stock or make any distribution (other than regular cash dividends) to the holders of its Class A Common Stock; or (ii) the Company shall offer for subscription pro rata to all of the holders of its Class A Common Stock any additional shares of stock of any class or other rights; or (iii) there shall be any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of substantially all of its assets to another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; (v) then in any one or more of such cases, the Company shall give written notice to the Warrant Agent and the holders of the Warrants in the manner set forth in Section 11(a) of the date on which (A) a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Class A Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Class A Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. The Company will cause such notice to be delivered at least ten (10) days prior to the action in question and not less than ten (10) days prior to the record date in respect thereof. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any of the matters set forth in this Section 11(b). (c) The Company shall cause copies of all financial statements and reports, proxy statements and other documents that are sent to the Company stockholders to be sent by first-class mail, postage prepaid, on the date of mailing to such stockholders, to each registered holder of Warrants at his address appearing in the Warrant register as of the record date for the determination of the stockholders entitled to such documents. Section 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS. (a) The Warrant Agent shall promptly forward to the Company all monies received by the Warrant Agent for the purchase of shares of Class A Common Stock through the exercise of such Warrants. Page 9 (b) The Warrant Agent shall keep copies of this Agreement available for inspection by holders of Warrants during normal business hours. Section 13. REDEMPTION OF WARRANTS. The Warrants are redeemable by the Company in whole or in part, on not less than ten (10) days' prior written notice at a redemption price of $.01 per Warrant, provided the average closing bid quotation of the Class A Common Stock as reported on the Nasdaq SmallCap Stock Market, if traded thereon, or if not traded thereon, the average closing sale price if listed on a national securities exchange (or other reporting system that provides last sales prices), has been at least 135% of the then current Exercise Price of the Warrants, for a period of 10 consecutive trading days ending within three days prior to the date on which the Company gives notice of redemption. Any redemption in part shall be made pro rata to all Warrantholders. The redemption notice shall be mailed to the holders of the Warrants at their respective addresses appearing in the Warrant register. Any such notice mailed in the manner provided herein shall be conclusively presumed to have been duly given in accordance with this Agreement whether or not the registered holder receives such notice. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a registered holder of a Warrant (1) to whom notice was not mailed or (ii) whose notice was defective. An affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Holders of the Warrants will have exercise rights until the close of business on the day immediately preceding the date fixed for redemption. Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. Any corporation or company which may succeed to the corporate trust business of the Warrant Agent by any merger or consolidation or otherwise shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Warrant Agent under the provisions of Section 16 of this Agreement. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrants shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrants so countersigned. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrants shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrants so countersigned. In all such cases such Warrants shall have the full force provided in the Warrants and in the Agreement. Section 15. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the duties Page 10 and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrants, by their acceptance thereof, shall be bound. (a) The statement of fact and recitals contained herein and in the Warrants shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except as such describe the Warrant Agent or action taken or to be taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrants except as herein expressly provided. (b) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants in this Agreement or in the Warrants to be complied with by the Company. (c) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. (d) The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate or other instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (e) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence, willful misconduct or bad faith. (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expenses unless the Company or one or more registered holders of Warrants shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding, and any such action, Page 11 suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights and interests may appear. (g) The Warrant Agent and any stockholder, director, officer, partner or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not the Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (h) The Warrant Agent shall act hereunder solely as agent and its duties shall be determined solely by the provisions hereof. (i) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, and the Warrant Agent shall not be answerable or accountable for any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct, provided reasonable care had been exercised in the selection and continued employment thereof. (j) Any request, direction, election, order or demand of the Company shall be sufficiently evidenced by an instrument signed in the name of the Company by its President or a Vice-President or its Secretary or an Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Warrant Agent by a copy thereof certified by the Secretary or an Assistant Secretary of the Company. Section 16. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company notice in writing; and to the holders of the Warrants notice by mailing such notice to the holders at their respective addresses appearing on the Warrant register, of such resignation, specifying a date when such resignation shall take effect. The Warrant Agent may be removed by like notice to the Warrant Agent from the Company and the like mailing of notice to the holders of the Warrants. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of action, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of thirty (30) days afer such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or after the Company has received such notice from a registered holder of a Warrant (who shall, with such notice, submit his Warrant for inspection by the Company), then the registered holder of any Warrant may apply to any court of competent jurisdiction for the Page 12 appointment of a successor to the Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or by such a court, shall be a bank or trust company, in good standing, incorporated under New York, Texas or federal law. After appointment, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibility as if it had been originally named as Warrant Agent without further act or deed and the former Warrant Agent shall deliver and transfer to the successor Warrant Agent all cancelled Warrants, records and property at the time held by it hereunder, and execute and deliver any further assurance or conveyance necessary for the purpose. Failure to file or mail any notice provided for in this Section, however, or any defect therein, shall not affect the validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. Section 17. IDENTITY OF TRANSFER AGENT (OTHER THAN WARRANT AGENT. Forthwith upon the appointment of any designated transfer agent (other than the Warrant Agent) for the shares of Class A Common Stock or of any subsequent transfer agent for the shares of Class A Common Stock or other shares of the stock issuable upon the exercise of the rights of purchase represented by the Warrants, the Company will file with the Warrant Agent a statement setting forth the name and address of such transfer agent. Section 18. NOTICES. Any notice pursuant to this Agreement to be given by the Warrant Agent, or by the registered holder of any Warrant to the Company, shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another is filed in writing by the Company with the Warrant Agent) as follows: Precept Business Services, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, Texas 75201 Attention: General Counsel and a copy thereof to: Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas 75202 Attention: Richard F. Dahlson, Esq. Any notice pursuant to this Agreement to be given by the Company or by the registered holder of any Warrant to the Warrant Agent shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: Continental Stock Transfer & Trust Company [Address] Page 13 Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Agent may from time to time supplement or amend this Agreement in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not materially adversely affect the interest of the holders of Warrants; and in addition the Company and the Warrant Agent may modify, supplement or alter this Agreement (other than as otherwise prescribed in this Agreement) with the consent in writing of the registered holders of the Warrants representing not less than a majority of the Warrants then outstanding. Section 20. TEXAS CONTRACT. This Agreement and each Warrant issued hereunder shall be deemed to be a contract made under the laws of the State of Texas and shall be construed in accordance with the laws of Texas without regard to the conflicts of law principles thereof. Section 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of the Warrants any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrants. Section 22. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and insure to the benefit of their respective successors and assigns hereunder. Section 23. PRIOR AGREEMENTS. This Agreement sets for the entire agreement and understanding of the parties and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. PRECEPT BUSINESS SERVICES, INC. By: Name: Title: Page 14 CONTINENTAL STOCK TRANSFER & TRUST COMPANY By: Name: Title: EX-4.2 5 EXHIBIT 4.2 Exhibit 4.2 VOID AFTER AUGUST 26, 1999 CLASS A WARRANTS REDEEMABLE CLASS A WARRANT CERTIFICATE TO ------------------- PURCHASE ONE SHARE OF CLASS A COMMON STOCK PRECEPT BUSINESS SERVICES, INC. ------------------- CUSIP 740165 11 3 THIS CERTIFIES THAT, FOR VALUE RECEIVED or registered assigns (the "Registered Holder") is the owner of the number of Redeemable Class A Warrants (the "Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of Class A Common Stock, $.01 par value ("Common Stock"), of Precept Business Services, Inc., a Texas corporation (the "Company"), at any time from March 16, 1998 (the "Initial Warrant Exercise Date"), and prior to the Expiration date (as hereinafter defined), upon the presentation and surrender of this Class A Warrant Certificate with the Exercise Form on the reverse hereof duly executed, at the corporate office of Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $3.82 subject to adjustment (the "Exercise Price") in lawful money of the United States of America in cash or by certified or bank check made payable to the Company. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement, dated as of February 9, 1998 (the "Warrant Agreement"), between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Exercise Price and the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional interests will be issued. In the case of the exercise of less than all of the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 p.m. (New York time) on August 26, 1999, provided that if such date is not a business day, it shall mean 5:00 p.m., New York City time, on the next following business day. For purposes hereof, the term "business day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in New York City, New York, are authorized or obligated by law to be closed. The Company shall not be obligated to deliver any securities pursuant to the exercise of the Warrants represented hereby unless at the time of exercise the Company has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, (the "Act"), covering the securities issuable upon the exercise of the Warrant represented hereby and such registration statement has been declared and shall remain effective and shall be current, and such securities have been registered or qualified or deemed to be exempt under the securities laws of the state or other jurisdiction of residence of the Registered Holder and the exercise of the Warrants represented hereby in any state or other jurisdiction shall not otherwise be lawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon the presentment and payment of any tax or other charge imposed in connection therewith or incident thereto, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder as such, shall not be entitled to any rights of a shareholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed at the option of the Company, at a redemption price of $.01 per Warrant, at any time commencing on February 9, 1998, provided that the average closing bid quotation of the Common Stock as reported on the Nasdaq Stock Market, if traded thereon, or is not traded thereon, the average closing sale price if listed on a national exchange (or other reporting system that provides last sales prices), shall have for a period of 10 consecutive days on which such market is open for trading ending no more than three days prior to the date on which the Company gives the Notice of Redemption, as defined below, equalled or exceeded 135% of the then current Exercise Price. Notice of redemption (the "Notice of Redemption") shall be given by the Company not later than the tenth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no right with respect to this Warrant except to receive the $.01 per Warrant upon surrender of this Certificate. This Warrant Certificate and each Warrant represented hereby have been issued in substitution for and in replacement of those certain Redeemable Class C Warrants issued by U.S. Transportation Systems, Inc. on August 27, 1996 and which were due to expire pursuant to their terms on August 26, 1999. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary, except as provided in the Warrant Agreement. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Texas without regard to the conflicts of law principles thereof. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile, by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. - ------------------------------------------------ AMERICAN BANK NOTE COMPANY FEB 6, 1998 fm 3504 ATLANTIC AVENUE SUITE 12 LONG BEACH, CA 90807 (562) 989-2333 (FAX) (562) 426-7450 500-19X Proof __ REV 2 - ------------------------------------------------ Dated: PRECEPT BUSINESS SERVICES, INC. BY: BY: COUNTERSIGNED AND REGISTERED: [SIG] [SIG] CONTINENTAL STOCK TRANSFER & TRUST COMPANY (Jersey City, N.J.) [SEAL] PRECEPT BUSINESS TRANSFER AGENT SERVICES INC. TEXAS AND REGISTRAR /s/ Glenn R. Smith /s/ David L. Neely CHAIRMAN AND SECRETARY CHIEF EXECUTIVE OFFICER BY AUTHORIZED OFFICER
EXERCISE FORM To Be Executed by the Registered Holder in Order to Exercise Warrants The undersigned Registered Holder hereby irrevocably elects to exercise _______________ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ [please print or type name and address] and be delivered to ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ [please print or type name and address] and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. IMPORTANT: PLEASE COMPLETE THE FOLLOWING: 1. The exercise of this Warrant was solicited by _______________________________________________________ 2. If the exercise of this Warrant was not solicited, please check the following box. / / Dated: ____________________________________ X ______________________________________________________ ______________________________________________________ ______________________________________________________ Address ______________________________________________________ Social Security or Taxpayer Identification Number ______________________________________________________ Signature Guaranteed ASSIGNMENT To be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, ____________________________________________________________________, hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ [please print or type name and address] __________________________________________________________________________________________________________________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints __________________________________________________________________________________________________ as its/his/her attorney-in-fact to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: ____________________________________ X ______________________________________________________ Signature Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION ON OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS MEDALLION STAMP PROGRAM.
EX-4.3 6 EXHIBIT 4.3 NUMBER SHARES PBSI-A INCORPORATED UNDER THE LAWS PRECEPT CUSIP 740165 10 5 OF THE STATE OF TEXAS SEE REVERSE FOR CERTAIN DEFINITIONS PRECEPT BUSINESS SERVICES, INC. THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE $0.01 EACH OF THE CLASS A COMMON STOCK OF PRECEPT BUSINESS SERVICES, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ David L. Neely COUNTERSIGNED AND REGISTERED: CHAIRMAN OF THE BOARD AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY CHIEF EXECUTIVE OFFICER (Jersey City, NJ) TRANSFER AGENT AND REGISTRAR BY /s/ Glenn R. Smith (SEAL) SECRETARY AUTHORIZED SIGNATURE PRECEPT BUSINESS SERVICES, INC. TEXAS PRECEPT PRECEPT BUSINESS SERVICES, INC. The Amended and Restated Articles of Incorporation of the Corporation, on file in the office of the Secretary of State of the State of Texas, (i) deny preemptive rights of shareholders to acquire unissued or treasury shares or other securities of the Corporation and (ii) contain a statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued and the authority of the Board of Directors to fix and determine the rights and preferences of each series of preferred stock and relative to other such series. The Corporation will furnish a copy of the Amended and Restated Articles of Incorporation and of any resolution/s of the Board of Directors fixing and determining the relative rights and preferences of the shares of any series of preferred stock to the record holder of this certificate without charge on request to the Corporation at the Corporation's principal place of business or registered office. This certificate also evidences and entitles the holder to certain Rights as set forth in the Rights Agreement, between Precept Business Services, Inc. (the "Company") and Continental Stock Transfer & Trust Company (the "Rights Agent"), dated as of February 9, 1998, (as amended from time to time, the "Rights Agreement"), the terms of which are hereby incorporated in this certificate by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement as in effect on the date of mailing, without charge promptly following receipt of a written request. Under certain circumstances set forth in the Rights agreement, Rights beneficially owned by any person who is, was or becomes, an Acquiring Person or any Affiliate or an Associate of an Acquiring Person (as such terms are defined in the Rights Agreement) whether eventually held by or on behalf of such person or by any subsequent holder may become null and void. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM-- as tenants in common UNIF GIFT MIN ACT -- ________ Custodian__________ TEN ENT-- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right Under Uniform Gifts to Minors of survivorship and not as Act_________________________ tenants in common (State) ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST. For Value Received, _____________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________ _________________________________________________________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE _________________________________________________________________________________________________________________________________ _________________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ Shares of the Capital Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Company, with full power of substitution in the premises. Dated _____________________________________ X _________________________________________________ (SIGNATURE) NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE -------------> CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR EN- LARGEMENT OR ANY CHANGE WHATEVER. X _________________________________________________ (SIGNATURE) ___________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-16. ___________________________________________________ SIGNATURE(S) GUARANTEED BY: ___________________________________________________
EX-4.4 7 EXHIBIT 4.4 EXHIBIT 4.4 RIGHTS AGREEMENT DATED AS OF FEBRUARY 9, 1998 PRECEPT BUSINESS SERVICES, INC. AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY AS RIGHTS AGENT Table of Contents
Section Page - ------- ---- 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . 3. Issue of Rights Certificates. . . . . . . . . . . . . . . . . . . . . . 4. Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . 5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . 6. Transfer, Split Up, Combination, and Exchange of Rights Certificates; . Mutilated, Destroyed, Lost, or Stolen Rights Certificates. . . . . 7. Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . 8. Cancellation and Destruction of Rights Certificates . . . . . . . . . . 9. Reservation and Availability of Capital Stock . . . . . . . . . . . . . 10. Common Stock Record Date. . . . . . . . . . . . . . . . . . . . . . . . 11. Adjustment of Purchase Price, Number and Kind of Shares, or Number of Rights . . . . . . . . . . . . . . . . . . . . . . . . . 12. Certificate of Adjusted Purchase Price or Number of Shares. . . . . . . 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. . 14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . 15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . 17. Rights Certificate Holder Not Deemed a Stockholder. . . . . . . . . . . 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . 19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . 21. Change of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . 22. Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . 23. Redemption and Termination. . . . . . . . . . . . . . . . . . . . . . . 24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25. Notice of Certain Events. . . . . . . . . . . . . . . . . . . . . . . . 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27. Supplement and Amendments . . . . . . . . . . . . . . . . . . . . . . . 28. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29. Determinations and Actions by the Board of Directors, etc.. . . . . . . 30. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . . . 31. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34. Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit A -- Form of Rights Certificate Exhibit B -- Form of Summary of Rights ii RIGHTS AGREEMENT RIGHTS AGREEMENT, dated as of February 9, 1998 (the "Agreement"), between Precept Business Services, Inc., a Texas corporation (the "Company"), and Continental Stock Transfer & Trust Company (the "Rights Agent"). BACKGROUND On February 2, 1998 (the "Rights Dividend Declaration Date"), the Board of Directors of the Company authorized and declared a dividend distribution of one Right for each share of Class A common stock, par value $0.01 per share, of the Company (the "Class A Common Stock") and of one Right for each share of Class B common stock, par value, $.01 per share, of the Company (the "Class B Common Stock"), each as outstanding at the Close of Business on February 9, 1998 (the "Record Date"), and has authorized the issuance of one Right (as such number may be adjusted pursuant to the provisions of SECTION 11(p)) for each share of Class A Common Stock and Class B Common Stock issued between the Record Date (whether originally issued or delivered from the Company's treasury) and the Distribution Date, each Right initially representing the right to purchase one share of Class A Common Stock of the Company upon the terms and subject to the conditions set forth below (the "Rights"); NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth in this Agreement, the parties hereby agree as follows: SECTION 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Act" means the Securities Act of 1933, as amended. (b) "Acquiring Person" means any Person that, together with all Affiliates and Associates of such Person, is the Beneficial Owner of 15% or more of the shares of Class A Common Stock then outstanding, but does not include (i) the Company; (ii) any Subsidiary of the Company; (iii) any employee benefit plan of the Company or of any Subsidiary of the Company; (iv) any Person organized, appointed, or established by the Company for or pursuant to the terms of any such plan; (v) any Person that becomes an Acquiring Person pursuant to a Permitted Transaction; (vi) any Person that has become an Acquiring Person inadvertently and, within five Business Days of being requested by the Company to advise it regarding the same, certifies to the Company that such Person acquired beneficial ownership of shares of Class A Common Stock in excess of 14.9% inadvertently or without knowledge of the terms of the Rights and such certification is accepted as true by a Requisite Majority acting in good faith, and such Person divests as promptly as practicable a 1 sufficient amount of Class A Common Stock so that such Person would no longer hold in excess of 14.9% of the Class A Common Stock then outstanding; (vii) any Person that becomes an Acquiring Person solely as a result of a reduction in the number of outstanding shares of Class A Common Stock in a transaction that is approved by a Requisite Majority, provided that such Person will immediately be an Acquiring Person in the event such Person thereafter acquires any additional shares of Class A Common Stock (other than as a result of a stock split or stock dividend) while the Beneficial Owner of 15% or more of the shares of Class A Common Stock then outstanding; or (viii) Darwin Deason or any of his Affiliates. (c) "Affiliate" and "Associate" have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act and in effect on the date of this Agreement. (d) A Person will be deemed the "Beneficial Owner" of, and will be deemed to "beneficially own," any securities that: (i) such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time or upon the occurrence of certain events) pursuant to any agreement, arrangement, or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person will not be deemed the "Beneficial Owner" of, or to "beneficially own," (A) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange, (B) securities issuable upon exercise of Rights at any time prior to the occurrence of a Distribution Date, or (C) securities issuable upon exercise of Rights, which were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to SECTION 3(a) or SECTION 22 (the "Original Rights") or pursuant to SECTION 11(i) in connection with an adjustment made with respect to any Original Rights; (ii) such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement, or understanding, whether or not in writing; provided, however, that a Person will not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this SECTION 1(d)(ii) as a result of an agreement, arrangement, or understanding to vote such security if such agreement, arrangement, or understanding: (1) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (2) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or 2 (iii) are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate of such Person) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement, or understanding (whether or not in writing), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso in SECTION 1(d)(ii)), or disposing of any voting securities of the Company; provided, however, that nothing in this SECTION 1(d) will cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such Person's participation in good faith in a bona fide firm commitment underwriting until the expiration of forty days after the date of such acquisition. (e) "Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (f) "Close of Business" on any given date will mean 5:00 p.m., New York, New York time, on such date; provided, however, that if such date is not a Business Day it will mean 5:00 p.m., New York, New York time, on the next succeeding Business Day. (g) "Common Stock" means the Class A common stock, par value $0.01 per share, of the Company, or the Class B common stock, par value $0.01 per share, of the Company, as the case may be; "Common Stock" when used with reference to any Person other than the Company will mean the capital stock of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person. (h) "Continuing Director" means (i) any member of the Board of Directors of the Company who (i) is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person and (ii) was either a member of the Board of Directors of the Company on the date of this Agreement or who subsequently became a director of the Company and whose initial election or initial nomination for election was approved by a majority of the Continuing Directors then on the Board of Directors of the Company. (i) "Distribution Date" means the Close of Business on the tenth Business Day after the earlier to occur of (i) the Stock Acquisition Date or (ii) the date any Person commences or publicly announces an intention to commence a tender offer or exchange offer for the Class A Common Stock which would result in, upon the consummation of such offer, the Person making such offer, together with all of its Affiliates and Associates, being the Beneficial Owner of 15% or more of the Class A Common Stock then outstanding (including any such date that is after the date of this Agreement and prior to the issuance of the Rights); provided, however, that if the tender offer or exchange offer that gave rise to the Distribution Date is cancelled, terminated or otherwise withdrawn within ten Business Days of its announcement, such offer shall be deemed never to have been made and no Distribution Date shall occur with respect thereto. 3 (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (k) "Permitted Transaction" means a stock acquisition or a tender or exchange offer pursuant to a definitive agreement by which a Person (who is not at the time an Acquiring Person) would become an Acquiring Person and which has been approved by a Requisite Majority prior to the execution of the definitive agreement providing for the acquisition or the public announcement of the offer, as the case may be. (l) "Person" means any individual, firm, corporation, partnership, limited liability company or other public or private entity. (m) "Redemption Price" with respect to each Right means $0.01, as such amount may from time to time be adjusted in accordance with SECTION 11. All references herein to the Redemption Price means the Redemption Price as in effect at the time in question. (n) "Requisite Majority" means, at any time, the affirmative vote of a majority of the Continuing Directors then in office. (o) "Rights Shares" means the shares of Class A Common Stock issuable or issued upon the exercise of the Rights. (p) "Section 11(a)(ii) Event" means any event described in SECTION 11(a)(ii). (q) "Section 13 Event" means any event described in clauses (i), (ii), or (iii) of SECTION 13(a). (r) "Stock Acquisition Date" means the first date of public announcement (which, for purposes of this definition, will include, without limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become an Acquiring Person. (s) "Subsidiary" means, with reference to any Person, any entity of which an amount of voting securities sufficient to elect at least a majority of the directors or similar Persons of such entity is beneficially owned, directly or indirectly, by such Person, or otherwise controlled by such Person. (t) "Trading Day" means a day on which the principal national securities exchange or quotation system on which the shares of Class A Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Class A Common Stock are not listed or admitted to trading on any national securities exchange, a Business Day. (u) "Triggering Event" means any Section 11(a)(ii) Event or any Section 13 Event. 4 SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions of this Agreement, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. SECTION 3. ISSUE OF RIGHTS CERTIFICATES. (a) Prior to the Distribution Date, (i) the Rights will be evidenced (subject to the provisions of this SECTION 3(a)) by the certificates for the Class A Common Stock and/or Class B Common Stock, as the case may be, registered in the names of the holders of the Class A Common Stock and/or Class B Common Stock, as the case may be, (which certificates for Class A Common Stock and/or Class B Common Stock, as the case may be, will be deemed also to be certificates for Rights) and not by separate certificates, and (ii) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock (Class A Common Stock or the Class B Common Stock, as the case may be, including a transfer to the Company). As soon as practicable after the Distribution Date, the Rights Agent will send by first-class, insured, postage prepaid mail, to each record holder of the Class A and/or Class B Common Stock, as the case may be, as of the Distribution Date, at the address of such holder shown on the records of the Company, one or more rights certificates, in substantially the form of EXHIBIT A (the "Rights Certificates"), evidencing one Right for each share of Class A Common Stock and/or Class B Common Stock, as the case may be, so held, subject to adjustment as provided in this Agreement. In the event that an adjustment in the number of Rights per share of Class A Common Stock and/or Class B Common Stock, as the case may be, has been made pursuant to SECTION 11(p), at the time of distribution of the Rights Certificates, the Company will make the necessary and appropriate rounding adjustments (in accordance with SECTION 14(a)) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) As soon as practicable following the Record Date, the Company will send a copy of a Summary of Rights, in substantially the form of EXHIBIT B, by first-class, postage prepaid mail, to each record holder of the Class A Common Stock and/or Class B Common Stock, as the case may be, as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for the Class A Common Stock and/or Class B Common Stock, as the case may be, outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates for the Class A Common Stock and/or Class B Common Stock, as the case may be, and the registered holders of the Class A Common Stock and/or Class B Common Stock, as the case may be, will also be the registered holders of the associated Rights. Until the earlier of the Distribution Date or the Expiration Date (as defined in SECTION 7), the transfer of any certificates representing shares of Class A Common Stock and/or Class B Common Stock, as the case may be, in respect of which Rights have been issued will also constitute 5 the transfer of the Rights associated with such shares of Class A Common Stock and/or Class B Common Stock, as the case may be. (c) Rights will be issued in respect of all shares of Class A Common Stock and/or Class B Common Stock, as the case may be, that are issued (whether originally issued or from the Company's treasury) after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date. Certificates representing such shares of Class A Common Stock and/or Class B Common Stock, as the case may be, will also be deemed to be certificates for Rights, and will bear the following legend: THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER TO CERTAIN RIGHTS AS SET FORTH IN THE RIGHTS AGREEMENT BETWEEN PRECEPT BUSINESS SERVICES, INC. (THE "COMPANY") AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY (THE "RIGHTS AGENT") DATED AS OF FEBRUARY 9, 1998 (AS AMENDED FROM TIME TO TIME, THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE HEREBY INCORPORATED IN THIS CERTIFICATE BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE COMPANY WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT, AS IN EFFECT ON THE DATE OF MAILING, WITHOUT CHARGE PROMPTLY AFTER RECEIPT OF A WRITTEN REQUEST. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED BY ANY PERSON WHO IS, WAS, OR BECOMES AN ACQUIRING PERSON OR ANY AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BECOME NULL AND VOID. With respect to the shares of Class A Common Stock and/or Class B Common Stock, as the case may be, issued after the Record Date, until the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights associated with the Class A Common Stock and/or Class B Common Stock, as the case may be, represented by such certificates will be evidenced by such certificates alone and registered holders of Class A Common Stock and/or Class B Common Stock, as the case may be, will also be the registered holders of the associated Rights, and the transfer of any of such certificates will also constitute the transfer of the Rights associated with the Class A Common Stock and/or Class B Common Stock, as the case may be, represented by such certificates. (d) With respect to Rights associated with shares of Class B Common Stock, such Rights shall be automatically extinguished and terminated to the extent the associated shares of Class B 6 Common Stock are converted into shares of Class A Common Stock, and upon such conversion into Class A Common Stock, Rights are issued in association with such Class A Common Stock. In this regard, upon conversion of Class B Common Stock into Class A Common Stock in accordance with the provisions of the Class B Common Stock, a Right shall be issued associated with such Class A Common Stock in lieu of the Right associated with the converted Class B Common Stock, which Right extinguished and terminated in accordance with the immediately preceding sentence. SECTION 4. FORM OF RIGHTS CERTIFICATES. The Rights Certificates (and the forms of election to purchase and of assignment to be printed on the reverse of the rights certificates) will each be substantially in the form set forth in EXHIBIT A and may have such marks of identification or designation and such legends, summaries, or endorsements as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or quotation system on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of SECTION 11 and SECTION 22, the Rights Certificates, whenever distributed, will be dated as of the Record Date and on their face will entitle the holders of such Rights Certificates to purchase such number of shares of Class A Common Stock as is set forth in such Rights Certificates at the price set forth in such Rights Certificates (such exercise price per share, the "Purchase Price"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price will be subject to adjustment as provided in this Agreement. SECTION 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights Certificates will be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its Chief Operating Officer, its President, or any Executive Vice President, either manually or by facsimile signature, will have affixed thereto the Company's seal or a facsimile thereof, and will be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates will be countersigned by the Rights Agent, either manually or by facsimile signature and will not be valid for any purpose unless so countersigned. In case any officer of the Company who has signed any of the Rights Certificates ceases to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the Person who signed such Rights Certificates had not ceased to be such officer of the Company, and any Rights Certificate may be signed on behalf of the Company by any Person who, at the actual date of the execution of such Rights Certificate, is a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such Person was not such an officer. 7 (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office or offices designated as the appropriate place for surrender of Rights Certificates upon exercise or transfer, books for registration and transfer of the Rights Certificates issued under this Agreement. Such books will show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on the face of the Rights Certificates, and the date of each of the Rights Certificates. SECTION 6. TRANSFER, SPLIT UP, COMBINATION, AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED, DESTROYED, LOST, OR STOLEN RIGHTS CERTIFICATES. (a) Subject to the provisions of SECTION 7(e) and SECTION 14, at any time after the Distribution Date, and at or prior to the Expiration Date, any Rights Certificate or Certificates may be transferred, split up, combined, or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of Rights Shares (or, following a Triggering Event, preferred stock, other securities, cash, or other assets, as the case may be) as the Rights Certificate or Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine, or exchange any Rights Certificate or Rights Certificates will make such request in writing delivered to the Rights Agent, and will surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined, or exchanged at the principal office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company will be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder has completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and has provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company requests in good faith. Thereupon, the Rights Agent will, subject to SECTION 4, SECTION 7(e) and SECTION 14, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination, or exchange of any Rights Certificate. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction, or mutilation of a Rights Certificate, and, in case of loss, theft, or destruction, of indemnity or security satisfactory to them, and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Rights Certificate so lost, stolen, destroyed, or mutilated. 8 SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. (a) Subject to SECTION 7(e), the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided in this Agreement including, without limitation, the restrictions on exercisability set forth in SECTION 9(c), SECTION 11(a)(iii), SECTION 23(a) and SECTION 24) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side of the Rights Certificate duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price for each share of Class A Common Stock (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercisable, at or prior to the earlier of (i) the Close of Business on February 9, 2008 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in SECTION 23 or (iii) the time at which such rights are exchanged as provided in SECTION 24 (the earlier of the times, the "Expiration Date")). (b) The Purchase Price for each share of Class A Common Stock pursuant to the exercise of a Right will initially be $50.00, subject to adjustment from time to time as provided in SECTION 11, and SECTION 13(a). The Purchase Price will be payable in accordance with SECTION 7(c). (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment of the Purchase Price for the shares of Class A Common Stock (or other shares, securities, cash or other assets, as the case may be) to be purchased and an amount equal to any applicable transfer tax, the Rights Agent will, subject to SECTION 20(k), promptly (i) (A) requisition from any transfer agent of the shares of Class A Common Stock (or make available, if the Rights Agent is the transfer agent for such shares) certificates for the total number of shares of Class A Common Stock to be purchased (the Company hereby irrevocably authorizing its transfer agent to comply with all such requests) or (B) if the Company has elected to deposit the shares of Class A Common Stock with a depository agent, requisition from the depository agent depository receipts representing such number of shares of Class A Common Stock as are to be purchased (in which case certificates for the shares of Class A Common Stock represented by such receipts will be deposited by the transfer agent with the depository agent) and the Company will direct the depository agent to comply with such request; (ii) requisition from the Company the amount of cash, if any, to be paid in lieu of fractional shares in accordance with SECTION 14; (iii) after receipt of such certificates or depository receipts, cause such certificates or depository receipts to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder; and (iv) after receipt thereof, deliver such cash, if any, to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced pursuant to SECTION 11(a)(iii)) will be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities (including Class A Common Stock) of the Company, pay cash, or distribute other property 9 pursuant to SECTION 11(a), the Company will make all arrangements necessary so that such other securities, cash, or other property are available for distributi on by the Rights Agent, if and when appropriate. The Company reserves the right to require prior to the occurrence of a Triggering Event that, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Common Stock would be issued. (d) If the registered holder of any Rights Certificate exercises less than all the Rights evidenced by such certificate, a new Rights Certificate evidencing the unexercised Rights will be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, subject to the provisions of SECTION 14. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially owned by any Person referred to in CLAUSES (i) through (iii) below will become null and void without any further action and no holder of such Rights will have any rights whatsoever with respect to such Rights, under any provision of this Agreement or otherwise: (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee from an Acquiring Person (or from any Associate or Affiliate of an Acquiring Person) that becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee from an Acquiring Person (or of any such Associate or Affiliate) that becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement, or understanding regarding the transferred Rights or (B) a transfer that the Board of Directors of the Company has determined is part of an agreement, plan, arrangement, or understanding that has as a substantial purpose or effect the avoidance of this SECTION 7(e). The Company will use reasonable efforts to insure that the provisions of this SECTION 7(e) and SECTION 4(b) are complied with, but will have no liability under this Agreement to any holder of Rights Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person, or any of its Affiliates, Associates, or transferees. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company will be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this SECTION 7 unless such registered holder has (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company requests in good faith. 10 SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange (or in connection with conversion of Class B Common Stock into Class A Common Stock) will, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, will be cancelled by it, and no Rights Certificates will be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company will deliver to the Rights Agent for cancellation and retirement, and the Rights Agent will so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent will deliver all cancelled Rights Certificates to the Company, or will, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case will deliver a certificate of destruction to the Company. SECTION 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK. (a) The Company will use its best efforts to reserve and keep available out of its authorized and unissued shares of Class A Common Stock (and/or or other securities) or its authorized and issued shares of Class A Common Stock (and/or or other securities) held in its treasury, the number of shares of Class A Common Stock (and/or other securities) that will be sufficient to permit the exercise in full of all outstanding Rights. (b) So long as the shares of Class A Common Stock (and, following the occurrence of a Triggering Event, Common Stock or other securities) issuable and deliverable upon the exercise of the Rights may be listed on any national securities exchange or automated quotation system, the Company will use its reasonable efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange or automated quotation system upon official notice of issuance upon such exercise. (c) The Company will use its best efforts to (i) file, as soon as practicable following the first occurrence of a Section 11(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with SECTION 11(a)(iii), a registration statement under the Act, with respect to the securities purchasable upon exercise of the Rights or issued in an exchange pursuant to SECTION 24 on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities, and (B) the Expiration Date. The Company will also take such action as may be appropriate under, or to ensure compliance with, the applicable state securities laws in connection with the exercisability of the Rights. The Company may temporarily suspend, for up to 90 days after the date described in CLAUSE (i) of this SECTION 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such 11 suspension, the Company will issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension no longer remains in effect. In addition, if the Company determines that a registration statement is required following the Distribution Date, the Company may temporarily suspend the exercisability of the Rights until such time as a registration statement has been declared effective. Notwithstanding any provision of this Agreement to the contrary, the Rights will not be exercisable in any jurisdiction if the requisite qualification in such jurisdiction has not been obtained, the exercise of such Rights is not permitted under applicable law, or a registration statement has not been declared effective. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all shares of Class A Common Stock (and/or other securities) delivered upon exercise of Rights will, at the time of delivery of the certificates for such shares upon payment of the Purchase Price, be duly and validly authorized and issued and fully paid and nonassessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges that may be payable in respect of the issuance or delivery of the Rights Certificates and any Class A Common Stock or other certificates issued upon the exercise of Rights. The Company will not, however, be required to pay any transfer tax that may be payable in respect of any transfer or delivery of Rights Certificates to a Person other than, or the issuance or delivery of Class A Common Stock (or other securities, as the case may be) in respect of a name other than that of the registered holder of the Rights Certificates or to issue or deliver any Class A Common Stock or other certificates in a name other than that of the registered holder until such tax has been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. SECTION 10. CLASS A COMMON STOCK RECORD DATE. Each Person in whose name any Rights Share certificate is issued will, for all purposes, be deemed to have become the record holder of such Rights Shares represented thereby, and such certificate will be dated, on the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and all applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Class A Common Stock (other securities, as the case may be) transfer books of the Company are closed, such Person will be deemed to have become the record holder of the Rights Shares on, and such certificate will be dated, the next succeeding Business Day on which the Class A Common Stock (or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the Rights Certificate holders will not be entitled to any stockholder rights with respect to Rights Shares, including, without limitation, the right to vote, to receive dividends or other distributions, or to exercise any preemptive rights, and will not be entitled to receive any notice of any proceedings of the Company, except as provided in this Agreement. 12 SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES, OR NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this SECTION 11. (a) (i) In the event the Company at any time after the date of this Agreement (A) declares a dividend on the Class A Common Stock payable in shares of Class A Common Stock, (B) subdivides the outstanding Class A Common Stock, (C) combines the outstanding Class A Common Stock into a smaller number of shares, or (D) issues any shares of its capital stock in a reclassification of the Class A Common Stock (including, without limitation, any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this SECTION 11(a) and SECTION 7(e), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Class A Common Stock or capital stock, as the case may be, issuable on such date, will be proportionately adjusted so that the holder of any Right exercised after such time will be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of shares of Class A Common Stock or capital stock, as the case may be, that, if such Right had been exercised immediately prior to such date and at a time when the Class A Common Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. If an event occurs that would require an adjustment under both this SECTION 11(a)(i) and SECTION 11(a)(ii), the adjustment provided for in this SECTION 11(a)(i) will be in addition to, and will be made prior to, any adjustment required pursuant to SECTION 11(a)(ii). In the event that any event referred to in this SECTION 11 occurs with respect to the Class B Common Stock, an appropriate adjustment will be made with respect to the Rights associated with such Class B Common Stock. (ii) In the event that any Person, alone or together with its Affiliates and Associates, at any time after the Rights Dividend Declaration Date, becomes an Acquiring Person, then, proper provision will be made so that each Right holder (except as provided in SECTION 7(e)) will thereafter have the right to receive, upon exercise of such Right at the then current Purchase Price in accordance with the terms of this Agreement, such number of Rights Shares equal to the result obtained by (x) multiplying the then current Purchase Price by the then number of Rights Shares for which a Right is then exercisable and (y) dividing that product by 50% of the Current Market Price (defined in SECTION 11(d)) per share of Class A Common Stock on the date such Person became an Acquiring Person (such number of Rights Shares, the "Adjustment Shares"). (iii) In the event that the number of shares of Class A Common Stock that are authorized by the Company's Articles of Incorporation but not issued, or issued but not outstanding, are not sufficient to permit the exercise in full of the Rights in accordance with SECTION 11(a)(ii), the Company will, upon the exercise of a Right and payment of the applicable Purchase Price, (A) 13 determine the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value"), and (B) with respect to each Right (subject to SECTION 7(e)), make adequate provision to substitute for the Adjustment Shares (1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock), that a Requisite Majority has deemed to have essentially the same rights, privileges and preferences as shares of Class A Common Stock ("Class A Common Stock Equivalents")), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been conclusively determined by a Requisite Majority based upon the advice of a nationally recognized investment banking firm selected by a Requisite Majority; provided, however, that if the Company has not made adequate provision to deliver value pursuant to CLAUSE (B) above within 30 days following the first occurrence of a Section 11(a)(ii) Event, then the Company will be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Class A Common Stock (to the extent available) and then, if necessary, cash, which shares or cash have an aggregate value equal to the Spread. The term "Spread" means the excess of (i) the Current Value over (ii) the Purchase Price. If the Board of Directors determines in good faith that it is likely that sufficient additional shares of Class A Common Stock could be authorized for issuance upon exercise in full of the Rights, the 30-day period set forth above may be extended to the extent necessary, but not more than 90 days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such 30-day period, as it may be extended, being the "Substitution Period"). To the extent that action is to be taken pursuant to this SECTION 11(a)(iii), the Company (1) will provide, subject to SECTION 7(e), that such action will apply uniformly to all outstanding Rights, and (2) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any required stockholder approval or to decide the appropriate form of distribution to be made and the value thereof. In the event of any such suspension, the Company will issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension no longer remains in effect. For purposes of this SECTION 11(a)(iii), the Current Value of each Adjustment Share will be the Current Market Price per share of the Class A Common Stock on the effective date of the Section 11(a)(ii) Event and the per share or per unit value of any Class A Common Stock Equivalent will be deemed to equal the Current Market Price per share of the Common Stock on such date. (b) In case the Company fixes a record date for the issuance of rights, options or warrants to all holders of Class A Common Stock entitling them to subscribe for or purchase (for a period expiring within 45 calendar days after such record date) Class A Common Stock (and/or Class A Common Stock Equivalents) (or securities convertible into Class A Common Stock) at a price per share of Class A Common Stock (or having a conversion price per share, if a security convertible into Class A Common Stock) less than the Current Market Price per share of Class A Common Stock on such record date, the Purchase Price to be in effect after such record date will be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, (i) the numerator of which is the number of shares of Class A Common Stock outstanding 14 on such record date, plus the number of shares of Class A Common Stock that the aggregate offering price of the total number of shares of Class A Common Stock (and/or Class A Common Stock Equivalents) so to be offered (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Current Market Price, and (ii) the denominator of which is the number of shares of Class A Common Stock outstanding on such record date, plus the number of additional shares of Class A Common Stock (and/or Class A Common Stock Equivalents) to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In the event that the number of shares of Class A Common Stock issuable under the terms of a convertible security, or the conversion or exercise price of such convertible security, changes after the initial issuance of such convertible security, an adjustment will be made to the Purchase Price that conforms with the adjustment set forth in this SECTION 11(b). In case such subscription price may be paid by delivery of consideration part or all of which may be in a form other than cash, the value of such consideration will be as conclusively determined in good faith by the Board of Directors of the Company, whose determination will be described in a statement filed with the Rights Agent and will be binding on the Rights Agent and the holders of the Rights. Shares of Class A Common Stock owned by or held for the account of the Company will be deemed not to be outstanding for the purpose of any such computation. Such adjustment will be made successively whenever such a record date is fixed, and in the event that such rights or warrants are not so issued, the Purchase Price will be adjusted to be the Purchase Price that would then be in effect if such record date had not been fixed. (c) In case the Company fixes a record date for a distribution to all holders of Class A Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness, cash (other than a regular quarterly cash dividend out of the earnings or retained earnings of the Company), assets (other than a dividend payable in Class A Common Stock, but including any dividend payable in stock other than Class A Common Stock) or subscription rights or warrants (excluding those referred to in SECTION 11(b)), the Purchase Price to be in effect after such record date will be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, (i) the numerator of which is the Current Market Price per share of Class A Common Stock on such record date, less the fair market value (as conclusively determined in good faith by the Board of Directors of the Company, whose determination will be described in a statement filed with the Rights Agent) of the portion of the cash, assets, or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a share of Class A Common Stock and (ii) the denominator of which is such Current Market Price per share of Class A Common Stock. Such adjustments will be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Purchase Price will be adjusted to be the Purchase Price that would have been in effect if such record date had not been fixed. (d) The "Current Market Price" per share of Class A Common Stock on any date will be deemed to be the average of the daily closing prices per share of such Class A Common Stock for the 30 consecutive Trading Days immediately prior to such date; provided, however, that in the event 15 that the Current Market Price per share of the Class A Common Stock is determined during a period following the announcement by the issuer of such Class A Common Stock of (i) a dividend or distribution on such Class A Common Stock payable in shares of such Class A Common Stock or securities convertible into shares of such Class A Common Stock (other than the Rights), or (ii) any subdivision, combination, or reclassification of such Class A Common Stock, and the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination, or reclassification has not occurred prior to the commencement of the requisite 30 Trading Day period, as set forth above, then, and in each such case, the Current Market Price will be properly adjusted to take into account ex-dividend trading. The closing price for each day will be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Class A Common Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Class A Common Stock are listed or admitted to trading or, if the shares of Class A Common Stock are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use, or, if on any such date the shares of Class A Common Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Class A Common Stock selected by the Board of Directors. If on any such date no market maker is making a market in the Class A Common Stock, the fair value of such shares on such date as determined in good faith by the Board of Directors will be used. If the Class A Common Stock is not publicly held or not so listed or traded, Current Market Price per share will mean the fair value per share as determined in good faith by the Board of Directors, the determination of which will be described in a statement filed with the Rights Agent and will be conclusive for all purposes. (e) Anything in this Agreement to the contrary notwithstanding, no adjustment in the Purchase Price will be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the Purchase Price; provided, however, that any adjustments that by reason of this SECTION 11(e) are not required to be made will be carried forward and taken into account in any subsequent adjustment. All calculations under this SECTION 11 will be made to the nearest cent or to the nearest one-hundredth of a share of Class A Common Stock. Notwithstanding the first sentence of this SECTION 11(e), any adjustment required by this SECTION 11 will be made no later than the earlier of (i) three (3) years from the date of the transaction that mandates such adjustment or (ii) the Final Expiration Date. (f) If, as a result of an adjustment made pursuant to SECTION 11(a)(ii) or SECTION 13(a), the holder of any Right thereafter exercised becomes entitled to receive any shares of capital stock other than Class A Common Stock, then the number of such other shares so receivable upon exercise of any Right and the Purchase Price will be subject to adjustment from time to time in a 16 manner and on terms as nearly equivalent as practicable to the provisions with respect to the Class A Common Stock contained in SECTIONS 11(a), (b), (c), (e), (g), (h), (i), (j), (k), (m), and (q) and the provisions of SECTIONS 7, 9, 10, 13, and 14 with respect to the Class A Common Stock will apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price under this Agreement will evidence the right to purchase, at the adjusted Purchase Price, the number of Rights Shares purchasable from time to time under this Agreement, all subject to further adjustment as provided in this Agreement. (h) Unless the Company has exercised its election as provided in SECTION 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in SECTIONS 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment will thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Rights Shares (calculated to the nearest one-hundredth) obtained by (i) multiplying (x) the number of Rights Shares covered by a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of Rights Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after such an adjustment in the number of Rights will be exercisable for the number of Rights Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights will become that number of Rights (calculated to the nearest one-hundredth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company will make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, will be at least ten Business Days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this SECTION 11(i), the Company will, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to SECTION 14, the additional Rights to which such holders are entitled as a result of such adjustment, or, at the option of the Company, will cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders are entitled after such adjustment. Rights Certificates so to be distributed will be issued, executed, and countersigned in the manner provided for in this Agreement (and may bear, at the option of the Company, the 17 adjusted Purchase Price) and will be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the Rights Shares, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per Rights Shares and the number of Rights Shares that were expressed in the initial Rights Certificates issued under this Agreement. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then stated value, if any, of the number of Rights Shares, the Company will take any corporate action that may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue such number of fully paid and nonassessable Rights Shares at such adjusted Purchase Price. (l) In any case in which this SECTION 11 requires that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of Rights Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of Rights Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company will deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment. (m) Anything in this SECTION 11 to the contrary notwithstanding, the Company will be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this SECTION 11, as and to the extent that, in its good faith judgment, the Board of Directors of the Company determines it to be advisable in order that any (i) consolidation or subdivision of the Class A Common Stock, (ii) issuance wholly for cash of any shares of Class A Common Stock at less than the current market price, (iii) issuance wholly for cash of shares of Class A Common Stock or securities that by their terms are convertible into or exchangeable for shares of Common Stock and/or its Class B Common Stock, (iv) stock dividends, or (v) issuance of rights, options, or warrants referred to in this SECTION 11, hereafter made by the Company to holders of its Class A Common Stock and/or its Class B Common Stock will not be taxable to such stockholders. (n) The Company covenants and agrees that it will not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction that complies with SECTION 11(o)), (ii) merge with, from, or into any other Person (other than a Subsidiary of the Company in a transaction that complies with SECTION 11(o)), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related 18 transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company or any of its Subsidiaries in one or more transactions each of which complies with SECTION 11(o)), if (x) at the time of or immediately after such consolidation, merger, or sale there are any rights, warrants, or other instruments or securities outstanding or agreements in effect that could reasonably be expected to substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with, or immediately after, such consolidation, merger, or sale, the stockholders of the Person that constitutes, or would constitute, the "Principal Party" for purposes of SECTION 13(a) has received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by SECTION 23 or SECTION 27, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) Notwithstanding anything in this Agreement to the contrary, in the event that the Company at any time after the Rights Dividend Declaration Date and prior to the Distribution Date (i) declares a dividend on the outstanding shares of Class A Common Stock or Class B Common Stock, as the case may be, payable in shares of Class A Common Stock or Class B Common Stock, as the case may be, (ii) subdivides the outstanding shares of Class A Common Stock, or Class B Common Stock, as the case may be, or (iii) combines the outstanding shares of Class A Common Stock or Class B Common Stock, as the case may be, into a smaller number of shares, the number of Rights associated with each share of Class A Common Stock or Class B Common Stock, as the case may be, then outstanding, or issued or delivered thereafter but prior to the Distribution Date, will be appropriately and proportionately adjusted so that the number of Rights thereafter associated with each share of Class A Common Stock or Class B Common Stock, as the case may be, following any such event will equal the result obtained by multiplying the number of Rights associated with each share of Class A Common Stock or Class B Common Stock, as the case may be, immediately prior to such event by a fraction the numerator of which is the total number of shares of Class A Common Stock or Class B Common Stock, as the case may be, outstanding immediately prior to the occurrence of the event and the denominator of which is the total number of shares of Class A Common Stock or Class B Common Stock, as the case may be, outstanding immediately following the occurrence of such event. (q) In the event that the Rights become exercisable following a Section 11(a)(ii) Event, the Company, by action of a Requisite Majority, may permit the Rights, subject to SECTION 7(e), to be exercised for 50% of the shares of Class A Common Stock (or cash or other securities or assets to be substituted for the Adjustment Shares pursuant to SECTION 11(a)(iii)) that would otherwise be purchasable under SECTION 11(a) in consideration of the surrender to the Company of the Rights so exercised and without other payment of the Purchase Price. Rights exercised under this SECTION 11(q) will be deemed to have been exercised in full and will be cancelled. 