<PAGE>
===============================================================================
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 MARCH 31, 1999
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 April 30, 1999, there were 7,881,006 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.
===============================================================================
<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
March 31, 1999 and June 30, 1998 ................................. 3
Condensed Consolidated Statements of Operations
for the nine-month and the three-month periods ended
March 31, 1999 and 1998........................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended March 31, 1999 and 1998.................. 6
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the nine-month periods ended
March 31, 1999 and 1998........................................... 7
Notes to Condensed Consolidated Financial Statements.................. 8
Item 2 Management's discussion and analysis of financial
condition and results of operations............................... 16
PART II OTHER INFORMATION
Item 1 Legal proceedings..................................................... 25
Item 2 Changes in securities and use of proceeds............................. 25
Item 3 Defaults by the company on its senior securities...................... 25
Item 4 Results of votes of holders........................................... 25
Item 5 Other information..................................................... 25
Item 6 Exhibits and reports on Form 8-K...................................... 26
Signature............................................................. 27
</TABLE>
2
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 510,476 $ 2,291,303
Trade accounts receivable, net of $1,395,000 and $404,000
allowance for doubtful accounts, respectively..................... 20,463,506 15,595,234
Accounts receivable from affiliates................................... 1,022,825 1,186,908
Other accounts receivable............................................. 1,265,718 1,609,529
Inventory............................................................. 5,597,938 5,133,484
Other current assets.................................................. 2,216,922 805,151
Deferred income taxes................................................. 1,531,986 499,264
Net assets of discontinued operations................................. - 1,115,125
---------------------------------
Total current assets.............................................. 32,609,371 28,235,998
Property and equipment, net.............................................. 7,530,651 5,751,487
Intangible assets, net................................................... 38,785,022 19,558,050
Deferred income taxes.................................................... 1,101,681 1,102,372
Other assets............................................................. 850,509 1,838,697
--------------- ---------------
Total assets.................................................. $ 80,877,234 $ 56,486,604
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................................ $ 12,225,246 $ 5,844,671
Accrued compensation.................................................. 1,373,983 1,943,964
Other accounts payable and accrued expenses........................... 9,838,414 5,189,268
Current portion of long-term debt..................................... 2,892,392 1,421,477
--------------- ---------------
Total current liabilities......................................... 26,330,035 14,399,380
Long-term debt........................................................... 29,676,880 20,084,756
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value; 3,000,000 authorized shares,
none issued ......................................................... - -
Class A common stock, $0.01 par value; 100,000,000 authorized shares
and 8,029,642 and 6,870,126 issued shares, respectively........... 80,296 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............................................ 36,450,733 23,515,022
Retained earnings (accumulated deficit)............................... (10,455,556) (1,395,905)
---------------- ----------------
26,081,394 22,193,739
Class A treasury stock - 148,636 shares............................... (1,211,075) (191,271)
---------------- ----------------
Total shareholders' equity........................................ 24,870,319 22,002,468
--------------- ---------------
Total liabilities and shareholders' equity.................... $ 80,877,234 $ 56,486,604
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenue:
Business products................................................ $ 103,873,555 $ 80,516,847
Transportation services.......................................... 17,991,729 5,663,059
------------- -------------
121,865,284 86,179,906
Costs and expenses:
Cost of goods sold............................................... 80,484,287 56,741,177
Sales commissions................................................ 14,090,459 10,534,447
Selling, general and administrative.............................. 19,102,466 15,615,314
Depreciation and amortization.................................... 2,460,114 1,264,487
Goodwill write-down and other non-recurring charges.............. 14,283,000 -
Non-recurring acquisition costs.................................. 180,000 485,555
------------- -------------
130,600,326 84,640,980
------------- -------------
Operating income (loss)............................................. (8,735,042) 1,538,926
Interest expense.................................................... 1,856,595 542,830
------------- -------------
Income (loss) from continuing operations before income taxes........ (10,591,637) 996,096
Income tax provision ............................................... (1,531,986) 398,438
-------------- -------------
Income (loss) from continuing operations............................ (9,059,651) 597,658
Loss from discontinued operations, net of applicable income taxes... - (467,392)
-------------- -------------
Net income (loss)................................................... $ (9,059,651) $ 130,266
============== =============
Basic net income per share:
Income (loss) from continuing operations......................... $ (1.10) $ 0.09
Loss from discontinued operations................................ - (0.07)
------------- -------------
Net income (loss)................................................ $ (1.10) $ 0.02
============= ==============
Weighted average shares outstanding................................. 8,207,717 6,391,557
Diluted net income per share:
Income (loss) from continuing operations......................... $ (1.08) $ 0.09
Loss from discontinued operations................................ - (0.07)
------------- -------------
Net income (loss)................................................ $ (1.08) $ 0.02
============= =============
Weighted average shares outstanding.............................. 8,380,327 6,436,760
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenue:
Business products................................................. $ 35,096,489 $ 29,188,752
Transportation services........................................... 7,115,002 1,623,738
------------- -------------
42,211,491 30,812,490
Costs and expenses:
Cost of goods sold................................................ 27,482,917 21,769,016
Sales commissions................................................. 4,910,852 3,605,986
Selling, general and administrative............................... 6,924,309 4,208,818
Depreciation and amortization..................................... 933,174 490,092
Goodwill write-down and other non-recurring charges............... 14,283,000 -
Non-recurring acquisition costs................................... 180,000 485,555
------------- -------------
54,714,252 30,559,467
------------- -------------
