<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............ to ............
Commission File Number 33-27603
------------------------
DIRECTCOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2942013
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3 Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices)
(973) 523-2500
(Registrant's telephone number, including area code)
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.
YES X NO
---- ----
The number of shares of Common Stock of the Registrant outstanding as of March
31, 1998 was 3,101,983.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
---------------------
Page No.
--------
Consolidated balance sheets - March 31, 1998 (unaudited) and
December 31, 1997 2
Consolidated statements of operations (unaudited) -Three months ended
March 31, 1998 and 1997 3
Consolidated statements of cash flows (unaudited) -Three months ended
March 31, 1998 and 1997 4
Notes to consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There is no material litigation or other proceeding currently pending against
the registrant.
Item 2. Change in Securities
--------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other information
-----------------
The basic and diluted per common share for the three months ended March 31, 1998
is calculated as follows:
Common shares outstanding 3,101,983
Common shares equivalents outstanding 68,000
Net Income $ 454,347
Per share - Basic $ .15
Per share - Diluted $ .14
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Company filed a Current Report on Form 8-K, under Item 4, dated February 13,
1998 and two clarifying amendments to that report on Forms 8-K/A No. 1 and No.
2, dated February 18, 1998 and February 20, 1998, respectively, stating under
Item 4 that the Company retained the services of Coopers and Lybrand L.L.P. to
replace Thompson Dugan, PC as the Company's certifying accountants.
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
--------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,891,336 $ 2,837,427
Cash - restricted 1,400,000 1,400,000
Accounts receivable, less allowance for doubtful accounts of $139,171
and $121,171 as of March 31, 1998 and December 31, 1997, respectively 3,485,278 2,200,749
Inventories 679,419 450,837
Prepaid and other current assets 518,944 903,232
----------- -----------
Total current assets 8,974,977 7,792,245
PROPERTY, PLANT AND EQUIPMENT, Net 5,809,570 6,002,779
OTHER ASSETS 513,369 504,744
----------- -----------
TOTAL ASSETS $15,297,916 $14,299,768
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 437,430 $ 437,430
Accounts payable 420,178 351,931
Accounts payable - related company 2,638,687 2,315,860
Income taxes payable - 82,847
Accrued expenses and other current liabilities 826,905 526,584
----------- -----------
Total current liabilities 4,323,200 3,714,652
LONG-TERM DEBT 6,160,590 6,215,452
DEFERRED INCOME TAXES 539,000 577,000
MINORITY INTEREST 830,415 802,300
----------- -----------
TOTAL LIABILITIES 11,853,205 11,309,404
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value - authorized 10,000,000 shares;
issued and outstanding: none - -
Common stock $.00001 par value - authorized 60,000,000 shares;
issued 3,421,983 of which 320,000 shares are held as treasury stock 34 34
Paid-in capital 650,181 650,181
Retained earnings 3,099,496 2,645,149
----------- -----------
3,749,711 3,295,364
Less treasury stock, at cost (305,000) (305,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 3,444,711 2,990,364
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,297,916 $14,299,768
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Database $3,055,738 $2,891,543
Printing - related company 683,692 677,861
Printing 2,487,011 3,575,383
---------- ----------
Total revenues 6,226,441 7,144,787
---------- ----------
COST OF REVENUE
Database - related company 1,505,020 1,145,542
Database - other 475,751 629,335
Printing - related company 158,530 18,277
Printing 1,580,958 2,337,222
---------- ----------
Total cost of revenue 3,720,259 4,130,376
OPERATING EXPENSES
Selling, general and
administrative expense 883,252 779,817
Administrative fee related party (Note 4) 435,850 -
Interest expense 93,594 98,681
Depreciation and amortization 287,024 219,837
---------- ----------
Total costs and expenses 5,419,979 5,228,711
---------- ----------
Income from operations before income taxes
and minority interest 806,462 1,916,076
Provision for income taxes 324,000 816,918
---------- ----------
Income from operations before minority interest 482,462 1,099,158
Minority interest in income of subsidiary 28,115 111,500
