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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock, NASDAQ SmallCap Market
par value $0.01 per share (PBSI)
Securities registered pursuant to Section 12(g) of the Act: None
The aggregate market value of the Class A Common Stock held by non-affiliates
as of September 20, 1999 was approximately $14,000,000.
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 September 20, 1999, there were 8,728,044 outstanding shares of Class A
Common Stock and 592,142 outstanding shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into portions of Part III
of this Form 10-K from the Company's Proxy Statement for the 1999 Annual Meeting
that is expected to be mailed to shareholders on or before October 10, 1999.
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PRECEPT BUSINESS SERVICES, INC.
INDEX TO FORM 10-K
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DESCRIPTION PAGE
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Item 1 Business....................................................................... 3
Item 2 Properties..................................................................... 16
Item 3 Legal Proceedings.............................................................. 16
Item 4 Submission of Matters to a Vote of Security Holders............................ 17
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters........... 17
Item 6 Selected Consolidated Financial Data........................................... 18
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 19
Item 7A Quantitative and Qualitative Disclosures about Market Risk..................... 28
Item 8 Consolidated Financial Statements and Supplementary Data....................... 29
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................. 51
Item 10 Directors, Executive Officers, Promoters and Control
Persons of the Registrant................................................. 51
Item 11 Executive Compensation......................................................... 51
Item 12 Security Ownership of Certain Beneficial Owners and Management................. 51
Item 13 Certain Relationships and Related Transactions................................. 51
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 51
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ITEM 1 - BUSINESS
Precept Business Services, Inc. ("Precept" or the "Company") is a
business services outsourcing supplier. Precept is an independent distributor
offering single source solutions for automated document management services,
inventory control and order processing via the internet, as well as many
other E-commerce services, and provides top quality custom and stock business
products to companies of all sizes throughout the United States. Precept also
operates various corporate transportation services companies focusing on
chauffeured town car and limousine services. The Company is organized in two
divisions: Business Products and Transportation Services. Precept was founded
in 1988 as a regional business products distributor in Dallas, Texas as a
subsidiary of Affiliated Computer Services, Inc. ("ACS") and has grown
significantly since then, both internally and through acquisitions. In June
1994, we were spun-off from ACS in a tax-free stock exchange to ACS'
shareholders in connection with the initial public offering of ACS. In March
1998, our Class A Common Stock became publicly traded upon the completion of
our merger with U. S. Transportation Systems, Inc. ("USTS"). We presently
operate from approximately 55 locations throughout the United States.
RECENT DEVELOPMENTS
ACQUISITION OF USTS AND LISTING ON NASDAQ. In March 1998, we
acquired certain operations of USTS and listed our Class A Common Stock and
warrants to purchase Class A Common Stock on the NASDAQ SmallCap Market. As
part of the acquisition of USTS, we issued 1,373,214 shares of Class A Common
Stock to USTS and assumed 259,286 warrants held by former shareholders of
USTS. In April 1998, USTS distributed such shares to USTS' shareholders. USTS
was engaged in transportation, including providing bus, chauffeured vehicle,
and package and delivery transportation-related services. We purchased nearly
all of the operating assets and assumed certain liabilities of USTS, after
which USTS changed its name to Transportation Equities Incorporated, became a
liquidating trust and was supposed to be liquidated and dissolved within one
year. The transaction was structured as a tax-free reorganization under the
Internal Revenue Service ("IRS") code Section 368(a)(1)(C).
SALE OF U.S. TRUCKING INC. On June 1, 1998, we sold our interest in
the common stock of U.S. Trucking Inc. ("U.S. Trucking"), a long-haul
trucking business, which we had acquired from USTS on March 18, 1998 to
Logistics Management, Inc. Prior to divestiture, we owned an interest in 75%
of the common stock of U.S. Trucking, and Logistics Management owned the
remaining 25% of the common stock of U.S. Trucking.
ACQUISITION OF INFOGRAPHIX. On April 13, 1998, we acquired all of
the issued and outstanding stock of InfoGraphix, Inc. ("InfoGraphix"), a
Massachusetts corporation. Boston-based InfoGraphix is a single source
provider of products and services to corporate marketing departments and a
distributor of document management services.
ACQUISITION OF MBF. On June 19, 1998, we acquired all of the issued
and outstanding stock of MBF Corporation ("MBF"), a Louisiana corporation.
MBF is a single source distributor of printed products, distribution services
and information solutions.
ACQUISITION OF CREATIVE. On September 4, 1998, through a merger of
our wholly owned subsidiary, we acquired Creative, a Maine corporation.
Creative operates a business providing printed business forms, distribution
services and information solutions to business customers throughout the New
England states and has three sales/distribution offices in Maine and two in
Massachusetts.
ACQUISITION OF SOUTHERN. On September 18, 1998, through a merger of
our wholly owned subsidiary, we acquired Southern Systems Business Forms &
Data Supply, Inc. ("Southern"), a South Carolina corporation. Southern is a
Florence, South Carolina-based provider of printed products, distribution
services and information solutions.
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ACQUISITION OF GARDEN STATE. On October 1, 1998, through a merger of
our wholly owned subsidiary, we acquired Garden State Leasing & Rent-A-Car
Corporation ("Garden State"), a New Jersey-based provider of corporate
transportation services.
ACQUISITION OF AMBASSADOR. On May 13, 1999, through mergers with our
wholly owned subsidiary, we acquired Ambassador Limousine Services, Inc. and
Ambassador Transportation Services, Inc., both of which are Connecticut
corporations. We also acquired the assets of Ambassador Executive Coaches,
L.L.C., a Connecticut limited liability company. The entities and businesses
acquired are jointly referred to as Ambassador. The Ambassador companies
provide executive town car and limousine services primarily in the tri-state
New York area.
ACQUISITION OF CF&P. On September 20, 1999, we acquired the common
stock of Computer Forms & Products, Inc. ("CF&P"), a business products
distribution company located in North Carolina. CF&P serves business
customers in North Carolina.
OTHER ACQUISITIONS. In fiscal 1999, we also acquired two additional
Business Products companies and two additional Transportation Services
companies.
CREDIT AGREEMENT. On March 22, 1999, we entered into a Revolving
Line of Credit Agreement with Bank One, Texas, N.A. which provides us up to
$40 million for borrowing 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. Two banks, Bank One, Texas, NA and Wells Fargo Bank, NA,
participated in this Credit Agreement, which 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.
GOODWILL WRITE-DOWNS AND OTHER NON-RECURRING CHARGES. In the third
quarter of fiscal 1999, we recorded goodwill write-down and other
non-recurring charges totaling $14.3 million relating to matters and events
which occurred during that quarter. We wrote-down $7.4 million related to a
customer's nonrenewal of our contract for employee bus shuttle service, $2.6
million related to the resignation of the management and sales force of MBF,
and $4.3 million related to various other transactions.
RESIGNATION OF OFFICER AND DIRECTOR. On April 19, 1999, David Neely,
our former Chairman and Chief Executive Officer, resigned from his position
as an officer and director due to personal and health reasons.
GENERAL
Document management services provided by the Company include the
distribution of custom business forms, commercial printing, graphic arts,
electronic forms, custom stock labels, computer supplies, envelopes and
advertising specialty products. We provide comprehensive information
solutions for our customers' business products, inventory control and
document management needs. In addition, we provide electronic forms
capabilities and integration of our customers' accounting operations to
streamline information flow and reduce overall operating costs. Our corporate
transportation services companies focus on chauffeured town car and limousine
services. Our business strategy is (1) to act as a premier sole source
"corporate outsourcer," providing a broad array of business products and
services to our customers while reducing overall procurement costs and
providing a high level of customer service, (2) to continue to expand our
transportation operations, emphasizing executive town car and limousine
services, particularly in the tri-state New York area, the Northeastern
United States, and to pursue selected acquisition opportunities focusing on
the 30 to 40 largest population centers in the United States, and (3) to
continue our expansion in our businesses through strategic acquisitions and
internal growth.
Since our founding and development, our goal has been to acquire or
establish a centrally managed network of regional offices and warehouses in
major geographic markets throughout the United States. Since 1991, we have
completed 21 acquisitions of these regional business products distributors.
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Once a regional office/warehouse is acquired or established, we seek to
leverage our distribution capabilities by acquiring smaller companies or
opening satellite sales offices in the surrounding areas. We also seek to
increase the sales and profitability of our acquired companies by integrating
our business strategy and eliminating redundant operating expenses. We
presently plan to continue to pursue this consolidation strategy within the
business products distribution and document management industries.
We believe that the acquisition and operational experience of our
management team provides us with the ability to execute the growth components
of our business strategy. In our fifth year of existence, we were recognized
as the largest independent business products distributor by a national
business products magazine, and we are currently one of the top three
independent distributors in the United States. Our management team brings
extensive experience in the acquisition and integration of businesses.
Management also believes we are the "preferred acquiror" in the business
products distribution and document management industries.
The two industries in which we operate are large and fragmented. We
believe that opportunities exist to strategically acquire participants in
both industries. Our principal competitors in the business products industry
are direct manufacturers and other, smaller independent distributors of
business products. Management believes that the market for business products
is in excess of $20 billion annually with the top independent distributors
representing $1.6 billion annually, or approximately 8.0% of the estimated
total market. We believe independent distributors' market share will continue
to grow in the future as more of their target customers make the decision to
outsource the distribution of their business products and document management
needs.
We believe that similar strategic acquisition possibilities exist in
the corporate transportation services industry. Our management believes that
the chauffeured vehicle service segment of the transportation industry, in
particular, presents an attractive opportunity for strategic acquisitions.
Based on industry data, our management estimates that in 1998 the chauffeured
vehicle service industry represented approximately $4.0 billion in revenues,
consisted of at least 3,000 companies, was highly fragmented and no single
company controlled more than 2% of the market.
ACQUISITION STRATEGY
BUSINESS PRODUCTS
We believe numerous factors exist which create a favorable
environment and significant opportunities for continued strategic
acquisitions in the business products distribution and document management
industry. Among others, these factors include: (1) the fragmented nature of
the industry, (2) the lack of operating and acquisition expertise of target
companies, (3) industry participants' desire for liquidity and/or capital
requirements for growth, (4) industry participants' desire to utilize our
existing management information systems, (5) the pressures of increasing
competition, and (6) creation of operating efficiencies and synergies
resulting in economies of scale.
We believe that we possess substantial competitive advantages over
other industry competitors. We base this belief on management's track record
in previous growth and strategic acquisition efforts as well as its
experience in acquiring and integrating businesses at Precept. We believe we
can leverage the experience and expertise of our executive management team to
become the leading strategic acquirer of the business products distribution
and document management industry. Furthermore, we believe that our ability to
attract and acquire companies as a preferred acquirer is due to (1) our
existing operations as a nationwide business products distributor and
document management company and (2) our corporate infrastructure and
management information systems. Under our business model, acquired companies
benefit from the economies of scale of a larger organization while
simultaneously retaining local operational control, thereby enabling them to
provide flexible and responsive service to long-term customers.
We seek to achieve operating efficiencies in acquisitions through
(1) the combination of certain general and administrative functions, (2)
elimination of redundant facilities, (3) improved management
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information systems and (4) implementation of our preferred vendor and volume
purchasing arrangements. Over the years we have negotiated certain
arrangements with manufacturers that we believe will enable us to reduce the
level of inventories in acquired companies, thereby allowing more efficient
operations. Integration of acquisitions is often a complex process which may
entail material nonrecurring expenditures, including facility closing costs,
modernization of equipment and computer systems, warehouse assimilation
expenses, asset writedowns and severance payments.
Consideration paid for acquisitions has typically involved a
combination of cash, common stock, preferred stock and promissory notes.
Acquisitions are made pursuant to acquisition agreements containing customary
representations, warranties, covenants and indemnification provisions. We
typically obtain non-compete and confidentiality agreements from selling
owners, many of whom remain as managers and employees of the acquired
businesses.
TRANSPORTATION SERVICES
We have identified the corporate and contract transportation
services industry as a second segment that has significant strategic
acquisition opportunities. We intend to pursue a strategy of acquiring
businesses that provide chauffeured services in town car sedans and
limousines to corporate customers.
We believe that there are significant advantages in continuing
strategic acquisitions in the chauffeured vehicle service segment of the
transportation services industry. Management believes it can increase
revenues of acquired companies through the implementation of training and
quality assurance programs as well as nationwide marketing of our services.
Moreover, we believe we can achieve cost savings in acquisitions through the
consolidation of certain administrative functions, increased use of
automation, and the elimination of redundant facilities, equipment and
personnel.
BUSINESS PRODUCTS
Our business philosophy lies in the provision of services and
distribution, rather than the actual manufacturing of the products we sell.
All manufacturers either sell directly to the end user or through independent
distributors. Because we utilize in excess of 5,000 manufacturers nationwide
that specialize in various products and quantity sizes, our management
believes that we have the ability to be our customers' single source supplier
and, therefore, will provide broader product availability and enhanced
delivery times as compared to direct manufacturers. Our distribution business
involves the design, warehousing and distribution of a broad variety of
business products. Through our document management services, we provide a
single point of contact for the purchase and warehousing of all printed
products and related items that a customer may use. Typically, we will
consult with a customer to perform a documents analysis and then, after
determining what documents are required on an ongoing basis, we will provide
for the design, production, inventorying, management, storage and
distribution of the documents to the customer on an as-needed basis. Our
sophisticated management information systems enable us to offer customized
services tailored to specific customer needs. As a result, customers are
provided customized product usage and stock status reports, customized
billing formats and other custom reports important to their operations.
OPERATING STRATEGY
Our operating strategy for Business Products over the next three
years focuses primarily on the following objectives:
- Continue integration efforts related to acquired businesses.
- Increase product development and awareness among our sales
force.
- Improve product pricing and availability with our vendors.
- Continue to grow revenue aggressively with business customers
while improving profitability.
- Continue information systems enhancements and improvements.
DISTRIBUTION
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We believe that the current trend of downsizing and vendor
reductions, combined with customers' desire to maximize efficient commitment
of capital in the inventory of its business products, makes distributors the
customers' best source for service and new products. We attempt to deliver a
complete solution for our customers' business products, inventory control and
document management needs along with the integration of the customers'
accounting operations to streamline the customer's workflow processes and
reduce overall operating costs. This one stop solution for all the customers'
needs allows us to act as the customers' business products outsourcer. As a
distributor, we believe we can provide a more effective business products
solution because we have the flexibility to offer the products of many
vendors and suppliers and not be burdened by offering only the products that
we manufacture. Furthermore, by foregoing the extensive capital investment
required of a direct manufacturer (e.g. machinery and equipment), we are well
positioned to act immediately as new technologies present themselves. In
addition to providing multiple product offerings, we are able to leverage our
size and scale to achieve volume purchasing discounts which can be passed on
to customers. Finally, acting as a communications link between our customers
and suppliers allows us to inform suppliers more efficiently what the end
users want while simultaneously making corresponding suggestions for the
suppliers' in-plant operations.
We market our various services directly to individual customers by
designing and offering a customized product and service package for each
customer after determining its specific needs. To emphasize our customization
approach, we can provide through our electronic forms system a
customer-specific catalog with increased utility as opposed to one catalog
for all or many customers.
To accomplish the above, we have developed the following
capabilities:
DISTRIBUTION AND WAREHOUSING. We do not manufacture any business
products. Management believes the vast majority of direct manufacturers are
wholesale producers and do not sell directly to the end user. As a
distributor, we have enhanced relationships with our preferred vendors that
typically provide business products at a lower cost. Both pick and pack
distribution services as well as full case shipping capabilities are
available to our customers. In addition, we provide bulk storage (full case
and full pallet), pick and pack and secure storage. Our nationwide
warehousing, along with the excess warehouse space offered to us in
conjunction with our manufacturing partners, gives us location advantages
superior to our competitors.
DESIGN. We utilize our experienced on-site personnel directly
involved with a particular account for design work, rather than a corporate
department, to leverage the knowledge derived from hands-on involvement with
a particular customer. In addition, we spend a significant amount of time
with our manufacturing partners on new product developments on behalf of our
customers.
DOCUMENT MANAGEMENT SERVICE. We believe that our innovative
management system streamlines business product ordering and distribution,
which simplifies document monitoring and storage and encourages
"Just-in-Time" business product management. Through our fully integrated
on-line Computerized Forms Management and Inventory Analysis System, our
customers are able to monitor on-line inventory, track orders, and release
products for distribution. We can receive, translate and process all ANSI
(American National Standards Institute) standard EDI (Electronic Data
Interchange) transaction sets (all versions) to give customers a channel to
access information in a seamless manner while providing electronic invoicing
and payments. This document management system allows us to maintain absolute
control through electronic forms, intelligent forms and print-on-demand
features. The complete management system allows a customer to access
inventory information, place orders, and make payments, all through
electronic interface.
