-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DXJD7DBIf1TcvudFNHPLwM3UhQkZ9QwZUTDHxqz4cmw3HZosKzVYl8HghoNcn3SG 54Zhg4HT62AXUZd5m7GdKw== 0001047469-99-005176.txt : 19990215 0001047469-99-005176.hdr.sgml : 19990215 ACCESSION NUMBER: 0001047469-99-005176 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECEPT BUSINESS SERVICES INC CENTRAL INDEX KEY: 0001051285 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 752487353 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23735 FILM NUMBER: 99533723 BUSINESS ADDRESS: STREET 1: 1909 WOODALL ROGERS FREEWAY STREET 2: STE 500 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2147546000 MAIL ADDRESS: STREET 1: PO BOX 219008 CITY: DALLAS STATE: TX ZIP: 75201 10-Q 1 10-Q ================================================================================ 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 DECEMBER 31, 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 January 31, 1999, there were 7,866,333 outstanding shares of Class A Common Stock, 592,142 outstanding shares of Class B Common Stock and 333,929 outstanding warrants to purchase shares of Class A 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 December 31, 1998 and June 30, 1998 ....................... 3 Condensed Consolidated Statements of Operations for the six-month and the three-month periods ended December 31, 1998 and 1997................................. 4 Condensed Consolidated Statements of Cash Flows for the six-month periods ended December 31, 1998 and 1997......... 6 Condensed Consolidated Statements of Changes in Shareholders' Equity for the six-month periods ended December 31, 1998 and 1997................................. 7 Notes to Condensed Consolidated Financial Statements........... 8 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..................................................... 23
2 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30, 1998 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents............................................. $ 2,747,719 $ 2,291,303 Trade accounts receivable, net of $650,000 and $404,000 allowance for doubtful accounts, respectively..................... 18,728,699 15,595,234 Accounts receivable from affiliates................................... 1,124,676 1,186,908 Other accounts receivable............................................. 3,068,613 1,609,529 Inventory............................................................. 7,258,282 5,133,484 Other current assets.................................................. 1,291,357 805,151 Deferred income taxes................................................. 486,875 499,264 Net assets of discontinued operations................................. - 1,115,125 ------------ ------------ Total current assets.............................................. 34,706,221 28,235,998 Property and equipment, net.............................................. 9,005,655 5,751,487 Intangible assets, net................................................... 39,558,073 19,558,050 Deferred income taxes.................................................... 1,075,365 1,102,372 Other assets............................................................. 1,974,692 1,838,697 ------------ ------------ Total assets.................................................. $ 86,320,006 $ 56,486,604 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable................................................ $ 9,085,627 $ 5,844,671 Accrued compensation.................................................. 2,400,743 1,943,964 Other accounts payable and accrued expenses........................... 7,187,479 5,189,268 Current portion of long-term debt..................................... 2,751,880 1,421,477 ------------ ------------ Total current liabilities......................................... 21,425,729 14,399,380 Long-term debt........................................................... 29,008,312 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 7,934,739 and 6,870,126 issued shares, Respectively...................................................... 79,347 68,701 Class B common stock, $0.01 par value; 10,500,000 authorized shares and 592,142 shares outstanding............................. 5,921 5,921 Additional paid-in capital............................................ 36,048,341 23,515,022 Retained earnings (accumulated deficit)............................... (56,373) (1,395,905) ------------ ------------ 36,077,236 22,193,739 Class A treasury stock - 68,406 shares................................ (191,271) (191,271) ------------ ------------ Total shareholders' equity........................................ 35,885,965 22,002,468 ------------ ------------ Total liabilities and shareholders' equity.................... $ 86,320,006 $ 56,486,604 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 3 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended December 31, ---------------------------- 1998 1997 ------------ ------------ Revenue: Business products................................................ $ 68,777,067 $ 51,940,783 Transportation services.......................................... 10,876,726 3,426,633 ------------ ------------ 79,653,793 55,367,416 Costs and expenses: Cost of goods sold............................................... 53,001,370 36,791,311 Sales commissions................................................ 9,179,607 6,928,461 Selling, general and administrative.............................. 12,178,157 9,587,346 Depreciation and amortization.................................... 1,526,940 774,395 ------------ ------------ 75,886,074 54,081,513 Operating income.................................................... 3,767,719 1,285,903 Interest expense.................................................... 1,191,695 286,573 ------------ ------------ Income from continuing operations before income taxes............... 2,576,024 999,330 Income tax provision ............................................... 1,236,492 399,732 ------------ ------------ Income from continuing operations................................... 