<PAGE>
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 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
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 November 11, 1999, there were 9,161,753 outstanding shares of Class A
Common Stock and 592,142 outstanding shares of Class B Common Stock.
==============================================================================
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 1999 ............................. 3
Condensed Consolidated Statements of Operations
for the three-month periods ended
September 30, 1999 and 1998....................................... 4
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended
September 30, 1999 and 1998....................................... 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the three-month periods
ended September 30, 1999 and 1998................................. 6
Notes to Condensed Consolidated Financial Statements.................. 7
Item 2 Management's discussion and analysis of financial
condition and results of operations............................... 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................................................... 17
Item 2 Changes in Securities and Use of Proceeds............................. 17
Item 3 Defaults Upon Senior Securities....................................... 17
Item 4 Submission of Matters to a Vote of Security Holders................... 17
Item 5 Other Information..................................................... 17
Item 6 Exhibits and Reports on Form 8-K...................................... 18
Signature............................................................. 18
</TABLE>
2
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30
1999 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ - $ -
Trade accounts receivable, net of $764,000 and $722,000 allowance
for doubtful accounts, respectively............................. 22,766,422 19,791,669
Accounts receivable from affiliates................................. 781,547 1,053,712
Other accounts receivable........................................... 729,853 1,544,920
Inventory........................................................... 5,965,415 4,815,228
Other current assets................................................ 2,477,267 785,246
Deferred income taxes and income taxes refundable................... 1,734,214 1,734,214
--------------- ---------------
Total current assets............................................ 34,454,718 29,724,989
Property and equipment, net............................................ 11,351,305 11,009,195
Intangible assets, net................................................. 47,704,491 43,368,313
Deferred income taxes.................................................. 1,745,829 1,009,849
Other assets........................................................... 794,191 1,030,293
--------------- ---------------
Total assets.................................................... $ 96,050,534 $ 86,142,639
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................................. $ 10,368,350 $ 8,421,736
Accrued expenses.................................................... 4,355,825 5,611,748
Accrued compensation................................................ 2,088,524 2,124,776
Current portion of long-term debt................................... 3,785,187 3,918,733
--------------- ---------------
Total current liabilities....................................... 20,597,886 20,076,993
Long-term debt......................................................... 42,516,101 36,943,618
Mandatory redeemable convertible preferred stock....................... 3,241,000 194,400
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 9,310,389 and 8,876,680 issued shares in 2000
and 1999, respectively.......................................... 93,104 88,766
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 39,717,113
Retained earnings (accumulated deficit)............................. (8,909,516) (9,673,097)
---------------- ----------------
30,906,622 30,138,703
Class A treasury stock - 148,636 shares............................. (1,211,075) (1,211,075)
---------------- ----------------
Total shareholders' equity...................................... 29,695,547 28,927,628
--------------- ---------------
Total liabilities and shareholders' equity.................. $ 96,050,534 $ 86,142,639
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenue:
Business products........................................................ $ 33,219,026 $ 30,904,655
Transportation services.................................................. 8,186,618 3,913,472
------------- -------------
41,405,644 34,818,127
Costs and expenses:
Cost of goods sold....................................................... 26,782,467 22,998,898
Sales commissions............................................. 4,670,695 4,279,345
Selling, general and administrative...................................... 6,052,463 5,472,370
Depreciation and amortization............................................ 1,392,500 649,915
------------- -------------
38,898,125 33,400,528
------------- -------------
------------- -------------
Operating income............................................................ 2,507,519 1,417,599
Interest and other expense.................................................. 1,119,189 475,210
------------- -------------
Income before income taxes.................................................. 1,388,330 942,389
Income tax provision ....................................................... 624,749 452,347
------------- -------------
Net income.................................................................. $ 763,581 $ 490,042
============= =============
Basic net income per share:
Net income per share..................................................... $ 0.08 $ 0.06
============= =============
Weighted average shares outstanding......................................
