<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 June 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
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 June
30, 1998 was 3,101,983.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Page No.
--------
<S> <C>
Consolidated balance sheets - June 30, 1998 (unaudited) and
December 31, 1997 2
Consolidated statements of operations (unaudited) - Three months ended
June 30, 1998 and 1997 3
Consolidated statements of operations (unaudited) - Six months ended
June 30, 1998 and 1997 4
Consolidated statements of cash flows (unaudited) - Six months ended
June 30, 1998 and 1997 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
</TABLE>
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 six months
ended June 30, 1998 is calculated as follows:
Six Months Three Months
---------- ------------
Common shares outstanding 3,101,983 3,101,983
Common shares equivalents outstanding 68,000 68,000
Net Income $ 946,733 $ 496,034
Per share - Basic $ .31 $ .16
Per share - Diluted $ .30 $ .16
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 PricewaterhouseCoopers
(formerly Coopers and Lybrand L.L.P.) to replace Thompson Dugan, PC as the
Company's independent accountants.
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,644,846 $ 2,837,427
Cash - restricted -- 1,400,000
Accounts receivable, net of allowance for doubtful
accounts of $157,171 and $121,171 as of June 30, 1998
and December 31, 1997, respectively 3,647,097 2,200,749
Inventories 450,052 450,837
Prepaid and other current assets 610,104 903,232
------------ ------------
Total current assets 7,352,099 7,792,245
PROPERTY, PLANT AND EQUIPMENT, Net 7,045,954 6,002,779
OTHER ASSETS 713,736 504,744
------------ ------------
TOTAL ASSETS $ 15,111,789 $ 14,299,768
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 347,430 $ 437,430
Accounts payable 490,521 351,931
Accounts payable - related company 2,603,804 2,315,860
Income taxes payable 48,509 82,847
Accrued expenses and other current liabilities 567,123 526,584
------------ ------------
Total current liabilities 4,057,387 3,714,652
LONG-TERM DEBT 5,745,118 6,215,452
DEFERRED INCOME TAXES 510,700 577,000
MINORITY INTEREST 861,487 802,300
------------ ------------
TOTAL LIABILITIES 11,174,692 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 3,591,882 2,645,149
------------ ------------
4,242,097 3,295,364
Less treasury stock, at cost (305,000) (305,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,937,097 2,990,364
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,111,789 $ 14,299,768
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUE
Database $2,974,398 $1,927,557
Printing - related company 597,362 593,996
Printing 2,606,437 4,225,236
---------- ----------
Total revenue 6,178,197 6,746,789
---------- ----------
COST OF REVENUE
Database - related company 1,245,898 635,395
Database - other 482,759 493,147
Printing - related company 92,510 20,856
Printing 1,741,799 2,247,836
---------- ----------
Total cost of revenue 3,562,966 3,397,234
---------- ----------
OPERATING EXPENSES
Selling, general and
administrative expense 1,196,627 978,431
Administrative fee related party (Note 4) 445,755 --
Interest expense 101,148 93,116
Depreciation and amortization 194,224 260,450
---------- ----------
Total costs and expenses 5,500,720 4,729,231
---------- ----------
OTHER INCOME
Gain on sale of equipment 190,000 --
---------- ----------
Total other income 190,000 --
---------- ----------
Income before income taxes and minority interest 867,477 2,017,558
Provision for income taxes 344,000 863,427
---------- ----------
Income before minority interest 523,477 1,154,131
Minority interest in income of subsidiary 27,443 230,244
---------- ----------
Net income $ 496,034 $ 923,887
========== ==========
BASIC EARNINGS PER SHARE $ 0.16 $ 0.31
========== ==========
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.30
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES
Database $ 6,030,136 $ 4,819,099
Printing - related company 1,281,054 1,271,857
Printing 5,093,448 7,800,619
----------- -----------
Total revenues 12,404,638 13,891,575
----------- -----------
COST OF REVENUE
Database - related company 2,750,918 1,800,904
Database - other 993,668 994,611
Printing - related company 251,040 39,133
Printing 3,322,757 4,585,059
----------- -----------
Total cost of revenue 7,318,383 7,419,707
----------- -----------
OPERATING EXPENSES
Selling, general and
administrative expense 2,044,721 1,866,153
Administrative fee related party (Note 4) 881,625 -
Interest expense 194,741 191,798
Depreciation and amortization 481,248 480,287
----------- -----------
Total costs and expenses 10,920,718 9,957,945
----------- -----------
OTHER INCOME
Gain on sale of equipment 190,000 -
----------- -----------
Total other income 190,000 -
----------- -----------
Income before income taxes and minority interest 1,673,920 3,933,630
Provision for income taxes 668,000 1,539,677
----------- -----------
Income before minority interest 1,005,920 2,393,953
Minority interest in income of subsidiary 59,187 190,599
----------- -----------
Net income $ 946,733 $ 2,203,354
=========== ===========
BASIC EARNINGS PER SHARE $ 0.31 $ 0.73
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.71
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 946,733 $ 2,203,354
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 481,248 480,287
Bad debt expense 36,000 35,000
Minority interest 59,187 190,599
Deferred taxes (66,300) (160,800)
Gain on sale of equipment (190,000) -
(Increase) decrease in:
Accounts receivable (1,482,348) (1,596,566)