Operating income (loss).............................................. (12,502,761) 253,023
Interest expense..................................................... 664,900 256,257
------------- -------------
Loss from continuing operations before income taxes.................. (13,167,661) (3,234)
Income tax provision ................................................ (2,768,278) (1,294)
------------- -------------
Loss from continuing operations...................................... (10,399,383) (1,940)
Loss from discontinued operations, net of applicable income taxes.... - (223,084)
------------- -------------
Net loss............................................................. $ (10,399,383) $ (225,024)
============= =============
Basic net income per share:
Income (loss) from continuing operations.......................... $ (1.22) $ (0.00)
Loss from discontinued operations................................. - (0.04)
------------- -------------
Net loss.......................................................... $ (1.22) $ (0.04)
============= =============
Weighted average shares outstanding............................... 8,512,210 6,391,878
Diluted net income per share:
Income (loss) from continuing operations.......................... $ (1.20) $ (0.00)
Loss from discontinued operations................................. - (0.04)
------------- -------------
Net loss.......................................................... $ (1.20) $ (0.04)
============= =============
Weighted average shares outstanding............................... 8,679,484 6,347,402
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
March 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ (9,059,651) $ 130,266
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization....................................... 2,460,114 1,264,487
Deferred income taxes............................................... 1,032,722 499,264
Goodwill write-down and other non-recurring charges................. 14,283,000 -
Non-recurring acquisition costs..................................... 180,000 485,555
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable....................................... (1,790,787) (1,987,788)
Accounts receivable from affiliates............................. 164,083 (260,153)
Other accounts receivable....................................... 343,811 (407,718)
Inventory....................................................... (223,196) (2,821,872)
Other current assets............................................ (718,779) (540,791)
Income taxes refundable......................................... - (234,079)
Net assets of discontinued operations........................... - 1,719,497
Trade accounts payable.......................................... 4,018,501 1,353,727
Accrued compensation............................................ (1,943,964) (238,559)
Other assets and liabilities, net............................... (1,342,379) 6,367,281
-------------- -------------
Net cash provided by operating activities........................... 7,403,475 3,385,153
------------- -------------
Cash flows provided by (used in) investing activities:
Acquisitions of businesses, including earnout payments.................. (16,128,345) (7,086,000)
Sale of net assets of discontinued operations........................... 1,115,125 -
Acquisition of property and equipment, net.............................. 1,948,350 (857,713)
------------- --------------
Net cash used in investing activities............................... (14,024,870) (7,943,713)
-------------- --------------
Cash flows provided by (used in) financing activities:
Repayment of shareholder notes receivable............................... - 208,060
Payments on long-term debt.............................................. (1,049,878) (227,305)
Payments of capital lease obligations................................... (2,644,076) (74,193)
Borrowings on revolving line of credit, net of repayments............... 8,534,522 4,408,120
------------- -------------
Net cash provided by financing activities........................... 4,840,568 4,314,682
------------- -------------
Decrease in cash and cash equivalents...................................... (1,780,827) (243,878)
Cash and cash equivalents at beginning of period........................... 2,291,303 1,675,824
------------- -------------
Cash and cash equivalents at end of period................................. $ 510,476 $ 1,431,946
============= =============
Cash paid for:
Interest................................................................ $ 1,420,467 $ 657,631
Income taxes............................................................ $ 212,544 $ 676,341
</TABLE>
See accompanying notes to condensed 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
Conversion of notes and
exercise of stock
options.................. 949 - 402,392 - (20,603) 382,739
Stock re-purchase........... - - - - (999,201) (999,201)
Net income.................. - - - (9,059,651) - (9,059,651)
--------- --------- -------------- ---------------- ------------ --------------
Balance, March 31, 1999..... $ 80,296 $ 5,921 $ 36,450,733 $ (10,455,556) $(1,211,075) $ 24,870,319
========= ======== ============= =============== =========== =============
Balance, June 30, 1997...... $ 46,458 $ 14,433 $ 17,803,121 $ (750,062) $(1,012,307) $ 16,101,643
Issuance of shares to
acquire businesses....... 13,732 - 4,265,243 - - 4,278,975
Repayment of shareholder
notes receivable......... - - - - 208,060 208,060
Net income.................. - - - 130,266 - 130,266
--------- --------- -------------- ---------------- ------------ --------------
Balance, March 31, 1998..... $ 60,190 $ 14,433 $ 22,068,364 $ (619,796) $ (804,247) $ 20,718,944
========= ======== ============= =============== =========== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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 nine-month reporting periods ended March
31, 1999 and 1998, 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 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.
8
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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 nine months ended March 31, 1999 and 1998.
3. ACQUISITIONS
In the quarter ended March 31, 1999, the Company 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. 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 $1.3 million, paid $0.2 million in cash, funded by working capital and the
Company's line of credit and $1.1 million in seller notes and debt assumed.
During the second quarter of fiscal year 1999, 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 $3.0 million, and $2.6 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.
9
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
In the third quarter of fiscal year 1998, the Company acquired U.S.
Transportation Systems, Inc. ("USTS"), a publicly traded company in the
transportation services industry. On March 18, 1998, Precept issued 1,373,214
shares of its Class A common stock and 259,286 warrants to purchase Class A
common stock for a total value of $4.4 million, assumed and repaid debt of $5.3
million and incurred $1.1 million in direct acquisition costs. Precept acquired
four of the operating businesses of USTS that provided chauffeured limousine,
livery and long-haul trucking services based in New York, Michigan, Ohio,
Northern Kentucky and the Carolinas. In the fourth quarter of 1998, Precept sold
its 75% interest in the long-haul trucking business, U.S. Trucking Inc. ("USTI")
to the owners of the 25% minority interest in USTI in exchange for $0.2 million
in cash and an interest bearing note receivable for $1.8 million, which note has
been fully reserved. The purchase price of USTS has been allocated as follows:
$12.8 million to goodwill, $0.9 million to accounts receivable, $6.4 million to
long-term debt, $3.7 million to accounts payable and accrued liabilities and
$0.8 million to other assets.
