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, 1999
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 March
31, 1999 was 3,101,983.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
<TABLE>
<CAPTION>
Page No.
<S><C>
Consolidated balance sheets - March 31, 1999 (unaudited) and December 31, 1998 2
Consolidated statements of operations (unaudited) - Three months ended
March 31, 1999 and 1998 3
Consolidated statements of cash flows (unaudited) - Three months ended
March 31, 1999 and 1998 4
Notes to consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
</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
months ended March 31, 1999 is calculated as follows:
Common shares outstanding 3,101,983
Common shares equivalents outstanding 68,000
Net Income $ 824,562
Per share - Basic $ .27
Per share - Diluted $ .26
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, 1999 December 31, 1998
--------------- -----------------
(Unaudited)
<S><C>
CURRENT ASSETS
Cash $ 3,627,645 $ 3,026,447
Accounts receivable, net of allowance for doubtful accounts of $200,266
and $188,218 as of March 31, 1999 and December 31, 1998, respectively 5,026,253 2,448,507
Inventory 365,041 509,009
Prepaid and other current assets 257,943 249,300
------------ ------------
Total current assets 9,276,882 6,233,263
PROPERTY, PLANT AND EQUIPMENT, Net 7,252,023 7,373,467
OTHER ASSETS 690,918 691,410
------------ ------------
TOTAL ASSETS $ 17,219,823 $ 14,298,140
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt 404,910 404,910
Accounts payable 176,339 372,047
Accounts payable - related company 2,917,381 1,107,941
Income taxes payable 614,200 214,909
Accrued expenses and other current liabilities 578,664 473,334
Deferred revenue - 30,000
------------ ------------
Total current liabilities 4,691,494 2,603,141
LONG-TERM DEBT 5,398,903 5,464,101
DEFERRED INCOME TAXES 594,000 574,000
MINORITY INTEREST 954,049 900,083
------------ ------------
TOTAL LIABILITIES 11,638,446 9,541,325
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 shares of which 320,000 shares are held
as treasury stock. 34 34
Paid-in capital 650,181 650,181
Retained earnings 5,236,162 4,411,600
------------ ------------
5,886,377 5,061,815
Less treasury stock, at cost (305,000) (305,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 5,581,377 4,756,815
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,219,823 $ 14,298,140
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S><C>
REVENUES
Database $ 5,556,797 $ 3,045,118
Printing 2,482,428 2,437,446
Printing - related company 553,467 683,692
----------- ---------
Total revenues 8,592,692 6,166,256
----------- ---------
COST OF REVENUE
Database - related company 3,255,953 1,505,020
Database - other 483,566 475,751
Printing 1,626,296 1,580,958
Printing - related company - 158,530
----------- ---------
Total cost of revenue 5,365,815 3,720,259
----------- ---------
Selling, general and
administrative expenses 851,975 883,252
Administrative fee - related party 606,743 435,850
Depreciation and amortization 214,695 287,024
----------- ---------
Total costs and expenses 7,039,228 5,326,385
----------- ---------
OTHER INCOME (EXPENSE)
Interest expense (78,630) (93,594)
Miscellaneous income 33,694 60,185
----------- ---------
Total other income (44,936) (33,409)
----------- ---------
Income before income taxes and minority interest 1,508,528 806,462
Provision for income taxes 630,000 324,000
----------- ---------
Income before minority interest 878,528 482,462
Minority interest in income of subsidiary 53,966 28,115
----------- ---------
Net income $ 824,562 $ 454,347
=========== =========
BASIC EARNINGS PER SHARE $ 0.27 $ 0.15
=========== =========
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.14
=========== =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S><C>
Cash flows from operating activities:
Net income $ 824,562 $ 454,347
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 214,695 287,024
Bad debt expense 12,048 18,000
Minority interest 53,966 28,115
Deferred taxes 20,000 (38,000)
(Increase) decrease in:
Accounts receivable (2,589,794) (1,302,529)
Inventory 143,968 (228,582)
Prepaid and other current assets (8,643) 384,288
Other assets 492 (8,625)
Increase (decrease) in:
Accounts payable (195,708) 68,247
Accounts payable - related company 1,809,440 322,827
Income taxes payable 399,291 (82,847)
Accrued expenses and other current liabilities 105,330 300,321
Deferred revenue (30,000) -
------------ -----------
Net cash provided by operating activities 759,647 202,586
------------ -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (93,251) (93,815)
------------ -----------
Net cash used in investing activities (93,251) (93,815)
------------ -----------
Cash flows from financing activities:
Repayments of long-term debt (65,198) (54,862)
------------ -----------
Net cash used in financing activities (65,198) (54,862)
------------ -----------
Net increase in cash 601,198 53,909
Cash at beginning of period 3,026,447 2,837,427
------------ -----------
Cash at end of period $ 3,627,645 $ 2,891,336
============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. 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, 1998.