19 SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in SECTION 11 or SECTION 13, the Company will (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent, and with each transfer agent for the Class A Common Stock and for the Class B Common Stock, a copy of such certificate, and (c) mail a brief summary thereof to each holder of a Rights Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing shares of Class A Common Stock and/or Class B Common Stock, as the case may be) in accordance with SECTION 25. The Rights Agent will be fully protected in relying on any such certificate and on any adjustment contained in such certificate. SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. (a) In the event that, following the Stock Acquisition Date, directly or indirectly, (i) the Company consolidates with, or merges with, or into, any other Person (other than a Subsidiary of the Company in a transaction that complies with SECTION 11(o)), and the Company is not the continuing or surviving Person of such consolidation or merger; (ii) any Person (other than a Subsidiary of the Company in a transaction that complies with SECTION 11(o)) consolidates with, or merges with, or into, the Company, and the Company is the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the outstanding shares of Class A Common Stock and/or Class B Common Stock, as the case may be, is changed into or exchanged for stock or other securities of any other Person or cash or any other property; or (iii) the Company sells or otherwise transfers (or one or more of its Subsidiaries sells or otherwise transfers), in one transaction or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons (other than the Company or any Subsidiary of the Company in one or more transactions each of which complies with SECTION 11(o)), then, and in each such case (except as contemplated by SECTION 13(d)), proper provision will be made so that (A) each holder of a Right, except as provided in SECTION 7(e) or SECTION 13(E), will thereafter have the right to receive, upon the exercise of such Right at the then current Purchase Price in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid, nonassessable, and freely tradable shares of Common Stock of the Principal Party (as defined below), not subject to any liens, encumbrances, preemptive rights, rights of first refusal, or other adverse claims, as are equal to the result obtained by (1) multiplying the then current Purchase Price by the number of Rights Shares for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such Rights Shares for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to such first occurrence), and (2) dividing that product (which, following the first occurrence of a Section 13 Event, will be referred to as the "Purchase Price" for 20 each Right and for all purposes of this Agreement) by 50% of the Current Market Price per share of the Common Stock of such Principal Party on the date of consummation of such Section 13 Event; (B) such Principal Party will thereafter be liable for, and will assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (C) the term "Company" will thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of SECTION 11 will apply only to such Principal Party following the first occurrence of a Section 13 Event; (D) such Principal Party will take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to assure that the provisions of this Agreement will thereafter be applicable, as nearly as may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (E) the provisions of SECTION 11(A)(II) will be of no effect following the first occurrence of any Section 13 Event. (b) "Principal Party" means (i) in the case of any transaction described in CLAUSE (i) or (ii) of the first sentence of SECTION 13(a), the Person that is the issuer of any securities into which shares of Class A Common Stock and/or Class B Common Stock, as the case may be, of the Company are converted in such merger or consolidation, and if no securities are so issued, the Person that is the other party to such merger or consolidation; and (ii) in the case of any transaction described in CLAUSE (iii) of the first sentence of SECTION 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions; provided, however, that in any such case, (1) if the Common Stock of such Person is not at such time and has not been continuously over the preceding twelve (12) month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, "Principal Party" will refer to such other Person; and (2) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, with Common Stock that is and has been so registered, "Principal Party" will refer to whichever of such Persons is the issuer of the Common Stock having the greatest aggregate market value. (c) The Company will not consummate any such consolidation, merger, sale, or transfer unless the Principal Party has a sufficient number of authorized shares of its Common Stock that have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this SECTION 13 and unless prior thereto the Company and such Principal Party have executed and delivered to the Rights Agent a supplemental agreement providing for the Principal Party to assume and perform the terms set forth in SECTIONS 13(a) and (b) and further providing that, as soon as practicable after the date of any consolidation, merger, or transfer mentioned in SECTION 13(a), the Principal Party will 21 (i) prepare and file a registration statement under the Act, with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, and will use its best efforts to cause such registration statement to (A) become effective as soon as practicable after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Final Expiration Date; and (ii) will deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates that comply in all respects with the requirements for registration on Form 10 under the Exchange Act. (d) In the event that the Rights become exercisable under SECTION 13(a), the Company, by action of a Requisite Majority, may agree with the Principal Party that the Principal Party may permit the Rights to be exercised for 50% of the Common Shares of the Principal Party that would otherwise be purchasable under SECTION 13(a), in consideration of the surrender to the Principal Party, as the successor to the Company under SECTION 13(a)(ii), of the Rights so exercised and without other payment of the Purchase Price. Rights exercised under this SECTION 13(e) will be deemed to have been exercised in full and cancelled. (e) The provisions of this SECTION 13 will similarly apply to successive mergers, consolidations, and sales or other transfers. In the event that a Section 13 Event occurs at any time after the occurrence of a Section 11(a)(ii) Event, the Rights that have not theretofore been exercised will thereafter become exercisable in the manner described in SECTION 13(a). SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company will not be required to issue fractions of Rights, except prior to the Distribution Date as provided in SECTION 11(p), or to distribute Rights Certificates that evidence fractional Rights. In lieu of such fractional Rights, there will be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For purposes of this SECTION 14(a), the current market value of a whole Right will be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any day will be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading, or if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such 22 date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights the fair value of the Rights on such date as conclusively determined in good faith by the Board of Directors of the Company will be used. (b) The Company will not be required to issue fractions of shares of Class A Common Stock upon exercise of the Rights or to distribute certificates that evidence fractional shares of Class A Common Stock. In lieu of fractional shares of Class A Common Stock, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as provided in this Agreement an amount in cash equal to the same fraction of the Current Market Price of one share of Class A Common Stock as of the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right, by the acceptance of the Rights, expressly waives the right to receive any fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this SECTION 14. SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Class A Common Stock and/or Class B Common Stock, as the case may be,); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Class A Common Stock and/or Class B Common Stock, as the case may be), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Class A Common Stock and/or Class B Common Stock, as the case may be), may, on its own behalf and for its own benefit, enforce, and may institute and maintain any suit, action, or proceeding against the Company to enforce, or otherwise act in respect of, its right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under this Agreement and injunctive relief against actual or threatened violations of the obligations under this Agreement of any Person subject to this Agreement. SECTION 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by accepting the Rights consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: 23 (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of Class A Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer, and with the appropriate forms and certificates fully executed; (c) subject to SECTION 6(a) and SECTION 7(f), the Company and the Rights Agent may deem and treat the person in whose name a Rights Certificate (or, prior to the Distribution Date, the associated certificate for Class A Common Stock and/or Class B Common Stock, as the case may be), is registered as the absolute owner of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated certificate for Class A Common Stock and/or Class B Common Stock, as the case may be, made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, will be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent will have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree, or ruling issued by a court of competent jurisdiction or by a governmental, regulatory, or administrative agency or commission, or any statute, rule, regulation, or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided, however, the Company will use its reasonable best efforts to have any such order, decree, or ruling lifted or otherwise overturned as soon as possible. SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Rights Certificate will be entitled to vote or receive dividends or be deemed for any purpose the holder of the number of shares of Class A Common Stock or any other securities of the Company that may at any time be issuable on the exercise of the Rights represented thereby, nor will anything contained in this Agreement or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in SECTION 25), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate have been exercised in accordance with the provisions of this Agreement. SECTION 18. CONCERNING THE RIGHTS AGENT. 24 (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it under this Agreement and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and disbursements and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties under this Agreement. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence, bad faith, or willful misconduct on the part of the Rights Agent, for anything done or omitted to be done by the Rights Agent in connection with the acceptance and administration of this Agreement, including, without limitation, the costs and expenses of defending against any claim of liability. Anything to the contrary notwithstanding, in no event shall the Rights Agent be liable for special, indirect, consequential or incidental loss or damage of any kind. (b) The Rights Agent will be protected and will incur no liability for or in respect of any action taken, suffered, or omitted by it in connection with its administration of this Agreement in reliance upon any Rights Certificate or certificate for Class A Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed, and, where necessary, verified or acknowledged, by the proper Person or Persons. SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any Person into or with which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any Person resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent is a party, or any corporation succeeding to the corporate trust or stockholder services business of the Rights Agent or any successor Rights Agent, will be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement; provided, however, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of SECTION 21. In case at the time such successor Rights Agent succeeds to the agency created by this Agreement, any of the Rights Certificates have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates have not been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in all such cases such Rights Certificates will have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent is changed and at such time any of the Rights Certificates have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case 25 at that time any of the Rights Certificates have not been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name, and in all such cases such Rights Certificates will have the full force provided in the Rights Certificates and in this Agreement. SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance of such Rights Certificates, will be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel will be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent deems it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person or Adverse Person and the determination of "Current Market Price") be proved or established by the Company prior to taking or suffering any action under this Agreement, such fact or matter (unless other evidence in respect of such fact or matter is specifically prescribed in this Agreement) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer, the President, any Executive Vice President, the Treasurer, any Assistant Treasurer, the Secretary, or any Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate will be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent will be liable under this Agreement only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent will not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates or be required to verify the same (except as to its countersignature on such Rights Certificates), but all such statements and recitals are and will be deemed to have been made by the Company only. (e) The Rights Agent will not be under any responsibility in respect of the validity of this Agreement or the execution and delivery of this Agreement (except the due execution of this Agreement by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature); nor will it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor will it be responsible for any adjustment required under the provisions of SECTION 11 or SECTION 13, or 26 responsible for the manner, method, or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after actual notice of any such adjustment); nor will it by any act under this Agreement be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Rights Certificate or as to whether any shares of Common Stock will, when so issued, be validly authorized or issued, fully paid, or nonassessable. (f) The Company agrees that it will perform, execute, acknowledge, and deliver or cause to be performed, executed, acknowledged, and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties under this Agreement from the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer, the President, any Executive Vice President, the Secretary, any Assistant Secretary, the Treasurer, or any Assistant Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it will not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. (h) The Rights Agent and any stockholder, director, officer, or employee of the Rights Agent may buy, sell, or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, contract with or lend money to the Company, or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing in this Agreement will preclude the Rights Agent from acting in any other capacity for the Company or for any other Person. (i) The Rights Agent may execute and exercise any of the rights or powers vested by this Agreement in it or perform any duty under this Agreement either itself or by or through its attorneys or agents, and the Rights Agent will not be answerable or accountable for any act, default, neglect, or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect, or misconduct; provided, however, reasonable care was exercised in the selection and continued employment of such Person. (j) No provision of this Agreement will require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under this Agreement or in the exercise of its rights if there are reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. 27 (k) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 or 2 of such certificate, the Rights Agent will not take any further action with respect to such requested exercise of transfer without first consulting with the Company. SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company, and to each transfer agent of the Class A Common Stock and/or Class B Common Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Class A Common Stock and/or Class B Common Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent resigns or is removed or otherwise becomes incapable of acting, the Company will appoint a successor to the Rights Agent. If the Company fails to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who will, with such notice, submit such holder's Rights Certificate for inspection by the Company), then any registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, will be a corporation organized and doing business under the laws of the United States or a State of the United States, in good standing, that is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority and that has at the time of its appointment as Rights Agent a combined capital and surplus of at least $25,000,000. After appointment, the successor Rights Agent will be vested with the same powers, rights, duties, and responsibilities as if it had been originally named as Rights Agent without further act or deed, except that the predecessor Rights Agent will deliver and transfer to the successor Rights Agent any property at the time held by it under this Agreement and execute and deliver any further assurance, conveyance, act, or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company will file notice of such appointment in writing with the predecessor Rights Agent and each transfer agent of the Class A Common Stock and/or Class B Common Stock, and mail a notice of such appointment in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this SECTION 21, however, or any defect in such notice, will not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. 28 SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, in its discretion, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number, kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Class A Common Stock and/or shares of Class B Common Stock following the Distribution Date and prior to the Expiration Date, the Company (a) will, with respect to shares of Class A Common Stock and/or shares of Class B Common Stock so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded as of the Distribution Date, or upon the exercise, conversion, or exchange of securities issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (y) no such Rights Certificate will be issued if, and to the extent that, the Company is advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued, and (z) no such Rights Certificate will be issued if, and to the extent that, appropriate adjustment has otherwise been made in lieu of the issuance of such Rights Certificate. SECTION 23. REDEMPTION AND TERMINATION. (a) The Company may, at its option, by action of a Requisite Majority, at any time prior to the earlier of (i) such time as a Person becomes an Acquiring Person, or (ii) the Final Expiration Date, redeem all but not fewer than all the then outstanding Rights at the Redemption Price (the date of such redemption, the "Redemption Date"), and the Company, at its option, may pay the Redemption Price either in cash or Class A Common Stock or other securities of the Company, deemed by the Board of Directors, in the exercise of its sole discretion, to be at least equivalent in value to the Redemption Price. (b) Immediately upon the action of a Requisite Majority ordering the redemption of the Rights, evidence of which has been filed with the Rights Agent and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights will be to receive the Redemption Price. Promptly after the action of a Requisite Majority ordering the redemption of the Rights, the Company will give notice of such redemption to the Rights Agent and to the holders of the then outstanding Rights by mailing such notice to all such holders at each holder's last address as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Class A Common Stock or Class B Common Stock, as the case may be. Each such notice of redemption will state the 29 method by which the payment of the Redemption Price will be made. Any notice that is mailed in the manner in this Agreement provided will be deemed given, whether or not the holder receives such notice. In any case, failure to give such notice by mail, or any defect in the notice, to any particular holder of Rights shall not affect the sufficiency of the notice to other holders of Rights. SECTION 24. EXCHANGE. (a) The Board of Directors of the Company may, at its option, at any time after a Triggering Event, exchange all or part of the then outstanding and exercisable Rights (which will not include Rights that have become void pursuant to the provisions of SECTION 7(e) hereof) for shares of Class A Common Stock, each Right being exchangeable for one share of Class A Common Stock, appropriately adjusted to reflect any transaction specified in SECTION 11(a)(i) occurring after the Record Date (such number of shares of Class A Common Stock issuable in exchange for one Right being referred to herein as the "Exchange Shares"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any of its Subsidiaries or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such Plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Class A Common Stock then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this SECTION 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive the Exchange Shares. The Company shall promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice that is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Class A Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of SECTION 7(e) hereof) held by each holder of Rights. (c) In the event that there shall not be sufficient Class A Common Stock issued but not outstanding, or authorized but unissued, to permit any exchange of Rights as contemplated in accordance with this SECTION 24, the Company shall take all such action as may be necessary to authorize additional Class A Common Stock for issuance upon exchange of the Rights or shall take such other action specified in SECTION 11(a)(iii) hereof. 30 (d) The Company shall not be required to issue fractions of shares of Class A Common Stock to distribute certificates which evidence fractional Class A Common Stock. In lieu of such fractional shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional shares would otherwise be issuable an amount in cash equal to the same fraction of the Current Market Price of a whole share of Class A Common Stock. For the purposes of this SUBSECTION (d), the Current Market Value of a whole share of Class A Common Stock shall be determined as of the Trading Day immediately prior to the date of exchange pursuant to this SECTION 24. SECTION 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company proposes, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Class A Common Stock or Class B Common Stock or to make any other distribution to the holders of Class A Common Stock or Class B Common Stock (other than a regular quarterly cash dividend out of earnings or retained earnings of the Company), or (ii) to offer to the holders of Class A Common Stock or Class B Common Stock rights or warrants to subscribe for or to purchase any additional shares of Class A Common Stock or shares of stock of any class or any other securities, rights or options, or (iii) to effect any reclassification of its Class A Common Stock or Class B Common Stock (other than a reclassification involving only the subdivision of outstanding shares), or (iv) to effect any consolidation or merger into, or with any other Person (other than a Subsidiary of the Company in a transaction that complies with SECTION 11(o)), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of related transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company or any of its Subsidiaries in one or more transactions each of which complies with SECTION 11(o)), or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company will give to each holder of a Rights Certificate, to the extent feasible and in accordance with SECTION 26, a notice of such proposed action, which will specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Class A Common Stock and/or Class B Common Stock, if any such date is to be fixed, and such notice will be so given in the case of any action covered by CLAUSE (i) or (ii) above at least 20 days prior to the record date for determining holders of the shares of Class A Common Stock and/or Class B Common Stock for purposes of such action, and in the case of any such other action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Class A Common Stock and/or Class B Common Stock, whichever is the earlier. (b) In case of a Triggering Event, then (i) the Company will as soon as practicable give to each holder of a Rights Certificate, to the extent feasible and in accordance with SECTION 26, a notice of the occurrence of such event, which will specify the event and the consequences of the 31 event to holders of Rights under this Agreement, and (ii) all references in SECTION 25(a) to Class A Common Stock or to Class B Common Stock will be deemed thereafter to refer to other securities, if appropriate. SECTION 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company will be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Precept Business Services, Inc. 1909 Woodall Rodgers Fwy., Suite 500 Dallas, Texas 75201 Attention: General Counsel with a copy to: Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas 75202-3797 Attention: Charles D. Maguire, Jr. Subject to the provisions of SECTION 21, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent will be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: Continental Stock Transfer & Trust Company 500 West 15th Street Plano, Texas 75___ Attention: General Counsel Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate (or, if prior to the Distribution Date, to the holder of certificates representing shares of Class A Common Stock and/or Class B Common Stock) will be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. SECTION 27. SUPPLEMENT AND AMENDMENTS. 32 The Company, by action of its Board of Directors, and the Rights Agent may from time to time supplement or amend this Agreement without the approval of any holders of Rights in order to cure any ambiguity, to correct or supplement any provision contained in this Agreement that may be defective or inconsistent with any other provisions in this Agreement, or to make any other provisions in regard to matters or questions arising under this Agreement that the Company and Rights Agent may deem necessary or desirable and that will be consistent with, and for the purpose of fulfilling, the objectives of the Board of Directors in adopting this Agreement; provided, however, that following the Distribution Date, this Agreement shall not be amended in any manner that would adversely affect the basic economic terms of the Rights; provided, further, that, once the Rights are no longer redeemable in accordance with SECTION 23 of this Agreement, no amendment to this Agreement may have the effect of making the Rights redeemable. SECTION 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent will bind and inure to the benefit of their respective successors and assigns under this Agreement. SECTION 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For all purposes of this Agreement, any calculation of the number of shares of Class A Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Class A Common Stock of which any Person is the Beneficial Owner, will be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement. The Board of Directors of the Company (with, where specifically provided for in this Agreement, the concurrence of the Continuing Directors) will have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors (with, where specifically provided for in this Agreement, the concurrence of the Continuing Directors) or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (a) interpret the provisions of this Agreement, and (b) make all determinations deemed necessary or advisable for the administration of this Agreement (including, without limitation, a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of CLAUSE (y) below, all omissions with respect to the foregoing) that are done or made by the Board of Directors (with, where specifically provided for in this Agreement, the concurrence of the Continuing Directors) in good faith, will (x) be final, conclusive, and binding on the Company, the Rights Agent, the holders of the Rights, and all other parties, and (y) not subject the Board of Directors or the Continuing Directors to any liability to the holders of the Rights. SECTION 30. BENEFITS OF THIS AGREEMENT. 