In the 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. These acquisitions were accounted for using the purchase method
of accounting. 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 purchase of these two business products
companies has been allocated as follows: $30,498 to equipment and $1.3 million
to goodwill. 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 and was allocated as follows: $0.2 million to vehicles and
other assets and $0.4 million to goodwill.
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 the fourth quarter of 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 Corporation. These
acquisitions have been accounted for using the pooling of interests method of
accounting. The Company's consolidated financial statements give retroactive
effect to the acquisitions of such companies for all periods presented.
The following presents the separate results from continuing operations,
in the third quarter and for the first nine 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>
Nine months ended Three months ended
March 31, 1998 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenue:
Company (excluding InfoGraphix and MBF)..... $57,051,797 $19,172,405
InfoGraphix................................. 16,570,903 4,859,065
MBF......................................... 12,557,206 6,781,020
------------ -----------
Company..................................... $86,179,906 $30,812,490
=========== ===========
Net income (loss):
Company (excluding InfoGraphix and MBF)..... $ 206,494 $ 12,333
InfoGraphix................................. 24,114 (273,917)
MBF......................................... 367,050 259,644
------------ -----------
Company..................................... $ 597,658 (1,940)
============ ===========
</TABLE>
10
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
The following table summarizes the consideration for the purchase
acquisitions completed and the fair value of the assets acquired.
<TABLE>
<CAPTION>
Nine months ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Purchase consideration:
Cash paid............................................ $ 9,365,000 $ 5,735,000
Amounts due sellers of acquired businesses........... 2,060,000 1,168,000
Stock and warrants issued............................ 12,544,000 4,318,000
Liabilities assumed.................................. 2,297,000 3,911,000
Other................................................ 179,000 60,000
------------ ------------
Fair value of net assets acquired....................... $ 26,445,000 $ 15,192,000
============ ============
<CAPTION>
Nine months ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Allocation of fair value of net assets acquired:
Goodwill and intangible assets....................... $ 22,371,000 $ 15,154,000
Accounts receivable.................................. 3,939,000 878,000
Inventory and other, net............................. 135,000 (840,000)
------------ ------------
$ 26,445,000 $ 15,192,000
============= =============
</TABLE>
The following table presents the pro forma results of continuing
operations as if all the acquisitions described above had occurred at the
beginning of each 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. The pro forma results of operations presented below exclude
goodwill write-down and other non-recurring charges that were recorded during
the third quarter of 1999.
<TABLE>
<CAPTION>
Nine months ended Three months ended
March 31, March 31,
---------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues................... $ 133,089,011 $136,249,285 $ 42,370,326 $ 44,273,299
Income before income taxes ...... $ 5,192,710 $ 6,675,203 $ 1,261,566 $ 1,892,813
Net income....................... $ 2,700,209 $ 3,540,224 $ 656,014 $ 984,263
Diluted net income per share..... $ 0.32 $ 0.58 $ 0.08 $ 0.16
</TABLE>
If the goodwill write-down and other non-recurring charges had been
included in the pro forma results for the three-month and nine-month periods
ended March 31, 1999, income before income taxes would have been ($13,201,434)
and ($9,270,290), respectively, net income would have been ($ 10,416,746) and
($8,372,551), respectively, and diluted net income per share would have been
($1.20) and ($1.00), respectively.
Since March 31, 1999, Precept has acquired two corporate transportation
services companies which provide executive town car and limousine service
primarily in the tri-state New York metropolitan area with annual revenues of
$6.7 million. The aggregate consideration for these transactions amounted to
$9.1 million, paid $2.2 million in cash, $4.4 million in common stock, $0.2
million in preferred stock and approximately $2.3 million in debt assumed.
Assets with a preliminary aggregate fair value of $9.1 million were acquired,
with a preliminary allocation as follows: $7.1 million to goodwill and
intangible assets, $2.0 million to property, plant, and equipment, $0.3 million
to accounts receivable, and $0.3 million (net) to other liabilities.
11
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
The operational results of these acquisitions are not considered to
be significant enough to significantly affect the pro forma results presented
above; therefore, the pro forma effects of these acquisitions on the
Company's pro forma operating results have not been separately disclosed.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, June 30,
Estimated Lives 1999 1998
--------------- ------------- ---------
<S> <C> <C> <C>
Land $ 411,000 $ 411,000
Buildings 15 to 40 years 1,778,854 1,670,926
Leasehold improvements 1 to 10 years 769,951 455,118
Equipment and vehicles 3 to 5 years 10,441,723 7,020,965
Capitalized leasehold rights 3 to 5 years 1,243,147 1,353,279
------------- -------------
14,644,675 10,911,288
Accumulated depreciation and amortization.................... 7,183,059 5,159,801
------------- -------------
$ 7,530,651 $ 5,751,487
============= =============
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Goodwill...................................................... $ 43,619,517 $ 23,955,689
Non-compete agreements........................................ 755,659 755,659
------------- -------------
44,375,176 24,711,348
Accumulated amortization...................................... 5,590,154 5,153,298
------------- -------------
$ 38,785,022 $ 19,558,050
============= =============
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Revolving line of credit..................................... $ 24,500,000 $ 15,965,478
Note payable and long-term liability to shareholder.......... 357,823 813,803
Convertible notes payable to sellers......................... 3,359,599 2,114,435
Capitalized lease obligations and other notes payable........ 4,351,850 2,612,517
------------- -------------
32,569,272 21,506,233
Less current portion due within one year..................... 2,892,392 1,421,477
------------- -------------
Long-term debt............................................... $ 29,676,880 $ 20,084,756
============= =============
</TABLE>
REVOLVING LINE OF CREDIT
On March 20, 1999, the Company completed a $40 million revolving
line of credit with its two banks for borrowing to finance working capital
and acquisition needs. The line of credit bears interest at prime (7.75% at
March 31, 1999) plus 1.75% 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 March
31, 1999, the margin rate was 2.75%. The revolving line of credit includes
restrictions on the level of interest coverage, debt to EBITDA coverage, net
worth levels, dividend restrictions and capital expenditure limits. 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. The amount of
the line of credit which is available is determined by a ratio of three times
the trailing twelve months pro forma EBITDA. The pro forma EBITDA gives
effect to the acquisitions made by the Company which are not included in the
historical results of the Company with certain adjustments for compensation
and non-recurring expenses. The amount available is adjusted concurrent with
each acquisition.
