<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2000
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 Identification No.)
incorporation or organization
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 May 12, 2000, there were 10,191,925 outstanding shares of Class A
Common Stock and 592,142 outstanding shares of Class B Common Stock.
Explanatory Note
This Form 10-Q/A is filed to amend the Form 10-Q for the period ended March
31, 2000 (the "Original Form 10-Q") to (i) restate the fourth paragraph under
Liquidity and Capital Resources in Management's Discussion and Analysis of
Financial Condition and Results of Operations (Item 2), (ii) restate the
seventh paragraph under Liquidity and Capital Resources in Management's
Discussion and Analysis of Financial Condition and Results of Operations
(Item 2), (iii) restate the second paragraph under Nine Months Ended March
31, 2000 Compared to Nine Months Ended March 31, 1999 in Management's
Discussion and Analysis of Financial Condition and Results of Operations
(Item 2), (iv) attach the Company's Certificate of Designation of Series 8%
Convertible Preferred Stock as an Exhibit, (v) restate the Exhibit List (Item
6), (vi) attach the Waiver and Consent No. 4 to Credit Agreement referenced
in the seventh paragraph under Liquidity and Capital Resources in
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 2), and (vii) disclose the recent departure of William W.
Solomon, Jr. as the Company's Chief Financial Officer.
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INDEX
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PAGE NO.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 2 Management's discussion and analysis of financial
condition and results of operations 3
PART II OTHER INFORMATION
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signature 17
</TABLE>
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PART I FINANCIAL INFORMATION
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 is a provider of document management services ("Business
Products Division") to businesses in a variety of industries throughout the
United States. We were one of the first distribution companies to begin
nationwide consolidation of operating companies in the Business Products
industry.
We also operate corporate transportation services ("Transportation
Services Division") companies in the United States. As discussed more fully
below under "Discontinued Operations" we have signed a letter of intent to
sell the operating assets and liabilities of the Transportation Services
Division. Unless otherwise indicated, discussion of the operating results of
the Company relates only to continuing operations.
STRATEGIC ALTERNATIVES REVIEW
In July 1999, the Company announced its engagement of Southwest
Securities as financial advisor to the Company as it evaluated its strategic
alternatives. Southwest Securities and Precept have worked together on the
sale of the Transportation Division discussed elsewhere in this Report.
Currently, the Company has directed Southwest Securities to continue to
investigate future sources of equity and debt financing, as well as
acquisition and disposition transactions.
ACQUISITIONS
Our results of operations and the comparability of our results of
operations from period to period have been affected significantly by
businesses acquired in each period. From 1991 through the date of this
report, we completed 21 acquisitions of Business Products distribution
companies.
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In the three-month period ended September 30, 1999, we completed the
acquisition of two Business Products companies located in North Carolina with
aggregate annual revenues of $10.2 million. We paid for such acquisitions
with $1.0 million in cash, financed by the Company's working capital and its
revolving line of credit, $3.0 million in mandatory redeemable convertible
preferred stock and $1.0 million in assumed debt and deal costs.