1,339,532 599,598 Loss from discontinued operations, net of applicable income taxes... - (244,308) ------------ ------------ Net income.......................................................... $ 1,339,532 $ 355,290 ------------ ------------ ------------ ------------ Basic net income per share: Income from continuing operations................................ $ 0.17 $ 0.10 Loss from discontinued operations................................ - (0.04) ------------ ------------ Net income....................................................... $ 0.17 $ 0.06 ------------ ------------ ------------ ------------ Weighted average shares outstanding.............................. 8,057,836 6,089,047 Diluted net income per share: Income from continuing operations................................ $ 0.16 $ 0.10 Loss from discontinued operations................................ - (0.04) ------------ ------------ Net income....................................................... $ 0.16 $ 0.06 ------------ ------------ ------------ ------------ Weighted average shares outstanding.............................. 8,265,520 6,089,047
See accompanying notes to consolidated financial statements. 4 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended December 31, ---------------------------- 1998 1997 ------------- ------------ Revenue: Business products............................................... $ 37,843,754 $ 24,711,619 Transportation services......................................... 6,992,112 1,623,738 ------------- ------------ 44,835,866 26,335,357 Costs and expenses: Cost of goods sold.............................................. 30,002,472 16,516,867 Sales commissions............................................... 4,900,262 3,366,158 Selling, general and administrative............................. 6,698,664 5,551,280 Depreciation and amortization................................... 877,025 487,617 ------------- ------------ 42,478,423 25,921,922 ------------- ------------ Operating income................................................... 2,357,443 413,435 Interest expense................................................... 723,609 110,925 ------------- ------------ Income from continuing operations before income taxes.............. 1,633,834 302,510 Income tax provision .............................................. 784,144 121,004 ------------- ------------ Income from continuing operations.................................. 849,690 181,506 Loss from discontinued operations, net of applicable income taxes.. - (79,331) ------------- ------------ Net income......................................................... $ 849,690 $ 102,175 ------------- ------------ ------------- ------------ Basic net income per share: Income from continuing operations............................... $ 0.10 $ 0.03 Loss from discontinued operations............................... - (0.01) ------------- ------------ Net income...................................................... $ 0.10 $ 0.02 ------------- ------------ ------------- ------------ Weighted average shares outstanding............................. 8,458,534 6,089,047 Diluted net income per share: Income from continuing operations............................... $ 0.10 $ 0.03 Loss from discontinued operations............................... - (0.01) ------------- ------------ Net income...................................................... $ 0.10 $ 0.02 ------------- ------------ ------------- ------------ Weighted average shares outstanding............................. 8,753,122 6,089,047
See accompanying notes to consolidated financial statements. 5 PRECEPT BUSINESS SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended December 31, ---------------------------- 1998 1997 ------------ ------------ Cash flows from operating activities: Net income............................................................. $ 1,339,532 $ 355,290 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 1,526,940 774,395 Changes in operating assets and liabilities, net of effects from acquisitions Trade accounts receivable.......................................... 806,235 (1,314,935) Accounts receivable from affiliates................................ 62,232 (236,926) Other accounts receivable.......................................... (1,459,084) (288,234) Inventory.......................................................... (540,540) (1,787,135) Other current assets............................................... 153,695 (171,801) Income taxes refundable............................................ - (12,277) Net assets of discontinued operations.............................. - 972,582 Trade accounts payable............................................. (817,500) 1,666,792 Accrued compensation............................................... (1,943,964) (635,005) Other assets and liabilities, net.................................. 3,126,804 (897,858) ------------ ------------ Net cash provided by (used in) operating activities.................. 2,254,350 (1,575,112) ------------ ------------ Cash flows provided by (used in) investing activities: Acquisitions of businesses, including earnout payments................. (9,192,545) (435,000) Sale of net assets of discontinued operations.......................... 1,115,125 - Acquisition of property and equipment, net............................. (327,198) (254,645) ------------ ------------ Net cash used in investing activities................................ (8,404,618) (689,645) ------------ ------------ Cash flows provided by (used in) financing activities: Repayment of shareholder notes receivable.............................. - 208,060 Payments on long-term debt............................................. (749,092) (227,305) Increase in (payments of) capital lease obligations.................... (448,746) 422,351 Borrowings on revolving line of credit................................. 7,804,522 525,000 ------------ ------------ Net cash provided by financing activities.......................... 6,606,684 928,106 ------------ ------------ Net increase (decrease) in cash and cash equivalents..................... 456,416 (1,336,651) Cash and cash equivalents at beginning of period......................... 2,291,303 2,432,202 ------------ ------------ Cash and cash equivalents at end of period............................... $ 2,747,719 $ 1,095,551 ------------ ------------ ------------ ------------ Cash paid for: Interest............................................................... $ 1,287,896 $ 380,816 Income taxes........................................................... $ 394,406 $ 422,783
