============================================================================== 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. ============================================================================== PRECEPT BUSINESS SERVICES, INC. INDEX TO FORM 10-Q DESCRIPTION PAGE - ----------- ---- 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 2 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, June 30 1999 1999 --------------- --------------- 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 ============= ============= See accompanying notes to condensed consolidated financial statements. 3 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended September 30, ------------------------------- 1999 1998 ------------- ------------- 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 See accompanying notes to condensed consolidated financial statements. 4 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended September 30, ------------------------------ 1999 1998 ------------- ------------- 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 See accompanying notes to condensed consolidated financial statements 5 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Retained Class A Class B Additional Earnings Total Common Common Paid-in (Accumulated Shareholders' Stock Stock Capital Deficit) Other Equity ----------- ----------- ----------- ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- See accompanying notes to condensed consolidated financial statements. 6 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 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. Three months ended September 30, ------------------------------- 1999 1998 ------------- -------------- 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 ============= ============= Three months ended September 30, ------------------------------- 1999 1998 ------------- -------------- 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 ============= ============= 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 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 Three months ended September 30, ------------------------------- 1999 1998 ------------- ------------- 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 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following: September 30, June 30, Estimated Lives 1999 1999 --------------- ------------- ------------- 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 ============= ============= 5. INTANGIBLE ASSETS Intangible assets consist of the following: September 30, June 30, 1999 1999 ------------- ------------- 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 ============= ============= 6. LONG-TERM DEBT Long-term debt consists of the following: September 30, June 30, 1999 1999 ------------- ------------- 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 ============= ============= 9 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. Three months ended September 30, ------------------------------- 1999 1998 ------------- ------------- 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 ============= ============= September 30, June 30, 1999 1999 ------------- ------------- 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 ============= ============= 10 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. Three months ended September 30, ------------------------------ 1999 1998 ------------- ------------- 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 =============== =============== 11 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 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. Three months ended September 30, ---------------------- 1999 1998 ----- ---- 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% ====== ====== 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 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 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 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 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. Class A and B Common Shares Voted ------------------------------------------------- Broker Non- Votes/withheld/ Proposal Description For Against Abstained - -------- ----------- ----------- ------------ -------------- 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 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 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ITEM 6(a) EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 27.1 Financial Data Schedule (1) - ------------ (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