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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, 1998
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 12, 1998, there were 55,064,764 outstanding shares of Class A
Common Stock, 4,145,000 outstanding shares of Class B Common Stock and
2,337,500 outstanding warrants to purchase shares of Class A Common Stock.
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PRECEPT BUSINESS SERVICES, INC.
INDEX TO FORM 10-Q
DESCRIPTION PAGE
- ----------- ----
PART I FINANCIAL INFORMATION
Item 1 Financial statements.................................................. 3
Item 2 Management's discussion and analysis of financial
condition and results of operations................................. 14
PART II OTHER INFORMATION
Item 1 Legal proceedings..................................................... 22
Item 2 Changes in securities and use of proceeds............................. 22
Item 3 Defaults by the company on its senior securities...................... 22
Item 4 Results of votes of holders........................................... 22
Item 5 Other information..................................................... 22
Item 6 Exhibits.............................................................. 23
Signatures............................................................ 24
2
PRECEPT BUSINESS SERVICES, INC.
PART I
ITEM I - FINANCIAL INFORMATION
3
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1998 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 2,423,343 $ 2,291,303
Trade accounts receivable, net of $410,000 and $404,000
allowance for doubtful accounts, respectively..................... 19,005,109 15,595,234
Accounts receivable from affiliates................................... 1,133,011 1,186,908
Other accounts receivable............................................. 2,117,529 1,609,529
Inventory............................................................. 6,390,981 5,133,484
Other current assets.................................................. 1,504,924 805,151
Deferred income taxes 680,344 499,264
Net assets of discontinued operations................................. - 1,115,125
------------- -------------
Total current assets.............................................. 33,255,241 28,235,998
Property and equipment, net.............................................. 6,205,384 5,751,487
Intangible assets, net................................................... 32,610,307 19,558,050
Deferred income taxes.................................................... 1,109,976 1,102,372
Other assets............................................................. 2,440,667 1,838,697
------------- -------------
Total assets.................................................. $ 75,621,575 $ 56,486,604
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................................ $ 9,345,512 $ 5,844,671
Accrued compensation................................................. 1,988,067 1,943,964
Other accounts payable and accrued expenses........................... 4,892,186 5,189,268
Current portion of long-term debt..................................... 1,471,236 1,421,477
------------- -------------
Total current liabilities......................................... 17,697,001 14,399,380
Long-term debt........................................................... 25,866,998 20,084,756
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value; 3,000,000 authorized shares, none
issued............................................................ - -
Class A common stock, $0.01 par value; 100,000,000 authorized shares
and 53,191,429 and 48,090,880 issued shares,
respectively...................................................... 531,914 480,909
Class B common stock, $0.01 par value; 10,500,000 authorized shares
and 4,145,000 shares outstanding.................................. 41,450 41,450
Additional paid-in capital............................................ 32,581,346 23,067,285
Retained earnings (accumulated deficit)............................... (905,863) (1,395,905)
------------- -------------
32,248,847 22,193,739
Class A treasury stock - 478,844 shares............................... (191,271) (191,271)
------------- -------------
Total shareholders' equity........................................ 32,057,576 22,002,468
------------- -------------
Total liabilities and shareholders' equity.................... $ 75,621,575 $ 56,486,604
============= =============
See accompanying notes to consolidated financial statements.
4
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
September 30,
-------------------------------
1998 1997
------------- -------------
Revenue:
Business products........................................................ $ 30,904,655 $ 27,393,512
Transportation services.................................................. 3,913,472 1,638,547
------------- -------------
34,818,127 29,032,059
Costs and expenses:
Cost of goods sold....................................................... 22,998,898 18,455,294
Sales commissions........................................................ 4,279,345 3,562,303
Selling, general and administrative...................................... 5,472,370 5,822,081
Depreciation and amortization............................................ 649,915 286,778
------------- -------------
33,400,528 28,126,456
------------- -------------
Operating income............................................................ 1,417,599 905,603
Interest and other expense:
Interest expense......................................................... 468,086 175,648
Other expense............................................................ 7,124 33,135
------------- -------------
475,210 208,783
------------- -------------
Income from continuing operations before income taxes....................... 942,389 696,820
Income tax provision ....................................................... 452,347 278,728
------------- -------------
Income from continuing operations........................................... 490,042 418,092
------------- -------------
Loss from discontinued operations, net of applicable income taxes........... - (164,977)
------------- -------------
Net income.................................................................. $ 490,042 $ 253,115
============= =============
Basic net income per share:
Income from continuing operations........................................ $ 0.01 $ 0.01
Loss from discontinued operations........................................ - -
-------------- --------------
Net income............................................................... $ 0.01 $ 0.01
============== ==============
Weighted average shares outstanding...................................... 53,599,997 42,623,332
Diluted net income per share:
Income from continuing operations........................................ $ 0.01 $ 0.01
Loss from discontinued operations........................................ - -
-------------- --------------
Net income............................................................... $ 0.01 $ 0.01
============== ==============
Weighted average shares outstanding...................................... 54,909,440 42,623,332
See accompanying notes to consolidated financial statements.