12
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
Two banks, Bank One, Texas, NA and Wells Fargo Bank, NA, participated
in this Credit Agreement. The Credit Agreement provides for an increase of $10
million if new lenders join the banking group or existing lenders increase their
levels of commitment.
The Credit Agreement includes other customary covenants and conditions
relating to the conduct and operation of Precept's business. Specifically, each
quarter, Precept will be subject to a 3:1 EBITDA to interest coverage ratio, to
minimum net worth levels, and to limits on capital expenditures. In addition,
acquisitions of companies with a purchase price greater than $7.5 million
individually and $25 million on an aggregate annual basis will require approval
from the banking group.
7. SEGMENT INFORMATION
The table below presents certain segment information from continuing
operations for the three- and the nine-month periods ended March 31, 1999 and
1998. Intersegment sales included in operating income below were not significant
for the third quarters ended March 31, 1999 and 1998, respectively. For the
first nine months in 1999 and 1998, intersegment sales included in operating
income below were not significant for the business products segment and amounted
to $292,376 and $333,758 for the transportation services segment.
<TABLE>
<CAPTION>
Nine months ended Three months ended
March 31, March 31,
------------------------------ ---------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating income:
Business products............... $ 7,108,767 $ 5,834,012 $ 2,164,698 $ 1,911,909
Transportation services......... 3,317,253 (35,382) 1,442,767 (66,806)
Other........................... (19,161,062) (4,259,704) (16,110,226) (1,592,080)
------------- ------------ ------------- -------------
Total operating income...... (8,735,042) 1,538,926 (12,502,761) 253,023
Interest expense..................... 1,856,595 542,830 664,900 256,257
------------- ------------ ------------- -------------
Income before income taxes........... $ (10,591,637) $ 996,096 $ (13,167,661) $ (3,234)
============== ============== =============== ===============
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Identifiable assets:
Business products................................................ $ 50,663,836 $ 39,173,092
Transportation services.......................................... 24,435,805 15,944,523
Other............................................................ 5,777,593 1,368,989
------------- -------------
Total identifiable assets.................................... $ 80,877,234 $ 56,486,604
============== =============
</TABLE>
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 nine-month
periods ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Nine months ended Three months ended
March 31, March 31,
------------------------------ -------------------------
1999 1998 1999 1998
------------- ------------- ------------- ---------
<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 6,232,854 8,458,475 6,232,854
Common shares repurchased....................... (79,000) - - -
Common shares issued upon exercise of options... 45,415 - - -
Common shares issued upon conversion of note
receivable.................................. 47,250 - - -
</TABLE>
13
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common shares used to acquire businesses during
the period.................................. 1,064,615 1,230,357 - 1,230,357
------------ ----------- ---------- -----------
Common shares, Class A and Class B, outstanding
at the end of the period.................... 8,473,148 7,463,211 8,473,148 7,463,211
=========== =========== =========== ==========
Weighted average number of common shares
outstanding during the period based on the
number of days outstanding (A).............. 8,207,717 6,391,557 8,512,210 6,391,878
=========== =========== =========== ==========
Diluted weighted average shares outstanding:
Common stock options:
Number of outstanding options............... 544,605 46,405 544,605 46,405
Number of options vested.................... 255 46,405 255 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........... $ - $ 20,603 $ - 20,603
Common shares repurchased with proceeds..... - 721 - 721
Common shares issued from exercise of
options, net (B)....................... - 45,684 - 45,684
=========== =========== =========== ==========
Warrants to purchase common stock:
Number of warrants outstanding.............. 326,668 326,688 326,668 326,668
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.................. $ 2,590,000 $ 440,000 $2,590,000 $ 440,000
Interest expense savings, net of tax
effect, on notes which would be
converted.............................. $ 141,150 $ 13,728 $ 47,050 $ 4,576
Common shares which would be repurchased
with net interest savings at average
market price during period (D)......... 10,783 481 3,853 160
=========== =========== =========== ==========
Common shares issued upon conversion (E).... 183,393 - 171,127 -
=========== =========== =========== ==========
Diluted weighted average common shares
outstanding (A + B + C - D + E)............ 8,380,327 6,436,760 8,679,484 6,437,402
=========== =========== =========== ==========
</TABLE>
9. GOODWILL WRITE-DOWN AND OTHER NON-RECURRING CHARGES
In the third quarter of fiscal year 1999, Precept recorded goodwill
write-down and other non-recurring charges totaling $14.3 million relating to
matters and events which occurred during the third quarter of fiscal year 1999.