33 Nothing in this Agreement will be construed to give to any Person other than the Company, the Rights Agent, and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock) any legal or equitable right, remedy, or claim under this Agreement; and this Agreement will be for the sole and exclusive benefit of the Company, the Rights Agent, and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock). SECTION 31. SEVERABILITY. If any term, provision, covenant, or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants, and restrictions of this Agreement will remain in full force and effect and will in no way be affected, impaired, or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant, or restriction is held by such court or authority to be invalid, void, or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in SECTION 23 will be reinstated and will not expire until the Close of Business on the tenth Business Day following the date of such determination by the Board of Directors. Without limiting the foregoing, if any provision requiring action by a Requisite Majority is held by any court of competent jurisdiction or other authority to be invalid, void, or unenforceable, such determination will then be made by the Board of Directors of the Company in accordance with applicable law and the Company's articles of incorporation and by-laws. SECTION 32. GOVERNING LAW. THIS AGREEMENT, EACH RIGHT, AND EACH RIGHTS CERTIFICATE ISSUED UNDER THIS AGREEMENT WILL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF TEXAS AND FOR ALL PURPOSES WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SUCH STATE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. SECTION 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts will for all purposes be deemed to be an original, and all such counterparts will together constitute but one and the same instrument. 34 SECTION 34. INTERPRETATION. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and will not control or affect the meaning or construction of any of the provisions of this Agreement. References in this Agreement to Sections and Exhibits are references to the Sections of and Exhibits to this Agreement unless the context requires otherwise. In this Agreement, the word "or" is not exclusive. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. PRECEPT BUSINESS SERVICES, INC. By: ___________________________________________ Name: _________________________________________ Title: ________________________________________ 35 CONTINENTAL STOCK TRANSFER & TRUST COMPANY By: ___________________________________________ Name: _________________________________________ Title: ________________________________________ 36 Exhibit A to Rights Agreement Certificate No. R- [FORM OF RIGHTS CERTIFICATE] ________ Rights NOT EXERCISABLE AFTER FEBRUARY 9, 2008 OR EARLIER IF REDEEMED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. Rights Certificate PRECEPT BUSINESS SERVICES, INC. This certifies that _____________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions, and conditions of the Rights Agreement, dated as of February 9, 1998 (as amended from time to time, the "Rights Agreement"), between Precept Business Services, Inc., a Texas corporation (the "Company"), and Continental Stock Transfer & Trust Company (the "Rights Agent"), to purchase from the Company at any time prior to 5:00 p.m. (Dallas, Texas time) on February 9, 2008 at the office or offices of the Rights Agent designated for such purpose, or its successors as Rights Agent, one fully paid, nonassessable share of Class A Common Stock (the "Common Stock") of the Company, at a purchase price of $50.00 per share (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase and related Certificate duly executed. The number of Rights evidenced by this Rights Certificate (and the number of shares that may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of _____________ based on the Common Stock as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number and kind of shares of Common Stock or other securities, that may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events. This Rights Certificate is subject to all of the terms, provisions, and conditions of the Rights Agreement, which terms, provisions, and conditions are incorporated herein by reference and made a part of this certificate and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties, and immunities hereunder of the 37 Rights Agent, the Company, and the holders of the Rights Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the certain circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the above-mentioned office of the Rights Agent and are also available upon written request to the Rights Agent. All capitalized terms not otherwise defined have the meaning set forth in the Rights Agreement. Upon the occurrence of a Section 11(a)(ii) Event, if the Rights evidenced by this Rights Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person, (ii) a transferee of any such Acquiring Person, Associate, or Affiliate, or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a Person who, after such transfer, became an Acquiring Person or an Affiliate or Associate of an Acquiring Person, such Rights will become null and void and no holder of this certificate will have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event. This Rights Certificate, with or without other Rights Certificates, upon surrender at the principal office or offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of shares of Common Stock as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered have entitled such holder to purchase. If this Rights Certificate is exercised in part, the holder will be entitled to receive upon surrender of this certificate another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at its option at a redemption price of $0.01 per Right. In addition, in certain circumstances the Rights may be exchanged, in whole or in part, for shares of the Common Stock. Immediately upon the action of the Board of Directors of the Company authorizing any such exchange, and without any further action or any notice, the Rights (other than Rights that are not subject to such exchange) will terminate and the Rights will only enable holders to receive the shares issuable upon such exchange. Under certain circumstances set forth in the Rights Agreement, the decision to redeem the Rights will require the concurrence of a majority of the Continuing Directors. No fractional shares of Common Stock will be issued upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate will be entitled to vote or receive dividends or be deemed for any purpose the holder of shares of Common Stock or of any other securities of the Company that may at any time be issuable on the exercise hereof, nor will anything contained in the Rights Agreement or herein be construed to confer upon the holder of this certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any 38 matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or, to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate have been exercised as provided in the Rights Agreement. This Rights Certificate will not be valid or obligatory for any purpose until it has been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of: ____________ PRECEPT BUSINESS SERVICES, INC. By: ___________________________________________ Name: _________________________________________ Title: ________________________________________ Countersigned: ______________________________ By: CONTINENTAL STOCK TRANSFER & TRUST COMPANY Name: _________________________________________ Title: ________________________________________ 39 [FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED hereby sells, assigns, and transfer unto (Please print name and address of transferee) This Rights Certificate, together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint _________________ attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated:____________ Signature Signature Guaranteed: Certificate The undersigned hereby certifies by checking the appropriate boxes that: (1) this Rights Certificate [ ] is [ ] is not being sold, assigned, or transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ]did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated:____________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. 40 FORM OF ELECTION TO PURCHASE The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. To: PRECEPT BUSINESS SERVICES, INC.: The undersigned hereby irrevocably elects to exercise __________ Rights represented by this Rights Certificate to purchase the shares of Class A Common Stock issuable upon the exercise of the Rights (or such other securities of the Company or of any other person that may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of and delivered to: Please insert social security or other identifying number: ______________ Please print name and address:___________________________________________ _____________________________________________________________________________. If such number of Rights are not all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights will be registered in the name of and delivered to: * Please insert social security or other identifying number: ______________ Please print name and address:___________________________________________ _____________________________________________________________________________. Dated: ______________ Signature Signature Guaranteed: 41 Certificate The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Adverse Person or an Affiliate or Associate of any such Acquiring Person or an Adverse Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ]did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or Adverse Person or an Affiliate or Associate of an Acquiring Person or an Adverse Person. Dated:_______________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. 42 Exhibit B to Rights Agreement SUMMARY OF RIGHTS TO PURCHASE SHARES OF PRECEPT BUSINESS SERVICES, INC. CLASS A COMMON STOCK On February 2, 1998 the Board of Directors of Precept Business Services, Inc. (the "Company") declared a dividend of one common share purchase right (a "Right") for each outstanding share of Class A common stock, $0.01 par value (the "Class A Common Stock") and for each share of Class Common Stock, $0.01 value (the "Class B Common Stock"), of the Company. The dividend was made on February 9, 1998 (the "Record Date") to the stockholders of record at the close of business on that date. Each Right entitles the registered holder to purchase from the Company one share of Class A Common Stock of the Company, 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 the Company 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 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 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 Class A Common Stock and/or Class B Common Stock outstanding as of the Record Date, by such certificates for Class A Common Stock and/or Class B Common Stock with a copy of this Summary of Rights attached to the certificate. Rights will be issued in respect of all shares of Class A Common Stock and/or Class B Common Stock, as the case may be, that are issued (whether originally issued or from the Company's treasury) after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Class A Common Stock and/or Class B Common Stock, as the case may be. 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 Class A Common Stock and/or Class B Common Stock, as the case may be, 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 Class A Common Stock and/or Class B Common Stock, as the case may be, outstanding even without such notation or a copy of this Summary of Rights being attached to such Certificate, will also constitute the transfer of the Rights 43 associated with the Class A Common Stock and/or Class B Common Stock, as the case may be, 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 Class A Common Stock and/or Class B Common Stock, as the case may be, as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on February 9, 2008 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed by the Company, in each case, as described below. The Purchase Price payable and the number of shares of 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 Class A Common Stock, (ii) upon the grant to holders of the Class A Common Stock of certain rights or warrants to subscribe for or purchase Class A Common Stock at a price or securities convertible into Class A Common Stock with a conversion price less than the then current market price of the Class A Common Stock; (iii) upon the distribution to holders of the Class A Common Stock of evidences of indebtedness or assets or of subscription rights or warrants (other than those referred to above); or (iv) upon any of the foregoing happens with respect to the Class B Common Stock. In the event that any person or entity becomes an Acquiring Person (the beneficial owner of 15% or more of the Class A Common Stock), provision will be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will then be void), will have the right to receive upon exercise that number of shares of Class A Common Stock having a market value of two times the applicable exercise price of the Right. The Rights Agreement excludes from the definition of Acquiring Person, Persons who certify to the Company that they inadvertently acquired in excess of 14.9% of the outstanding Class A Common Stock and thereafter divest such excess Class A Common Stock or who acquire 15% or more of the Class A Common Stock in a Permitted Transaction. A "Permitted Transaction" is a stock acquisition or tender or exchange offer pursuant to a definitive agreement which would result in a person beneficially owning 15% or more of the Class A Common Stock and which has been approved by the Board of Directors (including a majority of the Directors not in association with an Acquiring Person) prior to the execution of the agreement or the public announcement of the offer. In the event that the Company 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 44 company that at the time of such transaction will have a market value of two times the applicable exercise price of the Right. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Class A Common Stock will be issued and, in lieu of such fractional shares, an adjustment in cash will be made based on the market price of the Class A Common Stock on the last trading day prior to the date of exercise. After a person becomes an Acquiring Person, the Company'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 Class A Common Stock per Right, subject to adjustment. However, the Board of Directors cannot conduct an exchange at any time after any Person, together with its Affiliates and Associates, becomes the Beneficial Owner of 50% or more of the outstanding Class A Common Stock. At any time prior to any Person becoming an Acquiring Person, a Requisite Majority may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the "Redemption Price"). In addition, the Board of Directors may extend or reduce the period during which the Rights are redeemable, so long as the Rights are redeemable at the time of such extension or reduction. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company 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 stockholder of the Company, including, without limitation, the right to vote, or to receive dividends. 45 EX-4.5 8 EXHIBIT 4.5 EXHIBIT 4.5 IRREVOCABLE PROXY RELATING TO CLASS A COMMON STOCK OF PRECEPT INVESTORS, INC. KNOW ALL MEN BY THESE PRESENTS, that: 1. The undersigned (the "Holder") being the owner and registered holder of shares (the "Shares") of Class A Common Stock, par value $0.01 per share ("Class A Common Stock"), of Precept Investors, Inc., a Texas corporation (the "Company"), hereby irrevocably and perpetually appoints Darwin Deason ("Deason") the true and lawful attorney, agent and proxy of the Holder, with full power of substitution and resubstitution to vote on behalf of the Holder any and all of the Shares that the Holder is entitled to vote on all matters which the stockholders of the Company shall have the right to vote upon as the owners of shares of Class A Common Stock, including, without limitation, the election of directors. 2. The Holder hereby affirms that this Irrevocable Proxy is coupled with an interest in the Shares and is irrevocable on the part of the Holder; provided, however, that upon the death or permanent incapacity of Deason, this Irrevocable Proxy shall terminate. 3. The Holder hereby ratifies and confirms all that Deason may lawfully do or cause to be done by virtue hereof. IN WITNESS WHERE, the Holder has executed this Irrevocable Proxy as of the date set forth below. SHAREHOLDER: ----------------------------------- Signature ----------------------------------- (Signature of Holder's spouse, if Holder is an individual) Dated: , 1997 ----------------------- proxy 97 EX-5 9 EXHIBIT 5 EXHIBIT 5 [Jackson Walker L.L.P. Letterhead] February 5, 1998 Precept Business Services, Inc. 1909 Woodall Rodgers Frwy. Suite 500 Dallas, Texas 75201 Re: Registration Statement on Form S-4 of Precept Business Services, Inc. Gentlemen: We are acting as counsel for Precept Business Services, Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Act"), of the offering and sale of: (i) up to 9,612,000 shares (the "Transaction Shares") of the Company's Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), to be issued in connection with the Company's purchase (the "Transaction") of substantially all of the assets of U.S. Transportation Systems, Inc. ("USTS") pursuant to an Agreement and Plan of Reorganization dated as of November 16, 1997 (the "Agreement and Plan of Reorganization") by and among USTS, the Company, and Precept Acquisition Company, L.L.C., a Nevada limited liability company and wholly-owned subsidiary o the Company, (ii) up to 1,815,000 warrants (the "Warrants") to purchase an aggregate of up to 1,815,000 shares of Class A Common Stock issuable in connection with the Transactions, (iii) 1,815,000 shares of Class A Common Stock (the "Warrant Shares") issuable upon exercise of the Warrants and (iv) an additional 19,887,500 shares of Class A Common Stock (the "Shelf Shares") to be offered and/or issued from time to time in connection with future direct or indirect acquisitions of other businesses, properties or securities in one or more business combination transactions by the Company. A Registration Statement on Form S-4 (the "Registration Statement"), covering the offering and sale of the securities described in items (i) through (iv) above, was filed with the Securities and Exchange Commission (the "Commission") on December 19, 1997. Amendment No. 1 to the Registration Statement was filed with the Commission on January 30, 1998 and Amendment No. 2 to the Registration Statement is expected to be filed with the Commission shortly after the date hereof. In reaching the conclusions expressed in this opinion, we have examined and relied upon the originals or certified copies of all documents, certificates and instruments as we have deemed Precept Business Services, Inc. February 5, 1998 Page 2 necessary to the opinions expressed herein. In making the foregoing examinations, we have assumed the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals and the conformity to original documents of all copies submitted to us. Based solely upon the foregoing, subject to the comments hereinafter stated, and limited in all respects to the laws of the State of Texas and the federal laws of the United States of America, it is our opinion that: (i) the Transaction Shares, when issued in connection with the Transaction, will be duly authorized, validly issued, fully paid and nonassessable; (ii) the Warrants, when issued in accordance with the terms and conditions of the Agreement and Plan of Reorganization, will be duly authorized, validly issued and will constitute the valid and binding obligation obligation of the Company; (iii) the Warrant Shares, when issued upon exercise of the Warrants in accordance with the terms and conditions thereof (including the payment of an exercise price in excess of the aggregate par value of the Warrant Shares so issued), will be duly authorized, validly issued, fully paid and nonassessable; (iv) the Shelf Shares, when issued in one or more business combination transactions in accordance with Rule 415 under the Securities Act of 1933, as amended, duly authorized by the Board of Directors of the Company, for an aggregate consideration in excess of the aggregate par value of the Shelf Shares so issued, will be duly authorized, validly issued, fully paid and nonassessable. Our opinion is subject to (i) the effect of applicable bankruptcy, reorganization, insolvency, moratorium, arrangement and other laws affecting creditor's rights, including, without limitation, the effect of statutory or other laws regarding fraudulent conveyances, fraudulent transfers and preferential transfers; and (ii) the limitations imposed by general principals of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). You should be aware that we are not admitted to the practice of law in any state other than the State of Texas. Accordingly, no opinion is expressed herein as to the laws of any state other than the State of Texas and the federal laws of the United States of America. Precept Business Services, Inc. February 5, 1998 Page 3 We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the use of our name in the Registration Statement under the caption "Legal Matters." In giving this consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, /s/ Jackson Walker L.L.P. EX-8.1 10 EXHIBIT 8.1 EXHIBIT 8.1 February 6, 1998 U.S. Transportation Systems, Inc. 33 West Main Street Elmsford, NY 10523 Precept Investors, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, TX 75201 Gentlemen: Pursuant to an agreement dated as of November 16, 1997, by and between Precept Acquisition Company, LLC, a Texas limited liability company ("Precept Acquisition"), Precept Business Services, Inc., a Texas corporation and the sole owner of Precept Acquisition ("Precept Business Services") and U.S. Transportation Systems, Inc., a Nevada corporation, ("USTS") (the "Agreement"), USTS will transfer substantially all of its assets and liabilities to Precept Acquisition in exchange for the common stock of Precept Business Services (the "Precept Common Stock") (the "Reorganization"). Precept Acquisition and Precept Business Services are together referred to herein as "Precept." Except as otherwise provided, capitalized terms referred to herein have the meanings set forth in the Agreement. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the "Code"). We have acted as legal counsel to USTS in connection with the Reorganization, and you have requested our opinion regarding certain federal income tax consequences of the Reorganization to USTS and the holders of USTS Common Stock and USTS Preferred Stock (together, "USTS Stock") who receive Precept Common Stock pursuant to the Plan of Liquidation and Dissolution. As such, and for the purpose of rendering this opinion, we have examined and are relying upon (without any independent investigation or review thereof) the truth and accuracy, at all relevant times, of the statements, covenants, representations and warranties contained in the following documents: U.S. Transportation Systems, Inc. Precept Investors, Inc. Page 2 February 6, 1998 - ---------------- A. The Agreement; B. The Joint Proxy and Registration Statement on Form S-4, including the Joint Proxy Statement/Prospectus included therein (the "Registration Statement"); and C. Letter dated December 18, 1997, signed by Michael Margolies on behalf of USTS containing representations as to certain factual matters relating to the Reorganization; D. Letter dated February 5, 1998, signed by David Neely, on behalf of Precept containing representations as to certain factual matters relating to the Reorganization; and E. Such other instruments and documents related to the formation, organization and operation of Precept and USTS or to the consummation of the Reorganization and the transactions contemplated thereby as we have deemed necessary or appropriate. In preparing our opinion we have reviewed such federal income tax authority as we deemed relevant under the circumstances. Further, for purposes of this opinion, we have assumed, with your permission and without independent investigation, the following: 1. Original documents (including signatures) are authentic, documents submitted to us as copies conform to the original documents, and there has been (or will be by the Closing Date) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof. 2. The "FACTS" section contained herein is true, correct, and complete in all material respects. 