9,608,272 7,657,142
Diluted net income per share:
Net income per share..................................................... $ 0.08 $ 0.06
============= =============
Weighted average shares outstanding...................................... 10,022,845 7,844,206
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 763,581 $ 490,042
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 1,392,500 649,915
Changes in operating assets and liabilities, net of effects from
acquisitions:
Trade accounts receivable......................................... (1,689,234) 294,609
Accounts receivable from affiliates............................... 272,165 53,897
Inventory......................................................... (226,401) 326,761
Other current assets.............................................. 815,067 (753,042)
Trade accounts payable............................................ 1,828,892 2,254,422
Accrued compensation and accrued expenses......................... (1,956,058) (233,021)
Other assets and liabilities, net................................. (865,731) (633,049)
-------------- --------------
Net cash provided by operating activities............................. 334,781 2,450,534
------------- -------------
Cash flows provided by (used in) investing activities:
Acquisitions of businesses, including earnout payments.................... (3,912,736) (5,990,513)
Acquisition of property and equipment, net................................ (671,860) (257,848)
Sale of assets of discontinued operations................................. - 1,115,125
------------- -------------
Net cash used in investing activities................................. (4,584,596) (5,133,236)
-------------- --------------
Cash flows provided by (used in) financing activities:
Payments on long-term debt and other long-term liabilities, net........... (1,350,185) (685,258)
Borrowings on revolving line of credit, net............................... 5,600,000 3,500,000
------------- -------------
Net cash provided by financing activities............................. 4,249,815 2,814,742
------------- -------------
Net change in cash and cash equivalents...................................... - 132,040
Cash and cash equivalents at beginning of period............................. - 2,291,303
------------- -------------
Cash and cash equivalents at end of period................................... $ - $ 2,423,343
============= =============
Supplemental disclosure:
Cash paid for:
Interest.............................................................. $ 952,171 $ 273,300
Income taxes ......................................................... $ 643,919 $ 301,815
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Class A Class B Additional Earnings Total
Common Common Paid-in (Accumulated Shareholders'
Stock Stock Capital Deficit) Other Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 ...... $ 68,701 $ 5,921 $23,515,022 $(1,395,905) $ (191,271) $22,002,468
Issuance of shares to
acquire businesses ....... 7,286 -- 9,557,780 -- -- 9,565,066
Net income .................. -- -- -- 490,042 -- 490,042
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 . $ 75,987 $ 5,921 $33,072,802 $ (905,863) $ (191,271) $32,057,576
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 ...... $ 88,766 $ 5,921 $39,717,113 $(9,673,097) $(1,211,075) $28,927,628
Issuance of shares to
acquire businesses ....... 4,338 -- -- -- -- 4,338
Net income .................. -- -- -- 763,581 -- 763,581
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1999 . $ 93,104 $ 5,921 $39,717,113 $(8,909,516) $(1,211,075) $29,695,547
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BUSINESS
Precept Business Services, Inc. and its subsidiaries ("Precept" or the
"Company") primarily engage in business products distribution management and
services and, to a lesser extent, in executive chauffeured limousine, livery and
courier services. The Business Products Division arranges for the manufacture,
storage, and distribution of business forms, computer supplies, advertising
information and other related business products for medium- to large-sized
corporate customers. Precept operates from offices throughout the United States.
The Transportation Services Division provides chauffeured corporate
transportation, livery and courier services from locations in the tri-state New
York metropolitan area and in the states of Texas, Michigan, Kentucky and Ohio.
PUBLICLY TRADED COMPANY
Precept's Class A common stock trades under the Nasdaq symbol "PBSI".
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements comprise the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
PRO FORMA INFORMATION
The pro forma information included in these financial statements and
notes is unaudited.
FISCAL YEAR END AND QUARTERLY REPORTING PERIODS
The Company maintains a June 30 fiscal year end and ends its quarterly
reporting periods on September 30, December 31, and March 31, respectively. For
purposes of the Company's current report on Form 10-Q, references to 1999 and
1998 are meant to be the three-month reporting periods ended September 30, 1999
and 1998, respectively. References to fiscal years 2000 and 1999 are meant to be
for the fiscal year ending June 30, 2000 and the fiscal year ended June 30,
1999, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are consistent with the accounting policies
described in the Company's notes to consolidated financial statements included
in the Company's Annual Report to Shareholders and Form 10-K for the fiscal year
ended June 30, 1999.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements and information are
unaudited. Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, although the Company believes that the
disclosures included herein are adequate to make the information presented not
misleading. These interim financial statements should be read in conjunction
with the Company's consolidated financial statements for the year ended June 30,
1999. The interim financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position, its results of operations and its cash flows.
