<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED DECEMBER 31, 1998
Commission file number: 000-23735
---------
PRECEPT BUSINESS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2487353
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1909 Woodall Rodgers Freeway, Suite 500 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. [X] Yes [ ] No
As of January 31, 1999, there were 7,866,333 outstanding shares of Class A
Common Stock, 592,142 outstanding shares of Class B Common Stock and 333,929
outstanding warrants to purchase shares of Class A Common Stock.
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<PAGE>
PRECEPT BUSINESS SERVICES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1998 ....................... 3
Condensed Consolidated Statements of Operations
for the six-month and the three-month periods ended
December 31, 1998 and 1997................................. 4
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended December 31, 1998 and 1997......... 6
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the six-month periods ended
December 31, 1998 and 1997................................. 7
Notes to Condensed Consolidated Financial Statements........... 8
Item 2 Management's discussion and analysis of financial
condition and results of operations........................ 14
PART II OTHER INFORMATION
Item 1 Legal proceedings.............................................. 22
Item 2 Changes in securities and use of proceeds...................... 22
Item 3 Defaults by the company on its senior securities............... 22
Item 4 Results of votes of holders.................................... 22
Item 5 Other information.............................................. 22
Item 6 Exhibits....................................................... 23
Signatures..................................................... 23
</TABLE>
2
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 2,747,719 $ 2,291,303
Trade accounts receivable, net of $650,000 and $404,000
allowance for doubtful accounts, respectively..................... 18,728,699 15,595,234
Accounts receivable from affiliates................................... 1,124,676 1,186,908
Other accounts receivable............................................. 3,068,613 1,609,529
Inventory............................................................. 7,258,282 5,133,484
Other current assets.................................................. 1,291,357 805,151
Deferred income taxes................................................. 486,875 499,264
Net assets of discontinued operations................................. - 1,115,125
------------ ------------
Total current assets.............................................. 34,706,221 28,235,998
Property and equipment, net.............................................. 9,005,655 5,751,487
Intangible assets, net................................................... 39,558,073 19,558,050
Deferred income taxes.................................................... 1,075,365 1,102,372
Other assets............................................................. 1,974,692 1,838,697
------------ ------------
Total assets.................................................. $ 86,320,006 $ 56,486,604
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................................ $ 9,085,627 $ 5,844,671
Accrued compensation.................................................. 2,400,743 1,943,964
Other accounts payable and accrued expenses........................... 7,187,479 5,189,268
Current portion of long-term debt..................................... 2,751,880 1,421,477
------------ ------------
Total current liabilities......................................... 21,425,729 14,399,380
Long-term debt........................................................... 29,008,312 20,084,756
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value; 3,000,000 authorized shares, none
issued............................................................ - -
Class A common stock, $0.01 par value; 100,000,000 authorized
shares and 7,934,739 and 6,870,126 issued shares,
Respectively...................................................... 79,347 68,701
Class B common stock, $0.01 par value; 10,500,000 authorized
shares and 592,142 shares outstanding............................. 5,921 5,921
Additional paid-in capital............................................ 36,048,341 23,515,022
Retained earnings (accumulated deficit)............................... (56,373) (1,395,905)
------------ ------------
36,077,236 22,193,739
Class A treasury stock - 68,406 shares................................ (191,271) (191,271)
------------ ------------
Total shareholders' equity........................................ 35,885,965 22,002,468
------------ ------------
Total liabilities and shareholders' equity.................... $ 86,320,006 $ 56,486,604
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Business products................................................ $ 68,777,067 $ 51,940,783
Transportation services.......................................... 10,876,726 3,426,633
------------ ------------
79,653,793 55,367,416
Costs and expenses:
Cost of goods sold............................................... 53,001,370 36,791,311
Sales commissions................................................ 9,179,607 6,928,461
Selling, general and administrative.............................. 12,178,157 9,587,346
Depreciation and amortization.................................... 1,526,940 774,395
------------ ------------
75,886,074 54,081,513
Operating income.................................................... 3,767,719 1,285,903
Interest expense.................................................... 1,191,695 286,573
------------ ------------
Income from continuing operations before income taxes............... 2,576,024 999,330
Income tax provision ............................................... 1,236,492 399,732
------------ ------------
Income from continuing operations................................... 1,339,532 599,598
Loss from discontinued operations, net of applicable income taxes... - (244,308)
------------ ------------
Net income.......................................................... $ 1,339,532 $ 355,290
------------ ------------
------------ ------------
Basic net income per share:
Income from continuing operations................................ $ 0.17 $ 0.10
Loss from discontinued operations................................ - (0.04)
------------ ------------
Net income....................................................... $ 0.17 $ 0.06
------------ ------------
------------ ------------
Weighted average shares outstanding.............................. 8,057,836 6,089,047
Diluted net income per share:
Income from continuing operations................................ $ 0.16 $ 0.10
Loss from discontinued operations................................ - (0.04)
------------ ------------
Net income....................................................... $ 0.16 $ 0.06
------------ ------------
------------ ------------
Weighted average shares outstanding.............................. 8,265,520 6,089,047
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenue:
Business products............................................... $ 37,843,754 $ 24,711,619
Transportation services......................................... 6,992,112 1,623,738
------------- ------------
44,835,866 26,335,357
Costs and expenses:
Cost of goods sold.............................................. 30,002,472 16,516,867
Sales commissions............................................... 4,900,262 3,366,158
Selling, general and administrative............................. 6,698,664 5,551,280
Depreciation and amortization................................... 877,025 487,617
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42,478,423 25,921,922
------------- ------------
Operating income................................................... 2,357,443 413,435
Interest expense................................................... 723,609 110,925
------------- ------------
Income from continuing operations before income taxes.............. 1,633,834 302,510
Income tax provision .............................................. 784,144 121,004
------------- ------------
Income from continuing operations.................................. 849,690 181,506
Loss from discontinued operations, net of applicable income taxes.. - (79,331)
------------- ------------
Net income......................................................... $ 849,690 $ 102,175
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------------- ------------