See accompanying notes to consolidated financial statements 6 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........ 10,646 - 12,533,319 - - 12,543,965 Net income................... - - - 1,339,532 - 1,339,532 -------- -------- ------------ ------------ ------------ ------------ Balance, December 31, 1998... $ 79,347 $ 5,921 $ 36,048,341 $ (56,373) $ (191,271) $ 35,885,965 -------- -------- ------------ ------------ ------------ ------------ -------- -------- ------------ ------------ ------------ ------------ Balance, June 30, 1997....... $ 46,458 $ 14,433 $ 17,803,121 $ (750,062) $ (1,012,307) $ 16,101,643 Repayment of shareholder notes receivable.......... - - - - 208,060 208,060 Net income................... - - - 355,290 - 355,290 -------- -------- ------------ ------------ ------------ ------------ Balance, December 31, 1997... $ 46,458 $ 14,433 $ 17,803,121 $ (394,772) $ (804,247) $ 16,664,993 -------- -------- ------------ ------------ ------------ ------------ -------- -------- ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 7 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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 small-to large-sized corporate customers. Precept operates from offices throughout the United States. The transportation services are provided 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" 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 three-month or six-month reporting periods ended December 31, 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 became effective December 4, 1998. All financial and share information presented in this report has been restated to give effect to this reverse stock split. 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 8 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 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 The Company adopted the new accounting standard on comprehensive income in the first quarter of fiscal year 1999, which requires companies to disclose comprehensive income separately from net income from operations. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-ownership sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. Comprehensive income (loss) is equal to net earnings as presented in the consolidated statements of operations for the three and six months ended December 31, 1998 and 1997. 3. ACQUISITIONS In the quarter ended December 31, 1998, the Company 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. This acquisition was accounted for using the purchase method of accounting. For this purchase acquisition, 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 this company have been included in the Company's historical results of operations for all periods following the acquisition. The aggregate acquisition cost for this purchased business amounted to $9.0 million and consisted of $3.4 million in cash, funded by working capital and the Company's revolving line of credit, 0.3 million shares of Class A common stock with an aggregate fair market value of $2.9 million, and $2.7 million in assumed debt and transaction 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 and assumed debt. In the second quarter of fiscal year 1998, the Company completed the acquisition of two business products companies located in Tempe, Arizona and Austin, Texas and one corporate transportation service company located in Dallas, Texas. Total annual revenues for the two business products companies amounted to $3.5 million. These companies were acquired with seller notes and assumed debt of $1.3 million. The transportation company's annual revenues totaled $3.4 million. This acquisition was paid for with a seller note of $0.4 million and assumed debt of $0.2 million. 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 combined annual revenues for these two companies were $0.6 million. In fiscal year 1998, the Company issued 0.9 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 Inc. and MBF Corproation. These acquisitions have been 9 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 accounted for using the pooling of interests method of accounting. The Company's consolidated financial statements give retroactive effect to the acquisitions of such companies for all periods presented. The following presents the separate results from continuing operations, in the second quarter and for the first six months 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.
Six months ended Three months ended December 31, 1997 December 31, 1997 ----------------- ------------------ Revenue: Company (excluding InfoGraphix and MBF)......... $ 37,879,392 $ 18,943,914 InfoGraphix..................................... 9,789,883 4,367,115 MBF............................................. 7,698,141 3,024,328 ------------ ------------ Company......................................... $ 55,367,416 $ 26,335,357 ------------ ------------ ------------ ------------ Net income: Company (excluding InfoGraphix and MBF)......... $ 323,602 $ 95,392 InfoGraphix..................................... 496,719 197,067 MBF............................................. 179,009 10,051 ------------ ------------ Company......................................... $ 999,330 $ 302,510 ------------ ------------ ------------ ------------
The following table summarizes the consideration for the purchase acquisitions completed and the fair value of the assets acquired.