In the three-month period ended September 30, 1998, we completed the
acquisition 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. We paid for such acquisitions 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
We have accounted for our acquisitions using the purchase accounting
method. We have included the historical results of operations for our
acquisitions in our results of operations from the dates of acquisition. The
acquisitions have affected, and will prospectively affect, the Company's
results of operations in certain significant respects. Our revenues and
operating expenses have been directly affected by the timing of the
acquisitions. We have allocated the aggregate acquisition costs, including
assumption of debt, 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 CONTINUING OPERATIONS
The following table sets forth various items from continuing
operations as a percentage of revenues for the three-month and nine-month
periods ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue: 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and operating expenses:
Cost of goods sold........................................... 67.6% 66.7% 67.1% 67.4%
Sales commissions............................................ 14.1% 13.9% 13.8% 13.5%
Selling, general and administrative.......................... 16.2% 17.2% 14.8% 15.9%
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Goodwill write-down and other non-recurring charges.......... 0.0% 19.3% 0.0% 6.5%
Depreciation and amortization................................ 1.6% 1.0% 1.5% 1.0%
------ ------ ------ ------
99.5% 118.1% 97.2% 104.3%
------ ------ ------ ------
Operating income (loss)........................................... 0.5% (18.1)% 2.8% (4.3)%
Interest and other expense........................................ 1.5% 0.6% 2.2% 1.1%
------ ------ ------ ------
Income (loss) from continuing operations before income taxes...... (1.0)% (18.7)% 0.6% (5.4)%
Income tax provision (benefit).................................... (0.4)% (8.7)% 0.3% (2.5)%
------ ------ ------ ------
Net income (loss) from continuing operations...................... (0.6)% (10.0)% 0.3% (2.9)%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUE for 2000 increased by $1.6 million, or 4.7%, from $35.1
million in 1999 to $36.7 million in 2000. Our revenue increased by $2.9
million due to the effect of two companies acquired during the first quarter
of fiscal year 2000. The Business Products internal growth rate of 4.4%, or
$1.4 million, excludes the effect of $2.7 million of lost revenue from MBF
Corporation ("MBF"). On February 16, 1999 substantially all of the
management, sales force and employees of MBF resigned to join a competitor
that had been founded by the same individuals. We are in litigation with the
competitor and former MBF officers over this matter.
COST OF GOODS SOLD during 2000 increased by $1.4 million, or 6.1%,
from $23.4 million to $24.8 million. The dollar change was due to the effects
of the companies acquired ($2.0 million) and internal growth of the Company
($1.2 million), offset by lower cost of goods related to the lower MBF
revenue ($1.8 million). As a percentage of revenue, cost of goods sold
increased from 66.7% in 1999 to 67.6% in 2000. Changes in the mix of products
sold, changes in the geographic markets served and vendor pricing all
contributed to this change. As a percentage of revenue, the effect of cost of
goods sold from companies acquired was offset by the effect of the cost of
goods sold from the lost MBF revenue.
SALES COMMISSIONS for 2000 increased by $0.3 million, or 6.4%, from
$4.9 million, or 13.9% of revenue in 1999, to $5.2 million, or 14.1% of
revenue in 2000. The increase in both the dollar amount and percentage of
revenue for sales commissions was due to a greater proportion of the sales
revenue being generated by salespersons with higher commission rates. The
higher level of gross profit also contributed to the increase in sales
commissions as our sales force is compensated on a percentage of gross
profit. Increases in commission expense from the companies acquired were
offset by lower commission expense as a result of the lost MBF revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE for 2000 decreased by
$0.1 million, or 2.2%, from $6.1 million in 1999 to $5.9 million in 2000. As
a percentage of revenue, such expense decreased from 17.2% in 1999 to 16.2%
in 2000. The Company reduced its selling, general and administrative expense
from existing operations due to integration and cost control efforts.
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Increased selling, general and administrative expenses of $0.5 million from
companies acquired were offset by $0.5 million of expenses from MBF that did
not recur.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.2 million in 2000
from $0.4 million in 1999 to $0.6 million in 2000 due largely to the size and
timing of the acquisitions completed since October 1, 1998.
INTEREST EXPENSE increased $0.4 million, or 174.6%, from $0.2
million in 1999 to $0.6 million in 2000 due to the additional debt used to
finance acquisitions and fund the working capital needs of the Company.
NET LOSS was reduced by $3.3 million in 2000 due primarily to the
non-recurrence of $6.7 million in goodwill write-down and non-recurring
charges recorded during the third quarter of 1999. The loss per basic share
was lowered from $0.41 in 1999 to $0.02 in 2000 for the same reasons.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
REVENUE for 2000 increased by $2.9 million, or 2.8%, from $103.9
million in 1999 to $106.8 million in 2000. During the first nine months of
fiscal year 2000, Business Products revenue increased from internal growth by
$9.7 million or 10.7%. In addition, revenue increased by $5.7 million due to
the effect of two companies acquired during the first quarter of fiscal year
2000 and two companies acquired during the first quarter of fiscal year 1999.
The internal growth rate excludes the effect of $12.5 million of lost revenue
from MBF.
