<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 September 30, 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 of (IRS Employer Identification No.)
incorporation or organization)
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
September 30, 1998 was 3,101,983.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Page No.
--------
Consolidated balance sheets - September 30, 1998 (unaudited) and 3
December 31, 1997
Consolidated statements of operations (unaudited) - Three months ended
September 30, 1998 and 1997 4
Consolidated statements of operations (unaudited) - Nine months ended
September 30, 1998 and 1997 5
Consolidated statements of cash flows (unaudited) - Nine months ended
September 30, 1998 and 1997 6
Notes to consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There is no material litigation or other proceeding currently pending against
the registrant.
Item 2. Changes 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 earnings per common share for the three and nine months
ended September 30, 1998 is calculated as follows:
Nine Months Three Months
----------- ------------
Common shares outstanding 3,101,983 3,101,983
Common shares equivalents outstanding 68,000 68,000
Net Income $1,378,047 $ 431,313
Per share - Basic $ .44 $ .14
Per share - Diluted $ .43 $ .14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation. The
Certificate of Ownership and Merger was filed with
DirectCom's Form 10-K on April 20, 1990 and is hereby
incorporated by reference.
3.2 Bylaws of the Corporation already have been files with
DirectCom's prior Registration Statement effective May
18, 1989 and are hereby incorporated by reference.
4.1 Form of Common Stock Certificate (specimen) has been
filed with DirectCom's Form 8-A dated April 30, 1997 and
is hereby incorporated by reference.
10.1 Office Lease Agreement between Garrett Mountain Plaza
Office Center Associates - I and DirectCom, with regard
to the West Paterson, New Jersey office has been filed
with DirectCom's 10-K for the year ended December 31,
1996 and is hereby incorporated by reference.
10.2 Stock Option Plan has been filed with DirectCom's 10-K
for the year ended December 31, 1997 and is hereby
incorporated by reference.
11.1 Statement regarding the computation of per-share earnings
is included in Note 7 to Financial Statements on
sequentially numbered page - and is hereby incorporated
by reference.
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
2
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 3,350,177 $ 2,837,427
Cash - restricted -- 1,400,000
Accounts receivable, net of allowance for doubtful accounts of $170,218
and $121,171 as of September 30, 1998 and December 31, 1997, respectively 2,379,904 2,200,749
Inventories 404,700 450,837
Prepaid and other current assets 250,606 903,232
----------- -----------
Total current assets 6,385,387 7,792,245
PROPERTY, PLANT AND EQUIPMENT, Net 7,862,181 6,002,779
OTHER ASSETS 166,248 504,744
----------- -----------
TOTAL ASSETS $14,413,816 $14,299,768
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 347,430 $ 437,430
Accounts payable 323,801 351,931
Accounts payable - related company 1,696,465 2,315,860
Income taxes payable -- 82,847
Accrued expenses and other current liabilities 593,825 526,584
----------- -----------
Total current liabilities 2,961,521 3,714,652
LONG-TERM DEBT 5,689,066 6,215,452
DEFERRED INCOME TAXES 512,000 577,000
MINORITY INTEREST 882,818 802,300
----------- -----------
TOTAL LIABILITIES 10,045,405 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 4,023,196 2,645,149
----------- -----------
4,673,411 3,295,364
Less treasury stock, at cost (305,000) (305,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 4,368,411 2,990,364
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,413,816 $14,299,768
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUE
Database $2,905,813 $2,826,269
Printing - related company 544,317 495,633
Printing 2,095,841 2,850,370
---------- ----------
Total revenue 5,545,971 6,172,272
---------- ----------
COST OF REVENUE
Database - related company 1,179,379 1,402,630
Database - other 475,912 539,696
Printing 1,507,528 1,909,738
---------- ----------
Total cost of revenue 3,162,819 3,852,064
---------- ----------
OPERATING EXPENSES
Selling, general and
administrative expense 998,492 1,074,417
Administrative fee related party (Note 4) 376,972 --
Interest expense 98,078 85,355
Depreciation and amortization 222,811 270,737
---------- ----------
Total costs and expenses 4,859,172 5,282,573
---------- ----------
OTHER INCOME
Gain on sale of equipment 9,749 --
Miscellaneous income 68,096 47,807
---------- ----------
Total other income 77,845 47,807
---------- ----------
Income from operations before income taxes
and minority interest 764,644 937,506
Provision for income taxes 312,000 318,753
---------- ----------
Income from operations before minority interest 452,644 618,753