Inventory 785 (86,596)
Prepaid and other current assets 293,130 291,281
Other non-current assets (208,992) (91,291)
Restricted cash 66,250 -
Increase (decrease) in:
Accounts payable (24,226) (36,182)
Accounts payable - related company 450,760 515,749
Income taxes payable (34,338) (115,676)
Accrued expenses and other current liabilities 35,215 253,779
Decrease in long term liabilities -- (136,408)
Deferred revenue 5,324 (99,475)
----------- -----------
Net cash provided by operating activities 362,428 1,647,055
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,524,425) (967,593)
Proceeds from sale of equipment 190,000 -
Change in restricted cash 1,333,750 -
----------- -----------
Net cash used in investing activities (675) (967,593)
----------- -----------
Cash flows from financing activities:
Sale of treasury stock -- 150,000
Repayments of notes payable -- (473,768)
Repayments of long-term debt (560,334) (348,445)
----------- -----------
Net cash used in financing activities (560,334) (672,213)
----------- -----------
Net (decrease) increase in cash (192,581) 7,249
Cash at beginning of period 2,837,427 1,080,630
----------- -----------
Cash at end of period $ 2,644,846 $ 1,087,879
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<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 six months ended June 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:
June 30, 1998 December 31, 1997
------------- -----------------
Paper $ 290,244 $ 293,373
Other raw materials 94,173 93,823
Work-in-process 65,635 63,641
------------- -----------------
$ 450,052 $ 450,837
============= =================
NOTE 3 - PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following:
June 30, 1998 December 31, 1997
------------- -----------------
Deferred income taxes $ 133,000 $ 133,000
Refundable state taxes 13,876 13,876
Prepaid income taxes 385,953 676,591
Other current assets 127,249 79,765
------------- -----------------
$ 660,078 $ 903,232
============= =================
6
<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 June 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 to NAC of $162,816 as of June 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 six months ended June
30, 1998 was $881,625.
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 six months ended June 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.
7
<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.
8
<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 June 30, 1998 and June 30, 1997
Database Printing Total
-------- -------- -----
1998
----
Revenue $ 2,974,398 $ 3,203,799 $ 6,178,197
Gross profit $ 1,245,741 $ 1,369,490 $ 2,615,231
Operating income $ 577,461 $ 100,016 $ 677,477
1997
----
Revenue $ 1,927,557 $ 4,819,232 $ 6,746,789
Gross profit $ 799,015 $ 2,550,054 $ 3,349,069
Operating income $ 777,649 $ 1,239,909 $ 2,017,558
Consolidated net revenue of $6,178,197 for the three month period ended June 30,
1998 represent a decrease of $568,592 over the three month period ended June 30,
1997. Operating income of $677,477 represents a decrease of $1,340,081 over
1997. The decrease in the net revenue is 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. The operating
income decrease resulted primarily from the printing net revenue decrease, the
related party administrative fee and costs associated with the relocation of
Color Graphics.
Revenue
- -------
Net revenue decreased $568,592 from $6,746,789 in 1997 to $6,178,197 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 year.
The database and advertising revenue for the three month period ended June 1998
increased 54% over the prior period comparison. The increase resulted primarily
from increased sales to existing customers.
9
<PAGE>
Cost of Revenue
- ---------------
The Company's cost of revenue, as a percentage of net revenue was 57.6% for the
three month period ended June 30, 1998 as compared to 50.3% for the prior
period.
The database cost of revenue for the three month period ended June 30, 1998, as
a percentage of database revenue, decreased .4% from the prior period
comparison. The current period cost of revenue - related company increased 8.9%
due to an increase in printing and mailing sales volume. The related party
increase is offset by a 9.3% decrease in other database cost 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 three month period ended June 30, 1998, as
a percentage of printing revenue, increased 10.2% from the prior period
comparison. The current period cost of revenue - related company increased 2.5%
and resulted from the fact that the related party provided printing services
during the relocation of Color Graphics, which caused substantial downtime of
the Company's presses. Other printing costs increased 7.7% as a result of costs
associated with the relocation of Color Graphics. The increase relates to costs
for maintaining two operating facilities until the transition to the new
location was complete.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased $218,196 in 1998 as
compared to the prior period. The current period increase resulted primarily
from expenditures associated with the moving expenses for the relocation of
Color Graphics. The current three month period cost related to the relocation
expense is $389,250.
Interest Expense
- ----------------
Interest expense increased $8,032 for the three month period ended June 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 $66,226 for the three month period ended
June 30, 1998 as compared to the prior period. The decrease resulted primarily
from the depreciable value of prior property, plant and equipment purchases.