COST OF GOODS SOLD for 2000 increased by $1.7 million, or 2.4%, from
$70.0 million in 1999 to $71.7 million in 2000. In dollar amounts, such
change was due to the effects of the companies acquired ($3.8 million) and
the internal growth of the Company ($6.3 million) offset the effect of the
lower cost of goods sold from the lost MBF revenue ($8.4 million). As a
percentage of revenue, cost of goods sold improved from 67.4% in 1999 to
67.1% in 2000 due primarily to the effects of changes in product mix,
geographic markets served and vendor pricing. As a percent of revenue, the
effect of cost of goods sold from companies acquired was offset by the effect
of the lower cost of goods sold from the lost MBF revenue.
SALES COMMISSIONS for 1999 increased by $0.7 million, or 5.0%, from
$14.0 million, or 13.5% of revenue in 1999, to $14.7 million, or 13.8% of
revenue in 2000. The change in the percentage of revenue is due primarily to
the higher dollar amount of commissions paid to existing salespersons due to
improved gross profit levels. The increase in the dollar amount is due to
internal growth ($1.8 million), and to companies acquired ($0.6 million),
offset by lower commissions due to the lost MBF revenue ($1.7 million).
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE decreased by $0.7
million, or 4.3%, in 2000 from $16.6 million in 1999 to $15.8 million in
2000. The Company increased its selling, general and administrative expense
from existing operations by $0.3 million to support the revenue growth.
Increased selling, general and administrative expenses of $1.0 million from
companies acquired were offset by $2.0 million of expenses from MBF that did
not recur. As a percentage of revenue, selling, general and administrative
expenses have decreased from 15.9% in 1999 to 14.8% in 2000. The percentage
decrease reflects the results of the Company's continued revenue growth while
controlling costs and continuing its integration efforts.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.6 million in 2000
from $1.0 million in 1999 to $1.6 million in 2000 due largely to acquisitions
completed since July 1, 1998.
INTEREST EXPENSE increased by $1.2 million or 102.3% during 2000,
from $1.1 million in 1999 to $2.3 million in 2000 principally due to
additional debt incurred by us in fiscal years 1999 and 2000 to finance our
business acquisitions and our investment in working capital.
NET INCOME increased by $3.4 million, or 111.3% in 2000, from a net
loss of $3.1 million in 1999 to net income of $0.3 million in 2000, as the
goodwill write-down and non recurring charges did not recur. The improvement
in the net income per share is due primarily to the same reason.
DISCONTINUED OPERATIONS
The discontinued operations consist of the Transportation Division.
During March 2000, we signed a revised letter of intent to sell
substantially all the assets and liabilities of the Transportation Division
to a company funded by a group of investors, led by Holding Capital Group and
certain members of the Transportation Division's executive management. The
sale of the Transportation Division, which is subject to a number of
conditions including the execution of a definitive purchase agreement, is
expected be completed by the end of September 2000. The revised letter of
intent contemplates the Transportation Division is to be sold for five times
the annual pro forma free cash flow of the division and for an earnout based
on future earnings of the new company. Free cash flow would be defined as the
earnings before interest, income taxes, depreciation and amortization less
the annual debt service for the division. Under the foregoing, the purchase
price for the Transportation Division would be approximately $20.0 million.
In addition, the new company would assume the debt of the Transportation
Division.
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Revenue for the three months ended March 31, 2000 increased by $0.4
million, or 5.4%, to $7.5 million in 2000 as compared to $7.1 million in
1999. Companies acquired since September 30, 1998 accounted for $2.0 million
of the revenue increase. Revenue from existing operations declined by $1.6
million due principally to the loss of a bus service contract with Ford which
was not renewed after June 30, 1999 ($0.6 million) and to lower ride volume
and lower ride rates for the town car and limousine operations in the
tri-state New York market ($1.0 million). Revenue for the nine months ended
March 31, 2000 increased by $5.6 million, or 31.2%, to $23.6 million in 2000
as compared to $18.0 million in 1999. Companies acquired since September 30,
1998 accounted for $9.7 million of the revenue change. Revenue from existing
operations declined by $2.4 million due principally to the loss of a bus
service contract with Ford which was not renewed after June 30, 1999 ($1.7
million) and to lower ride volume and lower ride rates for the town car and
limousine operations in the tri-state New York market.