Minority interest in income of subsidiary 21,331 11,400
---------- ----------
Net income $ 431,313 $ 607,353
========== ==========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.20
========== ==========
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.20
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER,
(UNAUDITED)
1998 1997
---- ----
REVENUES
Database $ 8,914,391 $ 7,623,895
Printing - related company 1,825,371 1,839,534
Printing 7,275,717 10,486,855
----------- -----------
Total revenues 18,015,479 19,950,284
----------- -----------
COST OF REVENUE
Database - related company 3,930,296 3,203,534
Database - other 1,503,803 1,534,306
Printing - related company 251,040 --
Printing 4,830,285 6,521,464
----------- -----------
Total cost of revenue 10,515,424 11,259,304
----------- -----------
OPERATING EXPENSES
Selling, general and
administrative expense 3,198,991 2,938,254
Administrative fee related party (Note 4) 1,258,597 --
Interest expense 292,820 277,153
Depreciation and amortization 704,059 794,310
----------- -----------
Total costs and expenses 15,969,891 15,269,021
----------- -----------
OTHER INCOME
Gain on sale of equipment 199,749 --
Miscellaneous income 193,228 161,372
----------- -----------
Total other income 392,977 161,372
----------- -----------
Income from operations before income taxes
and minority interest 2,438,565 4,842,635
Provision for income taxes 980,000 1,934,500
----------- -----------
Income from operations before minority interest 1,458,565 2,908,135
Minority interest in income of subsidiary 80,518 214,516
----------- -----------
Net income $ 1,378,047 $ 2,693,619
=========== ===========
BASIC EARNINGS PER SHARE $ 0.44 $ 0.89
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.43 $ 0.87
=========== ===========
See notes to consolidated financial statements.
5
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,378,047 $ 2,693,619
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 704,059 794,310
Bad debt expense 54,000 54,000
Minority interest 80,518 214,516
Deferred taxes (65,000) --
Gain on sales of equipment (199,749) (4,573)
(Increase) decrease in:
Accounts receivable (233,155) 779,019
Inventory 46,137 (52,836)
Prepaid and other current assets 652,626 (146,131)
Other non-current assets 338,496 (99,583)
Increase (decrease) in:
Accounts payable (28,130) (202,453)
Accounts payable - related company (619,395) 570,810
Income taxes payable (82,847) (703,482)
Accrued expenses and other current liabilities 67,241 (108,802)
Decrease in long term liabilities -- (129,103)
Deferred revenue -- (99,475)
----------- ----------
Net cash provided by operating activities 2,092,848 3,559,836
----------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,563,461) (1,254,988)
Proceeds from sale of equipment 199,749 17,500
Change in restricted cash 1,400,000 --
----------- ----------
Net cash used in investing activities (963,712) (1,237,488)
----------- ----------
Cash flows from financing activities:
Sale of treasury stock -- 150,000
Repayments of notes payable -- (466,593)
Repayments of long-term debt (616,386) (408,041)
Repayments of long-term debt - related company -- (990,000)
----------- ----------
Net cash used in financing activities (616,386) (1,714,634)
----------- ----------
Net increase in cash 512,750 607,714
Cash at beginning of period 2,837,427 1,080,630
----------- ----------
Cash at end of period $ 3,350,177 $ 1,688,344
=========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<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 and nine months ended September 30, 1998, are
not necessarily indicative of the results that may be expected for the year
ending 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:
September 30, 1998 December 31, 1997
------------------ -----------------
Paper $ 267,725 $ 293,373
Other raw materials 82,352 93,823
Work-in-process 54,623 63,641
------------------ -----------------
$ 404,700 $ 450,837
================== =================
NOTE 3 - PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Deferred income taxes $ 133,000 $ 133,000
Refundable state taxes -- 13,876
Prepaid income taxes 70,792 676,591
Other current assets 46,814 79,765
------------------ -----------------
$ 250,606 $ 903,232
================== =================
7
<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. All pricing and
costing terms associated with the transactions between the Company and NAC are
recorded at market value. The Company's related party revenue is generated
through printed materials for direct mail packages for NAC. The Company's
related party expenses, provided by NAC, result from the purchase of production,
printing and mailing services for direct mail packages to integrate into the
Company's printing and production requirements. Additionally, related party
expenses included certain salary and insurance expenses.