The significant components are described below.
14
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
GOODWILL
Precept received formal notification from Ford Motor Company that the
contract for employee bus shuttle service would not be renewed after June 30,
1999. As a result, Precept evaluated the undiscounted cash flows that will be
generated by the remaining operations at its Dearborn, Michigan location. The
Company determined that the cash flows were less than the carrying amount of the
net book value of the intangible assets for this location. As a result, the
Company wrote off the amount, $7.4 million, by which the net book value of the
intangible assets exceeded the discounted cash flows expected to be generated by
the operations in Dearborn. In addition, as part of the Company's periodic
assessment of the appropriateness of the carrying value of its long-lived
assets, the Company also wrote-off the net book value of the intangible assets
associated with one of its branch offices.
MBF
On February 16, 1999, substantially all of the management, sales force
and employees of MBF Corporation ("MBF") and Mail/Source, Inc. resigned from the
Company to join a competitor, Peregrine Corporation ("Peregrine") that had been
founded and funded by the same individuals. In response to this departure,
Precept has sued Peregrine and the former legal officers of MBF for damages.
Precept continues to pursue its litigation for damages while also discussing
potential financial settlements. As a result of this departure, Precept is in
the process of closing and selling its sales offices and warehouses, collecting
outstanding accounts receivable, selling inventories and settling its remaining
trade, lease, tax and other obligations. As part of this effort, Precept has
identified $2.6 million of asset write-downs and other charges expected to be
incurred in connection with winding down the operations of MBF. These charges
include expected losses on the sale of inventories and of land and buildings,
expected losses on the collection of accounts receivable, remaining lease
obligations, litigation costs, termination costs, and other liabilities.
OTHER
During the third quarter of 1999, Precept recorded $4.3 million of
non-recurring charges. These included an investment of $0.5 million in the
preferred stock of an entertainment company which was written down to zero value
to reflect management's estimate of the recoverability of its investment due to
financial difficulties and financial restructuring of the entertainment company.
As part of the ongoing litigation with John Alden Insurance Company, Precept
adjusted the value of its trade receivable by $0.5 million to reflect the
expected settlement of the litigation. The Company also wrote down the value of
certain notes receivable by $0.5 million to their expected net realizable value.
Inventory and trade accounts receivable valuation reserves were increased by
$0.9 million. The Company increased its health claim reserve by $0.3 million
based on health claim payment trends during the third quarter of 1999. Other
reserves and liabilities increased by $1.6 million to address various matters
and evens which occurred during the third quarter of 1999.
15
<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 corporate transportation services
("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
11 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
third quarter of fiscal year 1999, the Company completed 31 acquisitions: 21
business products distribution companies and 11 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 prior to the completion of the acquisitions. The
remaining acquisitions have been accounted for following the purchase method
and, as a result, the results of operations of the acquired companies have been
included in the Company's results of operations from the dates of acquisition.
In the quarter ended March 31, 1999, the Company 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 $1.3 million, paid $0.2 million in cash and $1.1 million in seller
notes and debt assumed.
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.
16
<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 $5.7 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
$1.9 million in assumed debt.
In the third quarter of fiscal year 1998, the Company acquired U.S.
Transportation Systems, Inc. ("USTS"), a publicly traded company in the
transportation services industry. On March 18, 1998, Precept issued 1,373,214
shares of its Class A common stock and 259,286 warrants to purchase Class A
common stock for a total value of $4.4 million, assumed and repaid debt of
$5.3 million and incurred $1.1 million in direct acquisition costs. Precept
acquired five of the operating businesses of USTS that provided chauffeured
limousine, livery and long-haul trucking services based in New York,
Michigan, Ohio, Northern Kentucky and the Carolinas. In the fourth quarter of
1998, Precept sold its 75% interest in the long-haul trucking business, U.S.
Trucking Inc. ("USTI") to the owners of the 25% minority interest in USTI in
exchange for $0.2 million in cash and an interest bearing note receivable for
$1.8 million, which note has been fully reserved. The purchase price of USTS
has been allocated as follows: $12.8 million to goodwill, $0.9 million to
accounts receivable, $6.4 million to long-term debt, $3.7 million to accounts
payable and accrued liabilities and $0.8 million to other assets.
In the 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 allocation 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.
RESULTS OF OPERATIONS
The following table sets forth various items from continuing operations
as a percentage of revenues for the three-month and nine-month periods ended
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------------------- -----------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue:
Business products................................ 83.1% 94.7% 85.2% 93.4%
Transportation services.......................... 16.9% 5.3% 14.8% 6.6%
----- ----- ------ -----
100.0% 100.0% 100.0% 100.0%
17
<PAGE>
Costs and operating expenses:
Cost of goods sold............................... 65.1% 70.2% 66.0% 65.8%
Sales commissions................................ 11.6% 11.8% 11.6% 12.2%
Selling, general and administrative.............. 16.4% 13.8% 15.7% 18.1%
Depreciation and amortization.................... 2.2% 1.7% 2.0% 1.5%
Goodwill write-down and non-recurring charges.... 33.8% 0.0% 11.7% 0.0%
Non-recurring acquisition costs.................. 0.5% 1.7% 0.2% 0.6%
----- ----- ----- -----
129.6% 99.2% 107.2% 98.2%
----- ----- ----- -----
Operating income...................................... (29.6)% 0.8% (7.2)% 1.8%
Interest expense...................................... 1.6% 0.8% 1.5% 0.6%
----- ----- ----- -----
Income before income taxes............................ (31.2)% (0.0)% (8.7)% 1.2%
Income tax provision.................................. (6.6)% (0.0)% (1.3)% 0.5%
----- ----- ----- -----
Net income............................................ (24.6)% (0.0)% (7.4)% 0.7%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUE for 1999 increased by $11.4 million, or 37.0%, from $30.8
million in 1998 to $42.2 million in 1999. In 1999, Business Products revenue
increased by $5.9 million or 20.2% and Transportation Services revenue increased
by $5.5 million or 338.2%. 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 $8.7 million. Of the total increase in
Transportation Services revenue in 1999, $5.3 million was due to the acquisition
of six 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, one of which was acquired during the second quarter
of fiscal 1999, and one of which was acquired during the third quarter of fiscal
year 1999.