Basic net income per share:
Income from continuing operations............................... $ 0.10 $ 0.03
Loss from discontinued operations............................... - (0.01)
------------- ------------
Net income...................................................... $ 0.10 $ 0.02
------------- ------------
------------- ------------
Weighted average shares outstanding............................. 8,458,534 6,089,047
Diluted net income per share:
Income from continuing operations............................... $ 0.10 $ 0.03
Loss from discontinued operations............................... - (0.01)
------------- ------------
Net income...................................................... $ 0.10 $ 0.02
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------------- ------------
Weighted average shares outstanding............................. 8,753,122 6,089,047
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 1,339,532 $ 355,290
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 1,526,940 774,395
Changes in operating assets and liabilities, net of effects from
acquisitions
Trade accounts receivable.......................................... 806,235 (1,314,935)
Accounts receivable from affiliates................................ 62,232 (236,926)
Other accounts receivable.......................................... (1,459,084) (288,234)
Inventory.......................................................... (540,540) (1,787,135)
Other current assets............................................... 153,695 (171,801)
Income taxes refundable............................................ - (12,277)
Net assets of discontinued operations.............................. - 972,582
Trade accounts payable............................................. (817,500) 1,666,792
Accrued compensation............................................... (1,943,964) (635,005)
Other assets and liabilities, net.................................. 3,126,804 (897,858)
------------ ------------
Net cash provided by (used in) operating activities.................. 2,254,350 (1,575,112)
------------ ------------
Cash flows provided by (used in) investing activities:
Acquisitions of businesses, including earnout payments................. (9,192,545) (435,000)
Sale of net assets of discontinued operations.......................... 1,115,125 -
Acquisition of property and equipment, net............................. (327,198) (254,645)
------------ ------------
Net cash used in investing activities................................ (8,404,618) (689,645)
------------ ------------
Cash flows provided by (used in) financing activities:
Repayment of shareholder notes receivable.............................. - 208,060
Payments on long-term debt............................................. (749,092) (227,305)
Increase in (payments of) capital lease obligations.................... (448,746) 422,351
Borrowings on revolving line of credit................................. 7,804,522 525,000
------------ ------------
Net cash provided by financing activities.......................... 6,606,684 928,106
------------ ------------
Net increase (decrease) in cash and cash equivalents..................... 456,416 (1,336,651)
Cash and cash equivalents at beginning of period......................... 2,291,303 2,432,202
------------ ------------
Cash and cash equivalents at end of period............................... $ 2,747,719 $ 1,095,551
------------ ------------
------------ ------------
Cash paid for:
Interest............................................................... $ 1,287,896 $ 380,816
Income taxes........................................................... $ 394,406 $ 422,783
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
CLASS A CLASS B ADDITIONAL EARNINGS TOTAL
COMMON COMMON PAID-IN (ACCUMULATED SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT) OTHER EQUITY
-------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998....... $ 68,701 $ 5,921 $ 23,515,022 $ (1,395,905) $ (191,271) 22,002,468
Issuance of shares to
acquire businesses........ 10,646 - 12,533,319 - - 12,543,965
Net income................... - - - 1,339,532 - 1,339,532
-------- -------- ------------ ------------ ------------ ------------
Balance, December 31, 1998... $ 79,347 $ 5,921 $ 36,048,341 $ (56,373) $ (191,271) $ 35,885,965
-------- -------- ------------ ------------ ------------ ------------
-------- -------- ------------ ------------ ------------ ------------
Balance, June 30, 1997....... $ 46,458 $ 14,433 $ 17,803,121 $ (750,062) $ (1,012,307) $ 16,101,643
Repayment of shareholder
notes receivable.......... - - - - 208,060 208,060
Net income................... - - - 355,290 - 355,290
-------- -------- ------------ ------------ ------------ ------------
Balance, December 31, 1997... $ 46,458 $ 14,433 $ 17,803,121 $ (394,772) $ (804,247) $ 16,664,993
-------- -------- ------------ ------------ ------------ ------------
-------- -------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS
Precept Business Services, Inc. and its subsidiaries ("Precept" or
the "Company") primarily engage in business products distribution management
and services and, to a lesser extent, in executive chauffeured limousine,
livery and courier services. The business products management business
comprises arranging for the manufacture, storage, and distribution of
business forms, computer supplies, advertising information and other related
business products for small-to large-sized corporate customers. Precept
operates from offices throughout the United States. The transportation
services are provided from locations in the tri-state New York metropolitan
area and in the states of Texas, Michigan, Kentucky and Ohio.
PUBLICLY TRADED COMPANY
Precept's Class A common stock trades under the NASDAQ symbol "PBSI"
and its warrants trade under the NASDAQ symbol "PBSIW."
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements comprise the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
PRO FORMA INFORMATION
The pro forma information included in these financial statements and
notes is unaudited.
FISCAL YEAR END AND QUARTERLY REPORTING PERIODS
The Company maintains a June 30 fiscal year end and ends its
quarterly reporting periods on September 30, December 31, and March 31,
respectively. For purposes of the Company's current report on Form 10-Q,
references to 1999 and 1998 are meant to be the three-month or six-month
reporting periods ended December 31, 1998 and 1997, respectively.
REVERSE STOCK SPLIT
On November 11, 1998, the shareholders of the Company approved a one
for seven reverse stock split that became effective December 4, 1998. All
financial and share information presented in this report has been restated to
give effect to this reverse stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are consistent with the accounting policies
described in the Company's notes to consolidated financial statements
included in the Company's Annual Report to Shareholders and Form 10-K for the
fiscal year ended June 30, 1998.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements are unaudited. Certain
information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted, although the Company believes that the disclosures
included herein are adequate to make the information presented not
misleading. These interim financial statements should be read in conjunction
with the Company's consolidated financial statements for the year ended June
30, 1998. The interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position, its results of
8
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
operations and its cash flows. Operating results for any particular interim
period are not necessarily indicative of the operating results for a full
fiscal year.
The financial information for the year ended June 30, 1998 is
derived from the Company's audited financial statements for the same year as
included in the Company's Form 10-K for fiscal year 1998.
COMPREHENSIVE INCOME
The Company adopted the new accounting standard on comprehensive
income in the first quarter of fiscal year 1999, which requires companies to
disclose comprehensive income separately from net income from operations.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-ownership sources.
It includes all changes in equity during a period, except those resulting
from investments by owners and distributions to owners. Comprehensive income
(loss) is equal to net earnings as presented in the consolidated statements
of operations for the three and six months ended December 31, 1998 and 1997.
