<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File No. 000-23735
PRECEPT BUSINESS SERVICES, INC.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-2487353
-------------------------- -----------------------
(State of incorporation or (I.R.S. Employer
organization) Identification No.)
1909 Woodall Rodgers Frwy.
Dallas, Texas 75201
---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 754-6600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO / /
<PAGE>
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of the latest practicable date.
<TABLE>
Class Outstanding as of May 15, 1998
------------------------ ---------------------------------
<S> <C>
Common Stock, Class "A" 43,525,577
Class "B" 4,145,000
</TABLE>
PRECEPT BUSINESS SERVICES, INC.
INDEX
<TABLE>
PART I - FINANCIAL INFORMATION Page No.
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................... 2
March 31, 1998 (unaudited) and June 30, 1997 (audited)
Consolidated Statements of Operations.......................... 4
For the three months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited) and for the nine months ended
March 31, 1998 (unaudited) and March 31, 1997 (unaudited)
Consolidated Statements of Cash Flows.......................... 6
For the nine months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited)
Notes to Consolidated Financial Statements..................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 11
PART II - OTHER INFORMATION
Exhibits and Reports on Form 8-K.................................... 20
Signatures.......................................................... 21
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
MARCH 31, June 30,
1998 1997
(Unaudited) (Audited)
--------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,675,824 $ 2,496,029
Trade receivables, net of $242,000 and $288,000
allowance for doubtful accounts, respectively 10,147,976 9,229,452
Accounts receivable from affiliates 763,724 503,571
Other receivables 795,680 456,942
Inventory 4,850,407 2,569,498
Other current assets 970,468 642,819
Income taxes refundable 511,845 277,766
Deferred income taxes 1,090,886 1,090,886
Assets held for sale 748,333 -
Net assets of discontinued operations 1,092,416 3,560,246
--------------------------
Total current assets 22,647,559 20,827,209
Property and equipment, net of accumulated depreciation 4,692,407 1,857,793
Intangible assets, net of accumulated amortization 18,856,554 4,790,608
Deferred income taxes 615,019 615,019
Other assets 2,168,521 1,200,379
--------------------------
Total assets $48,980,060 $29,291,008
--------------------------
--------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
2
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
MARCH 31, JUNE 30,
1998 1997
(Unaudited) (Audited)
--------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 45,915 $ 58,160
Current portion of capital lease obligations 434,870 185,055
Note payable and line of credit 847,167 -
Trade accounts payable 5,909,732 4,735,411
Sales taxes payable 293,725 1,181,047
Accrued compensation 959,766 1,132,015
Other accounts payable and accrued expenses 7,220,970 1,192,475
--------------------------
Total current liabilities 15,712,145 8,484,163
Long-term debt 13,359,505 6,984,644
Due to related party 965,059 -
Capital lease obligations, less current portion 726,609 517,234
Shareholders' equity:
Class A common stock, $.01 par value:
Authorized shares - 100,000,000
Issued shares - 35,988,347 359,883 263,758
Class B common stock, $.01 par value:
Authorized shares - 10,500,000
Issued and outstanding shares - 10,102,997 101,030 101,030
Additional paid-in capital 21,650,143 17,427,653
Accumulated deficit (3,703,043) (3,475,167)
--------------------------
18,408,013 14,317,274
Class A treasury stock, at cost:
Shares - 478,844 (191,271) (191,271)
Shareholder notes for stock purchases - (821,036)
--------------------------
Total shareholders' equity 18,216,742 13,304,967
--------------------------
Total liabilities and shareholders' equity $48,980,060 $29,291,008
--------------------------
--------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
3
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
NINE MONTHS ENDED
MARCH 31,
1998 1997
--------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Business products $51,516,093 $54,106,023
Transportation 5,535,704 4,870,254
--------------------------
57,051,797 58,976,277
Costs and expenses:
Cost of goods sold 34,762,816 36,930,455
Selling, general, and administrative 20,355,433 19,701,297
Depreciation and amortization 1,102,454 1,082,982
--------------------------
56,220,703 57,714,734
--------------------------
Operating income 831,094 1,261,543
Interest expense 486,937 299,218
--------------------------
Income from continuing operations before
income taxes 344,157 962,325
Income tax provision 137,663 388,394
--------------------------