Operating results for any particular interim period are not necessarily
indicative of the operating results for a full fiscal year.
7
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
The financial information for the year ended June 30, 1999 is derived
from the Company's audited financial statements for the same year as included in
the Company's Form 10-K for fiscal year 1999.
3. ACQUISITIONS
During the fist quarter of fiscal year 2000, Precept acquired one
business products distribution company and one transportation services company
with combined annual revenues of $10.6 million. These acquisitions were
accounted for using the purchase method of accounting. For each of these
purchase acquisitions, the aggregate acquisition cost was allocated to the net
assets acquired based on the fair market value of such net assets. The operating
results of such companies have been included in the Company's historical results
of operations for all periods following the acquisition. The aggregate
acquisition cost for such purchased businesses amounted to $5.5 million and
consisted of $1.3 million in cash, funded by the Company's revolving line of
credit, $3.1 million in redemption value of mandatory redeemable convertible
preferred stock and $1.1 million in assumed debt and deal costs.
During the first quarter of fiscal year 1999, Precept acquired four
business products distribution companies with combined annual revenues of $34.3
million. These acquisitions were accounted for using the purchase method of
accounting. For each of these purchase acquisitions, the aggregate acquisition
cost was allocated to the net assets acquired based on the fair market value of
such net assets. The operating results of such companies have been included in
the Company's historical results of operations for all periods following the
acquisition. The aggregate acquisition cost for such purchased businesses
amounted to $18.6 million and consisted of $5.7 million in cash, funded by
working capital and the Company's revolving line of credit, 0.7 million shares
of Class A common stock with an aggregate fair market value of $9.6 million, and
$3.3 million in seller notes, assumed debt and deal costs.
The following table summarizes the consideration for the purchase
acquisitions completed and the fair value of the assets acquired.
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Purchase consideration:
Cash paid..................................................... $ 1,318,000 $ 5,736,000
Amounts due sellers of acquired businesses.................... - 1,380,000
Common and preferred stock issued............................. 3,060,000 9,604,000
Liabilities assumed........................................... 1,037,000 1,777,000
Other......................................................... 51,000 107,000
------------- -------------
Fair value of net assets acquired.................................. $ 5,466,000 $ 18,604,000
============= =============
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Allocation of fair value of net assets acquired:
Goodwill and intangible assets................................ $ 3,707,000 $ 13,323,000
Accounts receivable........................................... 1,286,000 3,704,000
Inventory and other, net...................................... 473,000 1,577,000
------------- -------------
$ 5,466,000 $ 18,604,000
============= =============
</TABLE>
The following table presents the pro forma results of continuing
operations as if all the acquisitions described above had occurred at the
beginning of each period presented. Pro forma adjustments reflect additional
amortization expense since the excess of acquisition cost over the fair value of
the assets acquired is amortized for a full period. Pro forma adjustments also
reflect additional interest expense due to the related debt being outstanding
for a full period. The income tax effect of the pro forma adjustments has also
been reflected. These pro forma results are presented for comparative purposes
only and do not purport to be indicative of what would have occurred had the
businesses actually been acquired as of those dates or of results which may
occur in the future.