SALES AND MARKETING. We have a broad customer base and believe that
no single customer accounted for more than 10% of total sales during fiscal
years 1999, 1998, and 1997. We rely primarily on a commission-only based
sales force dedicated to all of our products and services, thereby ensuring
product and service knowledge focused on our principal customers. We
emphasize personal sales and marketing relationships with the customer by
providing a single account executive responsible for each customer account.
Our sales representatives offer customers customized merchandising and
purchasing programs tailored to each customer's needs. Sales representatives
have frequent contact with their customers and are
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accountable for increasing account penetration and solving customer problems.
For major accounts, we utilize the "Team Concept" where an experienced team
of individuals, including an account executive and a customer service
representative, maximize service and enhance long term customer relations. We
believe that our presence in 47 locations allows our sales representatives to
service customers ranging from small businesses to large, national
corporations in multiple locations. Through a continued effort to improve
efficiency and provide customized systems and enhancements, we are committed
to a long-term partnership with our customers. We compensate our sales force
with commissions based primarily on the level of gross profit.
MANAGEMENT INFORMATION SYSTEM. We believe that our management
information system features state-of-the-art hardware and software fully
customized for the business products and document management industry. This
customization fully integrates order entry, receiving, distribution, billing,
accounts payable and general ledger functions. The system generates reports
such as customized summary billing, cost center analysis, inventory stock
status and reorder notices. Connectivity is accomplished via direct link,
dial up, satellite bounce off, VAN (Value Added Network) systems and
personalized Internet access.
A major development during fiscal 1999 within the Business Products
Divisions involved the introduction of PRECEPTONLINE, a fully integrated
Internet based electronic forms and order management system. A number of key
clients, including Nieman-Marcus, Bristol Hotels and ACS, are already using
this system. We believe it will play a key role in Precept's future success.
PRECEPTONLINE was designed, developed and has available an electronic forms
package that can operate on a single PC, LAN (Local Area Network), Full Host,
or in an Internet environment and features electronic cataloging,
print-on-demand, intelligent and interactive form processing and multimedia
capabilities (audio and video) for instruction or training needs.
We have performed a review of our hardware and software systems and
believe that our current management information systems are Year 2000
compliant. To the extent that any current means of electronic commerce are
found to be non-compliant with the year 2000, we believe that we will be able
to continue to conduct such commerce through other electronic or manual
methods.
TRANSPORTATION SERVICES
We are engaged in the corporate transportation services industry in
Dallas/Fort Worth, Texas; Cincinnati, Ohio and Northern Kentucky; Dearborn,
Michigan; and in the tri-state New York, New Jersey and Connecticut area. The
transportation services division provides chauffeured vehicle services,
courier and delivery services, and contract transportation services.
Chauffeured vehicle operations located in the Dallas/Fort Worth, tri-state
New York and Cincinnati/Northern Kentucky markets provide services under the
names Precept Transportation Services of Texas, Garden State Limousine,
Westchester Express, Ambassador Limousine, AAA Guaranteed On Time Limousine,
Crown Limousine and Adams-Barr Limousine using a fleet of town cars, stretch
limousines, vans and mini-buses. In addition, we provide courier and delivery
services primarily in the Dallas/Fort Worth market. Contract transportation
services are provided in Dearborn, Michigan and at the Cincinnati/Northern
Kentucky airport with a fleet of buses.
CHAUFFEURED VEHICLE SERVICES. Our chauffeured vehicle service
operations are located in the tri-state New York area, Dallas/Fort Worth and
Cincinnati/Northern Kentucky markets are performed for corporate customers
and the general public in those metropolitan markets. We operate a fleet of
approximately 300 vehicles, most of which are company-owned, consisting of a
mixture of town cars, stretch limousines, vans and mini-buses. The vehicles
are used to provide services for airport shuttles, conventions, social
events, business meetings and leisure travel. We also make this chauffeured
service available on a worldwide basis through an international reservation
and referral network. Corporate customers utilize the services primarily to
achieve more efficient use of their employees' time and other resources.
Approximately 750 to 1000 regular Fortune 2000 and mid-size business
customers are served by the three fleets and 500 employees, drivers and
independent contractors. There is significant competition in the Dallas/Fort
Worth, New York and Cincinnati geographic markets.
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COURIER AND DELIVERY SERVICES. Courier and delivery services are
provided under the Wingtip and Relay names within the Dallas/Fort Worth
metropolitan area. Courier and delivery services are provided on both a
scheduled and an unscheduled pick-up and delivery basis for approximately
1,000 customers using a fleet of approximately 90 vehicles that are
company-owned, driver-owned and driver-leased. On-board computers in the
vehicles, along with automated tracking and dispatching, allow packages to be
picked up and delivered within various time constraints including one-hour
deliveries. There is significant competition in the Dallas/Fort Worth market
from a number of competitors. The market is unregulated, price sensitive and
constantly evolving through the development of new services.
CONTRACT TRANSPORTATION SERVICE. This portion of our business
consists of supplying buses, vans or customized vehicles to customers
pursuant to written contracts or purchase orders that are generally awarded
on a competitive bid basis. Customers include corporations and governmental
agencies. Our ongoing operation in Dearborn, Michigan uses a fleet of 5
vehicles and 15 employees to provide parking lot transportation for Rouge
Steel. Our operation in Northern Kentucky uses 18 vehicles and 50 employees
to provide long-term parking shuttle and downtown shuttle services at the
airport and from the airport to downtown Cincinnati. A smaller portion of
each operation's business involves charter bus service on demand based on the
availability of buses.
COMPETITION
We believe that our ability to compete successfully in the business
product distribution and document management business is based upon our
ability to offer a complete range of products and services and to achieve
favorable pricing by maintaining a significant volume of business with our
suppliers. Our principal competitors in the business products industry are
direct manufacturers, local and regional independent distributors and
divisions of larger publicly held companies. Competitors include Moore
Business Forms, Reynolds & Reynolds, Standard Register, Wallace, Workflow
Management and Global DocuGraphix. In the transportation services industry,
our principal competitors in the chauffeured vehicle service segment are
Carey Limousine, Music Express, Boston Coach and Davel Limousine. Our primary
competitors in the contract transportation services segment are Coach USA and
Laidlaw Transportation.
GOVERNMENT REGULATION
We are subject to regulation by various agencies including the New
York, Michigan, Kentucky, Ohio and Texas State Departments of Transportation;
the Port Authorities of New York, New Jersey, Dallas and Cincinnati; the U.S.
Department of Transportation; and the Federal Highway Administration, as well
as other state and local authorities. Each of these agencies regulates
various aspects of licensing, permitting and operations of our transportation
services.
EMPLOYEES
As of August 31, 1999, we had 870 full-time employees, of whom 261
are engaged in sales, sales support and warehouse activities, 522 directly
provide or support transportation services and 87 are administrative,
information systems and management employees. Two of our transportation
livery services businesses employ 55 people participating in collective
bargaining agreements. These agreements expire in August 2000 and July 2001.
We believe that our relations with our employees and unions are satisfactory.
RISK FACTORS
An investment in Precept's Class A Common Stock involves a high
degree of risk. In addition to the other information contained elsewhere in
this Form 10-K, you should carefully consider the following factors before
purchasing any of the shares of Class A Common Stock. Further, this Form 10-K
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of our plans, goals, objectives,
expectations and intentions. You are cautioned that, while the
forward-looking statements reflect our good faith beliefs, they are not
guarantees of future performance, and involve known and unknown risks and
uncertainties. You should not place undue reliance on any forward-looking
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statement. Our future financial performance may not meet our expectations.
Some of the factors that could cause or contribute to such differences
include the risk factors discussed below. If any of the following risks
actually occur, our business, financial condition or results of operations
would suffer and the trading price of our Class A Common Stock may decline.
COMPETITION FOR ACQUISITIONS MAY IMPEDE OUR BUSINESS STRATEGY
We believe that the fragmentation of our industries and the past
consolidation trend has intensified competition for acquisition targets. This
results in fewer acquisition targets and increased acquisition expectations
by potential targets. Thus, it will be more difficult to purchase acquisition
targets at reasonable prices or at all. Because our success is based on our
ability to grow quickly, and we intend to grow primarily through
acquisitions, this competition could negatively affect our profitability.
Furthermore, increased acquisitions in the industry will make it more
difficult to maintain and internally grow our customer base due to a reduced
available market share.
Since 1991, we have completed the acquisition of 37 businesses.
Since the end of our 1999 fiscal year, we have completed the acquisition of
one business products distributor and one transportation services company. We
have continued to actively negotiate to acquire additional businesses that
offer business products distribution and transportation services. However,
there can be no assurance that future acquisitions will occur at the same
pace or be available to us on favorable terms, or at all. Also, there can be
no assurance that we will complete acquisitions in a manner that coincides
with the end of our fiscal quarters. The failure to complete acquisitions on
a timely basis could have a material adverse effect on our ability to meet
our quarterly projected results and the projected results estimated by
investors and analysts. Likewise, delays in implementing planned integration
strategies and activities could also affect our quarterly earnings.
Furthermore, the volatility of our stock price may impede our
ability to complete acquisitions. For example, if we are unable to use our
Class A Common Stock as consideration in acquisitions because we believe that
the market price of such stock is too low or because the acquisition targets
conclude that the market price of such stock is too volatile, we would need
to use cash and/or notes to make acquisitions. In that case, we would be
unable to account for such acquisitions under the pooling-of-interest method
of accounting (which is available only for all-stock acquisitions). This
condition and the unavailability of cash or debt financing might adversely
affect the pace of our acquisition program and the impact of acquisitions on
our quarterly results.
IF WE FAIL TO INTEGRATE OUR ACQUISITIONS SUCCESSFULLY, OUR RESULTS
OF OPERATIONS WILL SUFFER; WE WILL HAVE A LIMITED COMBINED OPERATING
HISTORY
One of our business strategies, to grow through acquisitions of
existing business products distributors and transportation service companies,
involves numerous risks, including, among others, the following:
- the difficulty of assimilating the acquired
operations and personnel;
- the potential disruption of our ongoing business;
- the potential inability of management to successfully
incorporate acquired products and services into our
product and service offerings and to maintain uniform
standards, controls, procedures and policies;
- the risks of entering markets in which we have little
or no direct prior experience;
- the potential impairment of relationships with
employees and customers as a result of changes in
management;
- the risk that critical members of the sales force of
the acquired operations leave and become competitors
of our ongoing business; and
- the risk that our management and financial controls,
personnel, computer systems and other corporate
support systems will not be adequate to manage the
increase in the size and scope of increased
operations.
10
<PAGE>
We may not be successful in overcoming these risks or any other
problems encountered in connection with future acquisitions. In addition, any
such transaction could negatively affect our operating results due to
dilutive issuances of equity securities, the incurrence of additional debt
and the amortization of expenses related to goodwill and other intangible
assets, if any.
Since our inception, we have acquired 37 companies and continue to
execute our acquisition strategy. In most cases, the managers of the acquired
companies have continued to operate their companies after being acquired. We
have integrated the businesses acquired prior to September 1998; however,
there can be no assurance that we will be able to integrate all of the
companies acquired since September 1998 within our operations without
substantial costs, delays or other problems. In addition, our executive
management group may not be able to continue to oversee and effectively
implement our operating or growth strategies in each of the markets we serve.
Finally, the rapid pace of acquisitions may adversely affect our continuing
efforts to integrate and manage those acquisitions profitably.
WE HAVE EXPERIENCED SIGNIFICANT GOODWILL WRITE-DOWNS
In the third quarter of fiscal 1999, we recorded goodwill
write-downs and other non-recurring charges totaling $14.3 million relating
to acquisitions and other events which occurred during that quarter. For
example, a customer's nonrenewal of its contract with us and the departure of
substantially all of the management and sales force of a company we acquired
necessitated a write-down of the goodwill associated with those acquisitions.
Although management does not expect further write-downs, it is possible that
they may occur in connection with future acquisitions or other events.
RISKS RELATED TO EXPANSION INTO NEW PRODUCT AND SERVICE AREAS,
PARTICULARLY BY ACQUISITIONS
Our ability to manage an aggressive acquisition program in our
industries has not yet been fully tested. We have increased the range of
products and services we offer through acquisitions of companies offering
products and services that are complementary to ours. Our efforts to sell
additional products and services to existing customers are ongoing and there
can be no assurance that such efforts will be successful.
In addition, there can be no assurance that companies that have been
acquired or that may be acquired in the future will achieve sales and
profitability levels that justify the purchase prices paid by us.
Acquisitions may involve a number of special risks that could have a material
adverse effect on our operations and financial performance, including (1)
adverse short-term effects on our reported operating results, (2) diversion
of management's attention, (3) difficulties with the retention, hiring and
training of key personnel, particularly sales personnel, (4) risks associated
with unanticipated problems or legal liabilities and (5) amortization of
acquired intangible assets. Finally, although we conduct due diligence and
generally receive representations, warranties and indemnification from the
former owners of acquired companies, there can be no assurance that such
owners will have accurately represented the financial and operating
conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on our results of operations and financial condition.
INTENSE COMPETITION AND INDUSTRY CONSOLIDATION MAY RESULT IN REDUCED
REVENUES AND PROFITABILITY
We operate in a highly competitive environment. In our markets, we
generally compete with numerous larger and smaller companies offering
business products and transportation services, many of which are well
established in their markets. In addition, in the business products
distribution markets, we compete with several national retail office products
companies and national contract stationers. Many of these competitors possess
greater financial, personnel and other resources than we have. Most, if not
all, of our large competitors operate in many of our geographic and product
markets. In addition, other competitors may choose to enter our geographic
and product markets. As a result of this competition, we
11
<PAGE>
may lose customers or have difficulty acquiring new customers. As a result of
competitive pressures on the pricing of products, our revenues or margins may
decline.
We also face significant competition to acquire additional
businesses as the business products industry undergoes continuing
consolidation. Significant competition exists, or is expected to develop, in
the other markets that we serve or are planning to enter as consolidation
occurs (or accelerates) in those markets. We believe that our major
competitors are actively pursuing acquisitions in the United States and
outside of the United States. Many of these entities are well established and
have extensive experience in effecting business combinations. These
companies, or other large companies, may compete with us for acquisitions in
our markets. Such competition could lead to higher prices being paid for
acquired companies.
In response to industry and market changes, including industry
consolidation and the continued volatility in the market price of stock of
companies in our industries, we consider, from time to time, additional
strategies to enhance shareholder value in light of such changes. These
include, among others, strategic alliances and joint ventures, spin-offs,
purchase, sale or merger transactions with other large companies,
recapitalizations and other similar transactions. There can be no assurance
that any one of these strategies will be undertaken, or that, if undertaken,
any such strategy will be successfully completed.
CONSIDERATION PAID FOR ACQUISITIONS MAY EXCEED ASSET VALUE
The purchase price of our acquisitions to date has not been
established by independent appraisals, but generally has been determined
through arms-length negotiations between our management and representatives
of the acquired companies. The consideration paid for each acquisition has
been based primarily on the value of such company as a going concern rather
than the value of the acquired assets. Valuation of these companies
determined solely by appraisals of the acquired assets would have been less
than the consideration paid for the companies. No assurance can be given that
the future performance of such companies will be commensurate with the
consideration paid. Moreover, we have incurred and expect to continue to
incur significant amortization charges resulting from consideration paid in
excess of the fair value of the net assets of the companies acquired in
business combinations accounted for under the purchase method of accounting.
We may continue to make acquisitions in this manner in the future.
OUR FINANCING MAY NOT BE SUFFICIENT TO CONTINUE OUR ACQUISITION
STRATEGY
We expect to continue to finance acquisitions by using cash as well
as shares of Class A Common Stock. In addition, we expect that future
acquisitions may require a higher percentage of cash as total consideration.
In certain circumstances, we may be unable to use stock for consideration for
acquisitions. If we do not have sufficient cash resources or available debt
financing to pay the cash consideration for acquisitions, we may be unable to
continue the current pace of our aggressive acquisition program. As a result,
our business may not produce the level of profitability we hope to achieve
and the price of our Class A Common Stock may drop.