Income from continuing operations 206,494 573,931
Discontinued operations:
Discontinuation of Precept Holdings, Inc.:
Loss from discontinued operations,
net of applicable income taxes (455,093) (373,430)
Discontinuation of Precept Builders, Inc.:
Loss from discontinued operations,
net of applicable income taxes - (2,531,590)
Discontinuation of U.S. Trucking, Inc.:
Income from discontinued operations,
net of applicable income taxes 20,723 -
--------------------------
Loss from discontinued operations (434,370) (2,905,020)
--------------------------
Net loss $ (227,876) $(2,331,089)
--------------------------
--------------------------
Basic income per share data:
Income from continuing operations $0.01 $0.02
Loss from discontinued operations (0.01) (0.09)
--------------------------
Basic loss per common share $(0.00) $(0.07)
--------------------------
--------------------------
Weighted average common shares outstanding - Basic 36,422,527 33,414,072
--------------------------
--------------------------
Diluted income per share data:
Income from continuing operations $0.01 $0.02
Loss from discontinued operations (0.01) (0.09)
--------------------------
Diluted loss per common share $(0.00) $(0.07)
--------------------------
--------------------------
Weighted average common shares outstanding - Diluted 37,148,346 33,738,924
--------------------------
--------------------------
</TABLE>
4
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
THREE MONTHS ENDED
MARCH 31,
1998 1997
(Unaudited) (Unaudited)
--------------------------
<S> <C> <C>
Revenues:
Business products $17,063,334 $16,871,051
Transportation 2,109,071 1,617,162
--------------------------
19,172,405 18,488,213
Costs and expenses:
Cost of goods sold 11,492,542 11,691,094
Selling, general, and administrative 7,018,180 6,035,958
Depreciation and amortization 440,764 446,831
--------------------------
18,951,486 18,173,883
--------------------------
Operating income 220,919 314,330
Interest expense 200,364 88,773
--------------------------
Income from continuing operations before
income taxes 20,555 225,557
Income tax provision 8,538 90,223
--------------------------
Income from continuing operations 12,017 135,334
Discontinued operations:
Discontinuation of Precept Holdings, Inc.:
Loss from discontinued operations,
net of applicable income taxes (210,785) (63,679)
Discontinuation of Precept Builders, Inc.:
Loss from discontinued operations,
net of applicable income taxes - (2,606,243)
Discontinuation of U.S. Trucking, Inc.
Income from discontinued operations,
net of applicable income taxes 20,723 -
--------------------------
Loss from discontinued operations (178,045) (2,669,922)
--------------------------
Net loss $ (280,846) $(2,534,588)
--------------------------
--------------------------
Basic income per share data:
Income from continuing operations $0.00 $0.00
Loss from discontinued operations (0.01) (0.08)
--------------------------
Basic loss per common share $(0.01) $(0.08)
--------------------------
--------------------------
Weighted average common shares outstanding - Basic 37,281,667 35,875,752
--------------------------
--------------------------
Diluted income per share data:
Income from continuing operations $0.00 $0.00
Loss from discontinued operations (0.01) (0.07)
--------------------------
Diluted loss per common share $(0.01) $(0.07)
--------------------------
--------------------------
Weighted average common shares outstanding - Diluted 38,223,268 36,200,604
--------------------------
--------------------------
</TABLE>
5
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
NINE MONTHS ENDED
MARCH 31,
1998 1997
(Unaudited) (Unaudited)
----------------------------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $(2,326,341) $470,783
INVESTING ACTIVITIES
Acquisitions, including earnout payments (782,163) (889,181)
Proceeds from sale of property and equipment 2,819,540 -
Acquisition of property and equipment, net (470,843) (851,948)
---------------------------
Net cash provided by (used in) investing activities 1,566,534 (1,741,129)
FINANCING ACTIVITIES
Payments on long-term debt - (415,425)
Issuance of common stock - 30,900
Principal payments on capitalized lease obligations (74,193) (61,982)
Borrowings on revolving line of credit 3,983,185 5,984,864
Payments on revolving line of credit (3,969,390) (6,189,265)
---------------------------
Net cash used in financing activities (60,398) (650,908)
---------------------------
Net decrease in cash and cash equivalents (820,205) (1,921,254)
Cash and cash equivalents at beginning of period 2,496,029 3,879,458
---------------------------
Cash and cash equivalents at end of period $ 1,675,824 $ 1,958,204
---------------------------
---------------------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In January 1997, 3,281,502 shares of Class A Common Stock were issued in
exchange for shareholder notes of $208,060.