---------- ----------
Net income $ 454,347 $ 987,658
========== ==========
BASIC EARNINGS PER SHARE $0.15 $0.33
========== ==========
DILUTED EARNINGS PER SHARE $0.14 $0.32
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 454,347 $ 987,658
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 287,024 219,836
Bad debt expense 18,000 17,000
Minority interest 28,115 111,500
Deferred taxes (38,000) -
(Increase) decrease in:
Accounts receivable (1,302,529) (1,246,572)
Inventory (228,582) (262,531)
Prepaid and other current assets 384,288 92,869
Other non-current assets (8,625) (32,817)
Increase (decrease) in:
Accounts payable 68,247 267,601
Accounts payable - related company 322,827 774,227
Income taxes payable (82,847) 222,510
Accrued expenses and other current liabilities 300,321 302,448
Decrease in long term liabilities - (279,275)
Deferred revenue - (99,475)
----------- -----------
Net cash provided by operating activities 202,586 1,074,979
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (93,815) (302,015)
----------- -----------
Net cash used in investing activities (93,815) (302,015)
----------- -----------
Cash flows from financing activities:
Repayments of notes payable - (471,036)
Repayments of long-term debt (54,862) (109,905)
----------- -----------
Net cash used in financing activities (54,862) (580,941)
----------- -----------
Net increase in cash 53,909 192,023
Cash at beginning of period 2,837,427 1,080,630
----------- -----------
Cash at end of period $ 2,891,336 $ 1,272,653
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the consolidated financial statements
and related footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
NOTE 2 - INVENTORIES
Inventories consist of the following:
March 31, 1998 December 31, 1997
-------------- -----------------
Paper $ 378,887 $ 293,373
Other raw materials 81,289 93,823
Work-in-process 219,243 63,641
-------------- -----------------
$ 679,419 $ 450,837
============== =================
NOTE 3 - PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Deferred income taxes $133,000 $133,000
Refundable state taxes 13,876 13,876
Prepaid income taxes 319,744 676,591
Other current assets 52,324 79,765
-------- --------
$518,944 $903,232
======== ========
</TABLE>
5
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
NOTE 4 - RELATED-PARTY TRANSACTIONS
Certain of the Company's major shareholders also exercise control over North
American Communications, Inc. (NAC), an affiliated company. The Company's
related party revenue is generated through printed materials for direct mail
packages. The Company's related party expenses result from the production,
printing and mailing of direct mail packages in addition to salary and insurance
expenses.
ACCOUNTS PAYABLE - RELATED COMPANY
The accounts payable - related company as of March 31, 1998 and December 31,
1997 represents amounts due to NAC for printing and mailing services. Offset
against the related party payable are receivables in the amount of $386,085 for
the three months ended March 31, 1998 and $358,063 for the year ended December
31, 1997.
ADMINISTRATIVE FEE - RELATED COMPANY
The administrative fee is a result of a management agreement with a related
party for administrative and management support services. The agreement was
established during the fourth quarter of 1997. The fee for the three months
ended March 31, 1998 was $435,850.
NOTE 5 - SUBSEQUENT EVENTS
The Wilmington, Delaware office relocated their operations, to another location
within Wilmington, Delaware, as of May 1, 1998, entering into a three year lease
commitment. The relocation was prompted by the need for additional space to
accommodate the operations growth.
NOTE 6 - INCOME TAXES
Deferred income taxes are provided under the asset and liability method. The
Company recognizes deferred tax assets and liabilities for the expected future
income tax consequences of events that have been recognized in the Company's
financial statements. Under this method, deferred tax assets and liabilities are
based on temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities using enacted tax rates in effect in
the years in which the temporary differences are expected to reverse. Income tax
expense consists of the Company's current liability for federal and state taxes
and the change in the Company's deferred income tax assets and liabilities. The
Company determines its interim effective tax rate based upon the estimated
annual effective rate. Differences between the federal statutory rate and the
Company's effective tax rate are primarily due to state taxes and certain non-
deductible expenses.