3. ACQUISITIONS
In the quarter ended December 31, 1998, the Company acquired one
corporate transportation services company located in North Arlington, New
Jersey, which provides executive limousine and town car service to the
tri-state New York metropolitan area with annual revenues of $14.0 million.
This acquisition was accounted for using the purchase method of accounting.
For this purchase acquisition, the aggregate acquisition cost was allocated
to the net assets acquired based on the fair market value of such net assets.
The operating results of this company have been included in the Company's
historical results of operations for all periods following the acquisition.
The aggregate acquisition cost for this purchased business amounted to $9.0
million and consisted of $3.4 million in cash, funded by working capital and
the Company's revolving line of credit, 0.3 million shares of Class A common
stock with an aggregate fair market value of $2.9 million, and $2.7 million
in assumed debt and transaction costs.
During the first quarter of fiscal year 1999, Precept acquired four
business products distribution companies with combined annual revenues of
$34.3 million. These acquisitions were accounted for using the purchase
method of accounting. For each of these purchase acquisitions, the aggregate
acquisition cost was allocated to the net assets acquired based on the fair
market value of such net assets. The operating results of such companies have
been included in the Company's historical results of operations for all
periods following the acquisition. The aggregate acquisition cost for such
purchased businesses amounted to $18.6 million and consisted of $5.7 million
in cash, funded by working capital and the Company's revolving line of
credit, 0.7 million shares of Class A common stock with an aggregate fair
market value of $9.6 million, and $3.3 million in seller notes and assumed
debt.
In the second quarter of fiscal year 1998, the Company completed the
acquisition of two business products companies located in Tempe, Arizona and
Austin, Texas and one corporate transportation service company located in
Dallas, Texas. Total annual revenues for the two business products companies
amounted to $3.5 million. These companies were acquired with seller notes and
assumed debt of $1.3 million. The transportation company's annual revenues
totaled $3.4 million. This acquisition was paid for with a seller note of
$0.4 million and assumed debt of $0.2 million.
During the first quarter of fiscal year 1998, the Company completed
the purchase of two business products distributors for a total of $0.5
million. The acquisitions were accounted for using the purchase method of
accounting with the majority of the purchase price attributable to accounts
receivable, inventory, equipment and goodwill. The combined annual revenues
for these two companies were $0.6 million.
In fiscal year 1998, the Company issued 0.9 million shares of its
Class A common stock with an aggregate fair market value of $18.3 million at
the date of acquisition in order to acquire two business products
distribution companies, InfoGraphix Inc. and MBF Corproation. These
acquisitions have been
9
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
accounted for using the pooling of interests method of accounting. The
Company's consolidated financial statements give retroactive effect to the
acquisitions of such companies for all periods presented.
The following presents the separate results from continuing
operations, in the second quarter and for the first six months of fiscal year
1998, of the Company (excluding the results of InfoGraphix and MBF prior to
the dates on which they were acquired) and of InfoGraphix and MBF up to the
dates on which they were acquired.
<TABLE>
<CAPTION>
Six months ended Three months ended
December 31, 1997 December 31, 1997
----------------- ------------------
<S> <C> <C>
Revenue:
Company (excluding InfoGraphix and MBF)......... $ 37,879,392 $ 18,943,914
InfoGraphix..................................... 9,789,883 4,367,115
MBF............................................. 7,698,141 3,024,328
------------ ------------
Company......................................... $ 55,367,416 $ 26,335,357
------------ ------------
------------ ------------
Net income:
Company (excluding InfoGraphix and MBF)......... $ 323,602 $ 95,392
InfoGraphix..................................... 496,719 197,067
MBF............................................. 179,009 10,051
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Company......................................... $ 999,330 $ 302,510
------------ ------------
------------ ------------
</TABLE>
The following table summarizes the consideration for the purchase
acquisitions completed and the fair value of the assets acquired.
<TABLE>
<CAPTION>
Six months ended
December 31,
------------------------------
Purchase consideration: 1998 1997
------------- -------------
<S> <C> <C>
Cash paid..................................................... $ 9,165,000 $ 435,000
Amounts due sellers of acquired businesses.................... 1,380,000 354,435
Common stock issued........................................... 12,544,000 -
Liabilities assumed........................................... 1,777,000 1,971,000
Other......................................................... 179,000 -
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Fair value of net assets acquired.................................. $ 25,045,000 $ 2,760,435
------------- -------------
------------- -------------
<CAPTION>
Six months ended
December 31,
------------------------------
Allocation of fair value of net assets acquired: 1998 1997
------------- -------------
<S> <C> <C>
Goodwill and intangible assets................................ $ 20,771,000 $ 2,353,763
Accounts receivable........................................... 3,939,000 -
Inventory and other, net...................................... 335,000 406,672
------------- -------------
$ 25,045,000 $ 2,760,435
------------- -------------
------------- -------------
</TABLE>
The following table presents the pro forma results of continuing
operations as if all the acquisitions described above had occurred at the
beginning of each period presented. Pro forma adjustments reflect additional
amortization expense since the excess of acquisition cost over the fair value
of the assets acquired is amortized for a full period. Pro forma adjustments
also reflect additional interest expense due to the related debt being
outstanding for a full period. The income tax effect of the pro forma
adjustments has also been reflected. These pro forma results are presented
for comparative purposes only and do not purport to be indicative of what
would have occurred had the businesses actually been acquired as of those
dates or of results which may occur in the future.
10
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Six months ended Three months ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues................... $ 86,250,943 $ 87,532,457 $ 45,049,943 $ 45,042,457
Income before income taxes ...... $ 3,235,086 $ 4,237,757 $ 1,905,086 $ 2,414,757
Net income....................... $ 1,787,345 $ 2,349,674 $ 1,096,345 $ 1,255,674
Diluted net income per share..... $ 0.21 $ 0.27 $ 0.13 $ 0.15
</TABLE>
Since December 31, 1998, Precept has acquired one corporate
transportation services company which provides executive town car and
limousine service primarily in the tri-state New York metropolitan area with
annual revenues of $2.0 million. The aggregate consideration for this
transaction amounted to $1.4 million, paid $0.2 million in cash and
approximately $1.2 million in seller notes and debt assumed. Assets with a
preliminary aggregate fair value of $0.9 million were acquired, with a
preliminary allocation as follows: $1.6 million to goodwill and intangible
assets, $0.4 million to property, plant, and equipment, and $1.1 million
(net) to other liabilities.