Six months ended December 31, ------------------------------ Purchase consideration: 1998 1997 ------------- ------------- Cash paid..................................................... $ 9,165,000 $ 435,000 Amounts due sellers of acquired businesses.................... 1,380,000 354,435 Common stock issued........................................... 12,544,000 - Liabilities assumed........................................... 1,777,000 1,971,000 Other......................................................... 179,000 - ------------- ------------- Fair value of net assets acquired.................................. $ 25,045,000 $ 2,760,435 ------------- ------------- ------------- ------------- Six months ended December 31, ------------------------------ Allocation of fair value of net assets acquired: 1998 1997 ------------- ------------- Goodwill and intangible assets................................ $ 20,771,000 $ 2,353,763 Accounts receivable........................................... 3,939,000 - Inventory and other, net...................................... 335,000 406,672 ------------- ------------- $ 25,045,000 $ 2,760,435 ------------- ------------- ------------- -------------
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998
Six months ended Three months ended December 31, December 31, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Total revenues................... $ 86,250,943 $ 87,532,457 $ 45,049,943 $ 45,042,457 Income before income taxes ...... $ 3,235,086 $ 4,237,757 $ 1,905,086 $ 2,414,757 Net income....................... $ 1,787,345 $ 2,349,674 $ 1,096,345 $ 1,255,674 Diluted net income per share..... $ 0.21 $ 0.27 $ 0.13 $ 0.15
Since December 31, 1998, Precept has acquired one corporate transportation services company which provides executive town car and limousine service primarily in the tri-state New York metropolitan area with annual revenues of $2.0 million. The aggregate consideration for this transaction amounted to $1.4 million, paid $0.2 million in cash and approximately $1.2 million in seller notes and debt assumed. Assets with a preliminary aggregate fair value of $0.9 million were acquired, with a preliminary allocation as follows: $1.6 million to goodwill and intangible assets, $0.4 million to property, plant, and equipment, and $1.1 million (net) to other liabilities. The operational results of this acquisition are not considered to be significant enough to significantly affect the pro forma results presented above; therefore, the pro forma effect of this acquisition on the Company's pro forma operating results has not been separately disclosed. 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, June 30, Estimated Lives 1998 1998 --------------- ------------- ------------- Land $ 455,661 $ 411,000 Buildings 15 to 40 years 1,778,279 1,670,926 Leasehold improvements 1 to 10 years 496,156 455,118 Equipment and vehicles 3 to 5 years 11,392,268 7,020,965 Capitalized leasehold rights 3 to 5 years 1,385,137 1,353,279 ------------- ------------- 15,507,501 10,911,288 Accumulated depreciation and amortization.................... 6,501,846 5,159,801 ------------- ------------- $ 9,005,655 $ 5,751,487 ------------- ------------- ------------- -------------
5. INTANGIBLE ASSETS Intangible assets consist of the following:
December 31, June 30, 1998 1998 ------------- ------------- Goodwill.......................................................... $ 44,140,607 $ 23,955,689 Non-compete agreements............................................ 755,659 755,659 ------------- ------------- 44,896,266 24,711,348 Accumulated amortization.......................................... 5,338,193 5,153,298 ------------- ------------- $ 39,558,073 $ 19,558,050 ------------- ------------- ------------- -------------
11 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 6. LONG-TERM DEBT Long-term debt consists of the following:
December 31, June 30, 1998 1998 ------------- ------------- Revolving line of credit.......................................... $ 23,770,000 $ 15,965,478 Note payable and long-term liability to shareholder............... 510,730 813,803 Convertible notes payable to sellers.............................. 3,054,436 2,114,435 Capitalized lease obligations and other notes payable............. 4,425,026 2,612,517 ------------- ------------- 31,760,192 21,506,233 Less current portion due within one year.......................... 2,751,880 1,421,477 ------------- ------------- Long-term debt.................................................... $ 29,008,312 $ 20,084,756 ------------- ------------- ------------- -------------
REVOLVING LINE OF CREDIT The Company has a $25 million revolving line of credit with its bank for borrowing to finance working capital and acquisition needs. The line of credit bears interest at prime (7.75% at December 31, 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 December 31, 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 three- and the six-month periods ended December 31, 1998 and 1997. Intersegment sales included in operating income below amounted to $0 and $3,474 for the business products segment and $150,996 and $165,120 for the transportation services segment for the second quarters ended December 31, 1998 and 1997, respectively. For the first six months in 1999 and 1998, intersegment sales included in operating income below totaled $1,671 and $34,070 for the business products segment and $292,376 and $329,468 for the transportation services segment.