ACCOUNTS PAYABLE - RELATED COMPANY
The accounts payable - related company as of September 30, 1998 and December 31,
1997 represents amounts due to NAC for printing and mailing services. Offset
against the related party payable are receivables due from NAC of $377,476 as of
September 30, 1998 and $358,063 as of December 31, 1997.
ADMINISTRATIVE FEE - RELATED COMPANY
The administrative fee is a result of a management agreement with NAC for
administrative, consulting and management support services. The agreement was
established in the fourth quarter of 1997. The fee for the nine months ended
September 30, 1998 was $1,258,597.
NOTE 5 - 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 6 - NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" is effective for the nine months ended September 30, 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.
8
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS (continued)
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. The Company will implement SFAS No. 131 as of
December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will be
required to adopt this new accounting standard by January 1, 2000. Management
does not anticipate early adoption. The Company believes that the effect of
adoption of SFAS No. 133 will not be material.
NOTE 7 - 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.
9
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 - Three Months Ended September 30, 1998 and September
30, 1997
Database Printing Total
-------- -------- -----
1998
----
Revenue $ 2,905,813 $ 2,640,158 $ 5,545,971
Gross profit $ 1,250,522 $ 1,132,630 $ 2,383,152
Operating income $ 475,198 $ 289,446 $ 764,644
1997
----
Revenue $ 2,826,269 $ 3,346,003 $ 6,172,272
Gross profit $ 883,943 $ 1,436,265 $ 2,320,208
Operating income $ 711,166 $ 226,340 $ 937,506
Revenue
- -------
Net revenue decreased $626,301 from $6,172,272 in 1997 to $5,545,971 in 1998.
The revenue decrease was primarily attributed to the loss of two significant
printing customers. The revenue loss is being offset by increased sales to
existing customers in addition to sales to new 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 next year.
The database and advertising revenue for the three month period ended September
1998 increased 2.8% over the prior period comparison. The increase resulted
primarily from increased sales to existing customers.
Cost of Revenue
- ---------------
The Company's cost of revenue, as a percentage of net revenues, was 57% for the
three month period ended September 30, 1998 as compared to 62.4% for the prior
period.
The database cost of revenue for the three month period ended September 30,
1998, as a percentage of database revenue, decreased 11.75% from the prior
period comparison. The current period cost of revenue as a percentage of
database revenue - related company decreased 9% and other database cost of
revenue decreased 2.75%. The related company decrease resulted from the purchase
of paper for direct mail production for a specific customer for the three month
period ended September 30, 1997 and the same customer supplying their own paper
for the three month period ended September 30, 1998. The other database cost
decrease resulted from a re-negotiated contract provided by an outside vendor,
together with the development of internal resources to fulfill production
requirements.
The printing cost of revenue for the three month period ended September 30,
1998, as a percentage of printing revenue, increased less than 1% from the prior
period comparison.
10
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased $75,925 in 1998 as
compared to the prior period. The current period decrease resulted primarily
from a reduction in expenditures relating to: a) consulting expenses; b)
database expenses and supplies related to computer expenses; and c) the
Company's adherence to cost controls to reduce expenditures.