The operational results of this acquisition are not considered to be
significant enough to significantly affect the pro forma results presented
above; therefore, the pro forma effect of this acquisition on the Company's
pro forma operating results has not been separately disclosed.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
Estimated Lives 1998 1998
--------------- ------------- -------------
<S> <C> <C> <C>
Land $ 455,661 $ 411,000
Buildings 15 to 40 years 1,778,279 1,670,926
Leasehold improvements 1 to 10 years 496,156 455,118
Equipment and vehicles 3 to 5 years 11,392,268 7,020,965
Capitalized leasehold rights 3 to 5 years 1,385,137 1,353,279
------------- -------------
15,507,501 10,911,288
Accumulated depreciation and amortization.................... 6,501,846 5,159,801
------------- -------------
$ 9,005,655 $ 5,751,487
------------- -------------
------------- -------------
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------- -------------
<S> <C> <C>
Goodwill.......................................................... $ 44,140,607 $ 23,955,689
Non-compete agreements............................................ 755,659 755,659
------------- -------------
44,896,266 24,711,348
Accumulated amortization.......................................... 5,338,193 5,153,298
------------- -------------
$ 39,558,073 $ 19,558,050
------------- -------------
------------- -------------
</TABLE>
11
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------- -------------
<S> <C> <C>
Revolving line of credit.......................................... $ 23,770,000 $ 15,965,478
Note payable and long-term liability to shareholder............... 510,730 813,803
Convertible notes payable to sellers.............................. 3,054,436 2,114,435
Capitalized lease obligations and other notes payable............. 4,425,026 2,612,517
------------- -------------
31,760,192 21,506,233
Less current portion due within one year.......................... 2,751,880 1,421,477
------------- -------------
Long-term debt.................................................... $ 29,008,312 $ 20,084,756
------------- -------------
------------- -------------
</TABLE>
REVOLVING LINE OF CREDIT
The Company has a $25 million revolving line of credit with its bank
for borrowing to finance working capital and acquisition needs. The line of
credit bears interest at prime (7.75% at December 31, 1998) or at LIBOR plus
a maximum margin of 2.75%. The margin rate may be lower based on the
Company's ratio of debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). As of December 31, 1998, the margin rate was 2.5%.
The revolving line of credit includes restrictions as to the current ratios
and debt service coverage as well as borrowing restrictions based upon
accounts receivable, inventory and property and equipment. The line of credit
is secured by substantially all of the assets of the Company. The revolving
line of credit is due and payable on March 31, 2001.
7. SEGMENT INFORMATION
The table below presents certain segment information from continuing
operations for the three- and the six-month periods ended December 31, 1998
and 1997. Intersegment sales included in operating income below amounted to
$0 and $3,474 for the business products segment and $150,996 and $165,120 for
the transportation services segment for the second quarters ended December
31, 1998 and 1997, respectively. For the first six months in 1999 and 1998,
intersegment sales included in operating income below totaled $1,671 and
$34,070 for the business products segment and $292,376 and $329,468 for the
transportation services segment.
<TABLE>
<CAPTION>
Six months ended Three months ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Operating income:
Business products............. $ 5,098,693 $ 4,367,049 $ 2,425,647 $ 1,453,522
Transportation services....... 1,722,311 (283,136) 1,151,074 (99,131)
Other......................... (3,053,285) (2,798,010) (1,219,278) (940,956)
------------- ------------- ------------- -------------
Total operating income.... 3,767,719 1,285,903 2,357,443 413,435
Interest expense................... (1,191,695) (286,573) (723,609) (110,925)
------------- ------------- ------------- -------------
Income before income taxes......... $ 2,576,024 $ 999,330 $ 1,633,834 $ 302,510
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Identifiable assets:
Business products................................................ $ 52,517,901 $ 31,690,326
Transportation services.......................................... 27,582,295 2,403,033
Other............................................................ 6,219,810 9,100,198
------------- -------------
Total identifiable assets.................................... $ 86,320,006 $ 43,193,557
------------- -------------
------------- -------------
</TABLE>
12
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
8. WEIGHTED AVERAGE SHARES OUTSTANDING
The following table provides information to reconcile the basic and
diluted weighted average shares outstanding for the three-month and six-month
periods ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Six months ended Three months ended
December 31, December 31,
------------------------- ---------------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding:
Common shares, Class A and Class B, outstanding
at the beginning of the period.............. 7,393,919 6,089,047 8,122,565 6,089,047
Common shares used to acquire businesses during
the period.................................. 1,064,615 - 335,969 -
---------- --------- ---------- ----------
Common shares, Class A and Class B, outstanding
at the end of the period.................... 8,458,534 6,089,047 8,458,534 6,089,047
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Weighted average number of common shares
outstanding during the period based on the
number of days outstanding (A).............. 8,057,838 6,089,047 8,458,534 6,089,047
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Diluted weighted average shares outstanding:
Common stock options:
Number of outstanding options............... 663,832 46,405 663,832 46,405
Number of options vested.................... 66,405 46,405 66,405 46,405
Number of options which would be exercised
based on average market value of
common stock during the period......... 46,405 - 46,405 -
Proceeds from exercise of options........... $ 68,218 $ - $ 68,218 $ -
Common shares repurchased with proceeds..... 21,593 - 23,058 -
Common shares issued from exercise of
options, net (B)....................... 24,812 - 23,349 -
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Warrants to purchase common stock:
Number of warrants outstanding.............. 333,930 - 333,930 -
Number of warrants which would be exercised
based on average market value of
common stock during the period......... - - - -
Net proceeds from exercise of warrants...... $ - $ - $ - $ -
Common shares repurchased with proceeds..... - - - -
Common shares issued from exercise of
warrants (C)........................... - - - -
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Convertible notes payable:
Face value of notes which would be
converted based on average market
value of common stock during the
period................................. $2,470,000 $ 440,000 $2,470,000 $ 440,000
Common shares issued upon conversion (D).... 182,870 - 271,239 -
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Diluted weighted average common shares
outstanding (A + B + C + D)................ 8,265,520 6,089,047 8,753,122 6,089,047
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Precept is an independent distributor of custom and stock business
products and is a provider of document management services ("Business
Products") to businesses in a variety of industries throughout the United
States. Precept also operates seven corporate transportation service
("Transportation Services") companies in the United States.