Six months ended Three months ended December 31, December 31, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------- ------------- ------------- ----------- Operating income: Business products............. $ 5,098,693 $ 4,367,049 $ 2,425,647 $ 1,453,522 Transportation services....... 1,722,311 (283,136) 1,151,074 (99,131) Other......................... (3,053,285) (2,798,010) (1,219,278) (940,956) ------------- ------------- ------------- ------------- Total operating income.... 3,767,719 1,285,903 2,357,443 413,435 Interest expense................... (1,191,695) (286,573) (723,609) (110,925) ------------- ------------- ------------- ------------- Income before income taxes......... $ 2,576,024 $ 999,330 $ 1,633,834 $ 302,510 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
December 31, -------------------------------- 1998 1997 ------------- ------------- Identifiable assets: Business products................................................ $ 52,517,901 $ 31,690,326 Transportation services.......................................... 27,582,295 2,403,033 Other............................................................ 6,219,810 9,100,198 ------------- ------------- Total identifiable assets.................................... $ 86,320,006 $ 43,193,557 ------------- ------------- ------------- -------------
12 PRECEPT BUSINESS SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 8. WEIGHTED AVERAGE SHARES OUTSTANDING The following table provides information to reconcile the basic and diluted weighted average shares outstanding for the three-month and six-month periods ended December 31, 1998 and 1997.
Six months ended Three months ended December 31, December 31, ------------------------- --------------------------- 1998 1997 1998 1997 ---------- --------- ---------- ---------- Basic weighted average shares outstanding: Common shares, Class A and Class B, outstanding at the beginning of the period.............. 7,393,919 6,089,047 8,122,565 6,089,047 Common shares used to acquire businesses during the period.................................. 1,064,615 - 335,969 - ---------- --------- ---------- ---------- Common shares, Class A and Class B, outstanding at the end of the period.................... 8,458,534 6,089,047 8,458,534 6,089,047 ---------- --------- ---------- ---------- ---------- --------- ---------- ---------- Weighted average number of common shares outstanding during the period based on the number of days outstanding (A).............. 8,057,838 6,089,047 8,458,534 6,089,047 ---------- --------- ---------- ---------- ---------- --------- ---------- ---------- Diluted weighted average shares outstanding: Common stock options: Number of outstanding options............... 663,832 46,405 663,832 46,405 Number of options vested.................... 66,405 46,405 66,405 46,405 Number of options which would be exercised based on average market value of common stock during the period......... 46,405 - 46,405 - Proceeds from exercise of options........... $ 68,218 $ - $ 68,218 $ - Common shares repurchased with proceeds..... 21,593 - 23,058 - Common shares issued from exercise of options, net (B)....................... 24,812 - 23,349 - ---------- --------- ---------- ---------- ---------- --------- ---------- ---------- Warrants to purchase common stock: Number of warrants outstanding.............. 333,930 - 333,930 - Number of warrants which would be exercised based on average market value of common stock during the period......... - - - - Net proceeds from exercise of warrants...... $ - $ - $ - $ - Common shares repurchased with proceeds..... - - - - Common shares issued from exercise of warrants (C)........................... - - - - ---------- --------- ---------- ---------- ---------- --------- ---------- ---------- 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 $2,470,000 $ 440,000 Common shares issued upon conversion (D).... 182,870 - 271,239 - ---------- --------- ---------- ---------- ---------- --------- ---------- ---------- Diluted weighted average common shares outstanding (A + B + C + D)................ 8,265,520 6,089,047 8,753,122 6,089,047 ---------- --------- ---------- ---------- ---------- --------- ---------- ----------
13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Precept is an independent distributor of custom and stock business products and is a provider of document management services ("Business Products") to businesses in a variety of industries throughout the United States. Precept also operates seven 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 21 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 second quarter of fiscal year 1999, the Company completed 30 acquisitions: 21 business products distribution companies and 9 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 December 31, 1998, the Company 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. This acquisition was paid for with $3.4 million in cash, financed by the Company's revolving line of credit, $3.0 million in fair market value of 336,000 shares of Class A common stock, and $2.6 million in assumed debt. 14 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 and revolving line of credit, $1.4 million in seller notes, 729,000 shares of Class A common stock with a fair market value of $9.6 million, and $1.8 million in assumed debt. In January 1999, the Company acquired one corporate transportation services company in Canbery, New Jersey, which provides executive limousine and town car service to the tri-state New York metropolitan area with annual revenues of $2.0 million. The aggregate consideration for this transaction amounted to $1.4 million, paid with $0.2 million in cash and approximately $1.2 million in seller notes and debt assumed. In the three month period ended December 31, 1997, the Company completed the acquisition of two business products companies located in Tempe, Arizona and Austin, Texas and one corporate transportation service company located in Dallas, Texas. Total annual revenues for the two business products companies amounted to $3.5 million. These companies were acquired with seller notes and assumed debt of $1.3 million. The transportation company's annual revenues totaled $3.4 million. This acquisition was paid for with a seller note of $0.4 million and assumed debt of $0.2 million. In the three month period ended September 30, 1997, the Company completed the acquisition of two business products companies located in New York and Fort Worth, Texas with annual revenues of $0.6 million. These acquisitions were paid for with $0.5 million in cash, financed by the Company's revolving line of credit. 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 will generally result in the allocation of a portion of the purchase price to goodwill, which results in incremental annual and quarterly amortization expense. 15 RESULTS OF OPERATIONS The following table sets forth various items from continuing operations as a percentage of revenues for the three-month and six-month periods ended December 31, 1998 and 1997.