Assuming that the current pace of our acquisitions continues, we
will need debt or equity financing. We may not be able to obtain such
financing if and when it is needed or such financing may not be available on
acceptable terms. We have a revolving line of credit agreement with our
lenders, Bank One and Wells Fargo Bank, which provides us with up to $40
million available for borrowing. The amount available to be borrowed under
the credit facility will vary from time to time depending upon the level of
our consolidated earnings before interest, taxes, depreciation and
amortization on a pro forma basis reflecting completed acquisitions, our
total indebtedness and related interest expense. As of September 20, 1999, we
had approximately $38.6 million outstanding under the credit facility at an
average annual interest rate of approximately 8.2% and $1.4 million available
for future borrowing.
12
<PAGE>
FUTURE RAPID GROWTH MAY STRAIN OUR RESOURCES
For our business to grow rapidly, we must have an effective planning
and management process. Otherwise, we may not successfully implement our
expansion program in whole or in part. Our growth will place a significant
strain on our managerial, operational and financial resources. To manage this
growth effectively, we must further improve our operational, financial and
management information systems and continue to identify, attract, train,
integrate and retain qualified personnel. These demands may require the
addition of new management personnel and the development of additional
expertise by existing management. In particular, the successful integration
of acquired businesses and the implementation of an expansion strategy will
require (1) close monitoring of quality of service, (2) identification and
acquisition of physical sites, (3) acquisition and installation of equipment
and facilities, (4) implementation of marketing efforts in new as well as
existing markets, (5) employment of qualified personnel for such sites and
(6) expansion of our managerial, operational and financial resources. Our
resources, including our management personnel, operational and management
information systems and financial systems, may not be sufficient to manage
the growth in our business.
WE ARE DEPENDENT UPON THE IMPLEMENTATION AND OPERATION OF CERTAIN
SYSTEMS
Any failure of our computerized inventory management and order
processing systems and warehouse management and distribution systems would
cause our operations to suffer. Any failure of our primary software and
management information system, Prelude's Automated Distribution System, may
cause our revenues to decrease. Additionally, we may experience delays,
complications or expenses in integrating and operating our systems for our
recently acquired subsidiaries and future operations, any of which could have
a material adverse effect on our results of operations and financial
condition.
WE HAVE QUARTERLY FLUCTUATIONS IN OUR OPERATING RESULTS
Our business is subject to seasonal influences, generally during the
first and second quarters of each fiscal year. Our historical revenues and
profits have been lower in the first quarter of our fiscal year, primarily
due to the lower level of business activity during the summer months. As our
mix of business evolves through future acquisitions, these seasonal
fluctuations may continue.
Quarterly results may also be materially affected by numerous
factors, including (1) the timing of acquisitions, (2) the timing and
magnitude of costs related to such acquisitions, (3) variations in the prices
paid by us for the products we sell, (4) the mix of products sold, (5)
general economic conditions and (6) the retroactive restatements in
accordance with generally accepted accounting principles of our consolidated
financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies we
acquire may differ substantially from ours, which could contribute to the
further fluctuation in our quarterly operating results. Therefore, results
for any one quarter are not necessarily indicative of the results that we may
achieve for any subsequent fiscal quarter or for a full fiscal year. However,
fluctuations in quarterly operating results may have a material adverse
effect on the market price of our Class A Common Stock.
OUR CLASS A COMMON STOCK MAY BE DIFFICULT TO RESELL AND YOU MAY NOT
BE ABLE TO RESELL SHARES FOR MORE THAN YOU PAID
The market price of the Class A Common Stock is subject to
significant fluctuations. You may not be able to resell your shares at or
above the price you pay for them due to a number of factors, including:
- actual or anticipated fluctuations in our operating
results;
- changes in expectations as to our future financial
performance or changes in financial estimates of
securities analysts;
- announcements by us or our existing or future
competitors;
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<PAGE>
- conditions and trends in the business products or
transportation services industries;
- adoption of new accounting standards affecting our
industries;
- departures of management or key personnel;
- the operating and stock price performance of other
comparable companies; or
- general market conditions.
The stock market has recently experienced and may continue to
experience extreme price and volume fluctuations that often are unrelated or
disproportionate to the operating performance of any specific company. If
these broad market fluctuations continue, this may adversely affect the
trading price of the Class A Common Stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price
of a company's stock, securities class action litigation has often been
instituted against the issuing company. We cannot be certain that such
litigation will not occur in the future with respect to us. Such litigation
could result in substantial costs and would at a minimum divert management's
attention and resources. Any adverse determination in such litigation could
also subject us to significant liabilities.
IF WE CANNOT ATTRACT OR RETAIN MANAGEMENT, OUR BUSINESS WILL SUFFER
Our success is dependent upon the services of our executive
officers. We do not carry key man insurance on these officers. We may not be
able to locate and retain qualified persons to replace any member of
management or to expand our current management if necessary. In addition, our
operations are located in diverse geographical locations throughout the
United States, further taxing the members of our management team. The
prolonged unavailability of any current member of senior management, whether
as a result of death, disability or otherwise, could have an adverse effect
upon our business. In April 1999, David Neely, our Chairman and Chief
Executive Officer resigned. Darwin Deason has assumed the role of Chairman,
but the position of Chief Executive Officer has not been filled. Doug Deason,
President and Chief Operating Officer, has assumed the role of Acting Chief
Executive Officer.
CONTROL BY MANAGEMENT AND SHAREHOLDERS
Our officers and directors beneficially own approximately 32% of the
outstanding shares of the Class A Common Stock and all of the Class B Common
Stock and control approximately 55% of the voting power of such Common Stock.
By virtue of his Class B ownership and proxies with our chief operating
officer and former chief executive officer, Darwin Deason, our majority
shareholder, effectively controls the outcome of matters submitted to a vote
of shareholders and, indirectly, controls all major decisions reached by our
Board of Directors and officers.
A STRIKE BY UNIONIZED EMPLOYEES COULD AFFECT OUR PROFITABILITY
A small number of our employees are members of labor unions. If
unionized employees were to engage in a strike or other work stoppage, or if
other employees were to become unionized, we could experience a disruption of
operations or higher labor costs. This could have a material adverse effect
on operations.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR
ABILITY TO PROVIDE SERVICES
The Year 2000 issue could result in system failures or
miscalculations, causing disruptions of operations, including a temporary
inability to process transactions, send invoices or engage in similar
business activities. For further information on our efforts to handle the
Year 2000 issue, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Issue."
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<PAGE>
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY LOWER OUR STOCK
PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN FUTURE OFFERINGS
If our shareholders sell substantial amounts of our Class A Common
Stock in the public market, the market price of such stock could fall. The
price of our Class A Common Stock could also drop as a result of the exercise
of options for Common Stock or the perception that such sales or exercise of
options could occur. These factors also could make it more difficult for us
to raise funds through future offerings of Class A Common Stock.
As of September 20, 1999, there were 8,728,044 shares of Class A
Common Stock outstanding. In addition, as of September 20, 1999, we had
outstanding warrants and options to purchase 535,562 shares of Class A Common
Stock. The resale of up to approximately 800,000 of the 8,728,044 outstanding
shares will be registered by a future registration statement filed with the
Securities and Exchange Commission. We believe that the remaining shares
outstanding are freely transferable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for any shares held by our "affiliates," as defined in Rule 144
under the Securities Act.
The holders of approximately 1,055,000 outstanding shares have
certain rights to have shares registered under the Securities Act pursuant to
the terms of agreements between such holders and us. The resale of 620,342 of
those 1,055,000 shares will be registered by a future registration statement.
We believe that the remaining shares are freely tradeable, subject in certain
cases to the restrictions of Rule 144. In addition, we have filed a
registration statement on Form S-8 to register a total of 903,557 shares of
Class A Common Stock, which is all shares reserved for issuance under our
1998 Stock Incentive Plan, as well as shares underlying certain options
granted under a prior stock option plan.
ADDITIONAL SHARES REGISTERED FOR USE IN FUTURE ACQUISITIONS MAY RESULT
IN DILUTION
The registration statement expected to be filed in October 1999 will
cover the issuance of approximately 6.4 million shares of Class A Common Stock
from time to time in the future, in one or more business combination
transactions. We anticipate issuing some or all of such shares in one or more
acquisitions in the future. We may also file additional registration statements
in the future covering the issuance of additional shares for acquisitions or
other purposes. The use of shares of Class A Common Stock for a portion or all
of the consideration to be paid in future acquisitions could result in dilution
to the holders of the outstanding Class A Common Stock.
ANTI-TAKEOVER EFFECT OF ARTICLES OF INCORPORATION AND BYLAWS AND OTHER
SHAREHOLDER PROTECTION MECHANISMS
Certain provisions of our Articles and Bylaws may delay, defer, or
prevent a tender offer or takeover attempt that a shareholder might consider
being in such shareholder's best interest. This includes attempts that might
result in a premium over the market price for the Class A Common Stock. In
this regard, our Articles provide that the removal of any director or
directors, with or without cause, requires the affirmative vote of at least
80% of the combined voting stock. This provision would restrict the ability
of a party to gain control of our Board by acquiring a majority of our voting
stock, removing all of the directors and then replacing them with the
directors seeking to benefit such party. Additionally, our Bylaws provide
that the number of directors shall be fixed, from time to time, by resolution
of the Board. Currently, our Board is divided into three classes of directors
that are elected for staggered three-year terms. Thus, in any given year,
only a portion of our directors would be eligible for election, thereby
eliminating the ability of a hostile party to gain control of our Board in a
single proxy contest. This makes any unsolicited takeover attempt (including
an attempt that may be in our shareholders' best interest) more expensive and
more difficult. Our Bylaws provide for advance notice procedures with respect
to the submission by shareholders of proposals to be acted on at shareholder
meetings and of nominations of candidates for election as directors. The
establishment of such procedures removes any ambiguity with respect to how
matters can be so submitted by shareholders. Further, our Articles permit the
Board to establish by resolution one or more series of preferred stock and to
establish the powers, designations, preferences and relative, participating,
optional, or other special rights of each series of preferred stock. The
preferred stock
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<PAGE>
could be issued on terms that are unfavorable to the holders of Class A
Common Stock or that could make a takeover or change in control more
difficult. Further, we have instituted a shareholder rights plan, which plan
may have the effect of discouraging an unsolicited takeover proposal.
Moreover, we are subject to the Texas Business Combination Law, which places
restrictions on certain business combinations with certain shareholders that
could render a change in control more difficult. The Articles and Bylaws,
together with the provision of shareholder rights plan and Texas law, may
have the effect of discouraging a future takeover attempt by a third party
that is not approved by the Board and rendering the removal of the incumbent
management more difficult.
USTS RELATED LITIGATION
Although we have not been named a party to any significant
litigation involving USTS, its former shareholders or its former officers, we
believe that there is a risk that existing and future claims and litigation
involving former USTS shareholders, officers or business operations may arise
in the future to which we may be a party. We would vigorously defend any such
action; however, there can be no assurance that we will succeed in such
efforts without incurring damages, settlement costs or legal fees.
ITEM 2 - PROPERTIES
Our executive offices are located at 1909 Woodall Rodgers
Freeway, Suite 500, Dallas, Texas in approximately 50,000 square feet of
office space leased with a term which expires July 2001. We operate our
Business Products Division from 45 sales offices, branch offices and regional
offices located primarily in the Southeast, Southwest, Northeast and Central
areas in the United States. These offices, including related warehouse space,
are primarily leased and range in size from 500 to 28,000 square feet, for a
total of approximately 315,000 square feet. We also own approximately 50,000
square feet of office and warehouse space. In addition, we ship products from
approximately 25 warehouse locations in the United States. Our largest
warehouse facility consists of approximately 100,000 square feet in Dallas.
We generally own the equipment, furniture and fixtures in such locations.
In the Transportation Services division, we operate from
approximately 200,000 square feet of leased office, garage, and parking lot
space from eight locations in the states of New York, New Jersey,
Connecticut, Texas, Michigan, Ohio and Kentucky. We own and lease our
transportation equipment that consists principally of town cars, limousines,
vans, mini buses and buses.
We maintain satisfactory relations with our landlords. We
consider our current office and warehouse space to be adequate to serve our
existing business operations. We expect to replace our transportation
equipment on a recurring basis at the end of the equipment's useful life.
ITEM 3 - LEGAL PROCEEDINGS
JOHN ALDEN LIFE INSURANCE CO. On January 25, 1996, we filed
a collection action against John Alden Life Insurance Co. ("Alden"),
currently pending in the United States District Court for the Southern
District of Florida, for approximately $0.5 million in past due invoices.
Alden has denied that it received any products and has refused to pay us on
that basis. Alden and its affiliate, John Alden Systems Corp. have asserted a
counterclaim against us alleging that one of our employees participated with
an Alden employee in a plan to falsify sales to Alden. Alden sought
approximately $9.0 million in damages. During the third quarter of fiscal
year 1999, the Company learned that an insurance company for Alden paid $5
million to Alden for damages. Also during the quarter, John Alden Insurance
dismissed its litigation claims against the individuals involved in this
matter. Precept, Alden and certain other parties to the litigation and an
insurance carrier agreed to a settlement whereby all claims will be dismissed
and Precept will receive $0.2 million.
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<PAGE>
MBF AND PEREGRINE LITIGATION. On February 16, 1999,
substantially all of the sales force, management and employees of MBF and
Mail/Source, Inc. joined Peregrine Corporation ("Peregrine"), a competitor
that was founded and funded by these same individuals. During the third
quarter of fiscal year 1999, Precept sued Peregrine and seven former officers
of MBF for damages. This lawsuit was filed in the Judicial District, Ouachita
Parish, Division C, State of Louisiana. The Company and Peregrine entered
into negotiations to settle this litigation; however, a settlement that was
satisfactory to the Company and Peregrine was not reached. We have resumed
the litigation efforts against Peregrine and the seven former officers of MBF
and we intend to aggressively pursue a satisfactory resolution in our favor.
OTHER MATTERS. In addition to the foregoing, we are subject to
certain other legal proceedings, claims, and disputes which arise in the
ordinary course of business. While we have no reason to believe that any
pending claims are material, there can be no assurance that such claims, if
adversely determined, will not have a material adverse effect on our
business, financial condition results or operations or liquidity.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended June 30, 1999.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock of the Company is listed on the NASDAQ
SmallCap Market under the symbol "PBSI". The high and low prices for the
Company's Class A Common Stock since the common stock was approved for
listing on March 20, 1998 are shown below:
<TABLE>
<CAPTION>
Low Price High Price
--------- ----------
<S> <C> <C>
Fiscal year 1998 quarter ended
------------------------------
March 31, 1998 $ 28.887 $ 36.765
June 30, 1998 $ 15.537 $ 30.637
Fiscal year 1999 quarter ended
------------------------------
September 30, 1998 $ 9.410 $ 24.510
December 31, 1998 $ 5.625 $ 18.820
March 31, 1999 $ 7.500 $ 19.375
June 30, 1999 $ 3.250 $ 12.438
Fiscal year 2000
----------------
September 20, 1999 (quarter to date) $ 3.125 $ 7.875
</TABLE>
As of September 20, 1999, there were approximately 8,728,044 shares
of the Company's Class A Common Stock held by approximately 3,300 holders of
record and 592,142 shares of the Company's Class B Common Stock held by one
holder of record.
DIVIDEND POLICY
We have not declared or paid any cash or other dividends on our
common stock and do not expect to pay any cash dividends for the foreseeable
future. We intend to retain earnings to reduce indebtedness and support our
growth strategy. As a holding company, the ability of the Company to pay
dividends in the future is dependent upon the receipt of dividends or other
payments from its principal operating subsidiaries. Any future determination
to pay dividends will be at the discretion of our Board of Directors and will
depend upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal year 1999, we issued 663,229 shares of unregistered
Class A Common Stock in connection with the acquisition of four businesses
and 200 shares of Preferred Stock.