8
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Total revenues............................................... $ 44,529,000 $ 49,018,000
Income before income taxes .................................. $ 1,515,000 $ 2,266,000
Net income................................................... $ 788,000 $ 1,178,000
Diluted net income per share................................. $ 0.08 $ 0.12
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
Estimated Lives 1999 1999
--------------- ------------- -------------
<S> <C> <C> <C>
Land $ 150,000 $ 150,000
Buildings 15 to 40 years 1,056,021 1,411,021
Leasehold improvements 1 to 10 years 1,169,823 1,140,867
Equipment and vehicles 3 to 5 years 15,809,031 15,383,941
Capitalized leasehold rights 3 to 5 years 1,376,126 1,368,557
------------- -------------
19,561,001 19,454,386
Accumulated depreciation and amortization.................... 8,209,696 8,445,191
------------- -------------
$ 11,351,305 $ 11,009,195
============= =============
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -------------
<S> <C> <C>
Goodwill..................................................... $ 52,130,324 $ 47,380,903
Other........................................................ 599,579 569,579
------------- -------------
52,729,903 47,950,482
Accumulated amortization..................................... 5,025,412 4,582,169
------------- -------------
$ 47,704,491 $ 43,368,313
============= =============
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -------------
<S> <C> <C>
Revolving line of credit..................................... $ 36,700,000 $ 31,100,000
Note payable and long-term liability to shareholder.......... 138,752 246,587
Convertible notes payable to sellers......................... 2,934,339 3,285,195
Mortgage and equipment notes payable......................... 4,837,248 4,330,840
Capitalized lease obligations................................ 1,237,760 1,405,848
Other........................................................ 453,189 493,881
------------- -------------
46,301,288 40,862,351
Less current portion due within one year..................... 3,785,187 3,918,733
------------- -------------
Long-term debt............................................... $ 42,516,101 $ 36,943,618
============= =============
</TABLE>
9
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
7. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
As part of its acquisition of two businesses during the first quarter
of fiscal year 2000 and one acquisition during the third quarter of fiscal year
1999, the Company issued 3,200 shares of mandatory redeemable preferred stock in
three series with an aggregate initial redemption value of $3,260,000. The
preferred stock pays dividends at annual rates ranging from 6.0% to 9.0% on a
monthly and quarterly basis. The preferred stock includes a mandatory redemption
in the following annual amounts: $0.7 million in fiscal year 2000; $0.3 million
in 2001; $0.3 million in 2002; $1.8 million in 2003; and $0.1 million in 2004.
The preferred stock is generally convertible at the option of the holder at a
range of $8.00 to $30.00 for one share of Class A Common Stock.
8. SEGMENT INFORMATION
The table below presents certain segment information from continuing
operations for the three-month periods ended September 30, 1999 and 1998. For
the first three months in fiscal years 2000 and 1999, intersegment sales
included in operating income below were not significant for the Business
Products Division and amounted to $22,200 and $141,380 for the Transportation
Services Division.
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Operating income:
Business products................................................ $ 1,705,200 $ 879,569
Transportation services.......................................... 1,213,463 646,962
Other............................................................ (411,144) (108,932)
-------------- --------------
Total operating income........................................... 2,507,519 1,417,599
Interest expense................................................. (1,119,189) (475,210)
-------------- --------------
Income before income taxes....................................... $ 1,388,330 $ 942,389
============= =============
</TABLE>
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -------------
<S> <C> <C>
Identifiable assets:
Business products................................................ $ 52,795,354 $ 47,619,610
Transportation services.......................................... 38,864,373 36,411,638
Other............................................................ 4,390,807 2,111,391
------------- -------------
Total identifiable assets.................................... $ 96,050,534 $ 86,142,639
============= =============
</TABLE>
10
<PAGE>
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
9. WEIGHTED AVERAGE SHARES OUTSTANDING
The following table provides information to reconcile the basic and
diluted weighted average shares outstanding for the three-month periods ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Basic weighted average shares outstanding:
Common shares, Class A and Class B, outstanding at the
beginning of the period................................... 9,320,186 7,393,862
Common shares issued related to the acquisition of businesses
during the period.......................................... 433,709 728,646
------------- -------------
Common shares, Class A and Class B, outstanding at the end
of the period............................................. 9,753,895 8,122,508
============= ===============
Basic weighted average number of common shares
outstanding during the period based on the
number of days outstanding (A)........................... 9,608,272 7,657,142
============= ===============
Diluted weighted average shares outstanding:
Common stock options:
Number of outstanding options............................ 515,017 512,407
Number of options vested................................. 16,998 63,788
Number of options which would be exercised based on average
market value of common stock during the period...... - 46,407
Proceeds from exercise of options........................ $ - $373,344
Common shares repurchased with proceeds.................. - 20,848
Common shares issued from exercise of options, net (B)... - 25,559
=============== ===============
Warrants to purchase common stock:
Number of warrants outstanding........................... 43,096 333,929
Number of warrants which would be exercised based on average
market value of common stock during the period...... - 24,286
Net proceeds from exercise of warrants................... $ - $12,781
Common shares repurchased with proceeds.................. - 714
Common shares issued from exercise of warrants (C)....... - 23,572
=============== ===============
Convertible notes payable:
Face value of notes which would be converted based on average
market value of common stock during the period...... $1,964,000 $2,470,000
Common shares issued upon conversion (D)................. 414,573 137,933
=============== ===============
Interest expense reduction, net of income taxes, associated
with notes which are converted...................... $22,652 $34,412
====== =======
Diluted weighted average common shares outstanding
(A + B + C + D).......................................... 10,022,845 7,844,206
=============== ===============
</TABLE>
11
<PAGE>
ITEM 2 - 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.