Cost of goods sold for the Transportation Division for the three
months ended March 31, 2000 increased by $0.9 million, or 23.1%, from $4.1
million in 1999 to $5.0 million in 2000, primarily as a result of companies
acquired since September 30, 1998. Cost of goods sold for the Transportation
Division for the nine months ended March 31, 2000 increased by $4.2 million,
or 40.2%, from $10.5 million in 1999 to $14.7 million in 2000. Companies
acquired since September 30, 1998 accounted for $5.4 million of this change.
Cost of goods sold from existing operations decreased by $1.2 million due
primarily to the loss of the Ford bus contract at the end of June 1999 ($0.4
million), to lower ride volume at the town car and limousine operations in
the tri-state New York markets ($1.1 million) offset by increases in ride
volume from the Transportation Division's bus operations in Kentucky and Ohio
and town car and limousine operations in Texas.
Selling, general and administrative expenses for the three months
ended March 31, 2000 increased by $0.8 million, or 78.4%, from $1.0 million
in 1999 to $1.8 million in 2000. Selling, general and administrative expenses
for the nine months ended March 31, 2000 increased by $1.5 million, or 14.9%,
from $2.7 million in 1999 to $4.2 million in 2000. The increases in selling,
general and administrative expenses are primarily related to the acquisitions
completed since September 30, 1998.
Depreciation and amortization expense for the three months ended
March 31, 2000 increased by $0.2 million, or 33.3%, from $0.6 million in 1999
to $0.8 million in 2000. Depreciation and amortization expense for the nine
months ended March 31, 2000 increased by $1.0 million, or 71.4%, from $1.4
million in 1999 to $2.4 million in 2000.
Interest expense for the three months ended March 31, 2000 increased
by $0.4 million, or 83.0%, from $0.5 million in 1999 to $0.9 million in 2000.
Interest expense for the nine months ended March 31, 2000 increased by $0.5
million, or 72.4%, from $0.7 million in 1999 to $1.2 million in 2000. The
increase in interest expense is primarily due to the additional debt incurred
to finance acquisitions after September 30, 1999. Interest expense for the
Transportation
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Division includes an allocation of interest expense on the outstanding debt
under the Company's Credit Agreement.
The net loss for the Transportation Division decreased by $6.3
million for the three months ended March 31, 2000 from $6.9 million in 1999
to $0.6 million in 2000. Excluding the goodwill and asset write-downs of $7.6
million recorded in the third quarter of 1999, the division's operating
results declined by $1.7 million during the third quarter of 2000. This
deterioration is primarily due to three reasons. The division's town car and
limousine operations in the tri-state New York market have not performed as
well in 2000 due to price competition and higher fuel costs. Secondly, the
division did not benefit from the Ford contract during 2000. Lastly, during
the third quarter of 2000, the division recorded $0.6 million in adjustments
to revenue and operating expenses for its town car and limousine operation
based in N. Arlington, New Jersey. Such adjustments relate to matters which
became evident after the middle of the third quarter of fiscal year 2000 and
after a change in management at the operation.
Net income for the nine months ended March 31, 2000 improved by $6.5
million, from a loss of $6.0 million in 1999 to net income of $0.5 million in
2000. Excluding the goodwill and asset write-downs of $7.6 million recorded
in the third quarter of 1999, the division's operating results declined by
$1.6 million during 2000. This deterioration is primarily due to two reasons.
The division's town car and limousine operations in the tri-state New York
market have not performed as well in 2000 due to price competition and higher
fuel costs. Secondly, the division did not benefit from the Ford contract
during 2000.
LIQUIDITY AND CAPITAL RESOURCES - CONTINUING OPERATIONS
DEBT AND EQUITY FINANCING. Since October 1999, the Company has been
at or near its borrowing limit under its Credit Agreement. The Company's cash
flow from its operations, both continuing and discontinued, has been
sufficient to service the Company's debt and mandatory redeemable preferred
stock and finance its capital expenditures; however, the cash flow from its
operations has not been sufficient to lower the accounts payable financing
provided by the Company's vendors.