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ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Amounts in thousands, except per share amounts)
Our selected consolidated financial information from continuing
operations as of and for each of the five years in the period ended June 30,
1999 is presented below. The information as of and for each of the four years in
the period ended June 30, 1999 was derived from the audited consolidated
financial statements of Precept. The consolidated financial information for the
year ended June 30, 1995 was derived from a combination of Precept's audited
historical consolidated financial statements for the year ended June 30, 1995
and the unaudited historical financial statements for two acquired businesses
for a similar period. The selected consolidated financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the consolidated financial
statements and notes thereto, included in this annual report on Form 10-K. The
selected consolidated financial information is significantly affected by the
businesses acquired by Precept for each of the periods presented. The historical
financial statements of Precept for all periods presented have been restated to
combine the financial statements of two businesses acquired in 1998 that have
been accounted for following the pooling of interests method.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Business products....................... $ 137,527 $ 113,536 $ 109,397 $ 105,464 $ 87,392
Transportation services................. 26,572 9,456 6,566 5,840 6,005
--------- --------- --------- --------- ---------
164,099 122,992 115,963 111,304 93,397
Cost of goods sold.......................... 108,223 85,281 79,729 75,687 58,994
Sales commissions........................... 18,740 15,075 14,615 13,786 11,805
Selling, general and administrative expenses 25,315 16,417 17,229 18,302 18,350
Depreciation and amortization............... 3,643 1,821 1,788 1,677 1,516
Goodwill write-down and other
non-recurring charges................... 14,283 - - - -
Non-recurring acquisition costs............. 240 486 - - -
--------- --------- --------- --------- ---------
Operating income (loss)..................... (6,345) 3,912 2,602 1,852 2,732
Interest and other expense.................. 2,565 1,936 618 929 357
--------- --------- --------- --------- ---------
Income (loss) before income taxes........... (8,910) 1,976 1,984 923 2,375
Income tax provision (benefit).............. (633) 790 828 16 356
---------- --------- --------- --------- ---------
Net income (loss)........................... $ (8,277) $ 1,186 $ 1,156 $ 907 $ 2,019
========== ========= ========= ========= =========
Diluted net income (loss) per share (1)..... $ (0.98) $ 0.18 $ 0.19 $ 0.15 $ 0.33
Weighted average shares outstanding (1)..... 8,462 6,599 6,089 6,071 6,116
<CAPTION>
JUNE 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Trade accounts receivable................... $ 19,792 $ 15,595 $ 14,235 $ 15,089 $ 13,115
Inventory................................... 4,815 5,133 3,225 2,621 3,062
Working capital............................. 9,648 13,837 13,394 15,288 14,583
Total assets................................ 86,143 56,487 37,292 39,740 31,745
Long-term debt.............................. 37,138 20,085 7,821 5,397 1,128
Shareholders' equity........................ 28,928 22,002 16,102 19,059 18,846
</TABLE>
(1) Weighted average common outstanding shares reflect the 1 for 7
reverse stock split effected in December 1998.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS" UNDER "ITEM 1 - BUSINESS" ABOVE AND UNDER "FORWARD-LOOKING
STATEMENTS" BELOW.
OVERVIEW
Precept is an independent distributor of custom and stock business
products and provider of document management services ("Business Products") to
businesses in a variety of industries throughout the United States. We also
operate corporate transportation services ("Transportation Services") companies
in the United States. We were founded in 1988 as a subsidiary of ACS and have
grown since then, both internally and through acquisitions. In June 1994, we
were spun-off from ACS in a tax-free stock exchange to ACS shareholders in
connection with the initial public offering of ACS.
We were one of the first distributor companies to begin nationwide
consolidation of operating companies in the Business Products industry. Since
1991, we have acquired 21 companies in the Business Products industry plus 16 in
the Transportation Services industry.
A component of our business strategy is to increase the size of our
operations through strategic acquisitions and internally generated growth. We
place substantial emphasis on improving operational and information system
capabilities while integrating acquired operations. Our 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. We believe that these strategies will lead to lower cost of goods
and increased sales of various products and services to existing and new
customers.
ACQUISITIONS
Our results of operations and the comparability of our results of
operations from period to period have been significantly affected by businesses
acquired in each period. From 1991 through the date of this report, we completed
37 acquisitions: 21 Business Products distribution companies and 16
Transportation Services companies. Two Business Products companies acquired in
fiscal year 1998 were accounted for using the pooling-of-interests method and,
as a result, our consolidated financial statements have been restated to combine
our financial statements 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 our
results of operations from the dates of acquisition.
In the quarter ended June 30, 1999, we acquired two Transportation
Services companies which provide executive town car and limousine service
primarily in the tri-state New York metropolitan area with annual revenues of
$6.8 million. The aggregate consideration for these transactions amounted to
$9.7 million, paid $3.0 million in cash, $0.2 in mandatorily redeemable
preferred stock, $3.2 million in assumed debt, and 597,038 shares of Class A
Common Stock with a fair market value of $3.3 million.
In the quarter ended March 31, 1999, we acquired one Transportation
Services company which provides executive town car and limousine service
primarily in the tri-state New York metropolitan area with annual revenues of
$1.9 million. The aggregate consideration for this transaction amounted to $1.4
million, paid $0.2 million in cash and $1.2 million in seller notes and debt
assumed.
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In the quarter ended December 31, 1998, we acquired one Transportation
Services company located in North Arlington, New Jersey, which provides
executive town car and limousine 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 our revolving line of credit, $2.9 million in
the then current fair market value of 336,000 shares of Class A Common Stock,
and $4.4 million in assumed debt.
In the quarter ended September 30, 1998, we 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 our 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 $2.1 million in assumed debt.
In the quarter ended March 31, 1998, we acquired substantially all of
the assets USTS, a publicly traded company in the transportation services
industry. On March 18, 1998, we issued 1,373,214 shares of 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. We 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, we sold our 75% interest in the long-haul trucking
business, U. S. Trucking, to the owners of the 25% minority interest in U. S.
Trucking 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 quarter ended December 31, 1997, we completed the acquisition of
two Business Products companies located in Tempe, Arizona and Austin, Texas and
one Transportation Services 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 Services 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 quarter ended September 30, 1997, we 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 our revolving line of credit.
PURCHASE ACCOUNTING EFFECTS
Except as noted above, our acquisitions have been primarily accounted
for using the purchase accounting method. The acquisitions have currently
affected, and will prospectively affect, our results of operations in certain
significant respects. Our 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
result 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
amortization expense.
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RESULTS OF OPERATIONS
The following table sets forth various items from continuing operations
as a percentage of revenues for the fiscal years ended June 30, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Revenue:
Business products............................................ 83.8% 92.3% 94.3%
Transportation services...................................... 16.2% 7.7% 5.7%
--------- -------- -------
100.0% 100.0% 100.0%
Operating expenses:
Cost of goods sold........................................... 65.9% 69.3% 68.8%
Sales commissions............................................ 11.4% 12.3% 12.6%
Selling, general and administrative expenses................. 15.5% 13.3% 14.9%
Depreciation and amortization................................ 2.2% 1.5% 1.5%
Goodwill write down and other non-recurring charges.......... 8.7% - -
Non-recurring acquisition costs.............................. 0.2% 0.4% 0.0%
--------- -------- -------
Operating income (3.9)% 3.2% 2.2%
Interest and other expense:
Interest expense............................................. 1.6% 0.9% 0.5%
Other expense, net........................................... (0.1)% 0.7% 0.0%
--------- -------- -------
1.5% 1.6% 0.5%
--------- -------- -------
Income before income tax provision (benefit) ..................... (5.4)% 1.6% 1.7%
Income tax provision (benefit).................................... (0.4)% 0.6% 0.7%
--------- -------- -------
Net income (loss)................................................. (5.0)% 1.0% 1.0%
========= ======== =======
</TABLE>
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
REVENUE for 1999 increased by $41.1 million, or 33.4%, from $123.0
million in 1998 to $164.1 million in 1999. In 1999, Business Products revenue
increased by $24.0 million or 21.1% and Transportation Services revenue
increased by $17.1 million or 181.0%. 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 $26.2 million and internal growth of
$3.6 million or 5.6%. The internal growth excludes the effect of the lost
revenue from MBF. Of the total increase in Transportation Services revenue in
1999, $16.5 million was due to the acquisition of 11 transportation companies in
1999 and 1998.
COST OF GOODS SOLD for 1999 increased by $22.9 million, or 26.9%, from
$85.3 million in 1998 to $108.2 million in 1999. Cost of goods sold for Business
Products increased by $12.0 million of which approximately $19.6 million was due
to companies acquired after the beginning of fiscal year 1998. Cost of goods
sold from internal growth decreased by $7.6 million due to the effect in 1999 of
the Company's improved purchasing power and the mix of products sold.
Transportation Services cost of goods sold increased by $11.0 million due
primarily to the 11 transportation companies acquired since the beginning of
1998. As a percentage of revenue, cost of goods sold for 1999 decreased by 3.4%
from 69.3% in 1998 to 65.9% in 1999. This decrease was caused primarily by the
acquisition of business products companies in less price competitive markets, by
the mix of products sold, by improved purchasing power and by the higher
relative effect of the Transportation Services Division.
SALES COMMISSIONS increased by $3.6 million, or 23.8%, in 1999, from
$15.1 million in 1998 to $18.7 million in 1999 due primarily to the increased
level of Business Products revenue. Sales commissions for the Business Products
division increased from 13.2% to 13.5% of Business 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 0.9% from 12.3% in 1998 to 11.4% in 1999 because
the Transportation Services division contributed a higher proportion of
consolidated revenue in 1999.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $8.9 million
or 54.2% in 1999 from $16.4 million in 1998 to $25.3 million in 1999, which
included increased expenses of $5.2 million from business products and
transportation services companies acquired. As a percentage of revenue, selling,
general and administrative expenses have increased by 2.2% from 13.3% in 1998 to
15.5% in 1999. This percentage increase in selling, general and administrative
expense results primarily from the companies acquired in 1999 and 1998 and the
management and organization infrastructure put in place to control and manage
the Business Products Division.
DEPRECIATION AND AMORTIZATION EXPENSE increased $1.8 million in 1999
from $1.8 million in 1998 to $3.6 million in 1999 due largely to the size and
timing of the companies acquired since the beginning of 1998.
GOODWILL WRITE-DOWN AND OTHER NON-RECURRING CHARGES. In the third
quarter of fiscal year 1999, we 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
We 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, we evaluated the undiscounted cash flows that will be
generated by the remaining operations at our Dearborn, Michigan location. We
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, we 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.
We expect that the revenue, earnings, and cash flow generated by the
Ford contract will be replaced during fiscal year 2000 by contributions from
other town car and limousine companies that have been acquired or which are
expected to be acquired during the next fiscal year. We expect that the level of
revenue necessary 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 and Mail/Source, Inc. resigned to join a competitor,
Peregrine, that had been founded and funded by the same individuals. In response
to this departure, we are in litigation with Peregrine and the former officers
of MBF for damages. We continue to pursue this litigation for damages while also
discussing potential financial settlements. During the fourth quarter of 1999,
we entered into financial settlement discussions that were not productive due to
Peregrine's unwillingness to agree to a financial settlement on terms we
considered reasonable. As a result of this departure, we have closed and are in
the process of selling certain sales offices and warehouses, collecting
outstanding accounts receivable, selling inventories and settling certain
remaining trade, lease, tax and other obligations. As part of this effort, we
recorded $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 we have wound
down and closed the sales offices and warehouses of MBF, our revenue was
negatively affected by approximately $4.2 million during the fourth quarter of
1999. We expect that the negative impact from MBF will be at least as
significant during the first three quarters of 2000. In addition, our annual
revenues will be negatively affected by approximately $16 million due to the
departure of
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substantially all of the sales force. While we expect that our 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, we recorded $4.3 million of
non-recurring charges. These included an investment of $0.5 million in the
preferred stock on 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, we adjusted
the value of our trade receivable by $0.5 million to reflect the expected
settlement of the litigation. We 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. We
increased our health claim reserve by $0.8 million based on health claim payment
trends during the third quarter of 1999. Other reserves and liabilities
increased by $1.1 million to address various matters and events that occurred
during the third quarter of 1999.
INTEREST EXPENSE increased by $1.6 million or 130.6% during 1999, from
$1.2 million in 1998 to $2.8 million in 1999 principally due to additional debt
incurred by us in 1998 and 1999 to finance our business acquisitions.
INCOME TAX BENEFIT is provided at a 7.1% effective benefit rate in 1999
compared to a 40.0% tax provision rate in 1998. The change in the effective tax
rate for 1999 is due primarily to the non-deductibility of the goodwill
write-down and goodwill amortization expense as well as changes in the valuation
allowance.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS decreased by $9.5 million
in 1999, from $1.2 million in 1998 to $(8.3) million in 1999, due to the reasons
described above. Diluted earnings per share decreased $1.09 from $0.11 in 1998
to $(0.98) in 1999. Excluding the goodwill write-down and non-recurring charges
recorded during the third quarter of 1999, diluted net income per share
increased by $0.22 per share to $0.33 per share in 1999. Diluted earnings per
share for 1999 will not equal 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 Class A Common Stock was used as part of the
purchase consideration.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
REVENUE for 1998 increased by $7.0 million, or 6.1%, from $116.0
million in 1997 to $123.0 million in 1998. In 1998, Business Products revenue
increased by $4.1 million or 3.8% and Transportation Services revenues increased
$2.9 million or 44.0%. The increase in Business Products revenue was due to the
acquisition of three business products companies during 1998, which accounted
for $2.1 million, and internal growth from existing and pooled companies of $2.0
million. The internal growth offset the lost sales from three customers who were
acquired or who left the geographic markets we serve. The increase in
Transportation Services revenue of $2.9 million in 1998 was primarily due to the
acquisition of four transportation companies.
COST OF GOODS SOLD for 1998 increased by $5.6 million, or 7.0%, from
$79.7 million in 1997 to $85.3 million in 1996. Cost of goods sold for Business
Products increased by $3.1 million of which approximately one-half was due to
companies acquired during the year and the remainder was due to internal growth
of existing and pooled companies. Transportation Services cost of goods sold
increased by $2.5 million due to the four transportation companies acquired
during 1998. As a percentage of revenue, cost of goods sold for 1998 increased
by 0.5% from 68.8% in 1997 to 69.3% in 1998. This percentage increase was
primarily due to the mix of business products sold during the year.
23
<PAGE>
SALES COMMISSIONS increased by $0.5 million, or 3.1%, in 1998, from
$14.6 million in 1997 to $15.1 million in 1998 due primarily to the increased
level of Business Products revenue. As a percentage of revenue, sales
commissions have been fairly consistent in 1997 and 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE decreased by $0.8 million
or 0.4% in 1998 from $17.2 million in 1997 to $16.4 million in 1998. Increased
expenses of $0.8 million from business products and transportation services
companies acquired were offset by $1.6 million in reduced expenses in existing
business products and corporate functions. As a percentage of revenue, selling,
general and administrative expenses have declined by 1.6% from 14.9% in 1997 to
13.3% in 1998. The reduced expenses in existing operations are primarily a
result of our continuing efforts and strategy to realize synergies from
acquisitions by merging common administrative and support functions.
NON-RECURRING ACQUISITION COSTS amounted to $0.5 million in 1998 and
consist of accounting, legal and investment banking fees, real estate fees,
appraisal fees and various regulatory fees incurred in connection with the
acquisition of two companies which were accounted for following the pooling-of-
interests method.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.1 million in 1998
from $1.7 million in 1997 to $1.8 million in 1998 due largely to the size and
timing of the companies acquired in 1998.
INTEREST AND OTHER EXPENSE increased by $1.3 million or 213.4% during
1998, from $0.6 million in 1997 to $1.9 million in 1998. In 1998, interest
expense increased by $0.6 million or 92.1%, from $0.6 million in 1997 to $1.2
million in 1998 principally due to additional debt incurred by us in 1998 to
finance our acquisitions. Other expenses of $0.8 million in 1998 are due
primarily to a subsidiary's write-off of an investment and one time payment by
the shareholder of an acquired subsidiary.
INCOME TAXES are provided at a 40.0% effective rate in 1998 compared to
a 41.7% rate in 1997. This reduction is due primarily to state income tax and
non-deductible expense reductions.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH FLOWS FROM OPERATING ACTIVITIES. During fiscal year 1999,
we generated $13.4 million in cash from operating activities. The increase in
cash flow from operating activities from 1998 to 1999 is due to the increased
size of the Company, improved results from operations and a reduction in
working capital. In fiscal year 1998, the Company used $4.4 million in cash
from operations as compared to $0.7 million generated in 1997. During 1998,
increases in accounts receivable, inventory and other current assets were
funded with borrowings under the Company's revolving line of credit. During
fiscal year 1998, the Company increased its net income due to the benefits of
companies acquired in the previous two years and the reduction of the losses
from discontinued operations. During fiscal year 1997, the cash flow
generated by Business Products' and Transportation Services' continuing
operations was largely offset by the cash needs of the discontinued
operations of two subsidiaries, Precept Builders, Inc. ("Builders") and
Precept Holdings, Inc. ("Holdings"). The Company used its revolving line of
credit to supplement any cash needs that were not provided by operating
activities. During 1997, cash flow from operations was significantly reduced
by the levels of accounts receivable and costs in excess of billings on
uncompleted contracts for one of its discontinued operations. The working
capital of continuing operations was a relatively constant $13.0 million to
$14.0 million during this period.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During fiscal year 1999,
we used $25.7 million of cash for investing activities. We used $24.8 million
of cash to acquire businesses during fiscal year 1999. We also acquired $2.1
million of equipment and generated $1.1 million from the sale of the net
assets of our discontinued operations. During fiscal year 1998, Precept used
$5.5 million in cash for investing activities as compared to $3.1 million in
1997. In 1998, the Company used $7.1 million in cash to purchase five
businesses, including paying contingent consideration of $0.1 million and
paying direct acquisition costs of $1.7 million incurred in connection with
eight of its business acquisitions. During 1998, the Company acquired eight
businesses, six of which were accounted for following the purchase method and
two of which were accounted for following the pooling method. In 1998, the
Company spent $0.9 million for
24
<PAGE>
equipment. In addition, discontinued operations generated $2.4 million in
cash primarily from the sale of the Company's interest in a ranch and the
sale of a condominium. During 1997, the Company acquired two businesses for
$1.1 million and paid $0.1 million for contingent consideration. In addition,
the Company spent $1.9 million to acquire property and equipment, primarily
for information systems equipment, warehouse equipment, town cars and office
furniture and fixtures.