5
PRECEPT BUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
September 30,
-------------------------------
1998 1997
------------- -------------
Cash flows from operating activities:
Net income.............................................................. $ 490,042 $ 253,115
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 649,915 267,924
Changes in operating assets and liabilities, net of effects from
acquisitions
Trade accounts receivable....................................... 294,609 (1,205,740)
Accounts receivable from affiliates............................. 53,897 (83,419)
Other accounts receivable....................................... (508,000) (218,424)
Inventory....................................................... 326,761 (320,599)
Other current assets............................................ (753,042) (198,077)
Income taxes refundable......................................... - 265,400
Trade accounts payable.......................................... 2,254,422 2,138,107
Accrued compensation............................................ (233,021) (345,628)
Other assets and liabilities, net............................... (125,049) (355,387)
-------------- -------------
Net cash provided by operating activities........................... 2,450,534 197,272
-------------- -------------
Cash flows provided by (used in) investing activities:
Acquisitions of businesses, including earnout payments.................. (5,990,513) (381,941)
Sale of net assets of discontinued operations........................... 1,115,125 -
Acquisition of property and equipment, net.............................. (257,848) (254,645)
-------------- -------------
Net cash used in investing activities............................... (5,133,236) (636,586)
-------------- -------------
Cash flows provided by (used in) financing activities:
Payments on long-term debt.............................................. (192,754) (256,732)
Payments of capital lease obligations................................... (492,504) (70,482)
Borrowings (payments) on revolving line of credit, net.................. 3,500,000 (50,000)
------------- -------------
Net cash provided by (used in) financing activities................. 2,814,742 (377,214)
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Net increase (decrease) in cash and cash equivalents....................... 132,040 (816,528)
Cash and cash equivalents at beginning of period........................... 2,291,303 2,432,202
------------- -------------
Cash and cash equivalents at end of period................................. $ 2,423,343 $ 1,615,674
============= =============
Cash paid for:
Interest................................................................ $ 273,300 $ 251,102
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Income taxes............................................................ $ 301,815 $ 58,197
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See accompanying notes to consolidated financial statements
6
PRECEPT BUSINESS SERVICES, INC.
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, 1997 .... $325,204 $101,030 $17,437,778 $ (750,062) $(1,012,307) $16,101,643
Net income ................ -- -- -- 253,115 -- 253,115
-------- -------- ----------- ------------ ----------- ------------
Balance, September 30,
1997..................... $325,204 $101,030 $17,437,778 $ (496,947) $(1,012,307) $16,354,758
======== ======== =========== ============ =========== ============
Balance, June 30, 1998 .... $480,909 $ 41,450 $23,067,285 $(1,395,905) $ (191,271) $22,002,468
Issuance of shares to
acquire businesses ...... 51,005 -- 9,514,061 -- -- 9,565,066
Net income ................ -- -- -- 490,042 -- 490,042
-------- -------- ----------- ------------ ----------- ------------
Balance, September 30,
1998 .................. $531,914 $ 41,450 $32,581,346 $ (905,863) $ (191,271) $32,057,576
======== ======== =========== ============ =========== ============
See accompanying notes to consolidated financial statements.
7
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BUSINESS
Precept Business Services, Inc. and its subsidiaries ("Precept" or
the "Company") primarily engage in business products distribution management
and services and, to a lesser extent, in executive chauffeured limousine,
livery and courier services. The business products management business
comprises arranging for the manufacture, storage, and distribution of
business forms, computer supplies, advertising information and other related
business products for mid-to large-sized corporate customers. Precept
operates from offices throughout the United States. The transportation
services are provided from locations in Texas, New York, Ohio and Michigan.
PUBLICLY TRADED COMPANY
In March 1998, Precept completed its acquisition of U. S.
Transportation Systems, Inc. ("USTS"), a company whose common stock was
publicly traded on the NASDAQ SmallCap Market ("NASDAQ"). As part of this
acquisition, Precept listed its Class A common shares and its warrants to
purchase Class A common shares for public trading with NASDAQ and issued
9,612,500 shares of its Class A common stock to USTS and 1,815,000 warrants
to the former USTS warrant holders. Precept's Class A common stock trades
under the NASDAQ symbol "PBSIA" and its warrants trade under the NASDAQ
symbol "PBSIW."
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements comprise the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
PRO FORMA INFORMATION
The pro forma information included in these financial statements and
notes is unaudited.
FISCAL YEAR END AND QUARTERLY REPORTING PERIODS
The Company maintains a June 30 fiscal year end and ends its
quarterly reporting periods on September 30, December 31, and March 31,
respectively. For purposes of the Company's current report on Form 10-Q,
references to 1999 and 1998 are meant to be the quarterly reporting periods
ended September 30, 1998 and 1997, respectively.