3. The fair market value of the Precept Common Stock received by the USTS shareholders will be approximately equal to the fair market value of the USTS Stock surrendered in exchange therefor. 4. Precept will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by USTS immediately prior to the Reorganization. For purposes hereof, amounts paid by USTS to dissenters, amounts used by USTS to pay its reorganization expenses, amounts paid by USTS to shareholders who receive cash or other property, and all redemptions and distributions (except for regular normal dividends) made by USTS immediately preceding the transfer will be included as assets of USTS immediately prior to the Reorganization. 5. To the best knowledge of the management of USTS, there is no present plan or intention on the part of the USTS shareholders to sell, exchange, or otherwise dispose of, in the foreseeable future, a number of shares of Precept Common Stock U.S. Transportation Systems, Inc. Precept Investors, Inc. Page 3 February 6, 1998 - ---------------- received in the Reorganization that would reduce the USTS shareholders' ownership of Precept Common Stock to a number of shares having a value, as of the date of the Reorganization, of less than 50 percent of the value of the formerly outstanding USTS Stock as of the same date. For purposes of this representation, shares of USTS Stock exchanged for cash or other property, surrendered by dissenters or exchanged for cash in lieu of fractional shares of Precept Common Stock will be treated as outstanding USTS Stock as of the date of the Reorganization. Moreover, shares of USTS Stock and shares of Precept Common Stock held by USTS shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the transaction will be taken into account in making this representation. 6. Precept has no plan or intention to sell or otherwise dispose of any significant portion of the assets of USTS acquired in the transaction, except for dispositions made in the ordinary course of business or transfers described in section 368(a)(2)(C) of the Code. 7. USTS will distribute the stock, securities and other property it receives in the transaction, and its other properties, in pursuance of the plan of reorganization. 8. Following the Reorganization, Precept will continue the historic business of USTS or use a significant portion of USTS's historic business assets in a business. 9. Precept, USTS and the shareholders of USTS will pay their respective expenses, if any, incurred in connection with the transaction. U.S. Transportation Systems, Inc. Precept Investors, Inc. Page 4 February 6, 1998 - ---------------- 10. The fair market value of the assets of USTS transferred to Precept will equal or exceed the sum of any liabilities assumed by Precept, plus the amount of liabilities, if any, to which the transferred assets are subject. 11. The payment of cash in lieu of fractional shares of Precept Common Stock is solely for the purpose of avoiding the expense and inconvenience to Precept of issuing fractional shares and does not represent separately bargained-for consideration. 12. None of the compensation received by any shareholder-employee of USTS pursuant to any employment, consulting or similar arrangement entered into in connection with the Reorganization (including the employment agreement of Michael Margolies) will be separate consideration for, or allocable to, any of the shares of such shareholder-employee's USTS Stock exchanged in the Reorganization. None of the shares of Precept Common Stock received by any shareholder-employee in the Reorganization will be separate consideration for, or allocable to any such employment, consulting or similar arrangement (including the employment agreement of Michael Margolies) for services rendered or to be rendered. The compensation payable to any shareholder-employee under any such employment, consulting or similar arrangement (including the employment agreement of Michael Margolies) will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. 13. Precept Acquisition will elect under Treas. Reg. Section 301.7701-3(a) to be disregarded as an entity separate from its owner, Precept Investors, or will be treated as such under the default rule of Treas. Reg. Section 301.7701-3(b). U.S. Transportation Systems, Inc. Precept Investors, Inc. Page 5 February 6, 1998 - ---------------- 14. Precept has no plan or intention to reacquire any of the Precept Common Stock issued in the Reorganization. FACTS The Reorganization will be accomplished through the sale of substantially all the assets of USTS to Precept and the assumption of certain of USTS's liabilities by Precept. Certain assets, defined in the Agreement as "Excluded Assets," will be excluded from the sale. In the sale, USTS will receive 9.5 million shares of Precept Common Stock, plus one additional share of Precept Common Stock for each share of USTS Common Stock issued between the date of the Agreement and the date of the closing of the sale, and Precept will assume certain USTS liabilities. After the closing of the sale, USTS will make a partial distribution of Precept Common Stock received in the sale to the holders of USTS Common Stock and to the holders of USTS Preferred Stock. The final steps of the Reorganization will require that USTS dispose of its remaining assets, satisfy or make provision for its remaining liabilities and unmatured claims, dissolve USTS and transfer the remaining Precept Common Stock to a liquidating trust (the "Liquidating Trust") within one year of the Closing Date. A final distribution of Precept Common Stock, if any, from the Liquidating Trust will take place into more than three years from the transfer of assets to the Liquidating Trust. OPINIONS Based on the foregoing and subject to the assumptions, exceptions, limitations and qualifications set forth herein, and on the Code, the regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of today's date, it is our opinion that for federal income tax purposes the Reorganization will constitute a "reorganization" within the meaning of Section 368(a)(1)(C) of the Code and accordingly: A. USTS and Precept will each be considered a party to a reorganization within the meaning of Section 368(b) of the Code; B. No gain or loss will be recognized by USTS or Precept as a result of the Reorganization; C. No gain or loss will be recognized to the USTS shareholders upon receipt of Precept Common Stock in liquidation of their USTS Stock pursuant to the Reorganization unless and U.S. Transportation Systems, Inc. Precept Investors, Inc. Page 6 February 6, 1998 - ---------------- to the extent that a USTS shareholder receives or is deemed to receive property other than Precept Common Stock, recognizing that the receipt of a beneficial interest in the Liquidating Trust will be deemed to be the receipt of property other than Precept Common Stock to the extent that cash or other property is contributed to the Liquidating Trust; D. To the extent that they hold their USTS Stock as capital assets, the USTS shareholders receiving Precept Common Stock pursuant to the Reorganization will include their holding period for the USTS Stock in computing their holding periods for such Precept Common Stock; E. The holding period of the assets acquired by Precept will include the period for which such assets were held by USTS; F. The aggregate tax basis of the Precept Common Stock received by the USTS shareholders in the Reorganization, including Precept Common Stock that is deemed to be received by USTS shareholders as a result of receiving a beneficial interest in the Liquidating Trust, will be the same as the aggregate tax basis such shareholders had in their USTS Stock prior to the Reorganization, increased by the amount of gain recognized on the exchange, and decreased by the amount of any property other than Precept Common Stock received in the Reorganization, or deemed received as a result of the receipt of a beneficial interest in the Liquidating Trust (the aggregate tax basis of the USTS Stock surrendered in the exchange will be allocated between the Precept Common Stock actually received and the USTS's shareholder's pro rata share of the Precept Common Stock held in the Liquidating Trust; and G. The tax basis of the USTS assets received by Precept will be the same as the basis such assets had in the hands of USTS immediately prior to the Reorganization. In addition to the assumptions set forth above, this opinion is subject to the exceptions, limitations and qualifications set forth below. 1. This opinion represents and is based upon our best judgment regarding the application of federal income tax laws arising under the Code, existing judicial decisions, administrative regulations and published rulings and procedures. Our opinion is not binding upon the Internal Revenue Service or the courts, and there is no assurance that the Internal Revenue Service will not assert a contrary position. Furthermore, no assurance can be given U.S. Transportation Systems, Inc. Precept Investors, Inc. Page 7 February 6, 1998 - ---------------- that future legislative, judicial or administrative changes, on either a prospective or retroactive basis, will not adversely affect the accuracy of the conclusions stated herein. Nevertheless, we undertake no responsibility to advise you of any new developments in the application or interpretation of the federal income tax laws. 2. No opinion is expressed as to any transaction other than the Reorganization as described in the Agreement or to any transaction whatsoever, including the Reorganization, if all the transactions described in the Agreement or otherwise contemplated, including, without limitation, the establishment of the Liquidating Trust for the sole purpose of liquidating the assets transferred to it with no objective to continue or engage in the conduct of a trade or business, are not consummated in accordance with the terms of such Agreement and without waiver or breach of any material provision thereof or if all of the representations, warranties, statements and assumptions upon which we relied are not true and accurate at all relevant times. In the event any one of the statements, representations, warranties or assumptions upon which we have relied to issue this opinion is incorrect, our opinion might be adversely affected and may not be relied upon. 3. This opinion has been delivered to you for the purpose of complying with Securities and Exchange Commission requirements relating to the offering of the Precept Common Stock. We consent to the use of this opinion as an exhibit to the Registration Statement to register the Precept Common Stock issued in connection with the Reorganization, and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendment thereto. In giving such opinion, we do not thereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules or regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Bressler, Amery & Ross, P.C. Bressler, Amery & Ross, P.C. EX-10.6 11 EXHIBIT 10.6 Exhibit 10.6 PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan will be nonqualified stock options and not incentive stock options (as defined in Section 422 of the Code). 2. DEFINITIONS. As used herein, the following definitions shall apply; (a) "ADMINISTRATOR" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "AFFILIATE" means a company that is a member of a chain of corporations that includes the Company and that is connected through stock ownership with a common Parent but only if (i) the common Parent owns directly at least 50% of the total combined voting power of all classes of the stock in at least one of the other corprations and (ii) at least 50% of the total comibined voting power of all classes of the stock of each corporation is owned directly by one or more of the other corporations. (c) "BOARD" means the Board of Directors of the Company. (d) "CHANGE OF CONTROL" has the meaning given to it Section 12(b). (e) "CODE" means the Internal Revenue Code of 1986, as amended. (f) "COMMITTEE" means the Committee or Committees appointed by the Board in accordance with paragraph (a) of Section 4 of the Plan. (g) "COMMON STOCK" means the Class A Common Stock, $.01 par value, of the Company. (h) "COMPANY" means Precept Investors, Inc., a Texas corporation. (i) "CONSULTANT" means any person, including an advisor, who is engaged by the Company or any Parent or Subsidiary to render services and is compensated for such services and any director of the Company whether compensated for such services or not provided that if and in the event the Company registers any class of any equity security pursuant to the Exchange Act, the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company. PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 1 (j) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of the employment relationship by the Company or any Subsidiary. Continuous Status as an Employee shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Board, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or its successor. (k) "EMPLOYEE" means any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market Value System for the Nasdaq Stock Market ("Nasdaq"), its Fair Market shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such systems or exchange for the last market trading day prior to the time of determination) as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on Nasdaq (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator based upon the book value of the Company (or such other valuation method as is deemed appropriate by the Administrator). (n) "OPTION" means a stock option granted pursuant to the Plan. (o) "OPTIONED STOCK" means the Common Stock subject to an Option. (p) "OPTIONEE" means an Employee or Consultant who is granted an Option pursuant to the Plan. (q) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 2 (r) "PLAN" means this 1996 Stock Option Plan, as it may be amended from time to time. (s) "PRIMARY SUBSIDIARY" means Precept Business Products, Inc., a Delaware corporation and a Subsidiary of the Company. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (v) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of the Plan, the initial number of Shares which may be optioned and sold under the Plan, including to any individual Optionee, is 1,300,000 shares of Common Stock. The Shares may be authorized but unissued Shares or reacquired Shares held by the Company in its treasury. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. (i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. Except as may be required by subparagraph (iv) below, with respect to grants of Options to Employees who are also officers or directors of the Company, the Plan shall be administered by (A) the Board if the Board may administer the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with respect to a plan intended to qualify thereunder as a discretionary plan, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted in such a manner as to permit the Plan to comply with Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. (ii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to directors, non-director officers and Employees who are neither directors nor officers. PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 3 (iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER EMPLOYEES. With respect to grants of Options to Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of stock option plans, if any, of Texas corporate and securities laws and of the code (the "Applicable Laws"). Once appointed, such Committee shall continue to service in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (iv) ADMINISTRATION TO COMPLY WITH SECTION 16(m) OF THE CODE. If the Company has any class of common equity securities registered under Section 12 of the Exchange Act, with respect to grants of Options each year to the chief executive officer of the Company and the four other Employees of the Company whose total compensation ranks them among the four highest compensated officers for the year thereby triggering a report to the shareholders pursuant to the Exchange Act, each determined as of the last day of each year, the Plan shall be administered by a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of performance-based compensation pursuant to Section 162(m) of the Code. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members of substitution thereof, fill vacancies, however caused, as long as the Committee continues to satisfy the requirements of Section 162(m) of the Code. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(m) of the Plan; (ii) to select the officers, Consultants and Employees to whom Options may from time to time be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such Option granted hereunder; (v) to approve forms of agreement for use under the Plan; PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 4 (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted hereunder (including, but not limited to, the share price, or any vesting acceleration regarding any Option and/or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); and (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted. (c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. ELIGIBILITY. (a) Options may be granted to Employees and Consultants. An Employee or consultant who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options. (b) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with Optionee's right or the Company's right to terminate Optionee's employment or consulting relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall continue in effect for a term of ten (10) years from the original effective date unless sooner terminated under Section 14 of the Plan. 7. TERM OF OPTION. The term of each Option shall be the term stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. The Administrator may provide for the exercise of Options in installments. 8. OPTION EXERCISE PRICE AND CONSIDERATION. (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be equal to the dollar amount determined by the Administrator. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator and may consist entirely of (i) cash, (ii) check, (iii) promissory note, (iv) other Shares which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (v) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (vi) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 5 loan proceeds required to pay the exercise price, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercise of an Option is any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF EMPLOYMENT. In the event of termination of Optionee's consulting relationship or Continuous Status as an Employee with the Company, such Optionee may, subject to Section 9(f) below, exercise Options within sixty (60) days (or such other period of time as is determined by the Administrator, with such determination being made at the time of grant of the Option and not exceeding three (3) months) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), and only to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise an Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled under the Option Agreement within the time specified herein, the Option shall terminate. (c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee's consulting relationship or Continuous Status as an Employee as a result of Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within one (1) year from the date of such PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 6 termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise an Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise an Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (d) DEATH OF OPTIONEE. Notwithstanding the provisions of Section 9(b) above, in the event of the death of an Optionee, the Option may be exercised, but only within one (1) year from the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate of by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Option was vested at the date of death. To the extent the Optionee was not entitled to exercise an Option at the date of death, or if the estate or other person who acquired the right to exercise the Option by bequest or inheritance does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (e) RULE 16b-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (f) TERMINATION FOR CAUSE. Notwithstanding subsections (b), (c) and (d) of this Section 9, any Optionee whose consulting relationship or Continuous Status as an Employee is terminated by the Company for Cause shall forfeit all Options granted under this Plan, whether or not vested. For purposes of this Plan, an Optionee shall be deemed to have been terminated for Cause if the Optionee fails to satisfactorily perform his or her assigned duties or commits an act of gross negligence or willful misconduct, including, but not limited to, a dereliction of duty or the committing of and conviction for a crime involving breach of fiduciary duty to the Company or a Subsidiary, a felony or a crime involving moral turpitude. 10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercise, during the lifetime of the Optionee, only by the Optionee. 11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this Section. When an Optionee incurs tax liability in connection with an Option, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN PAGE 7 All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Administrator; (d) if the Optionee is subject to Rule 16b-3, the election must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. (a) Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, exchange of shares, recapitalization, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) In the event the Company shall be a party to any merger, consolidation or corporate reorganization, as the result of which the Company shall be the surviving corporation, the rights and duties of the Optionee and the Company shall not be affected in any manner. If the Company undergoes a Change of Control (as defined herein), then each outstanding Option PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN PAGE 8 held by an Optionee, whether or not such Option shall then be exercisable under the terms of the Option Agreement, shall become fully vested and exercisable effective on the day immediately preceding the effective date of the Change of Control (the "Accelerated Vesting Date"). In addition, the Company shall, at its election, (i) reach an agreement with the Purchaser (as defined herein) that the Purchaser will assume the obligations of the Company under each Option (if the Change of Control involves the Company) or under each Option held by an Optionee who is or becomes an Employee or Consultant of the Primary Subsidiary as of the Accelerated Vesting Date (if the Change of Control involves the Primary Subsidiary); (ii) reach an agreement with the Purchaser that the Purchaser will convert each Option (if the Change of Control involves the Company) or each Option help by an Optionee who is or becomes an Employee or Consultant of the Primary Subsidiary as of the Accelerated Vesting Date (if the Change of Control involves the Primary Subsidiary) into an option of at least equal value as to stock of the Purchaser; or (iii) in lieu of any such assumption or conversion, not later than twenty (20) days prior to the effective date of the Change of Control, notify each Optionee (if the Change of Control involves the Company) or each Optionee who is or becomes an Employee or Consultant of the Primary Subsidiary as of the Accelerated Vesting Date (if the Change of Control involves the Primary Subsidiary) that the vesting and exercisability of each such Optionee's Option is accelerated and afford to each such Optionee a right for fifteen (15) days after the date of such notice to exercise, effective as of the Accelerated Vesting Date, any then unexercised portion of the Option. Within such fifteen (15) day period, each such Optionee may exercise any portion of the Option as the Optionee may desire and deposit with the Company the requisite cash to purchase in full and not in installments the Common Stock thereby exercised (or comply with Section 8(b), if applicable, with respect to exercising the Option by tendering shares of Common Stock in lieu of cash payment for the Optioned Shares being purchased) in which case the Company shall, as of the Accelerated Vesting Date, issue all Common Stock this exercised, which shall be treated as issued stock of the Company for purposes of the Change of Control. For purposes of the preceding paragraph, a "Change of Control" shall have occurred if (i) the Company or the Primary Subsidiary sells all or substantially all of its respective assets, (ii) the Company or the Primary Subsidiary is a party to any merger, consolidation or corporate reorganization, as the result of which the Company or the Primary Subsidiary, respectively, is not the surviving corporation, (iii) any other person, entity, or group of persons or entities under common control purchases, or makes a tender or exchange offer for, stock of the Company or the Primary Subsidiary, whereby such other person, entity, or group would own more than 50% of the total combined voting power of all classes of the stock of the Company or the Primary Subsidiary, respectively, or (iv) the Company completes an initial public offering of the Common Stock pursuant to a registration statement filed under the Securities Act. For purposes of the preceding paragraph, such surviving corporation, purchaser or tendering corporation is referred to as the "Purchaser." 13. TIME OF GRANTINGh OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 9 14. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the material rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or with Section 162(m) of the Code (or any other applicable law or regulation, including the requirements of Nasdaq or an established stock exchange), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the Texas Securities Act of 1957, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange of Nasdaq market upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 16. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. AGREEMENTS. Options shall be evidenced by written agreements in such form as the Board shall approve from time to time. PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 10 PRECEPT INVESTORS, INC. NOTICE OF NONQUALIFIED STOCK OPTION GRANT TO ----------------------- You have been granted a nonqualified stock option to purchase Class A Common Stock, $.01 par value, of Precept Investors, Inc., a Texas corporation (the "Company") as follows: Option Number _____________________ Date of Grant _____________________ Number of Shares _____________________ Exercise Price Per Share $____________________ Term/Expiration Date: 10 years from Date of Grant Vesting Schedule: 20% as of each anniversary of the Date of Grant