NOTE 7 - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" is effective for the three months ended March 31, 1998. SFAS No. 130
establishes standards for reporting comprehensive income in a full set of
general purpose financial statements either in the statement of operations or
in a separate statement. The Company has no items of comprehensive income to
report.
6
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for reporting
information about operating segments, including related disclosures, and
products, services, geographic areas and major customers and is effective for
the year ending December 31, 1998.
NOTE 9 - EARNINGS PER SHARE
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share and diluted earnings per share. Basic
earnings per share is based on the weighted average number of outstanding common
shares for the period. Diluted earning per share adjusts the weighted average
for the potential dilution that could occur if the stock options, warrants or
other convertible securities were exercised or converted into common stock.
7
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Three Months Ended March 31, 1998 and March 31, 1997
General
The Company has focused its growth strategy on acquiring complementary
database and direct mail marketing companies. The Company intends to build a
vertically integrated company that provides turnkey database marketing products
and services to direct marketers. These services will include database
management and data warehousing, predictive modeling, marketing strategy
consulting, agency creative, production management, direct mail production and
fulfillment and printing.
(a) Results of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998
----
Database Printing Total
-------- -------- -----
<S> <C> <C> <C>
Revenues $3,055,738 $3,170,703 $6,226,441
Gross profit $1,074,967 $1,431,215 $2,506,182
Operating income $ 753,715 $ 52,747 $ 806,462
1997
----
Revenues $2,891,543 $4,253,244 $7,144,787
Gross profit $1,116,666 $1,897,745 $3,014,411
Operating income $ 777,412 $1,138,664 $1,916,076
</TABLE>
Consolidated net revenues of $6,226,441 for the three month period ended March
31, 1998 represent a decrease of $918,346 over three month period ended March
31, 1997. Operating income of $806,462 represents a decrease of $1,109,614 over
1997.
Revenues
- --------
Net revenues decreased $918,346 from $7,144,787 in 1997 to $6,226,441 in 1998.
The revenue decrease was primarily attributed to the loss of two significant
printing customers. Management does not believe that this loss will have any
adverse impact on future earnings of the Company and anticipates that the
printing revenues will be replaced during the upcoming quarter and continue to
increase throughout the year.
The database and advertising revenue for the three month period ended March 1998
increased 5.6% over the prior period comparison. The increase resulted primarily
from increased sales to existing customers, including Capital One and Fleet
Corporation, and sales to several new clients.
The sales at the end of the current period, March 31, 1998, were significantly
higher than the sales at December 31, 1997, which is reflected by the increase
in accounts receivable.
8
<PAGE>
Cost of Revenue
- ---------------
The Company's cost of revenue, as a percentage of net revenues was 59.7% for the
three month period ended March 31, 1998 as compared to 57.8% for the prior three
month period ended March 31, 1997.
The database cost of revenue for the three month period ended March 31, 1998, in
comparison to database revenues, increased 3.5% from the prior period
comparison. The current period increase resulted from a 9.6% increase in costs
associated with the printing and mailing services provided by a related party.
This increase resulted due to an increase in the printing and mailing sales
volume. The related party increase is offset by a 6.1% decrease in other
database costs of revenue, resulting from a re-negotiated contract provided by
an outside service, together with the development of internal resources to
fulfill production requirements.
The cost of revenue for printing in the three month period ended March 31, 1998,
as a percentage of printing revenues, decreased .5%
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased $103,435 in 1998 as
compared to the prior period. The current period increase resulted primarily
from: a) cost associated with the increase from the purchase of a building for
the relocation of Color Graphics and b) increased professional fees associated
with the Company's growth strategies.