Precept was one of the first organizations to begin nationwide
consolidation of operating companies in the Business Products industry. Since
1991, Precept has acquired 21 companies in the Business Products industry
plus 10 in the Transportation Services industry.
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 integrating 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
that these strategies will lead to lower cost of goods and increased sales of
various products and services to existing and new customers.
This section should be read in conjunction with the Company's
financial statements included in this report and with the Company's annual
report on Form 10-K for the year ended June 30, 1998.
ACQUISITIONS
The Company's results of operations and the comparability of the
Company's results of operations from period to period have been significantly
affected by businesses acquired in each period. From 1991 through the end of
the second quarter of fiscal year 1999, the Company completed 30
acquisitions: 21 business products distribution companies and 9
transportation service companies. Two business products companies acquired in
fiscal year 1998 were accounted for using the pooling-of-interests method
and, as a result, the consolidated financial statements of the Company have
been restated to combine the financial statements of the Company with the
pooled companies' financial statements for all periods presented. The
remaining acquisitions have been accounted for following the purchase method
and, as a result, the results of operations of the acquired companies have
been included in the Company's results of operations from the dates of
acquisition.
In the three-month period ended December 31, 1998, the Company
acquired one corporate transportation services company located in North
Arlington, New Jersey, which provides executive limousine and town car
service to the tri-state New York metropolitan area with annual revenues of
$14.0 million. This acquisition was paid for with $3.4 million in cash,
financed by the Company's revolving line of credit, $3.0 million in fair
market value of 336,000 shares of Class A common stock, and $2.6 million in
assumed debt.
14
<PAGE>
In the three-month period ended September 30, 1998, the Company
completed the acquisitions of four business products companies located in
Salt Lake City, Utah; Houston, Texas; Bangor, Maine; and Florence, South
Carolina with combined annual revenues of $34.3 million. Such acquisitions
were paid for with an aggregate of $5.8 million in cash, financed by the
Company's working capital and revolving line of credit, $1.4 million in
seller notes, 729,000 shares of Class A common stock with a fair market value
of $9.6 million, and $1.8 million in assumed debt.
In January 1999, the Company acquired one corporate transportation
services company in Canbery, New Jersey, which provides executive limousine
and town car service to the tri-state New York metropolitan area with annual
revenues of $2.0 million. The aggregate consideration for this transaction
amounted to $1.4 million, paid with $0.2 million in cash and approximately
$1.2 million in seller notes and debt assumed.
In the three month period ended December 31, 1997, the Company
completed the acquisition of two business products companies located in
Tempe, Arizona and Austin, Texas and one corporate transportation service
company located in Dallas, Texas. Total annual revenues for the two business
products companies amounted to $3.5 million. These companies were acquired
with seller notes and assumed debt of $1.3 million. The transportation
company's annual revenues totaled $3.4 million. This acquisition was paid for
with a seller note of $0.4 million and assumed debt of $0.2 million.
In the three month period ended September 30, 1997, the Company
completed the acquisition of two business products companies located in New
York and Fort Worth, Texas with annual revenues of $0.6 million. These
acquisitions were paid for with $0.5 million in cash, financed by the
Company's revolving line of credit.
PURCHASE ACCOUNTING EFFECTS
The Company's acquisitions have been primarily accounted for using
the purchase accounting method. The acquisitions have currently affected, and
will prospectively affect, the Company's results of operations in certain
significant respects. The Company's revenues and operating expenses will be
directly affected by the timing of the acquisitions. The aggregate
acquisition costs, including assumption of debt, are allocated to the net
assets acquired based on the fair market value of such net assets. The
allocations of the purchase price results in an increase in the historical
book value of certain assets, including property and equipment, and will
generally result in the allocation of a portion of the purchase price to
goodwill, which results in incremental annual and quarterly amortization
expense.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items from continuing
operations as a percentage of revenues for the three-month and six-month
periods ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Six months ended Three months ended
December 31, December 31,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Business products............................................ 86.2% 93.2% 84.4% 93.8%
Transportation services...................................... 13.8% 6.8% 15.6% 6.2%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Cost of goods sold........................................... 66.5% 66.4% 66.9% 62.7%
Sales commissions............................................ 11.5% 12.5% 10.9% 12.8%
Selling, general and administrative.......................... 15.3% 17.4% 14.9% 21.1%
Depreciation and amortization................................ 1.9% 1.4% 2.0% 1.9%
------ ------ ------ ------
95.2% 97.7% 94.7% 98.5%
------ ------ ------ ------
Operating income.................................................. 4.8% 2.3% 5.3% 1.5%
Interest expense.................................................. 1.5% 0.5% 1.7% 0.4%
------ ------ ------ ------
Income before income taxes........................................ 3.3% 1.8% 3.6% 1.1%
Income tax provision.............................................. 1.6% 0.7% 1.7% 0.5%
------ ------ ------ ------
Net income........................................................ 1.7% 1.1% 1.9% 0.6%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997
REVENUE for 1999 increased by $24.3 million, or 43.9%, from $55.4
million in 1998 to $79.7 million in 1999. In 1999, Business Products revenue
increased by $16.8 million or 32.4% and Transportation Services revenue
increased by $7.5 million or 217.4%. The increase in Business Products
revenue was due to the acquisition of nine business products companies during
fiscal years 1998 and 1999, which accounted for $12.5 million, and internal
growth of $4.3 million. Business Products internal revenue grew 8.4% for the
first six months of 1999. Of the total increase in Transportation Services
revenue in 1999, $7.2 million was due to the acquisition of five
transportation companies.
COST OF GOODS SOLD for 1999 increased by $16.2 million, or 44.1%,
from $36.8 million in 1998 to $53.0 million in 1999. Cost of goods sold for
Business Products increased by $11.7 million of which approximately $8.4
million was due to companies acquired after the beginning of fiscal year
1998. Transportation Services cost of goods sold increased by $4.5 million
due primarily to the five transportation companies acquired since the
beginning of 1998. As a percentage of revenue, cost of goods sold for 1999
increased by 0.1% from 66.4% in 1998 to 66.5% in 1999. This increase was
primarily due to the mix of products sold.