During the nine months ended March 31, 1997, the Company entered into
capitalized leases at a recorded value of $588,698.
During the nine months ended March 31, 1998 the Company entered into
capitalized leases at a recorded value of $488,413.
During the nine months ended March 31, 1998, the Company issued $2,114,435 in
notes payable for consideration in five acquisitions, which included $406,172
in property and equipment.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS
6
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
present fairly, in all material respects, the financial position of Precept
Business Services, Inc. ("Precept" or "Company") and the results of its
operations and its cash flows for the nine months ended March 31, 1998 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 consolidated financial
statements and notes thereto as of June 30, 1997 and for the three years then
ended included in the Company's Form S-4 filing, which became effective
February 9, 1998. The results of operations for the period ended March 31,
1998 are not necessarily indicative of the operating results for the full
year.
2. SELECTED SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to
the Statement 128 requirements.
3. ACQUISITIONS
During the nine months ended March 31, 1997, the Company completed acquisitions
of certain assets of four business products distributors and one chauffeured
vehicle service company, for a total of $2,695,435, comprised of $435,000 in
cash, $2,114,435 in convertible notes payable and $146,000 in assumed debt,
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.
Effective March 19, 1997, the Company completed its acquisition of U.S.
Transportation Systems, Inc. ("USTS"), which through March 19, 1997 was
publicly traded on the Nasdaq Smallcap Market. On March 20, 1998 the Company
began trading on the Nasdaq Smallcap under the symbol PBSIA. USTS is engaged
in business areas which relate to transportation, including bus, chauffeured
vehicle, package and delivery transportation-related services. The Company
purchased nearly all of the operating assets and assumed certain obligations
of USTS for 9,612,500 shares of the Company's Class A Common Stock (the
"Exchange Shares").
7
<PAGE>
The Company registered the Exchange Shares and an additional approximately 20
million Class A Common shares for acquisitions on a Form S-4 registration
statement with the Securities and Exchange Commission. The acquisition was
accounted for using the purchase method of accounting, with resulting
goodwill of approximately $12 million to be amortized over 20 years on a
straight-line basis. USTS' results of operations have been included in the
Company's Consolidated Statement of Operations since March 20, 1998.
Subsequent to the acquisition of USTS, the Company determined to divest of its
75% ownership in U.S Trucking, Inc. ("USTI"), which represents the long-haul
delivery transportation related services segment of USTS. The results of
operations of USTI have been classified as discontinued operations in the
accompanying financial statements. Similarly, the net assets of USTI have been
recorded at their estimated net realizable value of $200,000 and have been
classified as net assets of discontinued operations. The disposition of USTI
is expected to occur prior to June 30, 1998.
The following table presents the unaudited pro forma results of operations as
if the USTS acquisition had occurred at the beginning of each respective period
presented. 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
acquisition been made as of those dates or of results which may occur in the
future.
The unaudited pro forma table below presents the nine month results of
Precept ending March 31, 1998 as presented in its Consolidated Financial
Statements and explained in its MD&A. The Compny believes these results are
indicative of the Company operating as a privately held entity for the nine
months ending March 31, 1998. USTS is presented for the same nine month
period and includes significant one-time writedowns of assets, which include
the ASI note ($5.8 million), investment in Packaging Plus ($1.0 million), a
write off of other notes receivable, prepaid assets and inventory and
additional bad debt accrual. These one time write downs and write offs
explain the substantial loss incurred by USTS and the resulting goodwill
recorded in the purchase accounting described above.