REVERSE STOCK SPLIT
On November 11, 1998, the shareholders of the Company approved a one
for seven reverse stock split that is expected to take effect by the end of
November 1998. Since the reverse split will not take effect until after the
date of this report, the financial information of the Company presented in
this Form 10-Q has not been restated to give effect to the reverse split.
8
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
consolidated financial statements are consistent with the accounting policies
described in the Company's notes to consolidated financial statements
included in the Company's Annual Report to Shareholders and Form 10-K for the
fiscal year ended June 30, 1998.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements are unaudited. Certain
information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted, although the Company believes that the disclosures
included herein are adequate to make the information presented not
misleading. These interim financial statements should be read in conjunction
with the Company's consolidated financial statements for the year ended June
30, 1998. The interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position, its results of operations
and its cash flows. Operating results for any particular interim period are
not necessarily indicative of the operating results for a full fiscal year.
The financial information for the year ended June 30, 1998 is
derived from the Company's audited financial statements for the same year as
included in the Company's Form 10-K for fiscal year 1998.
COMPREHENSIVE INCOME
There are no significant differences between the Company's
historical income and comprehensive income and, as a result, comprehensive
income is not shown separately on the statement of operations.
3. ACQUISITIONS
During the first quarter of fiscal year 1999, Precept acquired four
business products distribution companies. 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, 5.1 million shares of class A common
stock with an aggregate fair market value of $9.6 million, and $3.3 million
in seller notes and assumed debt.
In fiscal year 1998, the Company issued 6.1 million shares of its
Class A common stock with an aggregate fair market value of $18.3 million at
the date of acquisition in order to acquire two business products
distribution companies, InfoGraphix and MBF. These acquisitions have been
accounted for using the pooling of interests method of accounting. The
Company's consolidated financial statements give retroactive effect to the
acquisitions of such companies for all periods presented.
9
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
The following presents the separate results from continuing
operations, in the first quarter of fiscal year 1998, of the Company
(excluding the results of InfoGraphix and MBF prior to the dates on which
they were acquired) and of InfoGraphix and MBF up to the dates on which they
were acquired.
Three months ended
September 30, 1997
------------------
Revenue:
Company (excluding InfoGraphix and MBF)....................... $ 18,935,478
InfoGraphix................................................... 5,422,768
MBF........................................................... 4,673,813
------------
Company....................................................... $ 29,032,059
============
Net income:
Company (excluding InfoGraphix and MBF)....................... $ 135,108
InfoGraphix................................................... 114,026
MBF........................................................... 168,958
------------
Company....................................................... $ 418,092
============
During the first quarter of fiscal year 1998, the Company completed
the purchase of two business products distributors for a total of $0.5
million. The acquisitions were accounted for using the purchase method of
accounting with the majority of the purchase price attributable to accounts
receivable, inventory, equipment and goodwill.
The following table summarizes the consideration for the purchase
acquisitions completed and the fair value of the assets acquired.
Three months ended
September 30,
-------------------------------
1998 1997
------------- -------------
Purchase consideration:
Cash paid..................................................... $ 5,736,000 $ 520,000
Amounts due sellers of acquired businesses.................... 1,380,000 -
Common stock issued........................................... 9,604,000 -
Liabilities assumed........................................... 1,777,000 -
Other......................................................... 107,000 -
------------- -------------
Fair value of net assets acquired.................................. $ 18,604,000 $ 520,000
============= =============
Three months ended
September 30,
-------------------------------
1998 1997
------------- -------------
Allocation of fair value of net assets acquired:
Goodwill and intangible assets................................ $ 13,323,000 $ 507,000
Accounts receivable........................................... 3,704,000 -
Inventory and other, net...................................... 1,577,000 13,000
------------- -------------
$ 18,604,000 $ 520,000
============= =============
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.
10
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
Three months ended
September 30,
-------------------------------
1998 1997
------------- -------------
Total revenues............................................... $ 41,201,000 $ 42,490,000
Income before income taxes .................................. $ 1,330,000 $ 1,823,000
Net income................................................... $ 691,000 $ 1,094,000
Diluted net income per share................................. $ 0.01 $ 0.02
Since September 30, 1998, Precept has acquired one corporate
transportation service company which provides executive town car and
limousine service primarily in the tri-state New York metropolitan area.
Aggregate consideration for this transaction amounted to $9.4 million, paid
$3.4 million in cash, 2.4 million shares of common stock with a market value
of $3.6 million and approximately $2.4 million in debt assumed. Assets with a
preliminary aggregate fair value of $7.0 million were acquired with a
preliminary allocation as follows: $7.9 million to goodwill and intangible
assets, $0.6 million to accounts receivable, $2.4 million to property and
equipment and $3.9 million (net) to other liabilities.
If the acquisitions since July 1, 1998 had been completed at the
beginning of the first quarter of fiscal year 1999, the pro forma results of
continuing operations would have been as shown below. Pro forma adjustments
have been recorded for amortization, interest and income taxes.