SALES COMMISSIONS increased by $2.3 million, or 32.5%, in 1999, from
$6.9 million in 1998 to $9.2 million in 1999 due primarily to the increased
level of Business Products revenue. Sales commissions for the Business
Products division remained consistent at 13.3% of Business Products revenue.
Total commission expense decreased by 1.0% from 12.5% in 1998 to 11.5% in
1999 because the Transportation Services division contributed a higher
proportion of consolidated revenue in 1999.
16
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $2.6
million or 27% in 1999 from $9.6 million in 1998 to $12.2 million in 1999,
which included increased expenses of $2.4 million from business products and
transportation services companies acquired. As a percentage of revenue,
selling, general and administrative expenses have declined by 2.1% from 17.4%
in 1998 to 15.3% in 1999. The reduced expenses in existing operations are
primarily a result of the Company's continuing efforts and strategy to
realize synergies from acquisitions by merging common administrative and
support functions.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.7 million in 1999
from $0.8 million in 1998 to $1.5 million in 1999 due largely to the size and
timing of the companies acquired since the beginning of 1998.
INTEREST EXPENSE increased by $0.9 million or 315.8% during 1999,
from $0.3 million in 1998 to $1.2 million in 1999 principally due to
additional debt incurred by the Company in 1998 and 1999 to finance its
business acquisitions.
INCOME TAXES are provided at a 48.0% effective rate in 1999 compared
to a 40.0% rate in 1998. This increase is due primarily to an increase in the
level of non-deductible expenses, primarily goodwill amortization.
NET INCOME FROM CONTINUING OPERATIONS increased by $0.7 million or
123.4% in 1999, from $0.6 million in 1998 to $1.3 million in 1999, due to the
reasons described above. Diluted earnings per share increased $0.06 from
$0.10 in 1998 to $0.16 in 1999. Diluted earnings per share for the six months
ended December 31, 1999 are not equal to the sum of the quarterly earnings
per share due to the difference in the weighted average number of shares
caused by the timing of acquisitions where common stock was used as part of
the purchase consideration.
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1997
REVENUE for 1999 increased by $18.5 million, or 70.2%, from $26.3
million in 1998 to $44.8 million in 1999. In 1999, Business Products revenue
increased by $13.1 million or 53.1% and Transportation Services revenue
increased by $5.4 million or 330.6%. The increase in Business Products
revenue was due to the acquisition of eight business products companies
during fiscal years 1998 and 1999, which accounted for $9.5 million, and
internal growth of $3.7 million. Business Products internal revenue grew
15.0% for the second quarter of 1999. Of the total increase in Transportation
Services revenue in 1999, $5.1 million was due to the acquisition of five
transportation companies, one of which was acquired in the second quarter of
fiscal year 1998, three of which were acquired at the end of the third
quarter of fiscal year 1998 and one of which was acquired during the second
quarter of fiscal 1999.
COST OF GOODS SOLD for 1999 increased by $13.5 million, or 81.6%,
from $16.5 million in 1998 to $30.0 million in 1999. Cost of goods sold for
Business Products increased by $10.3 million, of which approximately $6.4
million was due to companies acquired after the first quarter of fiscal year
1998. Transportation Services cost of goods sold increased by $3.2 million
due primarily to the five transportation companies acquired since the
beginning of the second quarter of 1998. As a percentage of revenue, cost of
goods sold for 1999 increased by 4.2% from 62.7% in 1998 to 66.9% in 1999.
This percentage increase was primarily the result of proportionately higher
sales of lower gross profit product categories and the effect of competitive
pricing.
17
<PAGE>
SALES COMMISSIONS increased by $1.5 million, or 45.6%, in 1999, from
$3.4 million in 1998 to $4.9 million in 1999 due primarily to the increased
level of Business Products revenue. Sales commissions for the Business
Products division decreased by 0.6% from 13.5% in 1998 to 12.9% in 1999 due
to a lower level of gross profit, in proportion to revenue, during the second
quarter of 1999. Total commission expense decreased by 1.9% from 12.8% in
1998 to 10.9% in 1999 because the Transportation Services division
contributed a higher proportion of consolidated revenue in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $1.1
million or 20.7% in 1999 from $5.6 million in 1998 to $6.7 million in 1999.
Increased expenses of $2.1 million from business products and transportation
services companies acquired were offset by $1 million in reduced expenses in
existing business products and transportation companies. As a percentage of
revenue, selling, general and administrative expenses have declined by 6.2%
from 21.1% in 1998 to 14.9% in 1999. The reduced expenses in existing
operations are primarily a result of the Company's continuing efforts and
strategy to realize synergies from acquisitions by merging common
administrative and support functions.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.4 million in 1999
from $0.5 million in 1998 to $0.9 million in 1999 due largely to the size and
timing of the companies acquired in 1998 and the first two quarters of 1999.
INTEREST EXPENSE increased by $0.6 million or 552.3% during 1999,
from $0.1 million in 1998 to $0.7 million in 1999 principally due to
additional debt incurred by the Company in 1998 and 1999 to finance its
business acquisitions.
INCOME TAXES are provided at a 48.0% effective rate in 1999 compared
to a 40.0% rate in 1998. This increase is due primarily to an increase in the
level of non-deductible expenses, primarily goodwill amortization.