8
<PAGE>
<TABLE>
Nine Months Ended
March 31, 1998
Precept USTS Combined
-------------------------------------------
<S> <C> <C> <C>
Total revenues $57,051,797 $ 18,955,062 $ 76,006,859
-------------------------------------------
-------------------------------------------
Income (loss) from continuing operations $206,494 $ (7,847,339) $ (7,640,845)
Loss from discontinued operations (434,370) (4,196,291) (4,630,661)
-------------------------------------------
Net Loss $ (227,876) $(12,043,630) $(12,271,506)
-------------------------------------------
-------------------------------------------
Loss per common share: Basic
Loss from continuing operations $(0.17)
Loss from discontinued operations (0.10)
------------
$(0.27)
------------
------------
Loss per common share: Diluted
Loss from continuing operations $(0.17)
Loss from discontinued operations (0.10)
------------
$(0.27)
------------
------------
Nine Months Ended
March 31, 1997
Precept USTS Combined
-------------------------------------------
Total revenues $58,976,277 $ 22,215,257 $ 81,191,534
-------------------------------------------
-------------------------------------------
Income (loss) from continuing operations $ 573,931 $ (4,426,562) $ (3,852,331)
Loss from discontinued operations (2,905,020) (3,791,259) (6,696,279)
-------------------------------------------
Net Loss $(2,331,089) $ (8,217,821) $(10,548,610)
-------------------------------------------
-------------------------------------------
Loss per common share: Basic
Loss from continuing operations $(0.08)
Loss from discontinued operations (0.15)
------------
$(0.23)
------------
------------
Loss per common share: Diluted
Loss from continuing operations $(0.08)
Loss from discontinued operations (0.15)
------------
$(0.23)
------------
------------
</TABLE>
9
<PAGE>
4. DISCONTINUED OPERATIONS
In February, 1997, the Company decided to reduce its investment in Precept
Builders, Inc. ("Builders"), an indirect 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 offer 100,000 shares of
its common stock in a private offering to the
shareholders 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 was zero. On
December 2, 1997, the private offering was consummated.
During February 1997, the Company also decided to sell nearly all of the
assets of Precept Holdings, Inc. ("Holdings"), which owns and operates
certain other real estate-related investments. 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. During October 1997 and February 1998, the
ranch was sold for $1.2 million in cash and the condominiums were sold for
$1.6 million in cash, respectively.
5. SUBSEQUENT EVENTS
On April 13, 1998 the Company acquired InfoGraphix, Inc., a business products
distributor. The Company issued 2,058,077 shares of Class A Common Stock in
the combination. The transaction will be accounted for using the pooling of
interests method of accounting.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company should be read
in conjunction with the information contained in the Company's consolidated
financial statements, including the notes thereto, and the other financial
information appearing elsewhere in this report. Statements regarding future
economic performance, management's plans and objectives, and any statements
concerning its assumptions related to the foregoing contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations
constitute forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. The Company
does not undertake any obligation to revise these forward-looking statements
to reflect any future events or circumstances. Unless otherwise indicated or
the context otherwise requires, each reference to a year is to the Company's
fiscal year which ends on June 30 of such year.
The financial information presented herein contains the results of the
Company's operations as a privately held entity prior to March 20, 1998 when
the Company acquired the business of U.S. Transportation Systems, Inc. and
when there became a public market for the Company's Class A common stock.
GENERAL
The Company is a leading 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. The Company also operates various corporate transportation services
within several metropolitan areas ("Transportation Services"). The Company
was founded in 1988 as a subsidiary of Affiliated Computer Services, Inc.
("ACS") (NYSE: AFA) and has grown significantly since then, both internally
and through acquisitions. In June 1994, the Company was spun-off from ACS in
a tax-free stock exchange to the original ACS shareholders in connection with
the initial public offering of ACS.
11
<PAGE>
ACQUISITIONS
Since 1991, the Company has acquired 16 companies operating in the
Business Products industry. During the fiscal year 1998 through May 15, 1998,
the Company completed five of the acquisitions discussed above, representing
approximately $32 million in annual revenue. Three of the five acquisitions
were completed with a combination of cash and convertible notes, one for all
cash and one for all stock. Four acquisitions were accounted for using the
purchase method of accounting and one using the pooling method of accounting.