NET CASH FLOWS FROM FINANCING ACTIVITIES. During fiscal year 1999, we
generated $10.1 million of cash by financing activities. We borrowed a net
amount of $15.1 million under the Company's revolving line of credit and used
such amount primarily to finance business acquisitions. During fiscal 1999, we
repaid $1.3 million of long-term debt, we repaid $2.7 million of capitalized
lease obligations and we purchased $1.0 million of treasury stock. In fiscal
year 1998, $9.7 million of cash was generated by financing activities as
compared to $1.7 million of cash generated by financing activities in fiscal
year 1997. During 1998, Precept increased its outstanding revolving line of
credit balance by approximately $8.7 million in order to finance acquisitions.
In addition, the Company financed $0.3 million of its equipment purchases with
capitalized lease obligations and collected $0.8 million in notes receivable
from shareholders for prior stock purchases. During 1997, the Company increased
its revolving line of credit by approximately $1.8 million in order to finance
its acquisitions of property and equipment and its acquisitions of businesses.
The Company also borrowed $0.3 million in long-term debt to finance equipment
purchases. During fiscal year 1997, one of the Company's acquired subsidiaries
distributed dividends of $0.3 million to the subsidiary's former shareholder.
Although the goodwill write-down and other non-recurring charges
affected our operating results for 1999, such items did not affect our cash flow
from operations. As certain of the obligations provided for in the non-recurring
charges are settled, we anticipate a use of approximately $1.0 million in cash
principally during fiscal year 2000. During the fourth quarter of fiscal year
1999, we used $0.7 of cash to settle certain of these non-recurring charges.
Management believes that the current levels of operations and the cash
flow from such operations and the amount available for borrowing under the
existing revolving line of credit agreement of $1.4 million will be adequate for
fiscal year 2000 to make required payments of principal and interest on our
indebtedness, to fund anticipated capital expenditures of approximately $3.0
million for fiscal year 2000, and to meet working capital needs.
On March 22, 1999, we signed a Revolving Line of Credit Agreement
("Credit Agreement") with Bank One, Texas, N.A. The Credit Agreement provides up
to $40.0 million for borrowing by us 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 our
historical operating results. 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 our business. Specifically, each quarter we 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 $25.0 million
on an aggregate annual basis will require approval from the banking group. At
June 30, 1999, we had borrowed $31,100,000 from the banking group and we had
$8,900,000 available to borrow under the line of credit agreement. We borrowed
such amounts at an average annualized interest rate of 8.2%.
In order for us to continue to acquire companies in the business
products distribution and the transportation services industries at the same
rate as we have acquired companies since March 1998, we will need to obtain
additional sources of debt or equity capital. As of September 20, 1999, we have
borrowed $38.6 million of the $40.0 million available under the existing line of
credit agreement. Should
25
<PAGE>
we not be able to locate additional lenders or equity partners, we will be
required to limit significantly the rate at which we acquire companies. We do
not believe that this current financial condition will hinder our plans for
internal growth during fiscal year 2000.
INFLATION
Certain of our 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. We generally are able to pass any increased costs on to our
customers through price increases, although we may not be able to adjust our
prices immediately. Significant increases in paper and other costs in the future
could materially affect our profitability if these costs cannot be passed on to
customers. In general, we do not believe that inflation has had a material
effect on our results of operations in recent years. However, there can be no
assurance that our business will not be affected by inflation in the future.
YEAR 2000 ISSUE
We have performed a review of our existing computer software and
hardware information systems. We believe that our existing management
information systems are year 2000 compliant, except for certain electronic
commerce matters, as described more fully in the next paragraph. To the extent
that we will be required to expend resources to ensure that the management
information systems are year 2000 compliant, we do not expect that significant
resources, either cash flow or manpower will be needed. Our management had
previously identified two subsidiaries that had key information systems that
were not year 2000 compliant. At the first subsidiary, we have integrated their
operations and information needs into Precept's automated distribution
information system. For the second subsidiary, we have made the necessary
programming changes to insure that the operating system will be year 2000
compliant.
We conduct a certain portion of our business operations, in particular
sales orders, purchasing, billing and shipping, using electronic means of
communication outside of our management information systems. We are in the
process of contacting or being contacted by our significant vendors and
customers to verify that the electronic means of communication used are year
2000 compliant. Although this project is still in process, we are not aware of
any significant issues in this area. If for some reason, electronic means of
communication with certain of our vendors and customers were not year 2000
compliant, we do not expect that this condition would have a material adverse
effect on our operations at that time. If necessary, we have processes and
procedures in place to conduct such business operations without electronic
communication for those specific customers and vendors.
FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, that is effective for reporting periods
beginning after June 15, 2000. The Company has not yet assessed the effects that
this statement will have on its results of operations, financial position, or
cash flows. We intend to adopt the disclosure requirements of this standard
during our fiscal year ending June 30, 2001.
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FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this annual
report on Form 10-K 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 us. This section should be
read in conjunction with the "Risk Factors" located elsewhere in this Form 10-K.
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, we 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 us, 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. Our expectations, beliefs and projections are expressed in
good faith and are believed by us to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in our 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
our view, 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 our customers.
3. Changes in our executive and senior management or control.
4. Inability to obtain new customers or retain existing customers and
contracts.
5. Significant changes in the composition of our sales force.
6. Significant changes in competitive factors, including product pricing
conditions, affecting us.
7. Governmental and regulatory actions and initiatives, including those
affecting financing.
8. Significant changes from expectations in operating expenses.
9. Occurrences affecting our 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 our relationship with our employees and the
potential adverse effects if labor disputes or grievance were to occur.
12. Changes in accounting principles and/or the application of such principles
to us.
The foregoing factors could affect our actual results and could cause
our actual results during fiscal year 2000 and beyond to be materially different
from any anticipated results expressed in any forward-looking statement made by
or on behalf of us. We disclaim any obligation to update any forward-looking
statements to reflect events or other circumstances after the date of this Form
10-K.
DISCONTINUED OPERATIONS
As part of our business strategy, we decided to focus on our core
businesses and discontinue certain non-core business operations. During fiscal
1998, the losses from discontinued operations consisted principally of the
losses from Holdings, which owned and operated certain real estate related
investments. During fiscal year 1998, we generated $2.4 million in cash from the
sale of our interest in a ranch to a company controlled by our majority
shareholder, the former chief executive officer and the chief operating officer,
and from the sale of a condominium to our majority shareholder. In September
1998, we sold the remaining assets of our discontinued operations consisting of
land, building and an interest in a restaurant to our majority shareholder for
$1.2 million in cash. These transactions were all negotiated on an arms' length
basis and at prices believed to represent the fair market value of the assets
sold.
27
<PAGE>
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The principal market risk (i.e. the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is interest
rates on its debt. At September 20, 1999, we had $38.6 million of debt
outstanding under our revolving line of credit which provides for interest to be
charged at the prime rate or at a LIBOR rate plus a margin of 2.75%. Based on
that level of outstanding revolving line of credit, a 1.0% change in interest
rate would result in a $0.4 million annual change in interest expense. The
remainder of our debt is at fixed interest rates that are not subject to changes
in interest rates. We do not own nor are we obligated for other significant debt
or equity securities that would be affected by fluctuations in market risk.
The Company does not hold or issue derivative financial instruments for
speculation or trading purposes.
28
<PAGE>
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRECEPT BUSINESS SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Report of Independent Auditors............................................................... 29
Consolidated Balance Sheets at June 30, 1999 and 1998........................................ 30
Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997....... 31
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997....... 32
Consolidated Statements of Changes in Shareholders' Equity for the three year period
ended June 30, 1999..................................................................... 33
Notes to Consolidated Financial Statements................................................... 34
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Precept Business Services, Inc.
We have audited the accompanying consolidated balance sheets of Precept
Business Services, Inc., as of June 30, 1999 and 1998, and the related
consolidated statements of operations, cash flows, and changes in shareholders'
equity for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Precept
Business Services, Inc. at June 30, 1999 and 1998, and the consolidated results
of its operations, cash flows and changes in shareholders' equity for each of
the three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
Dallas, Texas ERNST & YOUNG LLP
September 10, 1999
29
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------------------
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ - $ 2,291,303
Trade accounts receivable, net of $722,000 and $404,000 allowance
for doubtful accounts, respectively............................. 19,791,669 15,595,234
Accounts receivable from affiliates................................. 1,053,712 1,186,908
Other accounts receivable........................................... 1,544,920 1,609,529
Inventory........................................................... 4,815,228 5,133,484
Other current assets................................................ 785,246 805,151
Income taxes refundable............................................. 936,548 -
Deferred income taxes 797,666 499,264
Net assets of discontinued operations............................... - 1,115,125
------------- -------------
Total current assets............................................ 29,724,989 28,235,998
Property and equipment, net............................................ 11,009,195 5,751,487
Intangible assets, net................................................. 43,368,313 19,558,050
Deferred income taxes.................................................. 1,009,849 1,102,372
Other assets........................................................... 1,030,293 1,838,697
------------- -------------
Total assets.................................................... $ 86,142,639 $ 56,486,604
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................................. $ 8,421,736 $ 5,844,671
Accrued expenses. 5,611,748 5,189,268
Accrued compensation 2,124,776 1,943,964
Current portion of long-term debt................................... 3,918,733 1,421,477
------------- -------------
Total current liabilities....................................... 20,076,993 14,399,380
Long-term debt......................................................... 37,138,018 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 8,876,680 and 6,870,126 issued shares in 1999
and 1998, respectively.......................................... 88,766 68,701
Class B Common Stock, $0.01 par value; 10,500,000 authorized shares
and 592,142 issued shares ...................................... 5,921 5,921
Additional paid-in-capital.......................................... 39,717,113 23,515,022
Retained earnings (accumulated deficit)............................. (9,673,097) (1,395,905)
------------- -------------
30,138,703 22,193,739
Class A treasury stock - 148,636 and 68,406 shares, respectively (1,211,075) (191,271)
------------- -------------
Total shareholders' equity...................................... 28,927,628 22,002,468
------------- -------------
Total liabilities and shareholders' equity.................. $ 86,142,639 $ 56,486,604
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Business products $ 137,526,600 $ 113,536,213 $ 109,396,670
Transportation services................................. 26,571,927 9,455,575 6,565,838
------------- ------------- -------------
164,098,527 122,991,788 115,962,508
Costs and expenses:
Cost of goods sold...................................... 108,222,951 85,281,274 79,729,325
Sales commissions 18,739,556 15,074,985 14,615,160
Selling, general and administrative..................... 25,314,724 16,416,142 17,228,760
Depreciation and amortization........................... 3,643,332 1,820,935 1,787,624
Goodwill write-down and other non-recurring charges..... 14,283,000 - -
Non-recurring acquisition costs......................... 239,788 485,555 -
------------- ------------- -------------
170,443,351 119,078,891 113,360,869
------------- ------------- -------------
Operating income (loss).................................... (6,344,824) 3,912,897 2,601,639
Interest and other expense:
Interest expense........................................ 2,755,979 1,195,086 621,961
Other expense (income).................................. (191,009) 741,454 (4,211)
------------- ------------- -------------
2,564,970 1,936,540 617,750
------------- ------------- -------------
Income (loss) from continuing operations
before income taxes..................................... (8,909,794) 1,976,357 1,983,889
Income tax provision (benefit) ............................ (632,602) 790,544 828,098
------------- ------------- -------------
Income (loss) from continuing operations................... (8,277,192) 1,185,813 1,155,791
------------- ------------- -------------
Discontinued operations:
Loss from disposal of discontinued operations, net of
applicable income taxes............................. - - (497,971)
Loss from discontinued operations, net of applicable income
taxes........ - (467,392) (3,341,111)
------------- ------------- -------------
Loss from discontinued operations....................... - (467,392) (3,839,082)
------------- ------------- -------------
Net income (loss).......................................... $ (8,277,192) $ 718,421 $ (2,683,291)
============== ============= =============
Basic net income (loss) per share:
Income from continuing operations....................... $ (0.98) $ 0.18 $ 0.19
Loss from discontinued operations....................... - (0.07) (0.63)
------------- ------------- -------------
Net income (loss)....................................... $ (0.98) $ 0.11 $ (0.44)
============= ============= =============
Basic weighted average shares outstanding............... 8,462,017 6,480,325 6,089,047
Diluted weighted average shares outstanding............. 8,462,017 6,598,657 6,089,047
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ (8,277,192) $ 718,421 $ (2,683,291)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 3,643,332 1,820,935 1,787,624
Write off of property and equipment, net............... - - 408,245
Goodwill write-down and other non-recurring charges.... 14,283,000 - 150,477
Loss from disposal of discontinued operations.......... - - 497,971
Deferred income taxes.................................. - 104,269 (160,728)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Trade accounts receivable......................... (100,935) (483,981) 9,261,454
Accounts receivable from affiliates............... 133,196 (683,337) -
Inventory......................................... 1,702,514 (1,902,976) (575,567)
Cost in excess of billings on uncompleted
contracts, subcontracts payable and retainage... - - (4,923,077)
Other current assets.............................. 172,120 (1,871,935) (554,898)
Income taxes refundable........................... (936,548) 277,766 (277,766)
Trade accounts payable............................ 113,671 (822,560) 281,101
Accrued compensation.............................. 180,812 293,839 (132,523)
Other assets and liabilities, net................. 2,454,669 (1,838,876) (2,376,369)
------------- ------------- -------------
Net cash provided by (used in) operating activities... 13,368,639 (4,388,435) 702,653
------------- ------------- -------------
Cash flows provided by (used in) investing activities:
Acquisitions of businesses, including earnout payments..... (24,776,169) (7,086,000) (1,185,575)
Acquisition of property and equipment, net................. (2,081,197) (857,713) (1,882,096)
Sale of assets of discontinued operations................. 1,115,125 2,445,121 -
------------- ------------- -------------
Net cash used in investing activities.................. (25,742,241) (5,498,592) (3,067,671)
------------- ------------- -------------
Cash flows provided by (used in) financing activities:
Payments on long-term debt and other long-term liabilities. (1,316,282) (41,000) 286,237
Issuance of common stock................................... - - 30,900
Capital contributions (dividend to shareholder), net....... - - (307,000)
Purchase of treasury stock................................. (999,201) - -
Issuance (payments) of capital lease obligations........... (2,736,740) 257,972 (82,642)
Repayment of shareholder notes............................. - 821,036 -
Borrowings on revolving line of credit, net................ 15,134,522 8,708,120 1,786,181
------------- ------------- -------------
Net cash provided by financing activities.............. 10,082,299 9,746,128 1,713,676
------------- ------------- -------------
Net decrease in cash and cash equivalents..................... (2,291,303) (140,899) (651,342)
Cash and cash equivalents at beginning of year................ 2,291,303 2,432,202 3,083,544
------------- ------------- -------------
Cash and cash equivalents at end of year...................... $ - $ 2,291,303 $ 2,432,202
============= ============= =============
Supplemental disclosure:
Cash paid for:
Interest............................................... $ 2,744,883 $ 1,195,086 $ 621,961
Income taxes .......................................... $ 367,241 $ 790,543 $ 828,098
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
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, 1996..... $ 41,073 $ 14,432 $ 17,569,547 $ 2,238,229 $ (804,247) $ 19,059,034
Exercise of stock
options................ 5,384 - 233,576 - - 238,960
Issuance of shareholder
notes.................. - - - - (208,060) (208,060)
Distribution to
shareholder of
acquired subsidiary.... - - - (305,000) - (305,000)
Net loss................ - - - (2,683,291) - (2,683,291)
-------- -------- ------------ ------------ ----------- ------------
Balance, June 30, 1997..... 46,457 14,432 17,803,123 (750,062) (1,012,307) 16,101,643
Repayment of
shareholder notes...... - - - - 821,036 821,036
Contribution of
retained earnings
by shareholder of
acquired subsidiary.... - - 1,364,264 (1,364,264) - -
Acquisition of USTS...... 13,733 - 4,347,635 - - 4,361,368
Conversion of Class B
to Class A Common
Stock.................. 8,511 (8,511) - - - -
Net income............... - - - 718,421 - 718,421
-------- -------- ------------ ------------ ----------- ------------
Balance, June 30, 1998..... 68,701 5,921 23,515,022 (1,395,905) (191,271) 22,002,468
Acquisition of
subsidiaries........... 19,116 - 15,799,698 - - 15,818,814
Exercise of stock
Options................ 476 - 20,127 - (20,603) -
Repurchase of Class
A common Shares........ - - - - (999,201) (999,201)
Cash payment for
Fractional shares
in reverse split....... - - 26,803 - - 26,803
Conversion of seller
Notes.................. 473 - 355,463 - - 355,936
Net loss................. - - - (8,277,192) - (8,277,192)
-------- -------- ------------ ------------ ----------- ------------
Balance, June 30, 1999.... $ 88,766 $ 5,921 $ 39,717,113 $ (9,673,097) $(1,211,075) $ 28,927,628
======== ======== ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1. BUSINESS
Precept Business Services, Inc. and its subsidiaries ("Precept" or the
"Company") engage in business products distribution management and services and
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 mid- to large-sized corporate customers.