Three months ended
September 30, 1998
------------------
Total revenues.................................................... $ 44,692,000
Income before income taxes........................................ $ 1,730,000
Net income........................................................ $ 900,000
Diluted net income per share...................................... $ 0.02
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, June 30,
Estimated Lives 1998 1998
--------------- ------------- -------------
Land $ 441,654 $ 411,000
Buildings 15 to 40 years 1,672,166 1,670,926
Leasehold improvements 1 to 10 years 695,615 455,118
Equipment and vehicles 3 to 5 years 7,610,288 7,020,965
Capitalized leasehold rights 3 to 5 years 1,324,963 1,353,279
------------- -------------
11,744,686 10,911,288
Accumulated depreciation and amortization.................... 5,539,302 5,159,801
------------- -------------
$ 6,205,384 $ 5,751,487
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11
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, June 30,
1998 1998
------------- -------------
Goodwill........................................................ $ 36,833,360 $ 23,510,689
Non-compete agreements.......................................... 1,200,659 1,200,659
------------- -------------
38,034,019 24,711,348
Accumulated amortization........................................ 5,423,712 5,153,298
------------- -------------
$ 32,610,307 $ 19,558,050
============= =============
6. LONG-TERM DEBT
Long-term debt consists of the following:
September 30, June 30,
1998 1998
------------- -------------
Revolving line of credit........................................ $ 19,465,478 $ 15,965,478
Note payable and long-term liability to shareholder............. 721,049 813,803
Convertible notes payable to sellers............................ 3,459,900 2,114,435
Capitalized lease obligations and other notes payable........... 3,691,807 2,612,517
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27,338,234 21,506,233
Less current portion due within one year........................ 1,471,236 1,421,477
------------- -------------
Long-term debt.................................................. $ 25,866,998 $ 20,084,756
============= =============
REVOLVING LINE OF CREDIT
The Company's revolving line of credit with its bank has $25.0
million available for borrowing to finance working capital and acquisition
needs. The line of credit bears interest at prime (8.25% at September 30,
1998) or at LIBOR plus a maximum margin of 2.75%. The margin rate may be
lower based on the Company's ratio of debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). As of September 30, 1998,
the margin rate was 2.5%. The revolving line of credit includes restrictions
as to the current ratios and debt service coverage as well as borrowing
restrictions based upon accounts receivable, inventory and property and
equipment. The line of credit is secured by substantially all of the assets
of the Company. The revolving line of credit is due and payable on March 31,
2001.
7. SEGMENT INFORMATION
The table below presents certain segment information from continuing
operations for the quarters ended September 30, 1998 and 1997. Intersegment
sales included in operating income below amounted to $1,671 and $20,596 for
the business products segment and $141,380 and $164,348 for the
transportation services segment for the quarters ended September 30, 1998 and
1997, respectively.
Three months ended
September 30,
------------- -------------
1998 1997
------------- -------------
Operating income:
Business products............................................ $ 879,569 $ 922,182
Transportation services...................................... 646,962 26,799
Other........................................................ (108,932) (43,378)
------------- -------------
Total operating income................................... 1,417,599 905,603
Interest and other expense........................................ (475,210) (208,783)
------------- -------------
Income before income taxes........................................ $ 942,389 $ 696,820
============= =============
12
PRECEPT BUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
Three months ended
September 30,
-------------------------------
1998 1997
------------- -------------
Identifiable assets:
Business products............................................ $ 56,124,427 $ 29,560,462
Transportation services...................................... 17,444,535 1,945,521
Other........................................................ 2,052,613 4,410,147
------------- -------------
Total identifiable assets................................ $ 75,621,575 $ 35,916,130
============= =============
8. 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, 1998 and 1997.
Three months ended
September 30,
--------------------------------
1998 1997
----------- -----------
Basic weighted average shares outstanding:
Common shares, Class A and Class B, outstanding at the
beginning of the period ............................................ 51,757,036 42,623,332
Common shares used to acquire businesses during the period ............. 5,100,520 --
----------- -----------
Common shares, Class A and Class B, outstanding at the end of
the period ......................................................... 56,857,556 42,623,332
=========== ===========
Weighted average number of common shares outstanding during the
period based on the number of days outstanding (A) ................. 53,599,997 42,623,332
=========== ===========
Diluted weighted average shares outstanding:
Common stock options:
Number of outstanding options ...................................... 3,586,848 324,832
Number of options vested ........................................... 446,516 324,832
Number of options which would be exercised based on average market
value of common stock during the period ....................... -- 324,852
Proceeds from exercise of options .................................. $ 373,344 $ --
Common shares repurchased with proceeds ............................ 145,941 --
Common shares issued from exercise of options, net (B) ............. 178,910 --
=========== ===========
Warrants to purchase common stock:
Number of warrants outstanding ..................................... 2,337,500 --
Number of warrants which would be exercised based on average market
value of common stock during the period ....................... 170,000 --
Net proceeds from exercise of warrants ............................. $ 12,781 $ --
Common shares repurchased with proceeds ............................ 4,966 --
Common shares issued from exercise of warrants (C) ................. 165,004 --
=========== ===========
Convertible notes payable:
Face value of notes which would be converted based on average market
value of common stock during the period $ 2,470,000 $ 440,000
Common shares issued upon conversion (D) ........................... 965,529 --
=========== ===========
Interest expense reduction, net of income taxes, associated
with notes which are converted ................................ $ 34,412 --
=========== ===========
Diluted weighted average common shares outstanding
(A + B + C + D) .................................................... 54,909,440 42,623,332
=========== ===========
13
PRECEPT BUSINESS SERVICES, INC.