PRECEPT INVESTORS, INC. 1996 STOCK OPTION PLAN Page 11 EXHIBIT B PRECEPT INVESTORS, INC. NONQUALIFIED STOCK OPTION AGREEMENT 1. GRANT OF OPTION. Precept Investors, Inc., a Texas corporation (the "Company"), hereby grants to ___________________(the "Optionee"), a nonqualified stock option (the "Option") to purchase from the Company a total of __________ shares (the "Shares") of Class A Common Stock, $.01 par value of the Company (the "Common Stock"), at an exercise price per share of $.20 (the "Exercise Price"), subject to the terms, definitions and provisions of the Precept Investors, Inc. 1996 Stock Option Plan (the "Plan"), adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Nonqualified Stock Option Agreement ("Agreement"). This Option is not intended to constitute an incentive stock option within the meaning of Section 422 of the Code. 2. TIME OF EXERCISE. Except only as specifically provided elsewhere in this Agreement, this Option is exercisable up to 100% of the total optioned shares at any time after the date of grant. The percentage exercisable shall be equal to 20% of the total optioned shares for each year of service (for a maximum of 100% in the event of 5 years of prior service) as an employee or consultant of the Company and its predecessor prior to the date of grant. 3. SHAREHOLDER'S AGREEMENT; OPTIONEE'S REPRESENTATIONS As a condition precedent to the issuance of the Shares pursuant to the terms of this Option, the Optionee, or his guardian or personal representative must execute a Shareholder's Agreement in the form of Exhibit "A" attached hereto and made a part hereof and comply with the terms thereof and hereby agree to comply with all of the terms of such agreement. If the Shares have not been registered under the Securities Act of 1933, as amended ("Securities Act"), at the time this Option is exercised, the Shareholder's Agreement shall include the Optionee's investment representations included in 1 Exhibit "A". Concurrent with the issuance of such Shares, the Optionee, his personal representative, or his guardian shall execute such Shareholder's Agreement and deliver such executed agreement to the Company. Thereafter, the Board shall promptly cause the officers of the Company to execute the Shareholder's Agreement on behalf of the Company. The Shareholder's Agreement attached as Exhibit "A" may be modified upon agreement of the Company and the Optionee, but either party may require the other to execute the form of agreement attached to this Agreement. Notwithstanding the foregoing, if at the time of such issuance the Common Stock has been registered under Section 12 of the Securities Exchange Act of 1934, as amended, execution and delivery of the Shareholder's Agreement shall not be required. 4. EXERCISE OF OPTION. The exercise of this Option shall entitle the Optionee to purchase shares of Common Stock of the Company. If requested by the Optionee and approved by the Company, the Optionee may exercise this Option or any portion thereof by tendering Shares of Common Stock, in lieu of cash payment for the Option Shares being purchased, with the number of Shares tendered to be determined by the Fair Market Value per Share of the Common Stock on the date of exercise, as determined by the Company. 5. SUBJECT TO PLAN. This Option and the grant and exercise thereof are subject to the terms and conditions of the Plan, which is incorporated herein by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. In addition, this Option is subject to any rules and regulations promulgated pursuant to the Plan, now or hereafter in effect. 6. TERM. This Option will terminate at the first of the following: (a) 5 p.m. on January 2, 2007. (b) 5 p.m. on the date one year following the date the Optionee's employment or service as a consultant with the Company and its Subsidiaries terminates by reason of the Optionee's death or disability (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended). (c) 5 p.m. on the date the Optionee's employment or service as a consultant with the Company and its Subsidiaries terminates for failing to satisfactorily perform his assigned duties, for committing an act of gross negligence or willful misconduct, including, but not limited to, a dereliction of duty or for committing and being convicted for a crime involving breach of fiduciary duty to the Company or a Subsidiary, a felony or a crime involving moral turpitude (hereinafter collectively referred to as "cause"). (d) 5 p.m. on the date three months following the date the Optionee's employment or service as a consultant with the Company and its Subsidiaries terminates for any reason whatsoever other than death, disability or cause. 2 7. WHO MAY EXERCISE. During the lifetime of the Optionee, this Option may be exercised only by the Optionee. If the Optionee dies or becomes disabled (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended) prior to the termination date specified in Section 6 hereof without having exercised the Option as to all of the Shares covered hereby, the Option may be exercised to the extent the Optionee could have exercised the Option on the date of his death or disability at any time prior to the earlier of the dates specified in Section 6(a) and (b) hereof by (i) the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance or by reason of the death of the Optionee in the event of the Optionee's death, or (ii) the Optionee or his personal representative in the event of the Optionee's disability, subject to the other terms of this Agreement, the Plan and applicable laws, rules and regulations. For purposes of this Agreement, the Company shall determine the date of disability of the Optionee. 8. RESTRICTIONS ON EXERCISE. This Option: (a) may be exercised only with respect to full shares and no fractional share of stock shall be issued; (b) may not be exercised in whole or in part and no cash or certificates representing shares subject to such Option shall be delivered, if any requisite approval or consent of any government authority of any kind having jurisdiction over the exercise of options shall not have been secured; and (c) may be exercised only if at all times during the period beginning with the date of the granting of the Option and ending on the date three months prior to the date of exercise the Optionee was an employee of or a consultant to either the Company or a Subsidiary of the Company; provided, if the Optionee's continuous employment or service as a consultant is terminated by (i) cause, the Option will terminate as provided in Section 6(c), (ii) disability, the Option may be exercised in accordance with Section 7, or (iii) death, or if the Optionee dies within said three-month period, the Option may be exercised in accordance with Section 7. 9. MANNER OF EXERCISE. Subject to such administrative regulations as the Administrator may from time to time adopt, the Optionee or beneficiary shall, in order to exercise this Option: (a) give written notice to the Company, in the form of Exhibit "B" attached hereto, of the Exercise Price and the number of Shares which he will purchase and furnish an undertaking to make payment of such exercise price in United States dollars before issuance of such shares; or (b) give written notice to the Company, if he desires to tender other shares of Common Stock in exchange for Option Shares, of the number of shares for which he is requesting approval from the Company for a stock tender. 3 Any notice shall include an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (i) to evidence such exercise, in whole or in part, of the Option evidenced by this Agreement, (ii) to determine whether registration is then required under the Securities Act, or any other law, as then in effect, and (iii) to comply with or satisfy the requirements of the Securities Act, or any other law, as then in effect. In addition, if an exercise under paragraph (b) is requested, the notice shall include an undertaking to tender to the Company (i) promptly after receipt of denial by the Company of the paragraph (b) request, full payment in United States dollars of the Option Exercise Price for the Shares of stock being purchased hereunder or (ii) receipt of approval by the Company of exercise of this Option or portion hereof by payment of Common Stock, full payment in Common Stock in exchange for Shares being purchased hereunder. In addition, the Optionee shall tender payment of the amount as may be requested pursuant to Section 16 by the Company for the purpose of satisfying its liability to withhold federal, state or local income or other taxes incurred by reason of the exercise of this Option. The Company shall notify the Optionee or beneficiary in writing, within fifteen (15) days after the date of exercise, whether the Company approves the exchange of Common Stock for Option stock being purchased. The Company must receive full payment in United States dollars or the appropriate number of shares of Common Stock, whichever applies, of the Option Exercise Price within seven (7) days after the date of the Company's notice, unless the Company extends the time of payment. 10. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 11. RIGHTS OF SHAREHOLDER. The Optionee will have no rights as a shareholder with respect to any Shares covered by this Option until the issuance of a certificate or certificates to the Optionee for the Shares. Except as otherwise provided in Section 12 hereof, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates. 12. CAPITAL ADJUSTMENTS; ANTIDILUTION. The number of Shares of Common Stock covered by this Option, and the Option Exercise Price thereof, shall be subject to such adjustment as the Board deems appropriate to reflect any stock dividend, stock split, share combination, exchange of shares, recapitalization, merger, consolidation, separation, reorganization, liquidation or the like, of or by the Company. In the event the Company shall be a party to any merger, consolidation or corporate reorganization, as the result of which the Company shall be the surviving corporation, the rights and duties of the Optionee and the Company shall not be affected in any manner. If the Company undergoes a Change of Control, then this Option, whether or not then exercisable pursuant to Section 2 hereof, shall become fully vested and exercisable effective as of the day 4 immediately preceding the effective date of the Change of Control (the "Accelerated Vesting Date"). In addition, if the Change of Control involves the Company or if the Change of Control involves the Primary Subsidiary and the Optionee is or becomes an Employee or Consultant of the Primary Subsidiary as of the Accelerated Vesting Date, the Company shall, at its election, (i) reach an agreement with the Purchaser (as defined herein) that the Purchaser will assume the obligations of the Company under this Option; (ii) reach an agreement with the Purchaser that the Purchaser will convert this Option into an option of at least equal value as to stock of the Purchaser; or (iii) in lieu of any such assumption or conversion, not later than twenty (20) days prior to the effective date of the Change of Control, notify the Optionee that the vesting and exercisability of this Option is accelerated and afford to the Optionee a right for fifteen (15) days after the date of such notice to exercise, effective as of the Accelerated Vesting Date, any then unexercised portion of the Option. Within such fifteen (15) day period, the Optionee may exercise any portion of this Option as he may desire and deposit with the Company the requisite cash to purchase in full and not in installments the Common Stock thereby exercised (or comply with Section 9 with respect to exercising the Option by tendering shares of Common Stock in lieu of cash payment for the Option Shares being purchased) in which case the Company shall, as of the Accelerated Vesting Date, issue all Common Stock thus exercised, which shall be treated as issued stock of the Company for purposes of the Change of Control. 13. OPTIONEE'S ACKNOWLEDGEMENTS. (a) OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE PLAN, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY OR ANY SUBSIDIARY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S OR A SUBSIDIARY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. (b) Optionee acknowledges receipt of a copy of the Plan and certain information related thereto and represents that he is familiar with the terms and provisions thereof, and, by Optionee's execution of this Agreement, accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan. 14. LAW GOVERNING. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of such State. 15. DATE OF GRANT. The date of grant of this Option is January 2, 1997. 5 16. WITHHOLDING. It shall be a condition to the obligation of the Company to issue or transfer Shares of stock upon exercise of this Option that the Optionee pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying its liability to withhold federal, state or local income or other taxes incurred by reason of the exercise of this Option. If the amount requested is not paid, the Company may refuse to issue or transfer Shares of stock upon exercise of this Option. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Optionee, to evidence his consent and approval of all the terms hereof, has duly executed this Agreement, as of the date specified in Section 15 hereof. PRECEPT INVESTORS, INC. By: _____________________________ Title: __________________________ OPTIONEE: _________________________________ Signature _________________________________ Printed or typed name Date: ___________________________ 6 EXHIBIT B EXERCISE NOTICE Precept Investors, Inc. 1909 Woodall Rodgers Freeway, Suite 500 Dallas, Texas 75201 Attention: Corporate Secretary Effective as of the exercise date set forth below, the undersigned ("Optionee") hereby elects to exercise Optionee's option ("Option") to purchase the indicated number of shares ("Shares") of the Class A Common Stock, $.01 par value ("Common Stock"), of Precept Investors, Inc., a Texas corporation (the "Company"), under and pursuant to the Precept Investors, Inc. 1996 Stock Option Plan ("Plan") and the Nonqualified Stock Option Agreement described below ("Option Agreement"). Optionee acknowledges that Optionee has read and understands the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. Date of Option Agreement: _____________________________ Exercise Date: _____________________________ Number of Shares to be Purchased: _____________________________ Exercise Price Per Share: _____________________________ Total Exercise Price: _____________________________ (Number of Shares to be Purchased x Exercise Price Per Share) Method of Payment: / / in cash / / by check (check one) / / by wire transfer / / in Common Stock (subject to prior approval) Optionee herewith delivers payment to the Company in an amount equal to the "Total Exercise Price" set forth above in the method indicated above. Optionee understands and acknowledges that the Shares have not been registered under the Securities Act of 1933, as amended ("Securities Act"), and, notwithstanding any other provision of the Option Agreement to the contrary, the exercise of any rights to purchase any Shares is expressly conditioned upon compliance with the Securities Act, all applicable state securities laws, and all applicable requirements of any stock exchange or over the counter market on which the Company's Common Stock may be listed or traded at the time of exercise and transfer. Optionee agrees to cooperate with the Company to ensure compliance with such laws. Optionee acknowledges that Optionee has read and understands the form of Shareholder's Agreement attached to the Option Agreement, including without limitation the investment representations set forth therein, and has executed, and is tendering to the Company with this Exercise Notice, a Shareholder's Agreement in such form with respect to the Shares. Optionee hereby undertakes to execute such further instruments and to take such further action as may be reasonably necessary to complete the exercise of the Option and permit the issuance of the Shares by the Company in accordance with the Option Agreement. _____________________________ _____________________________ (Printed name of Optionee) (Signature) _____________________________ (Address) _____________________________ EX-10.7 12 EXHIBIT 10.7 EXHIBIT 10.7 PRECEPT BUSINESS SERVICES, INC. 1998 STOCK INCENTIVE PLAN 1. PURPOSES OF THE PLAN. The purposes of this Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Non-Employee Directors and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non-statutory stock options, as determined by the Administrator at the time of grant of an option. Stock purchase rights, stock appreciation rights, deferred stock, dividend equivalents and restricted stock may also be granted under the Plan. It is intended that certain Performance Based Grants made to "covered employees" (as defined in Code Section 162(m)(3)) will qualify as performance based compensation under Code Section 162(m)(4)(C), and the pertinent provisions of the Plan shall be interpreted accordingly. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan, acting pursuant to Section 4(a) of the Plan at the time in question. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee or committees appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan. (e) "COMMON STOCK" means the Class A Common Stock of the Company, provided that if the Company's Articles of Incorporation are amended after the date hereof to reclassify any shares of the Company's stock, "Common Stock" shall include any shares reclassified as Class A Common Stock or any other class of common stock of the Company. (f) "COMPANY" means Precept Business Services, Inc., a Texas corporation. (g) "CONSULTANT" means a member of any advisory board of the Company or any Parent or Subsidiary and any person, including an advisor, who is engaged by the Company or any Parent or Subsidiary to render services and is compensated for such services; provided that the term Consultant shall not include directors who are paid only a director's fee by the Company, except if such director is a member of any advisory board of the Company or any Parent or Subsidiary. (h) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of the employment relationship by the Company or any Subsidiary. Continuous Status as an Employee shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Board, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or its successor. (i) "DEFERRED STOCK" means a grant of Shares to be issued at a deferred date pursuant to Section 15(a) below. (j) "DIVIDEND EQUIVALENT" means a grant of rights described in Section 15(b) below. (k) "EMPLOYEE" means any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including, without limitation, the New York Stock Exchange ("NYSE") its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such system or exchange for the last market trading day prior to the time of determination) as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator based upon the book value of the Company (or such other valuation method as is deemed appropriate by the Administrator). 2 (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "NON-EMPLOYEE DIRECTOR" means a director of the Company who is not an Employee. (p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (q) "OPTION" means a stock option granted pursuant to the Plan. (r) "OPTIONED STOCK" means the Common Stock subject to an Option. (s) "OPTIONEE" means an Employee or Consultant who receives an Option. (t) "PARENT" means, for purposes of issuance of Incentive Stock Options under the Plan, a "parent corporation," whether now or hereafter existing, as defined in Section 425(e) of the Code. (u) "PERFORMANCE BASED GRANT" means an Option or Stock Appreciation Right granted to a "covered employee" (as defined in Code Section 162(m)(3)) that the Administrator designates as a "Performance Based Grant." Provided, that nothing in the Plan shall be construed to prevent the issuance of Options or other rights to such "covered employees" that are not Performance Based Grants if the Administrator so elects. (v) "PLAN" means this 1998 Stock Incentive Plan, as amended. (w) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 12 of the Plan or a Restricted Stock Grant pursuant to Section 14 of the Plan. (x) "SEVERANCE AGREEMENT" means a severance agreement or arrangement between the Company and any executive officer of the Company. (y) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 17 of the Plan. (z) "STOCK APPRECIATION RIGHT" means an award of a right to benefit from the appreciation of Common Stock granted pursuant to Section 13 of the Plan. (aa) "SUBSIDIARY" means, for purposes of issuance of Incentive Stock Options under the Plan, a "subsidiary corporation", whether now or hereafter existing, as defined in Section 425(f) of the Code. 3 3. STOCK SUBJECT TO THE PLAN. The maximum aggregate number of Shares which may be optioned, sold, granted, or otherwise issued under the Plan shall initially be 6,000,000, which amount may, at the discretion of the Board, be increased from time to time to a number such that the sum of (a) the number of shares of Common Stock covered by then outstanding options granted pursuant to the Company's 1996 Stock Option Plan and held by current employees and consultants, as defined in such plan, (b) the number of shares of Common Stock covered by their outstanding options granted pursuant to this Plan and held by current Employees, Consultants and Non-Employee Directors, and (c) the number of shares of Common Stock available for issuance pursuant to options to be granted pursuant to this Plan equals 12.5% of the total number of Shares of Common Stock of the Company and shares of any other class of common stock of the Company outstanding from time to time; provided however, subject to adjustment under Section 17 of the Plan, the number of Shares which may be optioned, sold, granted, or otherwise issued under the Plan shall never be less than 6,000,000. The Shares may be authorized, but unissued, or reacquired Common Stock. Notwithstanding the foregoing, subject to adjustment under Section 17 of the Plan, no more than 6,000,000 Shares will be available for the granting of Incentive Stock Options under the Plan. If an Option should expire or become unexercisable for any reason without having been exercised in full, or other rights to Shares granted under the Plan should lapse or be forfeited, the unpurchased, unissued or forfeited Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. (i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With respect to grants of Options, Stock Purchase Rights and other rights and awards hereunder to Employees who are also officers or directors of the Company, the Plan shall be administered by (A) the Board if the Board may administer the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with respect to a plan intended to qualify thereunder as a discretionary plan, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted in such a manner as to permit the Plan to comply with Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. With respect to grants to Non-Employee Directors under the Plan, the Plan shall be administered by the Board in accordance with Rule 16b-3, provided that no Non-Employee Director shall vote on any decision affecting his individual benefits under the Plan. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. Notwithstanding the foregoing, with respect to Performance Based Grants to any "covered employee" (as defined in Code Section 162(m)), the Plan shall be 4 administered by a Committee of the Board comprised solely of two or more outside directors (as defined in Code Section 162(m)(4)(C)). From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. (ii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to directors, non-director officers and Employees who are neither directors nor officers. (iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of incentive stock option plans, if any, of Texas corporate and securities laws and of the Code (the "Applicable Laws"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(m) of the Plan; (ii) to select the Consultants, Employees and Non-Employee Directors to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine whether and to what extent Options, Stock Purchase Rights and other rights, or any combination thereof, are granted hereunder; (iv) to determine the number of Shares of Common Stock to be covered by each such award granted hereunder; provided, however, that no Optionee who is a "covered employee" as defined in Code Section 162(m)(3) shall receive in any one 5 fiscal year of the Company grants of Options and Stock Appreciation Rights with respect to more than the initial number of shares subject to the Plan, as set forth in Section 3; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or other award and/or the Shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion) which shall be set forth in a written award document or agreement approved by the Administrator; (vii) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(f) instead of Common Stock; (viii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount, if any, of any deemed earnings on any deferred amount during any deferral period) in accordance with Section 15(a) below; (ix) to reduce the exercise price of any Option or Stock Appreciation Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Appreciation Right shall have declined since the date the Option was granted. Any such reduction in exercise price shall be subject to the requirements of section 8(a) below as if a new option were granted, and shall be treated as the granting of additional options for purposes of the share limitation set forth in section 4(b)(iv) above; and (x) to determine the terms and restrictions applicable to Restricted Stock, Deferred Stock, and Dividend Equivalents. (c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. ELIGIBILITY. (a) Nonstatutory Stock Options, Stock Purchase Rights, Stock Appreciation Rights, Deferred Stock, Dividend Equivalents and Restricted Stock may be granted to Employees, Consultants and Non-Employee Directors. Incentive Stock Options may be 6 granted only to Employees. An Employee, Consultant or Non-Employee Director who has been granted an Option or other awards may, if he is otherwise eligible, be granted an additional Option or Options or other awards. (b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000 (whether due to acceleration of exercisability, miscalculation or error), such excess Options shall be treated as Nonstatutory Stock Options. In the event that only a portion of the options granted at the same time can be applied to the $100,000 limit, the Company shall issue separate share certificate(s) for such number of shares as does not exceed the $100,000 limit, and shall designate such shares as Incentive Stock Options stock in its share transfer records. (c) For purposes of Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his right or the Company's right to terminate his employment or consulting relationship at any time, with or without cause. 6. TERM OF PLAN. Subject to any applicable law, the Plan shall continue in effect until terminated pursuant to Section 19; provided, however, that no grants of Incentive Stock Options shall be made under the Plan following the expiration of ten years from the original effective date of the Plan. 7. TERM OF OPTION. The term of each Option shall be the term stated in the Option Agreement; provided, however, that in the case of an Incentive Stock Option, the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. OPTION EXERCISE PRICE AND CONSIDERATION. 7 (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option granted to any person, the per Share exercise price shall be determined by the Administrator. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (6) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (7) delivery of an irrevocable subscription agreement for the Shares which irrevocably obligates the Optionee to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (8) any combination of the foregoing methods of payment, or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. EXERCISE OF OPTION. 8 (a) PROCEDURE FOR EXERCISE: RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF EMPLOYMENT. In the event of termination of an Optionee's consulting relationship, Continuous Status as an Employee or status as a Non-Employee Director of the Company, such Optionee may, subject to Section 9(g) below, exercise vested Options that are not Incentive Stock Options to the extent and subject to the provisions set out in Optionee's Notice of Grant and Stock Option Agreement. In the case of an Incentive Stock Option, such Option may be exercised only within sixty (60) days (or such other period of time as is determined by the Administrator, with such determination being made at the time of grant of the Option and not exceeding ninety (90) days) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), and only to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise an Incentive Stock Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled under the Option Agreement within the time specified herein, the Option shall terminate. (c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b) above, in the case of an Incentive Stock Option, in the event of termination of an Optionee's Continuous Status as an Employee as a result of his total and permanent disability 9 (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise an Incentive Stock Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise an Incentive Stock Option at the date of termination, or if Optionee does not exercise such Incentive Stock Option to the extent so entitled within the time specified herein, the Incentive Stock Option shall terminate. However, the twelve (12) month limitation set out in this paragraph shall not apply to limit the exercise period set out in the Stock Option Agreement in the case of any Nonstatutory Stock Option. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option may be exercised, according to its terms, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Option was vested at the date of death. To the extent the Option was unvested at the date of death, such unvested portion of the Option shall terminate. (e) RULE 16B-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (f) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. (g) TERMINATION FOR CAUSE. Notwithstanding subsections (b), (c) and (d) of this Section 9, any Optionee whose consulting relationship, Continuous Status as an Employee or status as a Non-Employee Director is terminated by the Company for Cause shall forfeit all Options granted under this Plan, whether or not vested. For purposes of this Plan, an Optionee shall be deemed to have been terminated for Cause if the Optionee commits an act of gross negligence or willful misconduct, including, but not limited to, a dereliction of duty or the committing of and conviction for a crime involving breach of fiduciary duty to an employer, a felony or a crime involving moral turpitude. (h) RELOAD OPTIONS. In the event a person who is an employee of the Company or a Subsidiary shall exercise an Option (the "Original Option") by paying all or a portion of the Exercise Price of the shares of Common Stock subject to the Original Option by tendering to the Company shares of Common Stock owned by such person, an Option to purchase the number of shares of Common Stock used for such purpose by the employee (the "Reload Option") shall be granted to the employee as of the exercise date; provided that a Reload Option has been granted to such Optionee with respect to such Option, as evidenced 10 in his written option agreement. The Reload Option may be exercised at any time during the term of the Original Option, under such terms and conditions, and subject to such limitations, if any, as may be placed on such exercisability in the Agreement. I. VESTING OF OPTIONS IN CERTAIN EVENTS. (a) If the Company undergoes a Change of Control, then all of the outstanding Options held by any Optionee, whether or not such Options are vested at such time, shall become vested and exercisable, effective the day immediately prior to such Change of Control. For purposes of the preceding sentence, a "Change of Control" shall have occurred if the Company is merged, consolidated, or reorganized into or with another person, entity, or group of entities under common control or if a majority of the outstanding capital stock or all or substantially all of the assets of the Company are sold to any other person, entity, or group of entities under common control and as a result of such merger, consolidation, reorganization, or sale of capital stock or assets, more than 51% of the combined voting power of the then outstanding voting securities of the surviving person or entity immediately after such transaction are held in the aggregate by a person, entity or group of entities under common control who beneficially owned less than 51% of the combined voting power of the Company prior to such transaction. (b) The Administrator shall, with respect to any participant under the Plan who has a Severance Agreement with the Company, and in its discretion may, with respect to any other participant under the Plan, include provisions similar to (a) above in the terms of an award of Stock Purchase Rights, Stock Appreciation Rights, Restricted Stock, Deferred Stock, or Dividend Equivalents hereunder. 11. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. Notwithstanding the foregoing, Nonstatutory Options granted hereunder shall, with respect to any Participant under the Plan who has a Severance Agreement with the Company, and may in the discretion of the Administrator, with respect to any other participant, be granted on terms that permit transfer without consideration of such Nonstatutory Options by Optionee to: (i) the spouse, children or grandchildren of the Optionee; (ii) a trust or Uniform Gifts to Minors Act custodial account for the exclusive benefit of the child(ren) or grandchild(ren) of the Optionee; or (iii) a partnership or other entity in which the Optionee's spouse, children and/or grandchildren are the only partners, and permit the pledge of such Nonstatutory Stock 11 Options by an Optionee to the Company or a third party, as security for indebtedness, provided that (A) the stock option agreement pursuant to which such Nonstatutory Options are granted must be approved by the Administrator, and must, except with respect to agreements with any Participant under the Plan who has a Severance Agreement with the Company, expressly provide for transferability in a manner consistent with this Section, and (B) subsequent transfers of transferred Options shall be prohibited except by will or the laws of descent and distribution. Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of each Agreement and Section 9 hereof the term "Optionee" shall be deemed to refer to the transferee (however, the events of termination of employment specified in Sections 9(b), (c) or (d) hereof shall continue to be applied with respect to the original Optionee). Except as set forth above, Options may not be transferred except by will or the laws of descent and distribution. 12. STOCK PURCHASE RIGHTS. (a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid (which price shall be determined by the Administrator), and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as "Restricted Stock". (b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Committee may determine. (c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser. 12 (d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 16 of the Plan. 13. STOCK APPRECIATION RIGHTS. The grant of Stock Appreciation Rights under the Plan shall be subject to the following terms and conditions, and shall contain such additional terms and conditions, not inconsistent with the express terms of the Plan, as the Committee shall deem desirable: (a) STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an Award entitling a Participant to receive an amount equal to (or if the Committee shall determine at the time of grant, less than) the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Fair Market Value of a share of Common Stock on the date of grant of the Stock Appreciation Right, or, in the case of a grant other than a Performance Based Grant, such other price as may be set by the Committee, multiplied by the number of shares of Common Stock with respect to which the Stock Appreciation Right shall have been exercised. (b) GRANT. A Stock Appreciation Right may be granted separately, or in tandem with Options or other rights hereunder, whereby the exercise of one such Award affects the right to exercise the other, subject to limitation under Code Section 422 with respect to Incentive Stock Options. (c) EXERCISE. A Stock Appreciation Right may be exercised by a Participant in accordance with procedures established by the Committee, except that in no event shall a Stock Appreciation Right be exercisable prior to the first Anniversary Date of the date of grant. The Committee shall establish procedures to provide that, with respect to any Participant subject to Section 16(b) of the Exchange Act who would receive cash in whole or in part upon exercise of the Stock Appreciation Right, such exercise may only occur during an exercise period beginning on the third business day following the Company's public release of quarterly or annual summary statements of sales and earnings and ending on the last day of the month following the month in which such public release occurred or during such other period as the Administrator may provide. To the extent it is not inconsistent with the preceding sentence, the Committee, in its discretion, may provide that a Stock Appreciation Right shall be automatically exercised on one or more specified dates, or that a Stock Appreciation Right may be exercised during only limited time periods. (d) FORM OF PAYMENT. Payment to the Participant upon exercise of a Stock Appreciation Right may be made (i) in cash, by certified or cashier's check or by money order, (ii) in shares of Common Stock, (iii) in the form of a Deferred Compensation Stock 13 Option, or (iv) any combination of the above, as the Committee shall determine. The Committee may elect to make this determination either at the time the Stock Appreciation Right is granted, or with respect to payments contemplated in clauses (i) and (ii) above, at the time of the exercise. 14. RESTRICTED STOCK. Restricted Stock Grants may be made to Employees, Non-Employee Directors and Consultants under the Plan. Restricted Stock Grants shall be subject to the following terms and conditions, and may contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee shall deem desirable: (a) RESTRICTED STOCK GRANTS. A Restricted Stock Grant is an award of shares of Common Stock transferred to a Participant subject to such terms and conditions as the Administrator deems appropriate, including, without limitation, the requirement that the Participant forfeit such units upon termination of employment for specified reasons within a specified period of time, and restrictions on the sale, assignment, transfer or other disposition of the units as set forth in (c) below. Further, as a condition to the grant of Restricted Stock to any Participant who, at the date of grant has not been employed by the Company and has not performed services for the Company, the Administrator shall require such Participant to pay at least an amount equal to the par value of the shares of Common Stock subject to the Restricted Stock Grant within 30 days of the date of the grant, and failure to pay such amount shall result in an automatic termination of the Restricted Stock Grant. (b) GRANT OF AWARDS. Restricted Stock Grants shall be granted under the Plan in such form and on such terms and conditions as the Administrator may from time to time approve. Subject to the terms of the Plan, the Administrator shall determine the number of Restricted Stock Grants to be granted to a Participant and the Administrator may impose different terms and conditions on any particular Restricted Award made to any Participant. Each Participant receiving a Restricted Stock Grant shall be issued a stock certificate in respect of the shares of Common Stock. The certificate shall be registered in the name of the Participant, shall be accompanied by a stock power duly executed by the Participant, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to the Award. The certificate evidencing the shares shall be held in custody by the Company until the restrictions imposed thereon shall have lapsed or been removed. (c) RESTRICTION PERIOD. Restricted Awards shall provide that in order for a Participant to vest in the Awards, the Participant must continuously provide services for the Company or its Subsidiaries, subject to relief for specified reasons established by the Administrator in the terms of the grant, such as disability or a Change of Control, for a period commencing on the date of the Award and ending on such later date or dates as the Administrator may designate at the time of the Award, provided that the Administrator determines that such period is adequate to result in a substantial risk of forfeiture under Code Section 83(a) ("Restriction Period"). During the Restriction Period, a Participant may not 14 sell, assign, transfer, pledge, encumber, or otherwise dispose of shares of Common Stock received under a Restricted Stock Grant. The Administrator, in its sole discretion, may provide for the lapse of restrictions in installments during the Restriction Period. Upon expiration of the applicable Restriction Period (or lapse of restrictions during the Restriction Period where the restrictions lapse in installments), the Participant shall be entitled to receive his or her Restricted Award or the applicable portion thereof, as the case may be. (d) RIGHTS AS A SHAREHOLDER. Except as provided above, a Participant shall have, with respect to the shares of Common Stock received under a Restricted Stock Grant, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any cash dividends. Stock dividends issued with respect to the shares covered by a Restricted Stock Grant shall be treated as additional shares under the Restricted Stock Grant and shall be subject to the same restrictions and other terms and conditions that apply to shares under the Restricted Stock Grant with respect to which the dividends are issued. 15. OTHER EQUITY BASED RIGHTS. (a) DEFERRED STOCK. The Administrator is authorized to grant Deferred Stock to Participants, subject to the following terms and conditions: (i) AWARD AND RESTRICTIONS. Delivery of Shares will occur upon expiration of the deferral period specified for Deferred Stock by the Administrator (or, if permitted by the Administrator, as elected by the Participant). Prior to delivery of the Deferred Stock, the Participant shall not have any of the rights of a Shareholder and shall have the status of an unsecured creditor having the Company's mere contractual obligation to deliver Shares at a later date. In addition, Deferred Stock shall be subject to such restrictions as the Administrator may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times, separately or in combination, in installments, or otherwise, as the Administrator shall determine. (ii) FORFEITURE. Except as otherwise determined by the Administrator, upon termination of employment (as determined under criteria established by the Administrator) during the applicable deferral period or portion thereof (as provided in the Award Agreement evidencing Deferred Stock), all Deferred Stock that is at that time subject to deferral (other than a deferral at the election of the Participant) shall be forfeited; provided, however, that the Administrator may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will be waived in whole or in part in the event of terminations resulting from specified causes. 15 (iii) Deferred Stock awards shall be made only if the Administrator determines that any applicable requirements of the Code (pertaining to deferral of taxation), the Employee Retirement Income Security Act of 1974, as amended, Rule 16b-3, and other pertinent statutes, rules and regulations have been complied with, and such awards shall be subject to all additional terms, conditions and restrictions necessary to comply therewith. (b) DIVIDEND EQUIVALENTS. The Administrator is authorized to grant Dividend Equivalents to Participants. The Administrator may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares or Awards, or otherwise reinvested. 16. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this paragraph. When an Optionee incurs tax liability in connection with an Option or Stock Purchase Right, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued in connection with the Stock Purchase Right, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option or Right as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Administrator; (d) if the Optionee is subject to Rule 16b-3, the election must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which 16 the Option or Stock Purchase Right is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 17. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action. In the event of a merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event that such successor corporation does not agree to assume the Option or to substitute an equivalent option, the Board may, in lieu of such assumption or substitution, provide for the Optionee to have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of such assumption or substitution in the event of a merger, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. 18. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee, Consultant or Non-Employee Director to whom an Option is so granted within a reasonable time after the date of such grant. 19. AMENDMENT AND TERMINATION OF THE PLAN. 17 (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the material rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Sections 162(m) or 422 of the Code (or any other applicable law or regulation, including the requirements of the NYSE, the Nasdaq, or any other established stock exchange), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 20. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. To the extent required under Code Section 162(m)(4)(C), Performance Based Grants made hereunder with respect to any "covered employee" are subject to stockholder approval of material provisions of the Plan. 21. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 22. AGREEMENTS. Options, Stock Purchase Rights, Stock Appreciation Rights, Deferred Stock, Restricted Stock and Dividend Equivalents shall be evidenced by written agreements or award documents in such form as the Administrator shall approve from time to time. 18 EX-21 13 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES - - Precept Business Services, Inc. - - Precept Business Products, Inc. - - Precept Transportation Services of Texas, Inc. - - Wingtip Couriers, Inc. - - Relay Couriers, Inc. - - Precept Holdings, Inc. - - Precept Property Management, Inc. - - Precept Financial Group, Inc. - - Precept Acquisition Company, L.L.C. EX-23.1 14 EXHIBIT 23.1 EXHIBIT 23.1 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 S-4 No. 333-42689) and related Proxy Statement/Prospectus of Precept Business Services, Inc. dated February 6, 1998. /s/ Ernst & Young LLP Dallas, Texas February 6, 1998 EX-23.2 15 EXHIBIT 23.2 EXHIBIT 23.2 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 S-4, No. 333-42689) and related Proxy Statement/Prospectus of Precept Business Services, Inc. /s/ Mahoney Cohen & Company, CPA, P.C. New York, New York February 6, 1998 EX-99.6 16 EXHIBIT 99.6 EXHIBIT 99.6 CONSENT OF SHELDON STEIN Pursuant to Rule 438, I hereby consent to the identification of me as a person who will become a director of Precept Business Services, Inc. after completion of the proposed Transactions in the Registration Statement (Form S-4, No. 333-42689) and related Proxy Statement/Prospectus of Precept Business Services, Inc. /s/ SHELDON STEIN ------------------------ Sheldon Stein Dallas, Texas February 6, 1998 EX-99.7 17 EXHIBIT 99.7 EXHIBIT 99.7 CONSENT OF J. LIVINGSTON KOSBERG Pursuant to Rule 438, I hereby consent to the identification of me as a person who will become a director of Precept Business Services, Inc. after completion of the proposed Transactions in the Registration Statement on Form S-4 (File No. 333-42689) and related Proxy Statement/Prospectus of Precept Business Services, Inc. /s/ J. Livingston Kosberg ---------------------------- J. Livingston Kosberg Dallas, Texas February 6, 1998 -----END PRIVACY-ENHANCED MESSAGE-----