Precept operates from offices throughout the United States. The transportation
services are provided from locations in Texas, New York, New Jersey,
Connecticut, Kentucky, Ohio and Michigan.
PUBLICLY TRADED COMPANY
In March 1998, Precept completed its acquisition of substantially all
of the assets of U. S. Transportation Services, Inc. ("USTS"), a company whose
common stock was publicly traded on the NASDAQ SmallCap Market ("NASDAQ"). As
part of this acquisition, Precept listed its Class A common shares and its
warrants to purchase Class A common shares for public trading with NASDAQ and
issued 1,373,214 shares of its Class A Common Stock to USTS. Precept's Class A
Common Stock trades under the NASDAQ symbol "PBSI."
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.
NAME CHANGE
During the fourth quarter of fiscal year 1998, in connection with its
strategic focus on being a consolidator in the business products and
transportation services industries, the Company changed its name from Precept
Investors, Inc. to Precept Business Services, Inc.
PRO FORMA INFORMATION
The pro forma information included in these financial statements and
notes is unaudited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
ACCOUNTING FOR ACQUISITIONS OF BUSINESSES
The Company evaluates each business acquisition separately. For
businesses acquired which have been or will be accounted for using the purchase
method of accounting, the cost to acquire the business includes the current
consideration and future contingent consideration, when earned, provided by the
Company, debt assumed by the Company and direct acquisition costs. The aggregate
acquisition cost is allocated to the net assets and liabilities of the business
acquired based on the fair values of net assets and liabilities. Any amount not
specifically allocated to an identified asset and liability is considered to be
34
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
goodwill. The results of operations of the businesses acquired are included in
the operating results of the Company from the dates of acquisition.
For businesses acquired which have been or will be accounted for using
the pooling method of accounting, the non-recurring acquisition costs incurred
to acquire such businesses are charged to operating results in the period that
such acquisition is consummated. The historical financial statements of the
Company have been and will be restated for all periods presented to include the
financial statements of the businesses acquired.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid, interest-bearing instruments
with an original maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Revenue is recognized when the Company ships goods or provides
transportation services to its customer. For items shipped directly to the
customer from the vendor, the Company recognizes revenue when the Company
receives notification that the vendor has shipped goods to the customer. For
certain customers, the Company enters into a business products management
agreement under which the customer asks the Company to hold and manage
customized products that the customer has ordered. Under this arrangement, the
Company generally recognizes the revenue at the time the goods are received in
its warehouse, which also represents the time that title passes to the customer.
Concentration of credit risk with respect to trade accounts receivable
is limited due to the large number of customers and their geographic dispersion
across the United States. The Company performs periodic credit evaluations of
its customers and does not require collateral. Historically, the Company has not
experienced significant losses related to individual customers or groups of
customers in any particular industry or geographic area. The effects of returns,
discounts and other incentives are estimated and recorded at the time of
shipment. Damaged or defective products may be returned to the Company for
replacement or credit. An allowance is maintained at a level that management
believes is sufficient to cover potential credit losses, including damaged,
defective and returned products and discounts, on trade accounts receivable.
The allowance for doubtful accounts was $722,000, $404,000 and $599,000
as of June 30, 1999, 1998 and 1997. The net change in the allowance for doubtful
accounts was charged to operations. No customer accounted for more than 10% of
the Company's revenue in 1999, 1998 or 1997.
INVENTORY
Inventory consists of products held for resale and is valued at the
lower of cost or market; cost is determined on first-in first-out and specific
identification methods. Market value is determined based on replacement cost or
net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The cost of property and
equipment held under capital leases, primarily transportation equipment, is
equal to the lower of the net present value of the minimum lease payments or the
fair value of the leased property at the inception of the lease. Depreciation of
property and equipment and amortization of capitalized leasehold rights are
computed using the straight-line method over the estimated useful lives of the
assets. Significant repairs or betterments, which extend the useful life of an
asset, are capitalized and depreciated over the assets' remaining useful lives.
35
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
LONG-LIVED ASSETS
It is the Company's policy to periodically review the fair market value
of its business operations and assess the operating performance and cash flows
of its business operations. If based on such assessment, the Company identifies
situations which indicate potential impairment or negative cash flow conditions,
then the Company will evaluate the net carrying value of its long-lived assets,
including goodwill and intangible assets, through an assessment of the estimated
future cash flows related to such assets. In the event that assets are found to
be carried at amounts which are in excess of estimated undiscounted net future
cash flows, the assets will be adjusted for impairment to a level commensurate
with a discounted cash flow analysis of the underlying assets. As more fully
described in Note 15, during the third quarter of 1999, the Company recognized a
permanent impairment in value for goodwill and certain other long-lived assets.
Based upon its most recent assessment, the Company does not believe an
impairment of long-lived assets exists at June 30, 1999.
INTANGIBLE ASSETS
Goodwill represents the cost in excess of fair value of the net assets
of companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method over periods ranging from 20 to 40 years. Other intangible
assets represent amounts allocated to non-compete agreements and are amortized
using the straight-line method over periods ranging from three to ten years.
DEBT ISSUANCE COSTS
Costs associated with obtaining and implementing the Company's revolver
and term debt agreements are capitalized and amortized using the effective
interest rate method over the terms of the related debt agreements.
INTERNALLY DEVELOPED SOFTWARE
Costs related to internally developed software such as supplies and
internal general and administrative salaries, except for programmers and other
employees directly associated with the projects, are expensed as incurred as a
component of selling, general and administrative expenses. External costs and
internal programming costs related to internally developed software such as
outside programmers and consultants are capitalized and expensed over the
expected useful life of the software, normally three to five years.
INCOME TAXES
The Company accounts for income taxes following the liability method.
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and tax net operating losses ("NOL") and tax
credit carryforwards. Deferred tax expense represents the change in the deferred
tax asset or liability balances. The Company periodically reviews the
realizability of its deferred tax assets and, as needed, records valuation
allowances when realizability of the deferred tax asset is not likely.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value per share of the share
at the date of grant. Because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The Company believes that the alternative
fair value accounting for employee stock options requires the use of option
valuation models that were not developed for use in valuing employee stock
options.
36
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
NET INCOME PER SHARE
Net income per share is calculated in dual fashion - basic and
diluted net income (loss) per share. Basic net income (loss) per share
excludes dilution, is based on the number of shares actually outstanding, and
is computed by dividing the income available to common shareholders by the
weighted average number of shares outstanding for the period. Diluted net
income (loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The difference between the weighted-average
number of common shares used for the calculation of basic net income (loss)
per share and the weighted-average number of common shares used for diluted
net income (loss) per share comprises the dilutive effect of the outstanding
common stock options and common stock which would be issued upon the
conversion of certain notes payable. However, the Company's warrants and a
certain portion of the Company's convertible notes payable were not included
in the computation of diluted net income (loss) per share as they would not
have been exercised. Diluted net loss per share is not presented for fiscal
year 1999 since the Company incurred a net loss from continuing operations.
The weighted average number of outstanding common shares is
calculated based on the historical timing of the common stock transactions,
except that the historical number of shares have been retroactively restated
for any shares issued in connection with businesses acquired as pooling of
interests transactions. In addition, the Company's 3.15438 for 1 stock split
in March 1998 and 1 for 7 reverse stock split in December 1998 have been
retroactively reflected in the Company's historical financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of Precept's financial instruments approximate
the fair values of such instruments due either to the short-term nature of
the instruments, the variable interest rate associated with the instruments,
or the conversion features of the instruments. The Company's financial
instruments include, but are not limited to, cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, and long-term debt.
EXPENSE ALLOCATION TO DISCONTINUED AND CONTINUING OPERATIONS
The Company allocates interest expense on its borrowings to
discontinued and continuing operations proportionately based on net assets of
each of the respective components. Interest expense allocated to discontinued
operations was $150,278 in 1997. General corporate administrative expenses
have not been allocated to discontinued operations.
RECLASSIFICATIONS
Certain reclassifications, none of which affect net income, have
been made to the 1997 consolidated financial statements in order to conform
to the 1999 and 1998 presentation.
3. ACQUISITIONS
During fiscal year 1999, Precept acquired four business products
distribution companies and five transportation service companies. All the
acquisitions were accounted for using the purchase method of accounting. For
these purchase acquisitions, the aggregate acquisition cost is allocated to
the net assets acquired based on the fair 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
$40.7 million and consisted of $12.4 million in cash, funded by working
capital and the Company's revolver line of credit, $12.3 million in seller
notes and assumed debt, $0.2 million in mandatorily redeemable preferred
stock and $15.8 million in Class A Common Stock. Four of the acquisitions
completed during fiscal year 1999 include provisions for contingent purchase
consideration in the event that the companies acquired exceed certain
earnings hurdles
37
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
during the three years following acquisition. Such contingent consideration
is generally to be paid with shares of Class A Common Stock. In addition,
five of the acquisitions completed during fiscal year 1999 provide for
additional shares of Class A Common Stock to be issued in the event that the
Class A shares used to acquire the businesses are sold below a certain share
price level. During fiscal year 1999, approximately 250,000 shares of Class A
Common Stock were deemed to be issued for such share price protection. During
fiscal year 1999, the Company paid $0.1 million for contingent purchase
consideration in connection with its business acquisitions.
During fiscal year 1998, Precept acquired five business products
distribution companies and four transportation companies. All the
acquisitions except for two business products distribution companies were
accounted for using the purchase method of accounting. For these purchase
acquisitions, the aggregate acquisition is allocated to the net assets
acquired based on the fair 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, except USTS, amounted to $3.6
million and consisted of $0.4 million in cash, funded by working capital and
the Company's revolving line of credit and $3.2 million in seller notes and
assumed debt.
The most significant of these acquisitions was Precept's purchase of
U.S. Transportation Systems, Inc., 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 June 1998, Precept
sold its 75% interest in the long-haul trucking business, U.S. Trucking, Inc.
("U. S. Trucking") 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 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 fiscal year 1998, the Company issued 877,791 shares of its Class
A Common Stock with an aggregate fair market value at the respective dates of
issuance of $18.3 million at the date of acquisition in order to acquire two
business products distribution companies, InfoGraphix and MBF. 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, for the years ended June 30, 1998 and 1997, 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>
Year Ended June 30,
-------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Revenues:
Company (excluding InfoGraphix and MBF)........................ $ 85,290,642 $ 77,343,925
InfoGraphix.................................................... 18,487,919 20,626,814
MBF............................................................ 19,213,227 17,991,769
-------------- -------------
Company........................................................ $ 122,991,788 $ 115,962,508
============== =============
Net income (loss):
Company (excluding InfoGraphix and MBF)........................ $ 658,890 $ 531,606
InfoGraphix.................................................... 331,825 388,205
MBF............................................................ 195,098 235,980
-------------- -------------
Company........................................................ $ 1,185,813 $ 1,155,791
============== =============
</TABLE>
38
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
During fiscal year 1997, the Company completed the purchase of
certain assets of two business forms distributors for a total of $0.9 million
plus up to $6.3 million of contingent consideration based on the subsequent
operating results over a five year period for one of the businesses acquired.
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 transactions generated $0.3 million of
goodwill in fiscal year 1997.
The following table summarized the consideration for the purchase
acquisitions completed and the fair value of the assets acquired.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Purchase consideration:
Cash paid $12,391,000 $ 5,735,000 $ 908,000
Amounts due sellers of acquired businesses 2,060,000 1,168,000 --
Common stock and warrants issued 15,816,000 4,318,000 --
Liabilities assumed 9,908,000 3,911,000 --
Other 527,000 60,000 --
----------- ----------- -----------
Fair value of net assets acquired $40,702,000 $15,192,000 $ 908,000
=========== =========== ===========
<CAPTION>
Year Ended June 30,
-----------------------------------------
1999 1998 1997
Allocation of fair value of net assets acquired: ------------ ------------ ------------
<S> <C> <C> <C>
Goodwill and intangible assets $ 32,898,000 $ 15,154,000 $ 274,000
Accounts receivable 4,096,000 878,000 400,000
Property and equipment 5,948,000 2,441,000 --
Inventory and other assets and liabilities, net. (2,240,000) (3,281,000) 234,000
------------ ------------ ------------
$ 40,702,000 $ 15,192,000 $ 908,000
============ ============ ============
</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 year presented, except that the goodwill write-down and
non-recurring charges recorded in the third quarter of 1999 are excluded. Pro
forma adjustments reflect additional amortization expense since the fair
value of the assets acquired is amortized for a full year. Pro forma
adjustments also reflect additional interest expense due to the related debt
being outstanding for a full year. 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.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Total revenues.................................. $ 180,621,000 $ 185,453,318 $ 187,948,668
Income before income taxes ..................... $ 7,655,000 $ 8,399,263 $ 10,073,734
Net income...................................... $ 3,980,000 $ 5,039,558 $ 5,872,987
Basic and diluted net income per share.......... $ 0.43 $ 0.54 $ 0.63
</TABLE>
During the first quarter of fiscal year 2000, Precept has acquired
one business products distribution company and one transportation company.
Aggregate consideration for these transactions amounted to $5.4 million, paid
$1.1 million in cash, $3.1 million in redemption value of mandatorily
convertible preferred stock and $1.2 million in debt assumed. Assets with a
preliminary aggregate fair value of $5.4 million were acquired with a
preliminary allocation as follows: $3.9 million to goodwill and intangible
assets, $1.2 million to accounts receivable, $0.9 million to inventory, $0.3
million to property and equipment and $0.9 million (net) to other liabilities.
If these acquisitions had been completed at the beginning of fiscal
year 1999, the pro forma results of continuing operations would have been as
follows: total revenue - $191.2 million; income before income taxes - $8.2
million; net income - $4.3 million and diluted net income per share - $0.46.
This pro forma financial information includes adjustments for amortization,
interest and income taxes.
39
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
The pro forma financial information for the year ended June 30, 1999
would have been as follows if the goodwill write-down and non-recurring charges
were included in the pro forma financial information.