PART I
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
OVERVIEW
Precept is an independent distributor of custom and stock business
products and provider of document management services ("Business Products")
to businesses in a variety of industries throughout the United States.
Precept also operates six corporate transportation service ("Transportation
Services") companies in the United States.
Precept was one of the first organizations to begin nationwide
consolidation of operating companies in the Business Products industry. Since
1991, Precept has acquired 25 companies in the Business Products industry
plus 10 in the Transportation Services industry.
A component of Precept's business strategy is to increase the size
of its operations through strategic acquisitions and internally generated
growth. Precept places substantial emphasis on improving operational and
information system capabilities while integrating acquired operations.
Precept's operational focus also includes continuous upgrading of management
systems allowing improved customer access to financial inventory and order
status information; new product and service offerings; preferred vendor
programs incorporating volume purchasing; regional and district management
oversight; and recruiting experienced sales individuals. Precept believes
that these strategies will lead to lower cost of goods and increased sales of
various products and services to existing and new customers.
This section should be read in conjunction with the Company's
financial statements included in this report and with the Company's annual
report on Form 10-K for the year ended June 30, 1998.
ACQUISITIONS
The Company's results of operations and the comparability of the
Company's results of operations from period to period have been significantly
affected by businesses acquired in each period. From 1991 through the end of
the first quarter of fiscal year 1999, the Company completed 35 acquisitions:
25 business products distribution companies and 10 transportation service
companies. Two business products companies acquired in fiscal year 1998 were
accounted for using the pooling-of-interests method and, as a result, the
consolidated financial statements of the Company have been restated to
combine the financial statements of the Company with the pooled companies'
financial statements for all periods presented. The remaining acquisitions
have been accounted for following the purchase method and, as a result, the
results of operations of the acquired companies have been included in the
Company's results of operations from the dates of acquisition.
In the 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 $5.8 million in cash, financed by the
Company's working capital revolving line of credit, $1.4 million in seller
notes, 5.3 million shares of Class A common stock with a fair market value of
$9.6 million, and $1.8 million in assumed debt.
In the three month period ended September 30, 1997, the Company
completed the acquisition of two business products company located in New
York and Fort Worth, Texas with annual revenues of $0.6 million. Such
acquisition was paid for with $0.5 million in cash, financed by the Company's
revolving line of credit.
Since September 30, 1998, the Company has acquired one corporate
transportation services company located in North Arlington, New Jersey, which
provides executive limousine and town car service to the tri-state New York
metropolitan area with annual revenues of $14.0 million. Such acquisition was
paid for with $3.4 million in cash, financed by the Company's revolving line
of credit, $3.6 million in fair market value of 2.4 million shares of Class A
common stock, and $2.4 million in assumed debt.
15
PURCHASE ACCOUNTING EFFECTS
The Company's acquisitions have been primarily accounted for using
the purchase accounting method. The acquisitions have currently affected, and
will prospectively affect, the Company's results of operations in certain
significant respects. The Company's revenues and operating expenses will be
directly affected by the timing of the acquisitions. The aggregate
acquisition costs, including assumption of debt, are allocated to the net
assets acquired based on the fair market value of such net assets. The
allocations of the purchase price results in an increase in the historical
book value of certain assets, including property and equipment, and may
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, 1998 and 1997.
Three months ended
September 30,
-----------------------
1998 1997
----- -----
Revenue:
Business products ...................... 94.3% 94.0%
Transportation services ................ 5.7% 6.0%
----- -----
100.0% 100.0%
Costs and operating expenses:
Cost of goods sold ..................... 66.1% 63.6%
Sales commissions ...................... 12.3% 12.3%
Selling, general and administrative .... 15.7% 20.1%
Depreciation and amortization .......... 1.8% 0.9%
----- -----
95.9% 96.9%
----- -----
Operating income ............................ 4.1% 3.1%
Interest and other expense:
Interest expense ....................... 1.4% 0.6%
Other expense .......................... 0.0% 0.1%
----- -----
1.4% 0.7%
----- -----
Income before income taxes .................. 2.7% 2.4%
Income tax provision ........................ 1.3% 1.0%
----- -----
Net income .................................. 1.4% 1.4%
===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE for 1999 increased by $5.8 million, or 19.9%, from $29.0
million in 1998 to $34.8 million in 1999. In 1999, Business Products revenue
increased by $3.5 million or 12.8% and Transportation Services revenue
increased by $2.3 million or 138.8%. The increase in Business Products
revenue was due to the acquisition of nine business products companies during
fiscal years 1998 and 1999, which accounted for $3.0 million, and internal
growth of $0.5 million. Of the total increase in Transportation Services
revenue in 1999, $2.1 million was due to the acquisition of four
transportation companies, one of which was acquired in the second quarter of
fiscal year 1998 and three of which were acquired at the end of the third
quarter of fiscal year 1998.