Accordingly, under the purchase method the results of the acquired
operations are included in the Company's consolidated results of operations
from the date of acquisition. Under the pooling method of accounting the
results of the Company's operations are restated to include the historical
financial results of the acquisition. Since the acquisition under the
pooling method was completed subsequent to the March 31 quarter end, the
Consolidated Financial Statements do not include its operating results.
During November 1997, the Company acquired one transportation entity for
a convertible note using the purchase method of accounting. This acquisition
represents approximately $1 million in revenue. Effective March 19, 1998 the
Company completed its acquisition of U.S. Transportation, Inc. ("USTS"),
structured as a tax-free merger, under a Triangular C Reorganization. The
Company acquired the assets and certain liabilities of USTS in exchange for
Precept Class A Common Stock. Under the Triangular C Reorganization, USTS is
required to liquidate as a corporation. As part of the liquidation process,
USTS distributed the Company's shares to its shareholders. The Company
registered the Class A Common Stock distributed to USTS shareholders on a
Form S-4 registration statement with the Securities and Exchange Commission.
The USTS acquisition was accounted for using the purchase method of
accounting. Under the purchase method of accounting, only operations for the
11 days beginning March 20, 1998 are included in the Consolidated Statements
of Operations of the Company. Continuing operations of USTS represent
approximately $9.5 million in revenue.
As a result of all the various acquisitions stated above, the historical
operating results of the Company for a given period may not be comparable to
prior or subsequent periods.
Except where specifically noted, the Discussion and Analysis of
Financial Condition and Results of Operations that appears below covers only
the Company's continuing operations. For additional information about the
results of discontinued operations, see Note 3 and 4 of the Company's "Notes"
to consolidated financial statements and discussion of "Discontinued
Operations" below.
12
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March
31, 1997
REVENUE
Revenues from continuing operations increased $684 thousand to $19.2
million for the three months ended March 31, 1998. These revenues include
eleven days of revenues from the acquired operations of USTS. This
represents a 4% increase compared to the period ended March 31, 1997, which
reflected $18.5 million.
BUSINESS PRODUCTS. Revenues for Business Products during the three month
period ended March 31, 1998 were $17.1 million, a $192 thousand increase from
the same reporting period in 1997. This increase is the result of growth
from existing operations, as there were no Business Product acquisitions
during the three month period ending March 31, 1998.
TRANSPORTATION. Transportation revenues were $2.1 million, a $492 thousand
increase from the same reporting period in 1997. These revenues include
eleven days of revenues from the acquired operations of USTS which were $202
thousand. The balance was from internal growth. During this period, certain
low margin accounts were discontinued, resulting in a lower increase in
revenue from internal growth.
OPERATING COSTS AND EXPENSES
BUSINESS PRODUCTS. One of the major expenses for Business Products is cost
of goods. For the three month period ended March 31, 1998, cost of goods
decreased by $199 thousand while sales revenue increased $192 thousand. This
resulted in a 1.9% increase in gross profit (revenues less cost of goods)
when compared to the same reporting period in 1997. Sales commissions for
Business Products rose in direct proportion to increased revenue for the period
due to all sales personnel being compensated on a straight commission basis.
TRANSPORTATION. For the reporting period, overall operating expenses
remained constant when compared to the period ended March 31, 1997. A soft
petroleum market and expense reduction programs accounted for the ability to
maintain expense levels.
13
<PAGE>
SELLING GENERAL AND ADMINISTRATIVE EXPENSES
BUSINESS PRODUCTS. General and administrative expenses ("G&A") for the
reporting period were $2.9 million. This represents a 17.5% or $439
thousand increase when compared to the same period for 1997. The increase was
primarily due to the creation and enhancement of the legal, financial and
information system functions of the Company in preparation of the Company
becoming publicly traded. Selling expenses or commissions earned for the
period were $2.1 million compared to $2.2 million for the same period in 1997.
TRANSPORTATION. Selling, general and administrative expenses in the
transportation group for the period ending March 31, 1998 were $2.0 million,
a $32 thousand increase from the same period in 1997. These expenses include
eleven days of USTS selling, general and administrative expenses which were
$157 thousand, including one time expenses connected with the sale of USTS
operations to the Company. The remainder of the increase was primarily due
to the restructuring and integration expenses associated with the chauffeured
vehicle service company acquisition.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the reporting period
decreased $6 thousand to $441 thousand from $447 thousand reported in the
same period of 1997.