NET INCOME FROM CONTINUING OPERATIONS increased by $0.7 million or
368.1% in 1999, from $0.2 million in 1998 to $0.8 million in 1999, due to the
reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first six months of
fiscal year 1999, the Company generated $2.0 million in cash from operations
as compared to cash use of $1.6 million in the first six months of fiscal
year 1998. During the first six months of 1999, the Company's net income,
adjusted for non-cash depreciation and amortization charges, amounted to $2.9
million. In addition, the Company reduced its working capital by $0.6
million. During the first six months of 1998, the Company's net income from
continuing operations generated the cash flow from operating activities as
the Company maintained a relatively stable level of working capital.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first six
months of fiscal year 1999, Precept used $8.2 million in cash for investing
activities as compared to a use of $0.7 million for investing activities in
the first six months of fiscal year 1998. During 1999, the Company acquired
four products businesses and one corporate transportation service company and
used $9.2 million in cash to finance these acquisitions and to pay for
contingent consideration on previous acquisitions. In addition, the Company
purchased $0.1 million of equipment for its existing operations. During 1998,
the Company acquired three products distribution businesses
18
<PAGE>
and one corporate transportation service company for $0.4 million in cash and
acquired $0.3 million of equipment.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first six months of
1999, $6.6 million of cash was generated by financing activities as compared
to $0.9 million of cash generated by financing activities in the first six
months of fiscal year 1998. During the first six months of 1999, Precept
increased its outstanding revolving line of credit balance by approximately
$7.8 million, primarily to finance acquisitions. In addition, the Company
repaid $1.1 million of existing long-term debt, including capital lease
obligations. During the first six months of 1998, the Company increased its
long-term debt and capital lease obligations by $0.2 million, increased its
outstanding revolving line of credit balance by $0.5 million., and received
$0.2 million in payments in shareholder notes receivable.
Management believes that the current levels of operations and the
cash flow from such operations, the existing revolving line of credit
agreement and the available cash on hand at December 31, 1998 of $2.7 million
will be adequate for fiscal year 1999 to make required payments of principal
and interest on the Company's indebtedness, to fund anticipated capital
expenditures of approximately $1.5 million for the remainder of fiscal year
1999, and to meet working capital needs.
The amount of debt available under the Company's current revolving
line of credit is $25.0 million. The revolving line of credit bears interest
at the lower of prime or LIBOR plus a margin range. The Company has the
option of electing a prime or LIBOR based interest rate. The margin range is
determined based on the Company's performance against certain ratios,
primarily debt and interest coverage. Substantially all the Company's
operating assets are pledged as collateral under this line of credit. As of
February 8, 1999, the Company had approximately $25.0 million outstanding
under the credit facility at an annual interest rate of approximately 8.5%.
During the first quarter of fiscal year 1999, the Company modified
its revolving line of credit from an asset-based facility to a cash flow
based facility. Under terms of the revolving line of credit agreement, the
Company may borrow up to $25.0 million with the availability determined by a
2.75 multiple of pro forma EBITDA. EBITDA is defined as earnings before
interest, taxes, depreciation and amortization. Such amount is adjusted, on a
pro forma basis, for the EBITDA of companies acquired by Precept for the
portion of a trailing twelve-month period when not owned by Precept. In
addition, the pro forma EBITDA includes adjustments for certain costs,
principally owners' compensation, which Precept identifies as non-recurring
after the acquisition is completed. As of December 31, 1998, Precept's pro
forma annual EBITDA amounted to $12.2 million. The Company is in the process
of working with its current lender and other commercial lenders to implement
a larger debt facility.
During the first six months of fiscal year 1999 and through the date
of this report, the Company has continued to evaluate the debt and equity
capital markets. Based on current market conditions, the Company believes
that financing strategies available in connection with incurring subordinated
debt or a secondary offering of equity are unattractive. The Company is
continuing to explore debt and equity financing strategies. Until favorable
financing is available to the Company, it is likely that the rate at which
the Company acquires companies will be reduced as compared with the rate of
acquisitions in the first quarter of fiscal year 1999 or during fiscal year
1998. It is also likely that the Company's rate of growth in revenue,
operating income and net income related to acquisitions will likewise be
reduced as compared to the first six months of fiscal year 1999 and fiscal
year 1998.
19
<PAGE>
OTHER
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. In the
last five to ten years, the prices for commodity grades of paper have shown
considerable volatility. 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.
YEAR 2000 ISSUE
During the second quarter of fiscal year 1999 as part of its year
2000 review, the Company's management identified one additional subsidiary
that has key information systems that may not be year 2000 compliant. The
Company is in the process of working with its software vendors to determine
if an upgrade to the key information systems will be sufficient to solve the
year 2000 compliance issues. If the upgrade solution does not solve the
compliance issues, the Company will implement a plan to integrate the
subsidiary's operations into the Company's primary information system by the
end of calendar year 1999. The Company's cost to resolve the year 2000
compliance issues at this subsidiary is expected to range from $200,000 to
$500,000 during the remainder of calendar year 1999.
FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, that is effective for reporting periods
beginning after June 15, 1999. As this statement requires only additional
disclosures or does not cover matters relating to Precept, it will have no
effect on Precept's financial position, results of operations or cash flows.
Precept intends to adopt the disclosure requirements of this standard during
its fiscal year ended June 30, 2000.
DISCLOSURE ABOUT MARKET RISK
The Company's revolving line of credit provides for interest to be
charged at the prime rate or at a LIBOR rate plus a margin of 2.75%. Based on
the Company's current level of outstanding revolving line of credit, a 1.0%
change in interest rate would result in a $0.3 million annual change in
interest expense. The remainder of the Company's debt is at fixed interest
rates that are not subject to changes in interest rates. The Company does not
own nor is the Company obligated for other significant debt or equity
securities that would be affected by fluctuations in market risk.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement
in this Form 10-Q to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by, or on behalf of, the
20
<PAGE>
Company. This section should be read in conjunction with the "Risk Factors
Affecting the Company's Prospects" located in Item I of the Company annual
report on Form 10-K for the year ended June 30, 1998. Forward-looking
statements include statements concerning plans, objectives, goals,
strategies, future events or performance, and underlying assumptions and
other statements which are other than statements of historical facts. From
time to time, the Company may publish or otherwise make available
forward-looking statements of this nature. All such subsequent
forward-looking statements, whether written or oral and whether made by or on
behalf of the Company, are also expressly qualified by these customary
statements. Certain statements contained herein are forward-looking
statements and accordingly involve risks and uncertainties that could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. The forward-looking statements contained herein
are based on various assumptions, many of which are based, in turn, upon
further assumptions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or
accomplished. In addition to the other factors and matters discussed
elsewhere herein, the following are important factors that, in the view of
the Company, could cause actual results to differ materially from those
discussed in the forward-looking statements.
1. Changes in economic conditions, in particular those that affect the
end users of business products and transportation services, primarily
corporations.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in executive and senior management or control of the Company.
4. Inability to obtain new customers or retain existing customers.
5. Significant changes in competitive factors, including product-pricing
conditions, affecting the Company.