OVERVIEW
Precept is an independent distributor of custom and stock
business products and provider of document management services ("Business
Products Division") to businesses in a variety of industries throughout the
United States. We also operate corporate transportation services
("Transportation Services Division") companies in the United States. We were one
of the first distributor companies to begin nationwide consolidation of
operating companies in the Business Products 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.
In the three-month period ended September 30, 1999, the
Company completed the acquisition of one Business Products company located in
North Carolina and one Transportation Services company with aggregate annual
revenues of $10.6 million. Such acquisitions were paid for with $1.3 million in
cash, financed by the Company's working capital and its revolving line of
credit, $3.1 million in mandatory redeemable convertible preferred stock and
$1.1 million in assumed debt and deal costs.
In the three-month period ended September 30, 1998, the Company
completed the acquisitions of four Business Products companies located in Salt
Lake City, Utah; Houston, Texas; Bangor, Maine; and Florence, South Carolina
with combined annual revenues of $34.3 million. Such acquisitions were paid for
with an aggregate of $5.7 million in cash, financed by the Company's working
capital and revolving line of credit, $1.4 million in seller notes, 0.7 million
shares of Class A common stock with a fair market value of $9.6 million, and
$1.9 million in assumed debt and deal costs.
PURCHASE ACCOUNTING EFFECTS
The Company's acquisitions have been primarily accounted for
using the purchase accounting method. The results of operations of the acquired
companies have been included in our results of operations from the dates of
acquisition. The acquisitions have currently affected, and will prospectively
affect, the Company's results of operations in certain significant respects. The
Company's revenues and operating expenses will be directly affected by the
timing of the acquisitions. The aggregate acquisition
12
<PAGE>
costs, including assumption of debt, are allocated to the net assets acquired
based on the fair market value of such net assets. The allocation of the
purchase price results in an increase in the historical book value of certain
assets, including property and equipment, and will generally result in the
allocation of a portion of the purchase price to goodwill, which results in
incremental annual and quarterly amortization expense.
RESULTS OF OPERATIONS
The following table sets forth various items from continuing operations
as a percentage of revenues for the three-month periods ended September 30, 1999
and 1998.
<TABLE>
<CAPTION>
Three months ended
September 30,
----------------------
1999 1998
----- ----
<S> <C> <C>
Revenue:
Business Products............................................ 80.2% 94.3%
Transportation Services...................................... 19.8% 5.7%
------ ------
100.0% 100.0%
Costs and operating expenses:
Cost of goods sold........................................... 64.6% 66.1%
Sales commissions............................................ 11.3% 12.3%
Selling, general and administrative.......................... 14.7% 15.7%
Depreciation and amortization................................ 3.3% 1.8%
------ ------
93.9% 95.9%
====== ======
Operating income 6.1% 4.1%
Interest and other expense........................................ 2.7% 1.4%
------ ------
Income before income taxes........................................ 3.4% 2.7%
Income tax provision.............................................. 1.6% 1.3%
------ ------
Net income........................................................ 1.8% 1.4%
====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE for 1999 increased by $6.6 million, or 18.9%, from
$34.8 million in 1998 to $41.4 million in 1999. In 1999, Business Products
revenue increased by $2.3 million or 7.5% and Transportation Services revenue
increased by $4.3 million or 109.2%. The increase in Business Products revenue
was due to the acquisition of three Business Products companies during fiscal
years 1999 and 2000, which accounted for $5.8 million and internal growth of
$1.1 million or 4.2%. The internal growth excludes the effect of $4.6 million of
lost revenue from MBF Corporation. Of the total increase in Transportation
Services revenue in 1999, $4.3 million was due to the acquisition of seven
Transportation Services companies in fiscal years 1999 and 2000.