OPERATING INCOME
Operating income for the three months ended March 31, 1998 declined $93
thousand. This was a direct result of G & A expenditures incurred to
facilitate the USTS acquisition and the unforecasted one time G & A expenses
of USTS for the eleven days included in this reporting period.
INTEREST EXPENSE
Interest expense for the period increased $112 thousand to $200
thousand. This increase was a reflection of additional debt incurred for
acquisition purposes.
TAX PROVISION
For the three months ended March 31, 1998, the Company reflected a $9
thousand provision for federal income tax as compared to a $90 thousand
provision for the same period in 1997.
NET INCOME
For the three months ended March 31, 1998, net income declined to $221
thousand from $314 thousand. This decline is primarily attributable to
expenses associated with the acquisition of USTS and four other companies
during the period.
14
<PAGE>
Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31,
1997
REVENUE
Consolidated revenues from continuing operations decreased $1.92 million
or 3.2% for the nine months reporting period when compared to the similar
period in 1997. This decrease was due to the loss of three Business Products
customers to competition during the period. As reflected by the increase in
revenue for the quarter ended March 31, 1998, the Company believes it has
taken the necessary steps to replace this revenue through acquisitions and
internal growth. Transportation revenues reflected a $731 thousand increase
primarily from internal growth.
OPERATING EXPENSES
COST OF GOODS
Cost of goods in Business Products decreased to $34.7 million from $36.9
million during the nine month period ended March 31, 1998. The greater portion
of this reduction is due to a lesser volume of goods procured by virtue of
decreased sales revenue. However, during this period the overall cost of
goods as a percent of revenue decreased approximately 1%, resulting in higher
gross profits.
SELLING GENERAL & ADMINISTRATIVE EXPENSES
BUSINESS PRODUCTS. G & A expenses for this nine month reporting period rose
$81 thousand to $8.5 million when compared to the same period in 1997. This
reflects less than a 1% growth in overall G & A expenses for the nine month
period.
The decrease in selling expenses is directly proportionate to Business
Products revenue due to all sales personnel being compensated on a straight
commission basis. For the nine month period ended March 31, 1998,
commissions paid were $6.6 million as compared to $7.2 million for the same
period of 1997.
TRANSPORTATION. Selling, general and administrative expenses for
transportation operations increased $300 thousand during the nine month
period ended March 31, 1998 to $5.2 million from $4.9 million. As discussed
above, results for the nine months ended March 31, 1998 reflect only 11 days
of USTS operations. Of the reported increase for the period ended March 31,
1998, USTS incurred $97 thousand of one time expenses connected with the sale
of USTS operations to Precept. All other transportation operations increased
selling, general and administrative expenses $204 thousand for the nine
months reporting period, attributable directly to supporting the $731
thousand revenue growth.
15
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense remained virtually unchanged for
the reporting period when compared to the same period in 1997.
OPERATING INCOME
Operating income for the reporting period declined by $430 thousand from
the same period in 1997. This was a direct result of decreased customer
revenues in Business Products for the first six months of the fiscal year.
As reflected in the consolidated statement for the three months ended March
31, 1998, the necessary steps have been put in place by the Company to replace
this revenue loss.
INTEREST EXPENSE
Interest expense for the nine month period increased $188 thousand to
$487 thousand. This was due primarily to additional debt incurred for the
five (5) acquisitions reported in a prior section.
TAX PROVISION
The company's effective tax rate was approximately 40%, unchanged for
the reporting period.
NET INCOME FROM CONTINUING OPERATIONS
As a result of the foregoing, net income from continuing operations
decreased to $206.5 thousand for the period from $574 thousand reported for
the nine months ended March 31, 1997.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of funding have been cash flow from
operations, commercial bank credit facilities and convertible notes issued by
the Company to sellers of acquired companies. The Company anticipates that
cash flow from operations and borrowings under its credit facility will be
its principal sources of funding. The Company'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.