Prior to October 1999, the Company's policy was to take advantage of
prompt payment discounts offered by the Company's vendors and pay vendors who
did not offer discounts within 30 to 45 days. Since October 1999, the Company
has, for the most part, not been able to take advantage of prompt pay
discounts and has been paying its vendors within 50 to 65 days. We estimate
that on an annual basis, we have lost approximately $1.5 million to $2.0
million in prompt pay discounts due to a lack of adequate working capital,
debt and equity financing to support the operating needs of our operations.
During the month of April, we experienced a reduction in the monthly
collections of accounts receivable of approximately $2.0 million. We have
recently added collections personnel to improve the timeliness of the
collection of accounts receivable from our customers. If we are able to
improve the collection of accounts receivable,
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then we will be able to reduce the level of vendor financing which is
provided by accounts payable. Should the timeliness of the collections not
improve, we will not be able to reduce the level of vendor financing unless
we are able to raise additional cash through equity or debt financing
transactions.
Management of the Company believes that our current level of debt
financing and our expected cash flows from operations will be sufficient
during the next twelve to twenty four months to service our debt, meet
capital expenditure requirements and maintain adequate employee and vendor
relations. However, if we are not able to obtain additional equity or debt
financing and we are not able to improve the timeliness of the collection of
our trade accounts receivable, our relations with our vendors could suffer
somewhat and this could lead to reduced revenue and operating income in the
next twelve to twenty four months.
In April 2000, we sold $2.0 million in convertible preferred stock
to The Shaar Fund Ltd. and used the net proceeds to pay vendors. The
preferred stock is convertible into Class A Common Stock at a conversion
price which is the lesser of $2.75 or 85% of the market price of the Class A
Common Stock, defined as the average of the five days closing price of the
stock prior to the conversion. No conversion is permitted for the first five
months. In addition, we may redeem the preferred stock at 120% of the face
value during the first five months. We will pay a quarterly dividend of 8% of
the face value in cash or Class A Common Stock. As part of the transaction,
we issued warrants expiring April 19, 2003 to purchase 125,000 shares of
Class A Common Stock at an exercise price of $2.50 per share. The governing
documents provide that unless shareholder approval is obtained, Precept may
not issue shares of Class A Common Stock (i) upon conversion of any shares of
Series A Preferred Stock, (ii) upon the conversion of shares of the Series A
Preferred Stock, (iii) upon the exercise of the Warrants issued pursuant to
the terms of the Sercurities Purchase Agreement, and (iv) in payment of
dividends on the Series A Preferred Stock, which, when added to the number of
shares of Common Stock previously issued by Precept, would equal or exceed
20% of the number of shares of Precept's common stock which were issued and
outstanding on the issue date. We also provided registration rights to The
Shaar Fund Ltd. for the shares of Class A Common Stock which may be issued
upon conversion and for the dividends to be paid.
In April 2000, our Credit Agreement with our banking group was
amended to increase the amount available for borrowing to $42.3 million. To
satisfy a lender condition to this amendment, the Company's Chairman and
controlling shareholder guaranteed $2.3 million of bank debt, and we agreed
to use our best efforts to sell our Transportation Division or our Business
Products Division with the proceeds to be applied to our bank debt. If we
sell the Transportation Division for more than $17.5 million by October 24,
2000, the guaranty will be removed. If the Transportation Division is not
sold by October 24, 2000, the banking group has the option to request the
Company's Chairman to provide common stock of Affiliated Computer Services,
Inc. as collateral for the guaranty. If such a request is made, then the
Chairman has the right to request Precept to provide the requested
collateral. Since all of Precept's assets are pledged as collateral to the
banking group and other lenders, we would not be able to provide the
collateral. In consideration of the personal guaranty provided by our
Chairman, Precept has
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agreed to reimburse the Chairman for any amounts he may have to pay under the
guaranty and, if he is required by the bank to collateralize the guaranty,
Precept has agreed to deliver to him as a guaranty fee securities equal to
what he would have received if the guaranteed amount had been invested in
preferred Stock and warrants on the same terms as the recent investment by
the Shaar Fund described elsewhere in this report or, at his election,
consideration of reasonably equivalent value.