Interest Expense
- ----------------
Interest expense increased $12,723 for the three month period ended September
30, 1998 as compared to the prior period. The current period increase resulted
primarily from interest incurred on a loan agreement with the New Jersey
Economic Development Authority for borrowings associated with the purchase of a
building, related land and renovations for the relocation of Color Graphics.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased $47,926 for the three month period ended
September 30, 1998 as compared to the prior period. The decrease resulted
primarily from the continued reduction in depreciable value of prior property,
plant and equipment purchases. Depreciation recorded on current year additions
did not offset the reductions in depreciation based or the increase in fully
depreciated assets.
Provision for Income Taxes
- --------------------------
Provision for income taxes decreased as a result of the decrease in income
before taxes.
(b) Results of Operations - Nine Months Ended September 30, 1998 and
September 30, 1997
Database Printing Total
-------- -------- -----
1998
----
Revenues $ 8,914,391 $ 9,101,088 $ 18,015,479
Gross profit $ 3,480,292 $ 4,019,763 $ 7,500,055
Operating income $ 1,361,012 $ 1,077,553 $ 2,438,565
1997
----
Revenues $ 7,623,895 $ 12,326,389 $ 19,950,284
Gross profit $ 2,886,055 $ 5,804,925 $ 8,690,980
Operating income $ 2,684,173 $ 2,158,462 $ 4,842,635
Revenue
- -------
Net revenue decreased $1,934,805 from $19,950,284 in 1997 to $18,015,479 in
1998. The revenue decrease was primarily attributed to the loss of two
significant printing customers. The revenue loss is being offset by increased
sales to existing customers in addition to sales to new 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 next year.
The database and advertising revenue for the nine month period ended September
1998 increased 17% over the prior period comparison. The increase resulted
primarily from increased sales to existing customers.
11
<PAGE>
Cost of Revenue
- ---------------
The Company's cost of revenue, as a percentage of net revenues, was 58.3% for
the nine month period ended September 30, 1998 as compared to 56.4% for the
prior period.
The database cost of revenue for the nine month period ended September 30, 1998,
as a percentage of database revenue, decreased 1.2% from the prior period
comparison. The current period cost of revenue as a percentage of database
revenue - related company increased 2.1% due to an increase in the printing and
mailing sales volume. The related party increase is offset by a 3.3% decrease in
other database costs of revenue resulting from a re-negotiated contract provided
by an outside vendor, together with the development of internal resources to
fulfill production requirements.
The printing cost of revenue for the nine month period ended September 30, 1998,
as a percentage of printing revenue, increased 2.9% from the prior period
comparison. The current period cost of revenue as a percentage of printing
revenue related company accounts for 2.7% of the increase, resulting from a
related party providing printing services during the relocation of Color
Graphics, which caused substantial downtime of the Company's presses.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased $260,737 in 1998 as
compared to the prior period. The current period increase resulted primarily
from expenditures associated with moving expenses for the relocation of Color
Graphics. The nine month period cost related to the relocation expense is
$412,535. The relocation expense is offset by a decrease in expenditures
relating to: a) consulting expenses; b) database expenses and supplies related
to computer expenses; and c) the Company's adherence to cost controls to reduce
expenditures.
Interest Expense
- ----------------
Interest expense increased $15,667 for the nine month period ended September 30,
1998 as compared to the prior period. The current period increase resulted
primarily from interest incurred on a loan agreement with the New Jersey
Economic Development Authority for borrowings associated with the purchase of a
building, related land and renovations for the relocation of Color Graphics.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased $90,251 for the nine month period ended
September 30, 1998 as compared to the prior period. The decrease resulted
primarily from the continued reduction in depreciable value of prior property,
plant and equipment purchases. Depreciation recorded on current year additions
did not offset the reductions in depreciation based or the increase in fully
depreciated assets
Provision for Income Taxes
- --------------------------
Provision for income taxes decreased as a result of the decrease in income
before taxes.