COST OF GOODS SOLD for 1999 increased by $5.7 million, or 26.2%, from
$21.8 million in 1998 to $27.5 million in 1999. Cost of goods sold for Business
Products increased by $2.7 million, of which approximately $3.2 million was due
to companies acquired after the first quarter of fiscal year 1998.
Transportation Services cost of goods sold increased by $3.0 million due
primarily to the six transportation companies acquired since the beginning of
the second quarter of 1998. As a percentage of revenue, cost of goods sold for
1999 decreased by 5.1% from 70.2% in 1998 to 65.1% in 1999.
SALES COMMISSIONS increased by $1.3 million, or 36.2%, in 1999, from
$3.6 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 increased by 1.6% from 12.3% in 1998 to 13.9% in 1999 due to the effect
of the commission plans of the companies acquired since July 1, 1998 and the
increase in the dollar amount of gross profit in 1999. Total commission expense
decreased by 0.2% from 11.8% in 1998 to 11.6% in 1999 because the Transportation
Services division contributed a higher proportion of consolidated revenue in
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $2.7 million
or 64.5% in 1999 from $4.2 million in 1998 to $6.9 million in 1999. Business
products and transportation services companies acquired accounted for $1.6
million of the increase. As a percentage of revenue, selling, general and
administrative expenses have increased by 2.6% from 13.8% in 1998 to 16.4% in
1999 due primarily to the companies acquired.
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 three quarters of 1999.
18
<PAGE>
GOODWILL WRITE DOWN AND OTHER NON RECURRING CHARGES: In the third
quarter of fiscal year 1999, Precept recorded goodwill write-down and other
non-recurring charges totaling $14.3 million relating to matters and events
which occurred during the third quarter of fiscal year 1999. The significant
components are described below.
GOODWILL
Precept received formal notification from Ford Motor Company that
the contract for employee bus shuttle service would not be renewed after June
30, 1999. As a result, Precept evaluated the undiscounted cash flows that
will be generated by the remaining operations at its Dearborn, Michigan
location. The Company determined that the cash flows were less than the
carrying amount of the net book value of the intangible assets for the
location. As a result, the Company wrote off the amount, $7.4 million, by
which the net book value of the intangible assets exceeded the discounted
cash flows expected to be generated by the operations in Dearborn. In
addition, as part of the Company's periodic assessment of the appropriateness
of the carrying value of its long-lived assets, the Company also wrote-off
the net book value of the intangible assets associated with one of its branch
offices.
Precept expects that the revenue, earnings, and cash flow generated
by the Ford contract will be replaced during the next year by contributions
from other town car and limousine companies which have been acquired, or
which are expected to be acquired during the next fiscal year. Precept
expects that the level of revenue to replace earnings from the Ford contract
will need to be higher than the revenue generated by the Ford contract.
MBF
On February 16, 1999, substantially all of the management, sales
force and employees of MBF Corporation ("MBF") and Mail/Source, Inc. resigned
from the Company to join a competitor, Peregrine Corporation ("Peregrine")
that had been founded and funded by the same individuals. In response to this
departure, Precept has sued Peregrine and the former legal officers of MBF
for damages. As of the date of the filing of this report, Precept continues
to pursue its litigation for damages while also discussing potential
financial settlements. As a result of this departure, Precept is in the
process of closing and selling its sales offices and warehouses, collecting
outstanding accounts receivable, selling inventories and settling its
remaining trade, lease, tax and other obligations. As part of this effort,
Precept has identified $2.6 million of asset write-downs and other charges
expected to be incurred in connection with winding down the operations of
MBF. These charges include expected losses on the sale of inventories and of
land and buildings, expected losses on the collection of accounts receivable,
remaining lease obligations, litigation costs, termination costs, and other
liabilities.
During the third quarter ended March 31, 1999, the Business Products
revenue from existing operations declined by $2.9 million, principally due to
the departure of substantially all of the sales force of MBF. As Precept
winds down and closes the sales offices and warehouses of MBF, Precept
expects that its operating income will be negatively affected by
approximately $0.4 to $0.6 million during the fourth quarter of 1999 and to a
lesser extent, during the first quarter of 2000. In addition, Precept's
annual revenues will be negatively affected by approximately $16 million due
to the departure of substantially all of the sales force. While Precept
expects that its internal revenue, cash flow, earnings, and cash flow growth
rate will offset the loss of MBF's revenues and earnings, there can be no
assurance that such revenue and earnings will be recovered.
OTHER
During the third quarter of 1999, Precept recorded $4.3 million of
non-recurring charges. These included an investment of $0.5 million in the
preferred stock of an entertainment company which was written down to zero
value to reflect management's estimate of the recoverability of its
investment due to financial difficulties and financial restructuring of the
entertainment company. As part of the ongoing litigation with John Alden
Insurance Company, Precept adjusted the value of its trade receivable by $0.5
million to reflect the expected settlement of the litigation. The Company
also wrote down the value of
19
<PAGE>
certain notes receivable by $0.5 million to their expected net realizable
value. Inventory and trade accounts receivable valuation reserves were
increased by $0.9 million. The Company increased its health claim reserve by
$0.3 million based on health claim payment trends during the third quarter of
1999. Other reserves and liabilities increased by $1.6 million to address
various matters and evens which occurred during the third quarter of 1999.