Administrative Fee
- ------------------
The administrative fee is a result of a management agreement with a related
party for administrative and management support services. The agreement was
established during the fourth quarter of 1997.
Interest Expense
- ----------------
Interest expense decreased $5,087 for the three month period ended March 31,
1998 as compared to the prior period. The current period decrease resulted from
no borrowings on the Company's revolving lines of credit during the three months
ended March 31, 1998.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased $67,187 in 1998 as compared to the prior
period. The increase resulted primarily from depreciation of a building
purchased for the relocation of Color Graphics.
Provision for Income Taxes
- --------------------------
Provision for income taxes decreased as a result of the decrease in income
before taxes.
9
<PAGE>
Liquidity and Capital Resources
- -------------------------------
3/31/98 12/31/97
---------- ----------
Working capital $4,651,777 $4,077,593
Cash 2,891,336 2,837,427
Cash - restricted 1,400,000 1,400,000
3/31/98 3/31/97
---------- ----------
Cash provided by operating activities 202,586 1,074,979
Cash used in investing activities 93,815 302,015
Cash used in financing activities 54,862 580,941
Working capital increased as of March 31, 1998 by $574,184 over the working
capital as of December 31, 1997, primarily as a result of increased customer
receivables, due to increased sales activity at the end of the first quarter.
The decrease in cash flows from operations in 1998 resulted primarily from the
Company's repayment of related party and other accounts payable.
The restricted cash is to be utilized for purposes relating to the renovations,
remodeling and moving expenses of the Color Graphics operations. The Company
intends to utilize all of these funds in 1998.
The decrease of cash used in investing activities resulted primarily from
decreased capital expenditures for the current period. The Company expects to
continue to invest in capital assets to support its growth.
The decrease of cash used in financing results from the fact that the Company
had no significant borrowings or repayments on the Company's lines of credit.
At March 31, 1998, the Company had outstanding debt of $6,598,020 primarily in
the form of notes payable.
At March 31, 1998 the amount available under the Company's lines of credit was
approximately $3,500,000.
The Company anticipates that current cash balances as well as anticipated cash
flows from operations will provide sufficient funds to meet its working capital
and capital expenditure needs at least through December 31, 1998. However, if
the pace or size of the Company's acquisition or capital expenditure activities
increase, then additional debt or financing may be necessary.
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 4,891,336 4,837,427
<SECURITIES> 0 0
<RECEIVABLES> 3,624,449 2,321,920
<ALLOWANCES> 139,171 121,171
<INVENTORY> 679,419 450,837
<CURRENT-ASSETS> 8,974,977 7,792,245
<PP&E> 7,558,712 7,464,897
<DEPRECIATION> 1,749,142 1,462,118
<TOTAL-ASSETS> 15,297,916 14,299,768
<CURRENT-LIABILITIES> 4,323,200 3,714,652
<BONDS> 0 0
0 0
0 0
<COMMON> 34 34
<OTHER-SE> 650,181 650,181
<TOTAL-LIABILITY-AND-EQUITY> 15,297,916 14,299,768
<SALES> 6,137,988 7,054,593
<TOTAL-REVENUES> 6,226,441 7,144,787
<CGS> 3,720,259 4,130,376
<TOTAL-COSTS> 3,720,259 4,130,376
<OTHER-EXPENSES> 866,252 762,817
<LOSS-PROVISION> 17,000 17,000
<INTEREST-EXPENSE> 93,594 98,861
<INCOME-PRETAX> 806,462 1,916,076
<INCOME-TAX> 324,000 816,918
<INCOME-CONTINUING> 482,462 1,099,158
<DISCONTINUED> 0 0
<EXTRAORDINARY> 28,115 111,500
<CHANGES> 0 0
<NET-INCOME> 454,347 987,658
<EPS-PRIMARY> .15 .33
<EPS-DILUTED> .14 .32
</TABLE>