Provision for Income Taxes
- --------------------------
Provision for income taxes decreased as a result of the decrease in income
before taxes. The effective income tax rate for the three months ended June 30,
1998 was less than the rate for the similar period in the prior year based on
certain non-deductible expenses incurred during the three months ended June 30,
1997.
10
<PAGE>
(b) Results of Operations - Six Months Ended June 30, 1998 and June 30, 1997
Database Printing Total
-------- -------- -----
1998
----
Revenues $ 6,030,136 $ 6,374,502 $ 12,404,638
Gross profit $ 2,285,550 $ 2,800,705 $ 5,086,255
Operating income $ 1,125,893 $ 358,027 $ 1,483,920
1997
----
Revenues $ 4,819,099 $ 9,072,476 $ 13,891,575
Gross profit $ 2,023,584 $ 4,448,284 $ 6,471,868
Operating income $ 1,973,005 $ 1,960,627 $ 3,933,632
Consolidated net revenue of $12,404,638 for the six month period ended June 30,
1998 represent a decrease of $1,486,937 over the six month period ended June 30,
1997. Operating income of $1,483,920 represents a decrease of $2,449,712 over
1997. The decrease in the net revenue is 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. The operating
income decrease resulted primarily from the printing revenue decrease the
related party administrative fee and costs associated with the relocation of
Color Graphics.
Revenue
- -------
Net revenue decreased $1,486,937 from $13,891,575 in 1997 to $12,404,638 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 year.
The database and advertising revenue for the six month period ended June 1998
increased 25% 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 58.9% for the
six month period ended June 30, 1998 as compared to 53.4% for the prior period.
The database cost of revenue for the six month period ended June 30, 1998, as a
percentage of database revenue, increased 4% from the prior period comparison.
The current period cost of revenue - related company increased 8.2% due to an
increase in the printing and mailing sales volume. The related party increase is
offset by a 4.2% 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 six month period ended June 30, 1998, as a
percentage of printing revenue, increased 5.1% from the prior period comparison.
The current period cost of revenue - related company accounts for the increase,
resulting from the fact that the related party provided printing services during
the relocation of Color Graphics, which caused substantial downtime of the
Company's presses.
11
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased $178,570 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 current six month period cost related to the relocation expense is
$389,250.
Interest Expense
- ----------------
Interest expense increased $2,943 for the three month period ended June 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 increased $961 for the six month period ended June
30, 1998 as compared to the prior period.
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
- -------------------------------
6/30/98 12/31/97
------- --------
Working capital $ 3,294,712 $ 4,077,593
Cash 2,644,846 2,837,427
Cash - restricted - 1,400,000
6/30/98 6/30/97
------- -------
Cash provided by operating activities 368,428 1,647,055
Cash used in investing activities (675) 967,593
Cash used in financing activities 560,334 672,213
Working capital decreased as of June 30, 1998 by $782,881 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.
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 June 30, 1998, the Company had outstanding debt of $6,092,548 primarily in
the form of notes payable. At June 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 is in the process of assessing its computer applications to insure
their functionality with respect to the "Year 2000" millennium change. At
present, the Company does not anticipate that material incremental costs will be
incurred in any single future year.
13
<PAGE>
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. There is certain information contained herein, in the Company's
press releases and in oral statements made by authorized officers of the Company
which are forward-looking statements, as defined by such Act. When used herein,
in the Company's press releases and said in such oral statements, the words
"estimate," "project," "anticipate," "expect," "intend" "believe," "plans," and
similar expressions are intended to identify forward-looking statements. Because
such forward-looking statements involve risk and uncertainties, there are
important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 2,644,846 4,837,427
<SECURITIES> 0 0
<RECEIVABLES> 3,804,268 2,321,920
<ALLOWANCES> 157,171 121,171
<INVENTORY> 450,052 450,837
<CURRENT-ASSETS> 7,352,099 7,792,245
<PP&E> 8,989,320 7,464,897
<DEPRECIATION> 1,943,366 1,462,118
<TOTAL-ASSETS> 15,111,789 14,299,768
<CURRENT-LIABILITIES> 4,057,387 3,714,652
<BONDS> 0 0
34 34
0 0
<COMMON> 0 0
<OTHER-SE> 650,181 650,181
<TOTAL-LIABILITY-AND-EQUITY> 15,111,789 14,299,768
<SALES> 12,402,541 13,715,025
<TOTAL-REVENUES> 12,404,638 13,891,575
<CGS> 7,318,383 7,419,707
<TOTAL-COSTS> 7,318,383 7,419,707
<OTHER-EXPENSES> 2,890,346 1,831,151
<LOSS-PROVISION> 36,000 35,000
<INTEREST-EXPENSE> 194,741 191,798
<INCOME-PRETAX> 1,673,920 3,933,630
<INCOME-TAX> 668,000 1,539,677
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 946,733 2,203,354
<EPS-PRIMARY> .31 .73
<EPS-DILUTED> .30 .71
</TABLE>