As part of the amendment to the Credit Agreement, the banking group
changed the total debt to pro forma EBTIDA (earnings before interest, income
taxes, depreciation and amortization) ratio to 3.53 to 1. The mandatory
redeemable convertible preferred stock that was issued by the Company in
April, July and September of calendar year 1999 is included in the total debt
amount for the ratio.
As of March 31, 2000, we did not comply with three of the financial
covenants in the Credit Agreement: specifically, the total debt to pro forma
EBITDA, the historical EBITDA to interest and the net worth financial
covenants. One June 14, 2000, our banking group executed a Waiver and Consent
No. 4 to Credit Agreement and waived our noncompliance with the three
applicable covenants. The waiver is effective through June 29, 2000. As a
result of such waiver, we have continued to present the outstanding debt
under the Credit Agreement as long-term debt.
NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first nine months
of fiscal year 2000, the Company generated $5.4 million of cash for operating
needs. During this period, the Company's net income, adjusted for non-cash
charges of $1.6 million, amounted to $2.0 million. We used an increase in
accounts payable vendor financing of $5.6 million to fund an increase in
inventory of $1.9 million and an increase in trade accounts receivable of
$1.2 million. Overall, we reduced our investment in working capital by $3.4
million during the nine months ended March 31, 2000. During the nine months
ended March 31, 1999, we generated $9.1 million in cash from operations.
Despite incurring a loss of $2.0 million, excluding non-cash charges such as
depreciation, amortization and goodwill write-down, the Company significantly
lowered its investment in working capital during this period. We reduced the
level of trade accounts receivable by $1.5 million and lowered our carrying
level of inventory by $0.9 million. During the same period, we increased the
level of vendor financing in accounts payable and accrued expenses by $8.2
million.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first nine
months of fiscal year 2000, Precept used $5.9 million in cash for investing
activities as compared to a use of $8.1 million for investing activities in
the first nine months of fiscal year 1999. During 2000, the Company acquired
two Business Products distribution companies. During the first nine months of
1999, the Company acquired four Business Products distribution businesses for
a total of $8.9 million, acquired $0.3 million of equipment and received $1.1
million in proceeds from the sale of land, building and an investment in a
restaurant company.
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NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first nine months
of fiscal year 2000, $7.6 million of cash was generated by financing
activities as compared to $7.5 million of cash generated by financing
activities in the first nine months of fiscal year 1999. During the first
nine months of 2000, Precept increased its outstanding revolving line of
credit balance by approximately $9.6 million, primarily to finance
acquisitions, service existing debt ($1.1 million), redeem preferred stock
and pay preferred dividends ($0.8 million) and provide cash to fund operating
cash flow needs of the Transportation Division. During the first nine months
of 1999, the Company decreased its long-term debt and capital lease
obligations by $1.0 million and increased its outstanding revolving line of
credit balance by $8.5 million to fund acquisitions.
NET CASH FLOWS FROM DISCONTINUED OPERATIONS. For the nine months
ended March 31, 2000, the Transportation Division used $0.1 million of cash
to fund its operating activities. Excluding non cash charges of $2.4 million
during this period for depreciation and amortization, $2.9 million was
generated by operating activities, before changes in working capital. This
was used primarily to reduce accounts payable and accrued expenses ($3.0
million).
For the nine months ended March 31, 1999, the Transportation
Division used $2.2 million of cash to fund its operating activities.
Excluding non cash charges of $8.7 million during this period for
depreciation, amortization and goodwill write-down, $2.7 million was
generated by operating activities, before changes in working capital. During
the same period, the Transportation Division financed an increase in trade
accounts receivable ($2.4 million) primarily from its town car and limousine
operations. In addition, the Transportation Division reduced its accounts
payable by $1.0 million and its accrued expenses by $1.4 million as it paid
for liabilities assumed as part of its acquisitions. During the nine months
ended March 31, 1999, the Transportation repaid $1.0 million in other debt,
primarily vehicle notes and capitalized leases. The Transportation Division's
net use of $10.3 million in cash was funded by the continuing operations of
the Company and by advances under the Company's Credit Agreement.