COST OF GOODS SOLD for 1999 increased by $3.8 million, or
16.5%, from $23.0 million in 1998 to $26.8 million in 1999. Such change is
primarily due to the effects of the companies acquired. As a percentage of
revenue, cost of goods sold improved from 66.1% in 1998 to 64.7% in 1999 due to
the effects of the companies acquired since June 1998 and the higher relative
effect of the Transportation Services Division, which operates with a lower cost
of goods sold. Cost of goods sold for the Business Products Division increased
by $1.4 million of which approximately $3.9 million was due to companies
acquired after the beginning of fiscal year 1998. Such increase in cost of goods
sold was offset by a reduction of $3.0 million created by the lost revenue from
MBF Corporation. Cost of goods sold for the Business Products Division decreased
from 67.0% in 1998 to 66.5% in 1999, as a percentage of revenue, due to the
acquisition of businesses which operate in less price competitive markets and
due to the improved purchasing power of the Company. The Transportation Services
Division's cost of goods sold increased by $2.4 million due primarily to the
seven Transportation Services companies acquired since October 1998. As a
percentage of revenue, cost of goods sold for the Transportation Services
Division declined from 58.9% in 1998 to 57.3% for 1999 due primarily to the
companies acquired.
13
<PAGE>
SALES COMMISSIONS increased by $0.4 million, or 9.2%, in 1999,
from $4.3 million in 1998 to $4.7 million in 1999 due primarily to the increased
level of the Business Products Division's revenue. Sales commissions for the
Business Products Division increased from 13.8% to 13.9% 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 1.0% from 12.3% in 1998 to 11.3%
in 1999 because the Transportation Services Division contributed a higher
proportion of consolidated revenue in 1999 while maintaining a lower commission
structure.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $0.6
million or 10.6% in 1999 from $5.5 million in 1998 to $6.1 million in 1999,
which included increased expenses of $1.5 million from Business Products and
Transportation Services companies acquired. As a percentage of revenue, selling,
general and administrative expenses have decreased by 1.0% from 15.7% in 1998 to
14.7% in 1999. This percentage decrease reflects the results of the Company's
integration and cost control efforts.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.7 million
in 1999 from $0.7 million in 1998 to $1.4 million in 1999 due largely to the
size and timing of the companies acquired since the beginning of fiscal year
1999.
INTEREST EXPENSE increased by $0.6 million or 135.5% during
1999, from $0.5 million in 1998 to $1.1 million in 1999 principally due to
additional debt incurred by us in fiscal years 1999 and 2000 to finance our
business acquisitions.
INCOME TAXES are provided for at a 45.0% effective rate in
1999 versus a 48.0% effective rate in 1998. The change in the effective income
tax rate is primarily due to the results of integration efforts as various
subsidiaries have been merged.
NET INCOME increased by $0.3 million in 1999, from $0.5
million in 1998 to $0.8 million in 1999 due to the improved operating results
described and partially offset by increased amortization and interest expense.