INTEREST EXPENSE increased by $0.4 million or 159.5% during 1999, from
$0.3 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 21.0% effective rate in 1999 compared to
a 40.0% rate in 1998. The change in the effective tax rate for 1999 is due to
the non-deductibility of the goodwill write down and other non-recurring charges
and to the goodwill amortization in 1999.
NET LOSS FROM CONTINUING OPERATIONS decreased by $10.4 million in 1999,
from a loss of $(0.0) million in 1998 to a loss of $(10.4) million in 1999, due
to the reasons described above.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
REVENUE for 1999 increased by $35.7 million, or 41.4%, from $86.2
million in 1998 to $121.9 million in 1999. In 1999, Business Products revenue
increased by $23.4 million or 29.0% and Transportation Services revenue
increased by $12.3 million or 217.7%. 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 $21.3 million, and internal growth of
$2.1 million. Of the total increase in Transportation Services revenue in 1999,
$12.5 million was due to the acquisition of five transportation companies.
COST OF GOODS SOLD for 1999 increased by $23.7 million, or 41.8%, from
$56.7 million in 1998 to $80.4 million in 1999. Cost of goods sold for Business
Products increased by $16.6 million of which approximately $7.3 million was due
to companies acquired after the beginning of fiscal year 1998. Transportation
Services cost of goods sold increased by $5.7 million due primarily to the six
transportation companies acquired since the beginning of 1998. As a percentage
of revenue, cost of goods sold for 1999 increased by 0.2% from 65.8% in 1998 to
66.0% in 1999. This increase was primarily due to the mix of products sold.
SALES COMMISSIONS increased by $3.6 million, or 33.8%, in 1999, from
$10.5 million in 1998 to $14.1 million in 1999 due primarily to the increased
level of Business Products revenue. Sales commissions for the Business Products
division increased from 13.0% to 13.5% of Products revenue primarily due to the
effect of the commission plans of companies acquired since July 1, 1998 and to
the increased dollar amount of gross profit in 1999. Total commission expense
decreased by 0.6% from 12.2% in 1998 to 11.6% in 1999 because the Transportation
Services division contributed a higher proportion of consolidated revenue in
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $3.5 million
or 33.8% in 1999 from $15.6 million in 1998 to $19.1 million in 1999, which
included increased expenses of $4.0 million from business products and
transportation services companies acquired. As a percentage of revenue, selling,
general and administrative expenses have declined by 2.4% from 18.1% in 1998 to
15.7% 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 $1.2 million in 1999
from $1.2 million in 1998 to $2.4 million in 1999 due largely to the size and
timing of the companies acquired since the beginning of 1998.
20
<PAGE>
INTEREST EXPENSE increased by $1.4 million or 242.0% during 1999, from
$0.5 million in 1998 to $1.9 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 14.5% effective rate in 1999 compared to
a 40.0% rate in 1998. The change in the effective tax rate for 1999 is due to
the non-deductibility of the goodwill write-down and other non-recurring charges
and to the goodwill amortization in 1999.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS decreased by $9.7 million
or 1615.9% in 1999, from $0.6 million in 1998 to $(9.0) million in 1999, due to
the reasons described above. Diluted earnings per share decreased $1.10 from
$0.02 in 1998 to $(1.08) in 1999. Diluted earnings per share for the nine months
ended March 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
primarily by the timing of acquisitions where common stock was used as part of
the purchase consideration.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first nine months of
fiscal year 1999, the Company generated $7.4 million in cash from operations as
compared to cash provided of $3.3 million in the first nine months of fiscal
year 1998. During the first nine months of 1999, the Company's net loss,
adjusted for non-cash depreciation and amortization, goodwill write-down and
other non-recurring charges, and non-recurring acquisition costs resulted in
positive net income of $7.9 million. In addition, the Company reduced its
working capital by $7.6 million. During the first nine months of 1998, the
Company reduced its working capital by $4.4 million due to the acquisition of
USTS.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first nine months
of fiscal year 1999, Precept used $14.0 million in cash for investing activities
as compared to a use of $7.9 million for investing activities in the first nine
months of fiscal year 1998. During 1999, the Company acquired four products
businesses and two corporate transportation service companies and used $16.1
million in cash to finance these acquisitions and to pay for contingent
consideration on previous acquisitions. During 1998, the Company acquired three
products distribution businesses and four corporate transportation service
companies for $7.0 million in cash and acquired $0.9 million of equipment.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first nine months of
1999, $4.8 million of cash was generated by financing activities as compared to
$4.3 million of cash generated by financing activities in the first nine months
of fiscal year 1998. During the first nine months of 1999, Precept increased its
outstanding revolving line of credit balance by approximately $8.5 million,
primarily to finance acquisitions. In addition, the Company repaid $3.7 million
of existing long-term debt, including capital lease obligations. During the
first nine months of 1998, the Company decreased its long-term debt and capital
lease obligations by $0.3 million, increased its outstanding revolving line of
credit balance by $4.4 million., and received $0.2 million in payments in
shareholder notes receivable.