COST OF GOODS SOLD for 1999 increased by $4.5 million, or 24.6%,
from $18.5 million in 1998 to $23.0 million in 1999. Cost of goods sold for
Business Products increased by $3.0 million of which approximately $2.2
million was due to companies acquired after the first quarter of fiscal year
1998 and the remainder was due to internal growth. Transportation Services
cost of goods sold increased by $1.5 million due primarily to the four
transportation companies acquired during 1998. As a percentage of revenue,
cost of goods sold for 1999 increased by 2.5% from 63.6% in 1998 to 66.1% in
1999. This percentage increase was primarily the result of proportionately
higher sales of lower gross profit product categories.
16
SALES COMMISSIONS increased by $0.7 million, or 20.1%, in 1999, from
$3.6 million in 1998 to $4.3 million in 1999 due primarily to the increased
level of Business Products revenue. As a percentage of revenue, sales
commissions have been consistent at 12.3% in 1998 and 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE decreased by $0.3
million or 6.0% in 1999 from $5.8 million in 1998 to $5.5 million in 1999.
Increased expenses of $0.9 million from business products and transportation
services companies acquired were offset by $1.2 million in reduced expenses
in existing business products and transportation companies. As a percentage
of revenue, selling, general and administrative expenses have declined by
4.4% from 20.1% in 1998 to 15.7% in 1999. The reduced expenses in existing
operations are primarily a result of the Company's continuing efforts and
strategy to realize synergies from acquisitions by merging common
administrative and support functions.
DEPRECIATION AND AMORTIZATION EXPENSE increased $0.3 million in 1999
from $0.3 million in 1998 to $0.6 million in 1999 due largely to the size and
timing of the companies acquired in 1998 and the first quarter of 1999.
INTEREST AND OTHER EXPENSE increased by $0.3 million or 127.6%
during 1999, from $0.2 million in 1998 to $0.5 million in 1999 principally
due to additional debt incurred by the Company in 1998 and 1999 to finance
its business acquisitions.
INCOME TAXES are provided at a 48.0% effective rate in 1999 compared
to a 40.0% rate in 1998. This increase is due primarily to an increase in the
level of non-deductible expenses, primarily goodwill amortization.
NET INCOME FROM CONTINUING OPERATIONS increased by $0.1 million or
17.2% in 1999, from $0.4 million in 1998 to $0.5 million in 1999, due to the
reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first quarter of
fiscal year 1999, the Company generated $2.5 million in cash from operations
as compared to $0.2 million generated in the first quarter of fiscal year
1998. During the first quarter of 1999, the Company's net income, adjusted
for non-cash charges, amounted to $0.9 million. In addition, the Company
reduced its working capital by $1.5 million. During the first quarter of
1998, the Company's net income from continuing operations generated the cash
flow from operating activities as the Company maintained a relatively stable
level of working capital.
NET CASH FLOWS FROM INVESTING ACTIVITIES. During the first quarter
of fiscal year 1999, Precept used $5.1 million in cash for investing
activities as compared to a use of $0.6 million for investing activities in
the first quarter of fiscal year 1998. During 1999, the Company acquired four
products distribution businesses and used $6.0 in cash to finance these
acquisitions and to pay for contingent consideration on previous
acquisitions. In addition, the Company purchased $0.3 million of equipment
for its existing operations. During 1998, the Company acquired two products
business for $0.3 million in cash and acquired $0.3 million of equipment.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first quarter of
1999, $2.8 million of cash was generated by financing activities as compared
to $0.4 million of cash used by financing activities in the first quarter of
fiscal year 1998. During the first quarter of 1999, Precept increased its
outstanding revolving line of credit balance by approximately $3.5 million in
order to finance acquisitions. In addition, the Company repaid $0.7 million
of existing long-term debt, including capital lease obligations. During the
first quarter of 1998, the Company repaid $0.3 million in long-term debt and
$0.1 million on its revolving line of credit.
17
Management believes that based on current levels of operations, cash
flow from operations, the existing revolving line of credit agreement and
available cash on hand at September 30, 1998 of $2.4 million will be adequate
for fiscal year 1999 to make required payments of principal and interest on
the Company's indebtedness, to fund anticipated capital expenditures of
approximately $1.5 million for the remainder of fiscal year 1999, and to meet
working capital needs.