Diluted earnings per share increased $0.02 from $0.06 in 1998 to $0.08 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first three months of
fiscal year 2000, the Company generated $0.3 million of cash for operating needs
as compared to cash provided of $2.5 million in the first three months of fiscal
year 1999. During the first quarter of 2000, the Company increased its
investment in working capital by $3.5 million due primarily to increases in the
level of trade accounts receivable and inventories and payments of certain
accrued expenses. During the first quarter of fiscal year 1999, the Company
generated $2.5 million from operating activities due primarily to the results of
operations and to a reduction in its working capital investment.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first three months
of fiscal year 2000, Precept used $4.6 million in cash for investing activities
as compared to a use of $5.1 million for investing activities in the first three
months of fiscal year 1999. During 2000, the Company acquired one Business
Products distribution company and one Transportation Services company using $2.6
million. In addition, the Company used $1.3 million in cash as consideration for
contingent obligations relating to businesses previously acquired. The Company
also acquired $0.7 million of equipment, primarily vehicles for the
Transportation Services Division. During the first quarter of 1999, the Company
acquired four Business Products distribution businesses and one Transportation
Services company for $6.0 million in cash and acquired $0.3 million of
equipment.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first three months of
fiscal year 2000, $4.2 million of cash was generated by financing activities as
compared to $2.8 million of cash generated by financing activities in the first
three months of fiscal year 1999. During the first three months of 2000, Precept
increased its outstanding revolving line of credit balance by approximately $5.6
million, primarily to finance acquisitions, service existing debt and provide
cash to fund operating cash flow needs. During the
14
<PAGE>
first three months of 1999, the Company decreased its long-term debt and capital
lease obligations by $0.7 million and increased its outstanding revolving line
of credit balance by $3.5 million to fund acquisitions.
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 $3.3 million at September 30,
1999 will be adequate for fiscal year 2000 to make required payments of
principal and interest on the Company's indebtedness, to fund anticipated
capital expenditures of approximately $2.5 million for the remainder of fiscal
year 2000, and to meet working capital needs.
OTHER
INFLATION
Certain of Precept's Business Products offerings, particularly paper
products, have been and are expected to continue to be subject to significant
price fluctuations due to inflationary and other market conditions. In the last
five to ten years, the prices for commodity grades of paper have shown
considerable volatility. Precept generally is able to pass such increased costs
on to its customers through price increases, although it may not be able to
adjust its prices immediately. Significant increases in paper and other costs in
the future could materially affect Precept's profitability if these costs cannot
be passed on to customers. In general, Precept does not believe that inflation
has had a material effect on its results of operations in recent years. However,
there can be no assurance that Precept's business will not be affected by
inflation in the future.
YEAR 2000 ISSUE
In October 1999, the Company completed the information systems
conversion for one of its significant branch offices in Boston, Massachusetts.
In addition, during the first quarter of fiscal year 2000, the Company finished
the software programming necessary at its Bangor, Maine branch to correct a year
2000 dating problem. Besides these events, there have been no significant
changes to the Year 2000 matters affecting the Company.
FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, that is effective for reporting periods beginning after
June 15, 1999. As this statement requires only additional disclosures or does
not cover matters relating to Precept, it will have no effect on Precept's
financial position, results of operations or cash flows. Precept intends to
adopt the disclosure requirements of this standard during its fiscal year ended
June 30, 2000.
DISCLOSURE ABOUT MARKET RISK
The Company's revolving line of credit provides for interest to be
charged at the prime rate or at a LIBOR rate plus a margin of 2.75%. Based on
the Company's current level of outstanding revolving line of credit, a 1.0%
change in interest rate would result in a $0.4 million annual change in interest
expense. The remainder of the Company's debt is at fixed interest rates that are
not subject to changes in interest rates. The Company does not own nor is the
Company obligated for other significant debt or equity securities that would be
affected by fluctuations in market risk.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. This section should be read in
conjunction with the "Risk Factors Affecting the Company's Prospects" located in
Item I of the Company annual report on Form 10-K for the year ended June 30,
1999. Forward-looking statements
15
<PAGE>
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and uncertainties that
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The forward-looking statements contained
herein are based on various assumptions, many of which are based, in turn, upon
further assumptions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or accomplished.
In addition to the other factors and matters discussed elsewhere herein, the
following are important factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the forward-looking
statements.
1. Changes in economic conditions, in particular those that affect the end
users of business products and transportation services, primarily
corporations.
2. Changes in the availability and/or price of paper, in particular if
increases in the price of paper are not passed along to the Company's
customers.