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, 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 addition, Precept
Transportation Division's operating results may be affected by increases in
the prices of fuel if the division is not able to pass along such increases
to its customers on a timely basis. In general, Precept does
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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, the price of paper and the price
of fuel in the future.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of these planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its services and products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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, 2000. Precept is required to adopt this standard for
its fiscal year ending June 30, 2001. The Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION, that is
required to be adopted beginning with the quarterly reporting period ending
June 30, 2000. Management is in the process of evaluating the effects, if
any, of adopting these two new pronouncements.
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's annual report on Form
10-K for the year ended June 30, 1999 and in the "Risk Factors" included in
the Company's Prospectus dated November 12, 1999. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which
are other than statements of historical facts. From time to time, the Company
may publish or otherwise make available forward-looking statements of this
nature. All such subsequent forward-looking statements, whether written or
oral and whether made by or on behalf of the Company, are also expressly
qualified by these cautionary statements. Certain statements
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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, fuel and labor, in
particular if increases in the costs of these resources 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 revenues and expenses.
9. Occurrences affecting the Company's ability to obtain funds from
operations, debt, or equity to finance needed capital acquisitions and
other investments, including the inability to formalize our oral agreement
with our banking group discussed elsewhere in this report.
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. The ability of Precept to sell one or both of its divisions or raise
additional capital.
14. 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.
15. 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.
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PART II OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
Subsequent to the Company's filing the Original Form 10-Q on May 19,
2000, William W. Solomon, Jr., the Company's executive vice president and
chief financial officer resigned to pursue other business opportunities. The
position of chief financial officer has not yet been permanently filled.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
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<S> <C>
2.1 Securities Purchase Agreement, dated as of April 19, 2000,
by and between Precept Business Services, Inc. and The
Shaar Fund Ltd. (1)
3.1 Amended and Restated Articles of Incorporation (3)
3.2 Bylaws (4)
4.1 Certificate of Designation of Series 8% Convertible
Preferred Stock of Precept Business Services, Inc. filed
with the Secretary of State of Texas on April 19, 2000.
(2)
4.2 Common Stock Warrant for The Shaar Fund Ltd. to purchase
125,000 shares of Class A Common Stock. (1)
4.3 Registration Rights Agreement, dated as of April 19, 2000,
by and between Precept Business Services, Inc. and The
Shaar Fund Ltd. (1)
10.1 Letter agreement dated April 25, 2000 among Precept
Business Services, Inc. and Darwin Deason, Chairman (1)
10.2 Amendment and Waiver No. 3 dated as of April 27, 2000 to
Credit Agreement dated as of March 22, 1999 and related
Limited Guaranty by Darwin Deason. (1)
10.3 Waiver and Consent No. 4, dated June 14, 2000 among Precept
Business Services, Inc., Bank One, N.A., individually and
as agent and Wells Fargo Bank (Texas), N.A., as a Lender
(2)
27.1 Financial Data Schedule (1)
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(1) Previously filed as Exhibit to the Original Form 10-Q for the quarterly
period ended March 31, 2000, initially filed with the Securities and
Exchange Commission on May 19, 2000.
(2) Filed herewith.
(3) Previously filed as an exhibit to the Company's Form 10-Q for the period
ended December 31, 1998.
(4) Previously filed as an exhibit to the Company's registration statement
on Form S-4 (file no. 333-42689) and incorporated herein by reference.
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(b) Reports on Form 8-K filed during the period from January 1, 2000
through May 17, 2000
The Company has not filed any reports on Form 8-K for the period
from January 1, 2000 through May 17, 2000.
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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 June 26, 2000.
PRECEPT BUSINESS SERVICES, INC.
/s/ Doug Deason
-----------------------------------------
Douglas R. Deason, President, Chief
Executive Officer and Acting Chief
Financial Officer
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