12
<PAGE>
Liquidity and Capital Resources
- -------------------------------
9/30/98 12/31/97
------- --------
Working capital $ 3,423,866 $ 4,077,593
Cash 3,350,177 2,837,427
Cash - restricted - 1,400,000
9/30/98 9/30/97
------- -------
Cash provided by operating activities 2,092,848 3,559,836
Cash used in investing activities 963,712 1,237,488
Cash used in financing activities 616,386 1,714,634
Working capital decreased as of September 30, 1998 by $653,727 over the working
capital as of December 31, 1997, primarily as a result of decreased cash, due to
the expenditure of restricted cash, utilized for the renovation, remodeling and
moving expenses associated with the relocation of Color Graphics, and a decrease
in prepaid income taxes.
The decrease in cash flows from operations in 1998 resulted primarily from the
Company's decreased net income.
The decrease of cash used in investing activity resulted from utilizing the
restricted cash for capital expenditures relating to the renovations and
remodeling of the Color Graphics location. The Company expects to continue to
invest in capital assets to support its growth.
The decrease of cash used in financing activity resulted from the reduction in
the Company's notes payable.
At September 30, 1998, the Company had outstanding debt of $6,036,496 primarily
in the form of notes payable. At September 30, 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.
Impact of Inflation
- -------------------
Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on results of
operations. Material increases in costs and expenses, particularly packaging,
raw materials and labor costs, in the future, could have a significant impact on
the Company's operating results to the extent that the effect of such increases
cannot be transferred to its customers.
Impact of Year 2000 Issues
- --------------------------
The Company continues its effort in assessing its computer applications to
insure their functionality with respect to the "Year 2000" millennium change.
The assessment phase is schedule to be completed by the end of 1998. The other
phases of the project are remediation and compliance testing. The Company
currently anticipates that all the work will be completed by the end of the
third quarter 1999. There can be no assurance that the Company will be
successful in its effort to resolve any Year 2000 issues. If required
modifications to existing software and conversions to new software are not made,
or are not completed in a timely fashion, the Year 2000 issue could have a
material impact on the operations of the Company.
The expenses of the Year 2000 project are being funded through operating cash
flows. There can be no assurance that these related expenses will not be
material to the Company or that the Company will be able to resolve in a timely
manner any issues that may arise in these areas. Since a number of steps remain
to be performed, the Company has not yet determined the total Year 2000
compliance expense and related potential effect on the Company's financial
position.
13
<PAGE>
The Company has not initiated formal communication with significant suppliers to
determine the extent to which the Company's operations are vulnerable to those
third parties' failure to remediate their own Year 2000 issues. The Company does
have information concerning the Year 2000 compliance status of its customers. In
the event that any of the Company's significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be adversely affected materially.
The Company has not yet fully developed a comprehensive contingency plan to
address situations that may result if the Company is unable to achieve Year 2000
readiness of its critical operations, but is expected to have a plan in place by
the end of the second quarter 1999. There can be no assurance that the Company
will be able to develop a contingency plan that will adequately address issues
that may arise in the year 2000.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. To date, management anticipates that the historical cost
related to the Year 2000 remediation efforts have been approximately $5,000. The
forthcoming Year 2000 compliance expenditures have been estimated by management
not to exceed an additional $15,000. There can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.
Forward-Looking Information
- ---------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements made by the Company in its disclosures to
the public. This Form 10-Q and the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements as defined by such Act that involve risks and
uncertainties that could cause actual results to differ materially. Factors that
may affect the Company's future performance include, among others, the loss of
one or more significant customers and risks associated with industry
consolidation, acquisitions and competition. Readers are cautioned not to rely
on forward-looking statements.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DIRECTCOM, INC.
By: /s/ Robert W. Paltrow Director, November 12, 1998
------------------------------- Secretary/Treasurer
Robert W. Paltrow
15
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<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 3,350,177 4,837,427
<SECURITIES> 0 0
<RECEIVABLES> 2,550,122 2,321,920
<ALLOWANCES> 170,218 121,171
<INVENTORY> 404,700 450,837
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<PP&E> 10,028,358 7,464,897
<DEPRECIATION> 2,166,177 1,462,118
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0 0
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