6. Governmental and regulatory actions and initiatives, including those
affecting financing.
7. Significant changes from expectations in operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital acquisitions and
other investments.
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievance were
to occur.
11. Changes in accounting principles and/or the application of such
principles to the Company.
12. Vendors and customers inability to address year 2000 issues on a
timely basis.
The foregoing factors could affect the Company's actual results and
could cause the Company's actual results during fiscal year 1999 and beyond
to be materially different from any anticipated results expressed in any
forward-looking statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after the date of this
report on Form 10-Q.
DISCONTINUED OPERATIONS
As part of its business strategy, Precept has decided to focus on
its core businesses and discontinue certain non-core business operations.
During the first six months of 1998, the losses from discontinued operations
consisted principally of the losses from Precept Holdings, Inc.,
21
<PAGE>
which owned and operated certain real estate related investments. In
September 1998, the Company sold the remaining assets of its discontinued
operations consisting of land, a building and an interest in a restaurant to
the Company's majority shareholder for $1.2 million in cash.
ITEM 1 LEGAL PROCEEDINGS
During the second quarter of fiscal year 1999 and through the date
of this report, there have been no significant changes to the legal
proceedings which affect the Company and are disclosed in the Company's Form
10-K for the year ended June 30, 1998.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
As discussed more fully in Item 4 and as disclosed in the Company's
Proxy to shareholders, a 1 for 7 reverse stock split was voted upon and
approved by the Company's shareholders at the Company's annual shareholder
meeting. In addition, the Company's shareholders approved an amendment to the
Company's articles of incorporation to change the vote required for certain
actions. The exhibits to this Form 10-Q include the Proxy and the amendment
to the articles of incorporation.
ITEM 3 DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
As of December 31, 1998, the Company was not in default of any of
its debt or equity securities.
ITEM 4 RESULTS OF VOTES OF HOLDERS
The Company's annual shareholder meeting was held in Dallas, Texas
on November 11, 1998. At such meeting, the following proposals were voted
upon and approved by the Company's shareholders. The Class B shareholder
voted all 592,142 shares in favor of all four proposals.
<TABLE>
<CAPTION>
Class A and Common Shares Voted
-------------------------------------------
Withheld/
Proposal Description For Against Abstained
- -------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C>
1. Election of the following directors:
J. Livingston Kosberg 6,179,680 15,744
William W. Solomon, Jr. 5,311,080 884,344
Sheldon I. Stein 6,179,247 16,177
2. Approval of a 1:7 reverse stock split. 5,789,079 399,777 6,568
3. Amendment to the Company's articles of
incorporation to change vote required
for certain actions. 5,813,591 108,023 273,810
4. Ratification of Ernst & Young LLP as independent
auditors for the fiscal year ending
June 30, 1999. 6,095,457 91,235 8,732
</TABLE>
ITEM 5 OTHER INFORMATION
There is no other significant information that the Company believes
should be disclosed in this report other than the information that is
presented herein and by exhibit.
22
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Form of Amended and Restated Articles of Incorporation approved by the Company's
shareholders and to be filed with the Texas Secretary of State. (1)
22.1 Form of Proxy mailed to the Company's shareholders in connection with the Company's
annual shareholder meeting. (1)
27.1 Financial Data Schedule (2)
</TABLE>
(1) Previously included with the Company's Form 10-Q filed November 12, 1998.
(2) Included as an exhibit to this report.
ITEM 6(b) REPORTS ON FORM 8-K FILED DURING THE PERIOD FROM OCTOBER 1,
1998 THROUGH FEBRUARY 12, 1999 (not filed as exhibits to this
report)
No reports on Form 8-K were filed during the period from October 1,
1998 through February 12, 1999.
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, as of February 12, 1999.
PRECEPT BUSINESS SERVICES, INC.
/s/ David L. Neely /s/ William W. Solomon, Jr.
- ------------------------------------- -----------------------------------
David L. Neely William W. Solomon, Jr.
Chairman and Chief Executive Officer Senior Vice President and Chief
Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,747,719
<SECURITIES> 0
<RECEIVABLES> 18,728,699<F1>
<ALLOWANCES> 650,000
<INVENTORY> 7,258,282
<CURRENT-ASSETS> 34,706,221
<PP&E> 9,005,655
<DEPRECIATION> 877,025
<TOTAL-ASSETS> 86,320,006
<CURRENT-LIABILITIES> 21,425,729
<BONDS> 0
0
0
<COMMON> 85,268
<OTHER-SE> 35,800,697<F2>
<TOTAL-LIABILITY-AND-EQUITY> 86,320,006
<SALES> 44,835,866
<TOTAL-REVENUES> 44,835,866
<CGS> 30,002,472
<TOTAL-COSTS> 12,475,951
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 723,609
<INCOME-PRETAX> 1,633,834
<INCOME-TAX> 784,144
<INCOME-CONTINUING> 849,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 849,690
<EPS-PRIMARY> 0.1
<EPS-DILUTED> 0.1
<FN>
<F1>AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE.
<F2>AMOUNT INCLUDES ADDITIONAL PAID-IN CAPITAL, RETAINED EARNINGS, AND TREASURY
STOCK.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,747,719
<SECURITIES> 0
<RECEIVABLES> 18,728,699<F1>
<ALLOWANCES> 650,000
<INVENTORY> 7,258,282
<CURRENT-ASSETS> 34,706,221
<PP&E> 0
<DEPRECIATION> 9,005,655
<TOTAL-ASSETS> 1,526,940
<CURRENT-LIABILITIES> 86,320,006
<BONDS> 0
0
0
<COMMON> 85,268
<OTHER-SE> 35,800,697<F2>
<TOTAL-LIABILITY-AND-EQUITY> 86,320,006
<SALES> 79,653,793
<TOTAL-REVENUES> 79,653,793
<CGS> 53,001,370
<TOTAL-COSTS> 22,884,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,191,695
<INCOME-PRETAX> 2,576,024
<INCOME-TAX> 1,236,492
<INCOME-CONTINUING> 1,339,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,339,532
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
<FN>
<F1>AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE.
<F2>AMOUNTS INCLUDES ADDITIONAL PAID-IN CAPITAL, RETAINED EARINGS, AND TREASURY
STOCK.
</FN>
</TABLE>