In the nine months ended March 31, 1998, five acquisitions were
completed for total consideration of approximately $2.5 million. Of the
total consideration paid for the acquisitions, approximately $435 thousand
was in cash and approximately $2.1 million was in the form of convertible
debt. The cash portion of the consideration paid for the acquisitions was
provided by proceeds from the Company's Senior Credit Facility.
16
<PAGE>
A First Amendment to the Credit Agreement with Wells Fargo Bank, Texas
was signed on March 20, 1998, consisting of a $5 million increase to a $15.0
million secured revolving credit facility ("Senior Credit Facility"), which
expires March 31, 2001. Borrowings under the Senior Credit Facility bear
interest at Prime or LIBOR plus 1.75%, 2.25%, 2.50% or 2.75% dependent upon a
financial ratio of the Company calculated at the beginning of each month.
The Senior Credit Facility is fully secured by substantially all of the
assets of the Company. Availability under the Senior Credit Facility is
calculated based upon a borrowing base composed of receivables and inventory.
The Company incurs capital expenditures primarily for its information
and accounting systems needs. Capital expenditures, from continuing
operations, for the nine months ended March 31, 1998, were $566 thousand.
The majority of capital expenditures related to the purchase of capitalized
software and computer equipment.
The Company had cash and cash equivalents totaling $1.7 million at March
31, 1998 compared to $2.5 million at June 30, 1997. The reason for the
decrease was cash utilized in acquisitions, expenses associated with the USTS
transaction, capital expenditures and reduction of accrued sales tax
liability.
Working capital at March 31, 1998 was $7.5 million, comparable to
working capital at June 30, 1997 of $12.3 million. The primary reason for
the decrease is due to the acquisition of USTS and the assumption of certain
of its liabilities. The Company's capitalization, defined as the sum of
long-term debt and shareholders' equity at March 31, 1998 was approximately
$32.5 million.
The Company's EBITDA, defined as income excluding interest, taxes,
depreciation and amortization of goodwill and other intangible assets, was
$1.9 million for the nine months ended March 31, 1998 compared to $2.3
million for the nine month period ended March 31, 1997. Management has
included EBITDA in its discussion herein as a measure of liquidity because it
believes that it is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness, maintain current operating
levels of fixed assets and acquire additional operations and businesses.
EBITDA should not be considered as a substitute for statement of operations
or cash flow data for the Company's consolidated financial statements, which
have been prepared in accordance with generally accepted accounting
principles.
The Company's management believes that capital requirements, other than
funding of acquisitions, will be met from cash generated from continuing
operations and additional financing available under the Senior Credit
Facility. Favorable acquisition or expansion opportunities requiring large
commitments of capital may arise that the Company may be unable to finance
internally. In order to pursue such opportunities, the Company may be
required to incur additional debt or to issue Common Stock, which would have
a dilutive effect on existing shareholders. However, the portion of future
acquisition costs, which will be funded with such Common Stock, is dependent
upon the seller's willingness to accept the stock as consideration and the
Company's willingness to
17
<PAGE>
issue such stock based on the market price of the stock. No assurance can be
given as to the Company's future acquisition and expansion opportunities.
INCOME TAXES
At March 31, 1998, the Company had $2.3 million of gross deferred tax
assets. The Company had 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, the Company has concluded that it is more likely that some
portion of its deferred tax assets will not be realized. After considering
the sources of taxable income that may be available, the Company estimates
that it will not realize $637 thousand of its deferred tax assets, for which
a valuation allowance is recorded.
DISCONTINUED OPERATIONS
As part of its business strategy, the Company decided in fiscal 1997 to
focus on its core businesses and discontinue certain business operations. To
effect this strategy 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 nearly all of the assets of
Precept Holdings, Inc. ("Holdings"), which owns and operates certain other
real estate-related investments. The assets to be sold of Holdings include
two condominiums, a ranch, a restaurant, and a luxury suite at a local racing
facility.
During December 1997, the private offering of Builders was completed.
During October 1997 and February 1998, the ranch and condominiums of Holdings
were sold for $1.2 million and $1.6 million in cash, respectively. The sale
of various other assets is expected to be completed by June 30, 1998. These
assets will be sold for cash.