<TABLE>
<CAPTION>
Acquisitions Acquisitions
through through
June 30, 1999 September 20, 1999
------------- -------------------
<S> <C> <C>
Total revenues.................................................... $ 180,621,000 $ 191,205,000
Loss before income taxes.......................................... $ (6,628,000) $ (6,105,000)
Net loss.......................................................... $ (6,898,000) $ (6,626,000)
Diluted net loss per share........................................ $ (0.74) $ (0.71)
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the following:
June 30,
------------------------------
Estimated Lives 1999 1998
--------------- ------------- -------------
<S> <C> <C> <C>
Land $ 150,000 $ 350,000
Buildings 15 to 40 years 1,411,021 1,731,926
Leasehold improvements 1 to 10 years 1,140,867 455,118
Equipment and vehicles 3 to 5 years 15,383,941 7,020,965
Capitalized leasehold rights 3 to 5 years 1,368,557 1,353,279
------------- -------------
19,454,386 10,911,288
Accumulated depreciation and amortization 8,445,191 5,159,801
------------- -------------
$ 11,009,195 $ 5,751,487
============= =============
</TABLE>
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets consist of the following:
June 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Goodwill.......................................................... $ 47,380,903 $ 24,141,769
Other............................................................. 569,579 569,579
------------- -------------
47,950,482 24,711,348
Accumulated amortization.......................................... 4,582,169 5,153,298
------------- -------------
$ 43,368,313 $ 19,558,050
============= =============
</TABLE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following:
June 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revolving line of credit.......................................... $ 31,100,000 $ 15,965,478
Note payable and long-term liability to shareholder............... 246,587 813,803
Convertible notes payable to sellers.............................. 3,285,195 2,114,435
Mortgage and equipment notes payable.............................. 4,330,840 317,813
Capitalized lease obligations..................................... 1,405,848 960,261
Other............................................................. 688,281 1,334,443
------------- -------------
41,056,751 21,506,233
Less current portion due within one year.......................... 3,918,733 1,421,477
------------- -------------
Long-term debt.................................................... $ 37,138,018 $ 20,084,756
============= =============
</TABLE>
40
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
REVOLVING LINE OF CREDIT
The Company's revolving line of credit with its banks has $40.0 million
available for borrowing by the Company for working capital and acquisition
needs. At the Company's option, the line of credit bears interest at prime, 8.5%
at June 30, 1999, 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 June 30, 1999, the margin
was 2.75%. The amount available under the revolving line of credit is determined
based on a multiple of three times the trailing twelve months pro forma EBITDA.
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 our historical operating results. 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, participate in
this revolving line of credit. 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 the Company's
business. Specifically, each quarter, the Company is 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 $25.0 million on an aggregate annual
basis requires approval from the banking group. At June 30, 1999, the Company
had borrowed $31,100,000 from the banking group and had $8,900,000 available to
borrow under the line of credit agreement. The Company borrowed such amounts at
an average interest rate of 8.2%. The revolving line of credit also includes
restrictions as to 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 continuing operations of the Company. The revolving line of credit is due
and payable on March 31, 2002.
LONG- TERM LIABILITY TO SHAREHOLDER
The long-term liability to shareholder is a non-interest bearing
separation obligation to a current shareholder and former director of the
Company which is payable at $21,075 monthly through March 2001.
CONVERTIBLE NOTES PAYABLE TO SELLERS
The convertible notes payable are unsecured, bear interest at rates
from 6.0% to 8.25% and require annual payments ranging from $0.1 million to $0.2
million through August 2003. The notes may be converted at the sellers'
respective options into shares of the Company's Class A Common Stock at either
the current market value of the stock or the price of the stock when the Company
became publicly traded.
MORTGAGE AND EQUIPMENT NOTES PAYABLE
These notes are secured and bear interest at rates from 7.0% to 12.0%
and require annual payments up to $0.3 million over the terms of the notes.
Land, building and equipment with a net book value of approximately $8.5 million
at June 30, 1999 are pledged as collateral for the notes.
CAPITALIZED LEASE OBLIGATIONS
Future minimum lease payments under the capital leases are as follows:
$0.8 million in 2000, $0.5 million in 2001 and $0.1 million in 2002. Such
amounts exclude payments for interest of $0.1 million. Capitalized leasehold
rights with a net book value of $0.5 million at June 30, 1999 are pledged as
collateral under the lease agreements.
41
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
DEBT REPAYMENT
Future annual payments of principal on all long term debt for the five
years ended June 30, 2004 are as follows: $4.0 million in 2000; $3.5 million in
2001; $0.9 million in 2002; $0.6 million in 2003 and $0.1 million in 2004.
OTHER
Included in other long-term debt and other long-term liabilities is one
series of mandatorily redeemable convertible preferred stock with a redemption
value of $0.2 million. This preferred stock is redeemable monthly, has a
dividend rate of 6.0% and is convertible at the holder's option into Class A
Common Stock at $30.00 per share. This preferred stock will be fully redeemed in
April 2004. Also included in other long-term debt is a note payable for a
stadium luxury suite.
7. INCOME TAXES
The provision (benefit) for federal and state income taxes attributable
to continuing operations consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current......................................... $ (632,602) $ 686,275 $ 988,826
Deferred........................................ - 104,269 (160,728)
------------- ------------- -------------
$ (632,602) $ 790,544 $ 828,098
============== ============= =============
</TABLE>
The provision for income taxes from continuing operations varies from
the statutory federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Statutory income tax expense (benefit) at $ (3,029,330) $ 671,961 $ 674,522
statutory rate..............................
State income tax expense, less federal benefit.. (470,437) 98,864 119,033
Expenses treated differently for book and tax
reporting purposes, primarily goodwill
amortization................................ 2,669,675 221,217 233,589
Other - primarily difference between income
taxes on S and C corporations for an
acquired subsidiary......................... 197,490 (201,498) (199,046)
------------- ------------- -------------
Income tax provision (benefit).................. $ (632,602) $ 790,544 $ 828,098
============= ============= =============
</TABLE>
One of the Company's acquired subsidiaries was an S corporation, an
entity that is not subject to federal income tax. If the operating results of
such entity were subject to federal income tax, on a pro forma basis, the
Company's net income (loss) would have been $939,638 and ($2,916,880), and the
Company's diluted net income (loss) per share would have been $0.14 and ($0.48),
respectively, for each of the years in the two-year period ended June 30, 1998.
Temporary tax differences affected and categorized by financial
statement line item are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Valuation reserves .................................................... $ 922,526 $ 124,187
Asset book/tax basis difference ....................................... 1,009,848 1,276,302
Accrued liabilities ................................................... 512,413 838,419
----------- -----------
2,444,787 2,238,908
Valuation allowance ................................................... (637,272) (637,272)
----------- -----------
Total deferred tax assets ........................................ $ 1,807,515 $ 1,601,636
=========== ===========
</TABLE>
42
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
The Company has a tax net operating loss of approximately $1.6 million
generated in fiscal year 1999 that is expected to be carried back to fiscal year
1998 or utilized in fiscal year 2000.
8. EMPLOYEE BENEFIT PLANS
Precept maintains a 401(k) plan that is available to qualified
employees meeting certain eligibility requirements. Participants may contribute
up to 15% of their compensation. On a discretionary basis, the Company may match
up to 6% of the participants' compensation. For the Company's primary plan, the
Company made no contributions in 1999, 1998 and 1997. Certain subsidiaries of
the Company have, or had prior to acquisition, 401(k) plans that allow for
voluntary pre-tax contributions by the employees and a matching contribution by
the subsidiaries. For these plans, the subsidiaries made aggregate contributions
of $30,264, $67,069 and $35,147 in 1999, 1998 and 1997, respectively.
9. SHAREHOLDERS' EQUITY
STOCK SPLIT
In November 1998, the Company's shareholders approved a 1 for 7 reverse
stock split that was effected in December 1998. In March 1998, the Company's
board of directors approved a 3.15438 for 1 stock split for the Class A and
Class B Common Stock. The financial statements of the Company have been
retroactively restated to reflect these stock splits.
CLASS B COMMON STOCK
All the outstanding shares of Class B Common Stock are held by the
majority shareholder of the Company, who is also Chairman and director of the
Company and an affiliated company, Affiliated Computer Services, ("ACS"). The
shares of Class B Common Stock are convertible into Class A Common Stock at a
one for one conversion ratio at the option of the Class B shareholder. The
shares of Class B Common Stock have the right to ten votes per share for any
matter to be voted on by the Company's shareholders.
WARRANTS
Warrants to purchase 259,286 shares of common stock were issued by
Precept to replace USTS warrants previously outstanding. Each warrant allowed
the holder to purchase one share of the Company's Class A Common Stock at a
price of $26.74 per share. The warrants expired on August 26, 1999.
1998 STOCK INCENTIVE PLAN
In February 1998, the Company adopted its 1998 Stock Incentive Plan
("1998 Plan"). The plan authorized the grant of up to 857,143 shares of the
Company's Class A Common Stock in the form of non-qualified stock options.
Generally, options granted vest over a five-year period. The vesting period for
options granted under the 1998 Plan is determined by the Company's Compensation
Committee. The term of the options is at the discretion of the administrator,
but not to exceed ten years. The following table presents the activity in the
1998 Stock Incentive Plan since its inception.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1999 1998
-------- ------
<S> <C> <C>
Beginning balance .............................. 14,286 --
Stock options granted .......................... 600,613 14,286
Stock options terminated or cancelled .......... (114,579) --
-------- ------
Ending balance ................................. 500,320 14,286
======== ======
</TABLE>
43
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Options granted under the 1998 Plan are exercisable at the market price
at date of grant and, subject to employment, expire ten years from the date of
grant, are not transferable other than on death, and are generally exercisable
in full after five years. At June 30, 1999, 383 options were exercisable. The
weighted-average exercise price for the outstanding stock options at June 30,
1999 is approximately $14.88.
Pro forma information regarding net income and earnings per share has
been determined as if the Company had accounted for its employee stock options
under the fair value method. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999, the first year in which any significant
number of options were granted: risk free interest rate of 6.0%, no dividends,
volatility factor of 1.2 and weighted average life of the option equal to 5
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a realistic
single measure of the fair value of its employee stock options. The weighted
average fair value of the stock options granted during the year amounted to $3.8
million.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period of five years.
The Company's pro forma net loss and net loss per share for 1999 would be as
follows: net loss of $8.4 million; basic and diluted net loss per share of
$(0.99).
1996 STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan"). The plan authorizes the grant of up to 585,813 shares of the Company's
Class A Common Stock in the form of non-qualified stock options. During January
1997, 538,408 options were granted with immediate vesting, and exercised for one
share each of common stock at an exercise price of $0.441 per share. In April
1997, 46,414 options were granted, with immediate vesting, and an exercise price
of $0.441 per share. These options were all exercised by June 30, 1999. In
conjunction with the adoption of the 1998 Plan, the Company's board of directors
decided that there would be no further grants of options under the 1996 Plan.
RIGHT TO PURCHASE SHARES OF CLASS A COMMON STOCK
On February 2, 1998, the Company's board of directors declared a
dividend of one common share purchase right (a "Right") for each outstanding
share of Precept's common stock. The dividend was made February 9, 1998 to the
shareholders of record at the close of business on that date. Each Right
entitles the registered holder to purchase from Precept one share of Precept
Class A Common Stock at a price of $350.00, subject to adjustment. Class A
Common Stock issued after such dividend also incorporates such Right. The terms
of the Rights have been designed to provide the holders of the rights with
anti-takeover defenses. As of June 30, 1999, no Rights have been exercised.
CAPITAL TRANSACTIONS WITH SHAREHOLDER OF ACQUIRED SUBSIDIARY
In 1997, one of the Company's acquired subsidiaries, which was an S
corporation, distributed dividends to the former shareholder of the subsidiary.
In addition, the retained earnings of such subsidiary at the date of acquisition
have been recorded as a contribution to paid in capital as the shareholder of
such S corporation is deemed to have distributed such earnings to himself and
subsequently contributed such amount as paid in capital.
44
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
CLASS A SHARES RESERVED FOR FUTURE ISSUANCE
As of June 30, 1999, the Company had reserved approximately 16,500,000
shares of Class A Common Stock for future issuance for acquisitions of
businesses, exercise of stock options, exercise of warrants, conversion of notes
payable, conversion of stock rights and conversion of Class B Common Stock.
10. WEIGHTED AVERAGE SHARES OUTSTANDING
The following table provides information to reconcile the basic and
diluted weighted-average shares outstanding for the years ended June 30, 1999,
1998 and 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average shares outstanding:
Common shares, Class A and Class B, outstanding
at the beginning of the period ......................... 7,393,862 6,089,047 5,550,633
Common shares repurchased .................................. (79,000) -- --
Common shares issued upon exercise of options .............. 45,415 -- 538,414
Common shares issued upon conversion of note
receivable ............................................. 47,258 -- --
Common shares used to acquire businesses during
the period ............................................. 1,912,651 1,304,815 --
--------- --------- ---------
Common shares, Class A and Class B, outstanding
at the end of the period ............................... 9,320,186 7,393,862 6,089,047
========= ========= =========
Weighted average number of common shares
outstanding during the period based on the number
of days outstanding .................................... 8,462,017 6,480,325 6,089,047
========= ========= =========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company is obligated under non-cancelable operating leases for
office space, warehouse space and equipment which expire at various times
through 2007. Annual minimum lease commitments under these leases amount to $2.4
million in 2000, $2.3 million in 2001, $1.2 million in 2002, $1.1 million in
2003, $0.9 million in 2004 and $1.7 million thereafter. Total rent expense
amounted to $3.1 million, $2.6 million and $2.9 million in 1999, 1998 and 1997,
respectively.
LITIGATION
JOHN ALDEN LIFE INSURANCE CO. On January 25, 1996, we filed a
collection action against John Alden Life Insurance Co. ("Alden"), currently
pending in the United States District Court for the Southern District of
Florida, for approximately $0.5 million in past due invoices. Alden has denied
that it received any products and has refused to pay us on that basis. Alden and
its affiliate, John Alden Systems Corp. have asserted a counterclaim against us
alleging that one of our employees participated with an Alden employee in a plan
to falsify sales to Alden. Alden sought approximately $9 million in damages.
During the third quarter of fiscal year 1999, the Company learned that an
insurance company for Alden paid $5 million to Alden for damages. Also during
the quarter, John Alden Insurance dismissed its litigation claims against the
individuals involved in this matter. Precept, Alden and certain other parties to
the litigation and an insurance carrier agreed to a settlement whereby all
claims will be dismissed and Precept will receive $0.2 million.
MBF AND PEREGRINE LITIGATION. On February 16, 1999, substantially all
of the sales force, management and employees of MBF and Mail/Source, Inc. joined
Peregrine Corporation ("Peregrine"), a
45
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
competitor that was founded and funded by these same individuals. During the
third quarter of fiscal year 1999, Precept sued Peregrine 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 entered into negotiations to settle this litigation;
however, a settlement that was satisfactory to the Company and Peregrine was
not reached. The Company resumed the litigation efforts against Peregrine and
the seven former officers of MBF Corporation.
OTHER MATTERS. In addition to the foregoing, we are subject to certain
other legal proceedings, claims, and disputes which arise in the ordinary course
of business. While we have no reason to believe that any pending claims are
material, there can be no assurance that such claims, if adversely determined,
will not have a material adverse effect on our business, financial condition
results or operations or liquidity.
12. SEGMENT INFORMATION
The Company operates principally in the business products and
transportation industry segments. Operations in the business products segment
involves arranging for the manufacture, storage and distribution of business
forms, computer supplies, advertising information and other related business
products for mid- to large-sized corporate customers. Operations in the
transportation segment primarily involve chauffeured limousine, livery and
courier services. Total revenue by industry includes both sales to unaffiliated
customers, as reported in the Company's consolidated statements of operations,
and intersegment sales, which are eliminated in the Company's consolidated
financial statements. Intersegment sales included in operating profits below
were $16,773, $20,075 and $25,028 for the business products segment and
$396,789, $177,723 and $220,363 in the transportation services segment for the
years ended June 30, 1999, 1998 and 1997, respectively.
In computing operating income (loss), none of the following items have
been added or deducted: general corporate expenses (these expenses were included
in the computation of Corporate and Other operating income (loss)), interest
expense, income taxes and loss from discontinued operations. Depreciation
expense and capital expenditures for each fiscal year by segment are shown
below. Identifiable assets by industry segment are those assets that are used in
the Company's operations in each industry. Corporate assets are principally
certain investments and net assets of discontinued operations.
Segment data as of and for each of the three years ended June 30, 1999
is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating income (loss):
Business products ...................................... $ 1,139,863 $ 3,893,954 $ 2,428,637
Transportation ......................................... (2,479,290) 315,572 (116,271)
Other and corporate .................................... (5,005,397) (296,629) 289,273
------------ ------------ ------------
Total operating income (loss) ..................... $ (6,344,824) $ 3,912,897 $ 2,601,639
============ ============ ============
Depreciation and amortization:
Business products ...................................... $ 1,326,842 $ 1,387,548 $ 1,336,099
Transportation ......................................... 2,174,192 412,194 414,717
Other and corporate .................................... 142,298 21,192 36,808
------------ ------------ ------------
Total depreciation and amortization ............... $ 3,643,332 $ 1,820,934 $ 1,787,624
============ ============ ============
Capital expenditures:
Business products ...................................... $ 475,998 $ 184,495 $ 1,804,146
Transportation ......................................... 1,605,199 673,218 77,950
Other and corporate .................................... -- -- --
------------ ------------ ------------
Total capital expenditures ........................ $ 2,081,197 $ 857,713 $ 1,882,096
============ ============ ============
Identifiable assets:
Business products ...................................... $ 47,619,610 $ 37,978,428 $ 31,034,819
Transportation ......................................... 36,411,638 15,944,523 1,247,953
Other and corporate .................................... 2,111,391 2,563,653 5,008,774
------------ ------------ ------------
Total identifiable assets ......................... $ 86,142,639 $ 56,486,604 $ 37,291,546
============ ============ ============
</TABLE>
46
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
13. DISCONTINUED OPERATIONS
In February 1997, the Company decided to reduce its investment in
Precept Builders, Inc. ("Builders") and to sell the majority of the assets of
Precept Holdings, Inc. ("Holdings"), the two subsidiaries that performed real
estate and related construction activities.