3. Changes in executive and senior management or control of the Company.
4. Inability to obtain new customers or retain existing customers and
contracts.
5. Significant changes in the composition of the Company's sales force.
6. Significant changes in competitive factors, including product-pricing
conditions, affecting the company.
7. Governmental and regulatory actions and initiatives, including those
affecting financing.
8. Significant changes from expectations in operating expenses.
9. Occurrences affecting the Company's ability to obtain funds from
operations, debt, or equity to finance needed capital acquisitions and
other investments.
10. Significant changes in rates of interest, inflation, or taxes.
11. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievances were
to occur.
12. Changes in accounting principles and/or the application of such
principles to the Company.
13. Vendors and customers inability to address year 2000 issues on a timely
basis.
The foregoing factors could affect the Company's actual results and
could cause the Company's actual results during fiscal year 2000 and beyond to
be materially different from any anticipated results expressed in any
forward-looking statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after the date of this
report on Form 10-Q.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
JOHN ALDEN LITIGATION
During the first quarter of fiscal year 2000, the Company received a
settlement payment of $0.2 million related to the John Alden litigation. In
addition, all parties to the litigation have dismissed their respective claims.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
As of September 30, 1999, there were no changes in securities and use
of proceeds.
ITEM 3 DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
As of September 30, 1999, the Company was not in default of any of its
debt or equity securities.
ITEM 4 RESULTS OF VOTES OF HOLDERS
The Company's annual shareholder meeting was held in Dallas, Texas on
November 3, 1999. At such meeting, the following proposals were voted upon and
approved by the Company's shareholders. The Class B shareholder voted all
592,142 shares in favor of all four proposals.
<TABLE>
<CAPTION>
Class A and B Common Shares Voted
-------------------------------------------------
Broker Non-
Votes/withheld/
Proposal Description For Against Abstained
- -------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
1. Election of the following directors:
Robert N. Bazinet 10,044,490 11,986
J.D. Greco 9,867,442 189,034
Peter H. Trembath 10,038,658 17,818
2. Amendments to the Company's 1998 Stock Incentive
Plan. 7,842,820 193,506 2,020,150
3. Ratification of Ernst & Young LLP as
independent auditors for the fiscal
year ending June 30, 2000. 10,043,466 5,105 7,905
</TABLE>
ITEM 5 OTHER INFORMATION
There is no other significant information that the Company believes
should be disclosed in this report other than the information that is presented
herein and by exhibit.
17
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule (1)
</TABLE>
- ------------
(1) Included as an exhibit to this report.
ITEM 6(b) REPORTS ON FORM 8-K FILED DURING THE PERIOD FROM JULY 1, 1999
THROUGH NOVEMBER 12, 1999
The Company has not filed any reports on Form 8-K for the period from July
1, 1999 through November 12, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, as of November 12, 1999.
PRECEPT BUSINESS SERVICES, INC.
/s/ WILLIAM W. SOLOMON, JR.
- --------------------------------
William W. Solomon, Jr.
Executive Vice President and Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001051285
<NAME> PRECEPT BUSINESS SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 24,277,822<F1>
<ALLOWANCES> 764,000
<INVENTORY> 5,965,415
<CURRENT-ASSETS> 29,724,989
<PP&E> 11,351,305
<DEPRECIATION> 8,209,696
<TOTAL-ASSETS> 96,050,534
<CURRENT-LIABILITIES> 20,597,886
<BONDS> 0
3,241,000
0
<COMMON> 99,025
<OTHER-SE> 29,596,522<F2>
<TOTAL-LIABILITY-AND-EQUITY> 96,050,534
<SALES> 41,405,644
<TOTAL-REVENUES> 41,405,644
<CGS> 26,782,467
<TOTAL-COSTS> 38,896,125
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,119,189
<INCOME-PRETAX> 1,388,330
<INCOME-TAX> 624,749
<INCOME-CONTINUING> 763,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 763,581
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE.
<F2>AMOUNT INCLUDES ADDITIONAL PAID-IN CAPITAL, RETAINED EARNINGS, AND TREASURY
STOCK.
</FN>
</TABLE>