Subsequent to the acquisition of USTS, the Company determined to divest
of its 75% ownership in USTI, which represents the long-haul delivery
transportation related services segment of USTS. Management of the Company
believed USTI could not provide an adequate return to Precept shareholders.
The Company has executed a definitive agreement to sell the stock of USTI for
$1.95 million. The Company will receive $200,000 in cash and a $1.75 million
promissory note. The note would be fully due and payable in two years. The
sale of USTI is expected to be completed prior to June 30, 1998. The results
of operations of USTI have been classified as discontinued operation in the
Company's Consolidated Statements of Operations. Similarly, the net assets
of USTI have been recorded at their estimated net realizable value and have
been classified as net assets of discontinued operations.
18
<PAGE>
YEAR 2000 COMPLIANCE
As of March 31, 1998, all of the Company's software utilized in
accounting and operations has been licensed from third-party vendors and is
certified as year 2000 compliant.
INFLATION
Certain of the Company's 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. The Company
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, fuel and other costs in the
future could materially affect the Company's profitability if these costs
cannot be passed on to customers. In general, the Company 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 the Company's business
will not be affected by inflation in the future.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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. (1)
2.2 Plan of Liquidation and Dissolution (1)
2.3 Stock Purchase Agreement by and among Precept Business Products, Inc.,
Precept Business Services, Inc., InfoGraphix, Inc. and James Gorin (3)
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
Investors shareholders (1)
10.1 Form of Registration Rights Agreement by and among Precept Investors, Inc.
Michael Margolies and The Margolies Family Trust (1)
10.2 Form of Employment Agreement by and between Precept Investors, Inc. and
Michael Margolies (1)
10.3 Form of Employment Agreement by and between Precept Investors, Inc. and
ron Sorci (1)
10.4 Reciprocal Services Agreement, dated June 30, 1994, between Precept and
ACS (1)
10.5 Form of Directors Indemnification Agreement (1)
10.6 Precept 1996 Stock Option Plan (1)
10.7 Precept 1998 Stock Option Plan (1)
10.8 Credit Agreement and Line of Credit Note, dated as of July 1, 1997,
between Precept Investors, Inc. and Wells Fargo Bank (Texas), National
Association (1)
10.9 First Amended and Restated Credit Agreement and Line of Credit Note, dated
March 20, 1998, between Precept Business Services, Inc. and Wells Fargo
Bank (Texas), National Association (2)
11.1 Statement re Computation of U.S. Transportation Systems, Inc. Per Share
Earnings (1)
27.1 Financial Data Schedule (4)
- -------------------------------
(1) Previously filed as an exhibit to the Company's registration statement on
Form S-4 (file no. 333-42689) and incorporated herein by reference
(2) Previously filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended December 31, 1997
(3) Previously filed as an exhibit to the Company's Form 8-K dated April 28,
1998
(4) Filed herewith
20
<PAGE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1998. On April 28, 1998, the Company filed a report on
Form 8-K in connection with its acquisition of all of the issued and
outstanding stock of InfoGraphix, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRECEPT BUSINESS SERVICES, INC.
Date: May 15, 1998 By: /S/ David L. Neely
David L. Neely
Chairman & Chief Executive Officer
By: /s/ Scott B. Walker
Scott B. Walker
Senior Vice President &
Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD
ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,675,824
<SECURITIES> 0
<RECEIVABLES> 11,949,380
<ALLOWANCES> 242,000
<INVENTORY> 4,850,407
<CURRENT-ASSETS> 22,647,559
<PP&E> 8,706,804
<DEPRECIATION> (4,014,397)
<TOTAL-ASSETS> 48,980,060
<CURRENT-LIABILITIES> 15,712,145
<BONDS> 0
0
0
<COMMON> 18,980,060
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,980,060
<SALES> 57,051,797
<TOTAL-REVENUES> 57,051,797
<CGS> 34,762,816
<TOTAL-COSTS> 56,220,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 486,937
<INCOME-PRETAX> 0
<INCOME-TAX> 137,663
<INCOME-CONTINUING> 206,494
<DISCONTINUED> (434,370)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (277,876)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