Six months ended Three months ended December 31, December 31, ----------------- ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ Revenue: Business products............................................ 86.2% 93.2% 84.4% 93.8% Transportation services...................................... 13.8% 6.8% 15.6% 6.2% ------ ------ ------ ------ 100.0% 100.0% 100.0% 100.0% Costs and operating expenses: Cost of goods sold........................................... 66.5% 66.4% 66.9% 62.7% Sales commissions............................................ 11.5% 12.5% 10.9% 12.8% Selling, general and administrative.......................... 15.3% 17.4% 14.9% 21.1% Depreciation and amortization................................ 1.9% 1.4% 2.0% 1.9% ------ ------ ------ ------ 95.2% 97.7% 94.7% 98.5% ------ ------ ------ ------ Operating income.................................................. 4.8% 2.3% 5.3% 1.5% Interest expense.................................................. 1.5% 0.5% 1.7% 0.4% ------ ------ ------ ------ Income before income taxes........................................ 3.3% 1.8% 3.6% 1.1% Income tax provision.............................................. 1.6% 0.7% 1.7% 0.5% ------ ------ ------ ------ Net income........................................................ 1.7% 1.1% 1.9% 0.6% ------ ------ ------ ------ ------ ------ ------ ------
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1997 REVENUE for 1999 increased by $24.3 million, or 43.9%, from $55.4 million in 1998 to $79.7 million in 1999. In 1999, Business Products revenue increased by $16.8 million or 32.4% and Transportation Services revenue increased by $7.5 million or 217.4%. 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 $12.5 million, and internal growth of $4.3 million. Business Products internal revenue grew 8.4% for the first six months of 1999. Of the total increase in Transportation Services revenue in 1999, $7.2 million was due to the acquisition of five transportation companies. COST OF GOODS SOLD for 1999 increased by $16.2 million, or 44.1%, from $36.8 million in 1998 to $53.0 million in 1999. Cost of goods sold for Business Products increased by $11.7 million of which approximately $8.4 million was due to companies acquired after the beginning of fiscal year 1998. Transportation Services cost of goods sold increased by $4.5 million due primarily to the five transportation companies acquired since the beginning of 1998. As a percentage of revenue, cost of goods sold for 1999 increased by 0.1% from 66.4% in 1998 to 66.5% in 1999. This increase was primarily due to the mix of products sold. SALES COMMISSIONS increased by $2.3 million, or 32.5%, in 1999, from $6.9 million in 1998 to $9.2 million in 1999 due primarily to the increased level of Business Products revenue. Sales commissions for the Business Products division remained consistent at 13.3% of Business Products revenue. Total commission expense decreased by 1.0% from 12.5% in 1998 to 11.5% in 1999 because the Transportation Services division contributed a higher proportion of consolidated revenue in 1999. 16 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $2.6 million or 27% in 1999 from $9.6 million in 1998 to $12.2 million in 1999, which included increased expenses of $2.4 million from business products and transportation services companies acquired. As a percentage of revenue, selling, general and administrative expenses have declined by 2.1% from 17.4% in 1998 to 15.3% 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 $0.7 million in 1999 from $0.8 million in 1998 to $1.5 million in 1999 due largely to the size and timing of the companies acquired since the beginning of 1998. INTEREST EXPENSE increased by $0.9 million or 315.8% during 1999, from $0.3 million in 1998 to $1.2 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 $0.7 million or 123.4% in 1999, from $0.6 million in 1998 to $1.3 million in 1999, due to the reasons described above. Diluted earnings per share increased $0.06 from $0.10 in 1998 to $0.16 in 1999. Diluted earnings per share for the six months ended December 31, 1999 are not equal to the sum of the quarterly earnings per share due to the difference in the weighted average number of shares caused by the timing of acquisitions where common stock was used as part of the purchase consideration. THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 REVENUE for 1999 increased by $18.5 million, or 70.2%, from $26.3 million in 1998 to $44.8 million in 1999. In 1999, Business Products revenue increased by $13.1 million or 53.1% and Transportation Services revenue increased by $5.4 million or 330.6%. The increase in Business Products revenue was due to the acquisition of eight business products companies during fiscal years 1998 and 1999, which accounted for $9.5 million, and internal growth of $3.7 million. Business Products internal revenue grew 15.0% for the second quarter of 1999. Of the total increase in Transportation Services revenue in 1999, $5.1 million was due to the acquisition of five transportation companies, one of which was acquired in the second quarter of fiscal year 1998, three of which were acquired at the end of the third quarter of fiscal year 1998 and one of which was acquired during the second quarter of fiscal 1999. COST OF GOODS SOLD for 1999 increased by $13.5 million, or 81.6%, from $16.5 million in 1998 to $30.0 million in 1999. Cost of goods sold for Business Products increased by $10.3 million, of which approximately $6.4 million was due to companies acquired after the first quarter of fiscal year 1998. Transportation Services cost of goods sold increased by $3.2 million due primarily to the five transportation companies acquired since the beginning of the second quarter of 1998. As a percentage of revenue, cost of goods sold for 1999 increased by 4.2% from 62.7% in 1998 to 66.9% in 1999. This percentage increase was primarily the result of proportionately higher sales of lower gross profit product categories and the effect of competitive pricing. 17 SALES COMMISSIONS increased by $1.5 million, or 45.6%, in 1999, from $3.4 million in 1998 to $4.9 million in 1999 due primarily to the increased level of Business Products revenue. Sales commissions for the Business Products division decreased by 0.6% from 13.5% in 1998 to 12.9% in 1999 due to a lower level of gross profit, in proportion to revenue, during the second quarter of 1999. Total commission expense decreased by 1.9% from 12.8% in 1998 to 10.9% in 1999 because the Transportation Services division contributed a higher proportion of consolidated revenue in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased by $1.1 million or 20.7% in 1999 from $5.6 million in 1998 to $6.7 million in 1999. Increased expenses of $2.1 million from business products and transportation services companies acquired were offset by $1 million in reduced expenses in existing business products and transportation companies. As a percentage of revenue, selling, general and administrative expenses have declined by 6.2% from 21.1% in 1998 to 14.9% 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 $0.4 million in 1999 from $0.5 million in 1998 to $0.9 million in 1999 due largely to the size and timing of the companies acquired in 1998 and the first two quarters of 1999. INTEREST EXPENSE increased by $0.6 million or 552.3% during 1999, from $0.1 million in 1998 to $0.7 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 $0.7 million or 368.1% in 1999, from $0.2 million in 1998 to $0.8 million in 1999, due to the reasons described above. LIQUIDITY AND CAPITAL RESOURCES NET CASH FLOWS FROM OPERATING ACTIVITIES. In the first six months of fiscal year 1999, the Company generated $2.0 million in cash from operations as compared to cash use of $1.6 million in the first six months of fiscal year 1998. During the first six months of 1999, the Company's net income, adjusted for non-cash depreciation and amortization charges, amounted to $2.9 million. In addition, the Company reduced its working capital by $0.6 million. During the first six months 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 six months of fiscal year 1999, Precept used $8.2 million in cash for investing activities as compared to a use of $0.7 million for investing activities in the first six months of fiscal year 1998. During 1999, the Company acquired four products businesses and one corporate transportation service company and used $9.2 million in cash to finance these acquisitions and to pay for contingent consideration on previous acquisitions. In addition, the Company purchased $0.1 million of equipment for its existing operations. During 1998, the Company acquired three products distribution businesses 18 and one corporate transportation service company for $0.4 million in cash and acquired $0.3 million of equipment. NET CASH FLOWS FROM FINANCING ACTIVITIES. In the first six months of 1999, $6.6 million of cash was generated by financing activities as compared to $0.9 million of cash generated by financing activities in the first six months of fiscal year 1998. During the first six months of 1999, Precept increased its outstanding revolving line of credit balance by approximately $7.8 million, primarily to finance acquisitions. In addition, the Company repaid $1.1 million of existing long-term debt, including capital lease obligations. During the first six months of 1998, the Company increased its long-term debt and capital lease obligations by $0.2 million, increased its outstanding revolving line of credit balance by $0.5 million., and received $0.2 million in payments in shareholder notes receivable. Management believes that the current levels of operations and the cash flow from such operations, the existing revolving line of credit agreement and the available cash on hand at December 31, 1998 of $2.7 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 February 8, 1999, the Company had approximately $25.0 million outstanding under the credit facility at an annual interest rate of approximately 8.5%. 