Although the goodwill write down and other non-recurring charges
affected the Company's operating results for 1999, such items did not affect the
Company's cash flow from operations. As certain of the obligations provided for
in the non-recurring charges are settled, there is likely to be a use of
approximately $2.5 million in cash principally during the remainder of 1999 and
fiscal year 2000.
Management believes that the current levels of operations and the cash
flow from such operations, the amount available for borrowing under the existing
revolving line of credit agreement of $3.2 million and the available cash on
hand at March 31, 1999 of $0.5 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 $1.0 million for the
remainder of fiscal year 1999, and to meet working capital needs.
21
<PAGE>
On March 22, 1999, Precept signed a Revolving Line of Credit Agreement
("Credit Agreement") with Bank One, Texas, N.A. The Credit Agreement provides up
to $40 million for borrowing by the Company to be used for acquisitions, working
capital, and general corporate purposes. The amount available under the Credit
Agreement is determined based on a multiple of three times the trailing twelve
months pro forma EBITDA. EBITDA is defined as earnings before interest, taxes,
depreciation, and amortization. EBITDA is also adjusted for the historical
EBITDA of acquired companies for the periods during the trailing twelve months
that the acquired companies results of operations are not included in the
historical operating results of Precept. The operating results of acquired
companies are also adjusted on a pro forma basis for interest, depreciation,
amortization, owners' compensation and non-recurring charges.
Two banks, Bank One, Texas, NA and Wells Fargo Bank, NA,
participated in this Credit Agreement. The Credit Agreement provides for an
increase of $10 million if new lenders join the banking group or existing
lenders increase their levels of commitment.
The Credit Agreement includes other customary covenants and
conditions relating to the conduct and operation of Precept's business.
Specifically, each quarter, Precept will be subject to a 3:1 EBITDA to
interest coverage ratio, to minimum net worth levels, and to limits on
capital expenditures. In addition, acquisitions of companies with a purchase
price greater than $7.5 million individually and $25 million on an aggregate
annual basis will require approval from the banking group.
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 has
determined that an upgrade to the key information systems will be sufficient to
solve the year 2000 compliance issues. The Company's cost to install the
software upgrade at this subsidiary is expected to range from $100,000 to
$250,000 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
22
<PAGE>
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 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 cautionary statements. Certain statements contained herein
are forward-looking statements and accordingly involve risks and uncertainties
that could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based,
in turn, upon further assumptions. 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 and
contracts.
5. Significant changes in the composition of the Company's sales force.
6. Significant changes in competitive factors, including product-pricing
conditions, affecting the company.
7. Governmental and regulatory actions and initiatives, including those
affecting financing.
8. Significant changes from expectations in operating expenses.
9. Occurrences affecting the Company's ability to obtain funds from
operations, debt, or equity to finance needed capital acquisitions and
other investments.
10. Significant changes in rates of interest, inflation, or taxes.
11. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievances were
to occur.
12. Changes in accounting principles and/or the application of such
principles to the Company. 13. 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.
23
<PAGE>
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 nine months of 1998, the losses from discontinued operations consisted
principally of the losses from Precept Holdings, Inc., 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.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
JOHN ALDEN LITIGATION
During the third quarter of fiscal year 1999, the Company learned that
an insurance company for John Alden Insurance paid $5 million to John Alden for
damages. Also during the quarter, John Alden Insurance dismissed its litigation
claims against the individuals involved in this matter. Precept and John Alden
Insurance discussed settlement of the litigation. John Alden Insurance has
offered to drop its claims against Precept in exchange for Precept dropping its
claims against John Alden Insurance. Precept is currently reviewing that offer.
If the offer is accepted, Precept may be able to recover some amounts from its
insurance carrier and certain individuals involved in this matter.
MBF AND PEREGRINE LITIGATION
On February 16, 1999, substantially all of the sales force, management
and employees of MBF Corporation and Mail/Source, Inc. joined Peregrine
Corporation, a competitor which was founded and funded by these same
individuals. During the third quarter of fiscal year 1999, Precept sued
Peregrine Corporation and seven former officers of MBF Corporation for damages.
This lawsuit was filed in the Judicial District, Ouachita Parish, Division C,
State of Louisiana. The Company and Peregrine are currently negotiating a
settlement to this litigation. In the event that Precept and Peregrine cannot
come to a settlement satisfactory to Precept, the Company intends to vigorously
pursue this litigation for damages.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
As of March 31, 1999, there were no changes in securities and use of
proceeds.
ITEM 3 DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
As of March 31, 1999, the Company was not in default of any of its debt
or equity securities.
ITEM 4 RESULTS OF VOTES OF HOLDERS
There were no votes of holders that the Company believes should be
disclosed in this report.
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.
25
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6(a) EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Revolving Line of Credit Agreement dated March 22, 1999 (1)
27.1 Financial Data Schedule (2)
(1) Previously included with the Company's report on Form 8-K for the
revolving line of credit agreement.
(2) Included as an exhibit to this report.
ITEM 6(b) REPORTS ON FORM 8-K FILED DURING THE PERIOD FROM JANUARY 1,
1999 THROUGH MAY 14, 1999 (not filed as exhibits to this
report)
On April 13, 1999, the Company filed a report on Form 8-K in
connection with its signing of a revolving line of credit agreement with Bank
One Texas, N.A.
On April 28, 1999, the Company filed a report on Form 8-K in
connection with the resignation of its Chairman and Chief Executive Officer,
David Neely.
26
<PAGE>
SIGNATURE
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 May 14, 1999.
PRECEPT BUSINESS SERVICES, INC.
/s/ William W. Solomon, Jr.
- ----------------------------
William W. Solomon, Jr.
Senior Vice President and Chief Financial Officer
27
<PAGE>
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28
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