The amount of debt available under the Company's current revolving
line of credit is $25.0 million. The revolving line of credit bears interest
at the lower of prime or LIBOR plus a margin range. The Company has the
option of electing a prime or LIBOR based interest rate. The margin range is
determined based on the Company's performance against certain ratios,
primarily debt and interest coverage. Substantially all the Company's
operating assets are pledged as collateral under this line of credit. As of
November 12, 1998, the Company had approximately $24.5 million outstanding
under the credit facility at an annual interest rate of approximately 8.5%
and $0.5 million available for future borrowing.
During the first quarter of fiscal year 1999, the Company modified
its revolving line of credit from an asset-based facility to a cash flow
based facility. Under terms of the revolving line of credit agreement, the
Company may borrow up to $25 million with the availability determined by a
2.75 multiple of pro forma EBITDA. EBITDA is defined as earnings before
interest, taxes, depreciation and amortization. Such amount is adjusted, on a
pro forma basis, for the EBITDA of companies acquired by Precept for the
portion of a trailing twelve-month period when not owned by Precept. In
addition, the pro forma EBITDA includes adjustments for certain costs,
principally owners' compensation, which Precept identifies as non- recurring
after the acquisition is completed. For the quarter ended September 30, 1998,
Precept's pro forma EBITDA amounted to $12.6 million. The Company has been
orally informed by Wells Fargo, its existing lender, that the available
revolving line of credit will not be extended beyond $25.0 million until the
fourth quarter of fiscal year 1999. The Company is in the process of working
with its current lender and other commercial lenders to implement a larger
debt facility.
During the first quarter of fiscal year 1999 and through the date of
this report, the Company has continued to evaluate the debt and equity
capital markets. Based on current market conditions, the Company believes
that financing strategies available in connection with incurring subordinated
debt or a secondary offering of equity are unattractive. The Company is
continuing to explore debt and equity financing strategies. Until favorable
financing is available to the Company, it is likely that the rate at which
the Company acquires companies will be reduced as compared with the rate of
acquisitions in the first quarter of fiscal year 1999 or during fiscal year
1998. It is also likely that the Company's rate of growth in revenue,
operating income and net income related to acquisitions will likewise be
reduced as compared to the first quarter of fiscal year 1999 and fiscal year
1998.
18
OTHER
INFLATION
Certain of Precept's business product offerings, particularly paper
products, have been and are expected to continue to be subject to significant
price fluctuations due to inflationary and other market conditions. In the
last five to ten years, the prices for commodity grades of paper have shown
considerable volatility. Precept generally is able to pass such increased
costs on to its customers through price increases, although it may not be
able to adjust its prices immediately. Significant increases in paper and
other costs in the future could materially affect Precept's profitability if
these costs cannot be passed on to customers. In general, Precept does not
believe that inflation has had a material effect on its results of operations
in recent years. However, there can be no assurance that Precept's business
will not be affected by inflation in the future.
YEAR 2000 ISSUE
During the first quarter of fiscal year 1999, there have been no
events which would significantly change the Company's year 2000 disclosure as
presented in its Form 10-K for the year ended June 30, 1998.
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 $0.2 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 debt or equity securities that
would be affected by fluctuations in market risk.
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Form 10-Q to make applicable and take advantage of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by, or on behalf of, the Company. This
section should be read in conjunction with the "Risk Factors Affecting the
Company's Prospects" located in Item I of the Company annual report on Form
10-K for the year ended June 30, 1998. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance, and underlying assumptions and other statements which are other
than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this
nature. All such subsequent forward-looking statements, whether written or
oral and whether made by or on behalf of the Company, are also expressly
qualified by these customary 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,
19
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.
5. Significant changes in competitive factors, including product-pricing
conditions, affecting the Company.
6. Governmental and regulatory actions and initiatives, including those
affecting financing.
7. Significant changes from expectations in operating expenses.
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital acquisitions and
other investments.
9. Significant changes in rates of interest, inflation or taxes.
10. Significant changes in the Company's relationship with its employees and
the potential adverse effects if labor disputes or grievance were to
occur. 11. Changes in accounting principles and/or the application of
such principles to the Company.
12. Vendors and customers inability to address year 2000 issues on a timely
basis.
The foregoing factors could affect the Company's actual results and
could cause the Company's actual results during fiscal year 1999 and beyond
to be materially different from any anticipated results expressed in any
forward-looking statement made by or on behalf of the Company.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or other circumstances after the date of this
report on Form 10-Q.
DISCONTINUED OPERATIONS
As part of its business strategy, Precept has decided to focus on
its core businesses and discontinue certain non-core business operations.
During the first quarter of 1998, the losses from discontinued operations
consisted principally of the losses from Precept Holdings, Inc., which owned
and operated certain real estate related investments. In September 1998, the
Company sold the remaining assets of its discontinued operations consisting
of land, a building and an interest in a restaurant to the Company's majority
shareholder for $1.2 million in cash.