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 $25.0 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. As of December 31, 1998, Precept's pro forma annual EBITDA amounted to $12.2 million. 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 six months 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 six months of fiscal year 1999 and fiscal year 1998. 19 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 second quarter of fiscal year 1999 as part of its year 2000 review, the Company's management identified one additional subsidiary that has key information systems that may not be year 2000 compliant. The Company is in the process of working with its software vendors to determine if an upgrade to the key information systems will be sufficient to solve the year 2000 compliance issues. If the upgrade solution does not solve the compliance issues, the Company will implement a plan to integrate the subsidiary's operations into the Company's primary information system by the end of calendar year 1999. The Company's cost to resolve the year 2000 compliance issues at this subsidiary is expected to range from $200,000 to $500,000 during the remainder of calendar year 1999. 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 $0.3 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 20 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, 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 six months of 1998, the losses from discontinued operations consisted principally of the losses from Precept Holdings, Inc., 21 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. ITEM 1 LEGAL PROCEEDINGS During the second 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 December 31, 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 592,142 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 6,179,680 15,744 William W. Solomon, Jr. 5,311,080 884,344 Sheldon I. Stein 6,179,247 16,177 2. Approval of a 1:7 reverse stock split. 5,789,079 399,777 6,568 3. Amendment to the Company's articles of incorporation to change vote required for certain actions. 5,813,591 108,023 273,810 4. Ratification of Ernst & Young LLP as independent auditors for the fiscal year ending June 30, 1999. 6,095,457 91,235 8,732
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 EXHIBITS AND REPORTS ON FORM 8-K ITEM 6(a) EXHIBITS
Exhibit No. Description - ----------- ----------- 2.1 Form of Amended and Restated Articles of Incorporation approved by the Company's shareholders and to be filed with the Texas Secretary of State. (1) 22.1 Form of Proxy mailed to the Company's shareholders in connection with the Company's annual shareholder meeting. (1) 27.1 Financial Data Schedule (2)
(1) Previously included with the Company's Form 10-Q filed November 12, 1998. (2) Included as an exhibit to this report. ITEM 6(b) REPORTS ON FORM 8-K FILED DURING THE PERIOD FROM OCTOBER 1, 1998 THROUGH FEBRUARY 12, 1999 (not filed as exhibits to this report) No reports on Form 8-K were filed during the period from October 1, 1998 through February 12, 1999. 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 February 12, 1999. PRECEPT BUSINESS SERVICES, INC. /s/ David L. Neely /s/ William W. Solomon, Jr. - ------------------------------------- ----------------------------------- David L. Neely William W. Solomon, Jr. Chairman and Chief Executive Officer Senior Vice President and Chief Financial Officer 23 EX-27 2 EXHIBIT 27
5 3-MOS JUN-30-1999 JAN-01-1998 DEC-31-1998 2,747,719 0 18,728,699 650,000 7,258,282 34,706,221 9,005,655 877,025 86,320,006 21,425,729 0 0 0 85,268 35,800,697 86,320,006 44,835,866 44,835,866 30,002,472 12,475,951 0 0 723,609 1,633,834 784,144 849,690 0 0 0 849,690 0.1 0.1 AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE. AMOUNT INCLUDES ADDITIONAL PAID-IN CAPITAL, RETAINED EARNINGS, AND TREASURY STOCK.
EX-27.1 3 EXHIBIT 27.1
5 6-MOS JUN-30-1999 JAN-01-1998 DEC-31-1998 2,747,719 0 18,728,699 650,000 7,258,282 34,706,221 0 9,005,655 1,526,940 86,320,006 0 0 0 85,268 35,800,697 86,320,006 79,653,793 79,653,793 53,001,370 22,884,704 0 0 1,191,695 2,576,024 1,236,492 1,339,532 0 0 0 1,339,532 0.17 0.16 AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE. AMOUNTS INCLUDES ADDITIONAL PAID-IN CAPITAL, RETAINED EARINGS, AND TREASURY STOCK.
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