The Company owned 810 shares of Builders' common stock, making it an
81% shareholder of Builders. Effective March 31, 1997, the Company obtained
additional 1,000 shares, increasing its ownership to 90.5%, in exchange for a
contribution of capital of approximately $2.3 million. During 1998, Builders
sold 100,000 shares to the majority shareholder of the Company, diluting the
Company's ownership percentage to 1.8%. Consequently, the Company recorded
the net assets of Builders at the estimated expected value remaining at the
disposal date, which is zero.
During fiscal year 1998, the Company disposed of the majority of the
assets of Holdings. These assets included one condominium, a ranch, land and
building, and an investment in a restaurant. The condominium, land and
building and restaurant investment were sold to the majority shareholder of
the Company during fiscal year 1998 and the first quarter of fiscal year
1999. The sales prices were equal to the carrying value of the assets at June
30, 1997 and the assets were sold for cash. The ranch was also sold for cash
during fiscal year 1998 to a company owned by the majority shareholder, the
chief executive officer and the chief operating officer of Precept.
Following is a summary of the net assets and results of operations of
the two entities, which have been reported as discontinued operations for all
periods presented in the consolidated balance sheets and the consolidated
statements of operations. The net assets of the discontinued operations as of
June 30, 1998 and 1997, exclude amounts related to Builders, as described above.
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accounts receivable and unbilled work .................................... $ -- $ --
Other current assets ...................................................... -- --
Land, property and equipment, net ......................................... -- 1,115,125
------------ ------------
Total assets .......................................................... -- 1,115,125
Accounts payable and other accrued expenses ............................... -- --
Non-current liabilities ................................................... -- --
------------ ------------
Net assets of discontinued operations ................................. $ -- $ 1,115,125
============ ============
Year Ended June 30,
---------------------------
1998 1997
------------ ------------
Revenue ................................................................... $ 127,279 $ 82,661,862
Costs and expenses......................................................... 940,806 86,002,973
Loss from disposal......................................................... -- (497,971)
------------ ------------
Loss before income taxes................................................... (813,527) (3,839,082)
Income tax benefit......................................................... (346,135) --
------------ ------------
Net loss from discontinued operations...................................... $ (467,392) $ (3,839,082)
============ ============
</TABLE>
A federal net operating loss ("NOL") carryforward of $2.9 million
was generated by discontinued operations during fiscal 1998 and 1997. A
deferred tax asset of $1.4 million attributable to discontinued operations
applicable to this NOL has been fully reserved with a valuation allowance due
to the uncertainty of the use of the asset to offset future taxable income of
discontinued operations.
14. TRANSACTIONS WITH AFFILIATES AND SHAREHOLDERS
SPIN-OFF FROM ACS
On June 30, 1994, the Company's common stock was distributed in a
tax-free spin-off on a pro rata basis to the shareholders of the Company's
former parent, ACS. The financial statements of the
47
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Company at the time of the spin-off reflected the financial position and
results of the combined businesses on a historical cost basis. As a result of
the spin-off from ACS, Precept and ACS entered into a Reciprocal Services
Agreement ("Services Agreement"), as discussed below.
SERVICES AGREEMENT WITH ACS
Under terms of the Services Agreement, Precept sells business forms
and supplies and provides courier and administrative services at prices that
result in an average gross margin that must be comparable to the average
gross margin realized by the Company from its other significant customers.
Revenues for services provided to ACS under this agreement were $5.4 million,
$4.3 million and $5.4 million in 1999, 1998 and 1997, respectively. Amounts
due from ACS were $0.9 million and $1.1 million at June 30, 1999 and 1998,
respectively. In addition, the Company purchases certain general and
administrative services, including data processing, from ACS. Except for the
rental of office space and data processing support for its courier business,
Precept discontinued purchasing such services in the fourth quarter of fiscal
year 1998. Precept incurred expenses of $0.3 million, $0.3 million and $0.4
million from ACS for these services in 1999, 1998 and 1997, respectively.
TRANSACTIONS WITH VENDORS OWNED BY RELATED PARTIES
During fiscal year 1999, 1998 and 1997, the Company purchased goods
and services amounting to $1.4 million, $1.1 million and $1.1 million,
respectively, at prices which management considered to be arms-length fair
market values, from companies which were owned by family members of certain
key shareholders and members of executive management.
LOANS TO CERTAIN EXECUTIVES
During the fiscal year ended June 30, 1996, the Company lent certain
senior executives $0.8 million to be used exclusively to purchase the
Company's stock from selling shareholders. The shareholder notes were paid
down to $0.6 million as of June 30, 1997 and were fully repaid in fiscal year
ended June 30, 1998.
In conjunction with the purchase of Class A Common Stock and with
the exercise of stock options under the Company's stock option plan, a note
receivable, with recourse, was issued by the Company for the purchase of the
Company's stock by certain executives. As of June 30, 1997, such shareholder
notes were classified as a reduction of shareholders' equity. Such
shareholder notes were repaid during the fiscal year ended June 30, 1998.
CLASS B COMMON STOCK
Precept's Class B Common Stock is held exclusively by the major
shareholder and is entitled to vote at 10 votes for each share held. Class A
Common Stock receives one vote on matters subject to a vote of the
shareholders. During fiscal year 1998, the major shareholder converted
851,142 shares of Class B Common Stock into an equal number of shares of
Class A Common Stock.
SALE OF LAND, BUILDING AND INVESTMENT IN RESTAURANT
During September 1998, Holdings completed the sale of land and
building and its investment in a restaurant business to its majority
shareholder for $1.1 million in cash. The property and equipment for such
operations were classified as net assets of discontinued operations at June
30, 1998.
LEASE OF RANCH
Precept was a party to a five-year lease for a limited use of a
ranch that is owned by a company controlled by the Company's majority
shareholder, its former chief executive officer and its chief operating
officer. This ranch was previously owned by Holdings and was sold in November
1997 for $1,200,000.
48
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Precept was liable for variable monthly lease payments of approximately
$10,000 during the lease term. In August 1999, the lease was terminated.
PROXIES
The majority shareholder has received the proxies of the former
chief executive and the chief operating officer of the Company whereby the
majority shareholder controls the votes that may be cast with shares owned by
the two officers. Such proxies continue until the majority shareholder's
death or his disability, whichever event occurs first.
TRANSACTIONS WITH FORMER DIRECTOR AND USTS FORMER CHAIRMAN
Subsequent to the USTS acquisition, Precept entered into a
separation agreement and general release with USTS' former chairman that
included his resignation from Precept's board of directors in exchange for
monthly payments of $21,075 through March 2001. In July 1998, Precept sold
the owned and leased buses of one of its businesses to USTS' former chairman
in exchange for a reduction of $0.6 million in Precept's note payable to him.
These events were considered in the allocation of the purchase price from the
acquisition of USTS.
15. 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 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.
MBF
On February 16, 1999, substantially all of the management, sales
force and employees of MBF and Mail/Source, Inc. resigned from the Company to
join a competitor, 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 recorded $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
49
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
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 $0.8 million based
on health claim payment trends during the third quarter of 1999. Other
reserves and liabilities increased by $1.1 million to address various matters
and events that occurred during the third quarter of 1999.
During the fourth quarter of 1999, the Company used $0.7 million of
cash to satisfy certain liabilities and reserves described above.
50
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable as there were no changes in or disagreements
with the Company's independent auditors on accounting and financial
disclosures for the periods covered by this Form 10-K.
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
This item is incorporated by reference from the Company's 1999 Proxy
Statement.
ITEM 11 - EXECUTIVE COMPENSATION
This item is incorporated by reference from the Company's 1999 Proxy
Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference from the Company's 1999 Proxy
Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference from the Company's 1999 Proxy
Statement.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 14(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements: The financial statements
listed in the accompanying Index to Consolidated Financial
Statements are filed as part of this annual report. See
pages 30 - 50.
2. Financial Statement Schedules - not applicable.
3. Exhibits: The exhibits listed on the accompanying Index to
Exhibits are filed or incorporated by reference as part of
this annual report. See pages 52 to 53.
Item 14(b) Reports on Form 8-K
On July 6, 1998, the Company filed a report on Form 8-K in
connection with its acquisition of all of the issued and
outstanding stock of MBF Corporation, a Louisiana corporation.
On September 14, 1998, the Company filed a report on Form
8-K in connection with its announcement of its preliminary
operating results for the year ended June 30, 1998.
On September 18, 1998, the Company filed a report on Form
8-K in connection with its acquisition of Creative, a Maine
corporation.
On September 25, 1998, the Company filed a report on Form
8-K in connection with its acquisition of Southern Systems
Business Forms & Data Supplies Inc., a South Carolina
corporation.
On October 2, 1998, the Company filed a report on Form 8-K
in connection with its announcement of summary operating results
for the month ended July 31, 1998.
On April 13, 1999, the Company filed a report on Form 8-K
in connection with a $40 million revolving line of credit
agreement signed March 22, 1999 with Bank One.
51
<PAGE>
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.
Item 14(c) Exhibits required by Item 601 of Regulation S-K
INDEX TO EXHIBITS
2.1 Agreement and Plan of Reorganization dated as of November 16,
1997 by and among U.S. Transportation Systems, Inc., Precept
Investors, Inc., and Precept Acquisition Company, L.L.C. (1)
2.2 USTS Plan of Liquidation and Dissolution (1)
2.3 Stock Purchase Agreement by and among Precept Business
Products, Inc., Precept Business Services, Inc., InfoGraphix,
Inc. and James Gorin (3)
2.4 Stock Purchase Agreement dated as of June 13, 1998 by and
among the Company, Precept Business Products, Inc., MBF
Corporation, and J.D. Greco (4)
2.5 Agreement and Plan of Merger dated as of September 1, 1998
by and among the Company, Creative Acquisition Corp.,
Creative, Edward Curtis and Robert Bazinet (5)
2.6 Agreement and Plan of Merger dated as of August 26, 1998
by and among the Company, Precept Acquisition Corp.,
Southern Systems Business Forms & Data Supplies, Inc., a
South Carolina corporation ("Southern") and each of the
shareholders of Southern (6)
3.1 Amended and Restated Articles of Incorporation (9)
3.2 Bylaws (1)
3.3 Warrant Agent Agreement (1)
3.4 Form of Precept Class A Warrant Certificate (1)
3.5 Form of Precept Class A Common Stock Certificate (1)
3.6 Form of Rights Agreement between Precept and Continental
Stock Transfer & Trust Co. (1)
3.7 Form of Irrevocable Proxy granted to Darwin Deason by
various Precept Investors shareholders (1)
10.1 Form of Registration Rights Agreement by and among Precept
Investors, Inc., Michael Margolies, and The Margolies
Family Trust (1)
10.2 Form of Employment Agreement by and between Precept
Investors, Inc. and Ron Sorci (1)
10.3 Reciprocal Services Agreement (as amended), dated June 30,
1994, between Precept and ACS (1)
10.4 First Amendment to Reciprocal Services Agreement, dated
May 1, 1998, between Precept and ACS (7)
10.5 Form of Directors Indemnification Agreement (1)
10.6 Precept 1996 Stock Option Plan (1)
10.7 Precept 1998 Stock Incentive Plan (1)
10.8 Credit Agreement dated as of March 22, 1999 among Precept
Business Services, Inc. an Bank One, Texas, NA as Agent
and First Chicago Capital Markets, Inc. as Arranger (8)
10.9 Separation Agreement and General Release, dated July 20,
1998, by and among Precept Business Services, Inc. and
Michael Margolies (7)
21 Precept Subsidiaries (10)
23 Consent of Ernst & Young LLP (10)
27 Financial Data Schedule (10)
- --------------------------------------------------------------------------------
Footnoted exhibits, except footnote 10 are incorporated herein by
reference as follows:
52
<PAGE>
(1) Previously filed as an exhibit to the Company's
registration statement on Form S-4 (file no. 333-42689)
and incorporated herein by reference
(2) Previously filed as an exhibit to the Company's Form 10-Q
for the quarterly period ended December 31, 1997
(3) Previously filed as an exhibit to the Company's Form 8-K
dated April 28, 1998
(4) Previously filed as an exhibit to the Company's Form 8-K
dated July 6, 1998
(5) Previously filed as an exhibit to the Company's Form 8-K
filed September 18, 1998
(6) Previously filed as an exhibit to the Company's Form 8-K
filed September 25, 1998
(7) Previously filed as an exhibit to the Company's Form 10-K
for the year ended June 30, 1998
(8) Previously filed as an exhibit to the Company's Form 8-K
filed April 13, 1999.
(9) Previously filed as an exhibit to the Company's Form 10-Q
for the period ended December 31, 1998.
(10) Filed herewith.
Item 14(d) Financial statement schedules required by Regulation S-X - not
applicable.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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 September 27,
1999.
PRECEPT BUSINESS SERVICES, INC.
/s/ DOUGLAS R. DEASON
- ---------------------------------------------
Douglas R. Deason
President and Acting Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below as of September 27, 1999 by the following persons
on behalf of the registrants and in the capacities indicated.
<TABLE>
<S> <C>
/s/ DARWIN DEASON /s/ DARWIN DEASON
- ------------------------------- -----------------------------------------
Darwin Deason Acting Chief Executive Officer, President
Chairman Chief Operating Officer, Director
/s/ SHELDON I. STEIN /s/ J. LIVINGSTON KOSBERG
- ------------------------------- -----------------------------------------
Sheldon I. Stein J. Livingston Kosberg
Director Director
/s/ ROBERT BAZINET /s/ J. D. GRECO
- ------------------------------- -----------------------------------------
Robert Bazinet J. D. Greco
Director Director
/s/ WILLIAM W. SOLOMON, JR.
- ------------------------------------------------------
William W. Solomon, Jr.
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer), Director
</TABLE>
54
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
EXHIBIT 21 TO FORM 10-K
LIST OF SUBSIDIARIES
FOR THE YEAR ENDED JUNE 30, 1999
Precept Business Products, Inc.
Precept Holdings, Inc.
Precept Transportation Services, LLC
Wingtip Couriers, Inc.
Precept Transportation Services of Texas, Inc.
Transportation Systems Corporation
Shortway River Rouge, Inc.
Jetport, Inc.
Infographix, Inc.
Creative Acquisition Corporation
Precept Acquisition Corporation
Garden State Acquisition Corporation
Precept Transportation of New England, Inc.
Computer Forms & Products, Inc.
<PAGE>
Exhibit 23
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-59815) pertaining to the Precept Business Services, Inc. 1998 Stock
Incentive Plan and Precept Business Services, Inc. 1996 Stock Option Plan of our
report dated September 10, 1999, with respect to the consolidated financial
statements of Precept Business Services, Inc. included in its Annual Report
(Form 10-K) for the year ended June 30, 1999.
/s/ ERNST & YOUNG LLP
Dallas, Texas
September 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 22,390,301<F1>
<ALLOWANCES> 722,000
<INVENTORY> 4,815,228
<CURRENT-ASSETS> 29,724,989
<PP&E> 11,009,195
<DEPRECIATION> 8,445,191
<TOTAL-ASSETS> 86,142,639
<CURRENT-LIABILITIES> 20,076,993
<BONDS> 0
0
0
<COMMON> 94,687
<OTHER-SE> 28,832,941<F2>
<TOTAL-LIABILITY-AND-EQUITY> 86,142,639
<SALES> 164,098,527
<TOTAL-REVENUES> 164,098,527
<CGS> 108,222,951
<TOTAL-COSTS> 170,443,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,755,979
<INCOME-PRETAX> (8,909,794)
<INCOME-TAX> (632,602)
<INCOME-CONTINUING> (8,277,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,277,192)
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
<FN>
<F1>Amount represents net accounts receivable.
<F2>Amount includes additional paid-in capital, retained earnings, and treasury
stock.
</FN>
</TABLE>