20
PRECEPT BUSINESS SERVICES, INC.
PART II - OTHER INFORMATION
21
ITEM 1 LEGAL PROCEEDINGS
During the first quarter of fiscal year 1999 and through the date of
this report, there have been no significant changes to the legal proceedings
which affect the Company and are disclosed in the Company's Form 10-K for the
year ended June 30, 1998.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
As discussed more fully in Item 4 and as disclosed in the Company's
Proxy to shareholders, a 1 for 7 reverse stock split was voted upon and
approved by the Company's shareholders at the Company's annual shareholder
meeting. In addition, the Company's shareholders approved an amendment to the
Company's articles of incorporation to change the vote required for certain
actions. The exhibits to this Form 10-Q include the Proxy and the amendment
to the articles of incorporation.
ITEM 3 DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
As of September 30, 1998, 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 11, 1998. At such meeting, the following proposals were voted
upon and approved by the Company's shareholders. The Class B shareholder
voted all 4,145,000 shares in favor of all four proposals.
Class A and Common Shares Voted
---------------------------------------------
Withheld/
Proposal Description For Against Abstained
- -------- ----------- ---------- --------- -----------
1. Election of the following directors:
J. Livingston Kosberg 43,257,761 110,206
William W. Solomon, Jr. 37,177,559 6,190,408
Sheldon I. Stein 43,254,727 113,240
2. Approval of a 1:7 reverse stock split. 40,523,551 2,798,442 45,974
3. Amendment to the Company's articles of
incorporation to change vote required for
certain actions. 40,695,138 756,164 1,916,665
4. Ratification of Ernst & Young LLP as independent
auditors for the fiscal year ending June
30, 1999. 42,668,197 638,643 61,127
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.
22
ITEM 6(a) EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Forum of Amended and Restated Articles of Incorporation
approved by the Company's shareholders and to be filed
with the Texas Secretary of State. (1)
2.2 Stock Purchase Agreement by and among Precept Business
Products, Inc., Precept Business Services, Inc., MBF
Corporation and J.D. Greco. (2)
2.3 Agreement and Plan of Merger by and among Precept Business
Services, Inc., Creative Acquisition Corp., Creative, and
Edward Curtis and Robert Bazinet. (2)
2.4 Agreement and Plan of Merger dated as of August 26, 1998, by
and among Precept Business Services, Inc., Precept Acquisition
Corporation, Southern and the shareholders of Southern. (2)
2.5 Agreement and Plan of Merger dated as of October 2, 1998, by
and among Precept Business Services, Inc., Precept
Transportation Services, LLC, Garden State Acquisition
Corporation, Garden State Leasing & Rent-a-Car and John Rose.
(3)
2.6 Technical amendment to agreement listed in exhibit 2.5. (3)
10.1 Fifth Amendment to First Amended and Restated Credit Agreement
dated September 29, 1998. (3)
22.1 Form of Proxy mailed to the Company's shareholders in
connection with the Company's 1988 annual meeting of
shareholders. (1)
27 Financial Data Schedule (3)
(1) Previously included with the Company's Schedule 14 A filed October 23,
1998.
(2) Previously included with the Company's report on Form 8-K for the
related acquisition. See Item 6(b) for a list of Forms 8-K filed by the
Company during this reporting period.
(3) Included as an exhibit to this report.
ITEM 6(b) REPORTS ON FORM 8-K FILED DURING THE PERIOD FROM JULY 1, 1998
THROUGH NOVEMBER 12, 1998 (not filed as exhibits to this report)
On July 6, 1998, the Company filed a report on Form 8-K in connection
with its acquisition of all of the issued and outstanding stock of MBF
Corporation.
On September 14, 1998, the Company filed a report on Form 8-K in
connection with its preliminary earnings release for the year ended June 30,
1998.
On September 14, 1998, the Company filed a report on Form 8-K/A in
connection with its sale of its 75% interest in U.S. Trucking, Inc.
On September 14, 1998, the Company filed a report on Form 8-K/A in
connection with the audited financial statements of MBF Corporation, a business
that the Company acquired in June 1998.
On September 18, 1998, the Company filed a report on Form 8-K in
connection with its acquisition of Creative, a Maine corporation.
On September 25, 1998, the Company filed a report on Form 8-K in
connection with its acquisition of Southern Systems Business Forms & Data
Supplies Inc., a South Carolina corporation.
On October 2, 1998, the Company filed a report on Form 8-K in connection
with the condensed summary results of operations for the two months ended August
31, 1998.
23
SIGNATURES
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, 1998.
PRECEPT BUSINESS SERVICES, INC.
- ------------------------------------ --------------------------------------
David L. Neely William W. Solomon, Jr.
Chairman and Chief Executive Officer Senior Vice President and Chief
Financial Officer
24