NOTE 2 - INVENTORIES
Inventories consist of the following:
March 31, 1999 December 31, 1998
-------------- -----------------
Paper $ 210,603 $ 282,706
Other raw materials 64,488 67,178
Work-in-process 89,950 159,125
-------------- -----------------
$ 365,041 $ 509,009
============== =================
NOTE 3 - RELATED-PARTY TRANSACTIONS
Certain of the Company's major shareholders also exercise control over North
American Communications, Inc. (NAC), an affiliated company that has extensive
transactions with the Company. 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 purchases of
production, printing and mailing services for direct mail packages to integrate
into the Company's printing and production requirements. Additionally, related
party expenses include certain salary and insurance expenses.
ACCOUNTS PAYABLE - RELATED COMPANY
The accounts payable - related company as of March 31, 1999 and December 31,
1998 represents amounts due to NAC for printing and mailing services. Offset
against the related party payable are receivables due from NAC of $162,822 as of
March 31, 1999 and $60,567 as of December 31, 1998, for printing services
provided to NAC. The increased receivables for the current period resulted from
providing increased printing services to NAC.
ADMINISTRATIVE FEE - RELATED COMPANY
The administrative fee results from a management agreement with NAC for
administrative, consulting and management support services provided to the
Company. This fee is based on 7% of consolidated revenues. The amount due NAC as
of March 31, 1999 related to this fee was $606,743, which was subsequently paid
in April 1999.
5
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
NOTE 4 - INCOME TAXES
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. Differences between the federal statutory rate and the Company's
effective tax rate are primarily due to state taxes and certain non-deductible
expenses.
The effective tax rate was approximately 41.8% and 40.2% for the three months
ended March 31, 1999 and 1998, respectively. The higher effective rate in 1999
reflects certain non-deductible expenses not included in the 1998 first quarter
tax provision. The provision for the three month period ended March 31, 1999
reflects management's estimate of the expected annual effective rate for the
year ending December 31, 1999.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
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 the
adoption of SFAS No. 133 will not be material.
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of
outstanding common shares for the period. Diluted earnings per share adjusts the
weighted average for the potential dilution that could occur if stock options,
warrants or other convertible securities were exercised or converted into common
stock.
NOTE 7 - SEGMENT INFORMATION
The Company organizes its business into three segments based on its product and
service offerings: database, advertising and marketing agency, and printing
services.
Segment data includes intercompany common customer revenues for contracted
services between segments. Management evaluates the performance of the Company's
segments based on EBITDA exclusive of the administrative fee, other income and
extraordinary items.
The table below presents information about the Company's segments.
March 31, 1999 Database Agency Printing Total
---------- ----------- ----------- -----------
Revenues $ 753,035 $ 4,803,762 $ 3,110,956 $ 8,667,753
EBITDA 108,240 1,351,087 915,575 2,374,902
March 31, 1998 Database Agency Printing Total
---------- ----------- ----------- -----------
Revenues $ 973,881 $ 2,071,238 $ 3,359,297 $ 6,404,416
EBITDA 213,729 462,136 886,880 1,562,745
6
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 - SEGMENT INFORMATION (Continued)
A reconciliation of the total segment revenues to total consolidated revenues
and the total segment EBITDA to total consolidated income before income taxes
for the three months ended March 31, 1999 and 1998 is as follows:
Revenues March 31, 1999 March 31, 1998
-------------- --------------
Total segment revenues $ 8,667,753 $ 6,404,416
Elimination of intercompany revenue (75,061) (238,160)
-------------- --------------
Consolidated revenues $ 8,592,692 $ 6,166,256
============== ==============
EBITDA March 31, 1999 March 31, 1998
-------------- --------------
Total EBITDA for reportable segments $ 2,374,902 $ 1,562,745
Management fee (606,743) (435,850)
Interest expense (78,630) (93,594)
Depreciation and amortization (214,695) (287,024)
Other income 33,694 60,185
-------------- --------------
Consolidated income before taxes $ 1,508,528 $ 806,462
============== ==============
At March 31, 1999 and December 31, 1998, approximately 56% and 65%,
respectively, of the Company's accounts receivable balance was due from
customers in the banking and credit card industry.
One customer accounted for 48% and 54% of the Company's total
consolidated revenues for the three months ended March 31, 1999 and
1998, respectively.
7
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended March 31, 1999 and March 31, 1998
General
DirectCom, Inc. has focused its growth strategy on acquiring
complementary database and direct mail marketing companies. DirectCom is
expanding its capabilities through the recent partnership investment in
DirectSort. The Company will continue to pursue strategic acquisitions
of businesses that complement or augment the existing mix of the
Company's capabilities. The Company continues to pursue its goal of
providing seamless, integrated database-marketing and printing services
to direct marketers. These services include database management and data
warehousing, predictive modeling, marketing strategy consulting,
fulfillment, agency creative, production management, printing and direct
mail production. DirectCom's strategy is to provide unmatched value in
each of these areas. With vertically integrated, closed loop
capabilities, DirectCom can deliver to its customers a lower cost of
production, reduced production cycles and a greater degree of control
over the quality of each element of the campaign. Please refer to
footnotes in the accompanying financial statements.
(a) Results of Operations - Three Months Ended March 31, 1999 and March 31,
1998
1999
----
Database Printing Total
-------- -------- -----
Revenues $ 5,556,797 $ 3,035,895 $ 8,592,692
Gross profit 1,817,278 1,409,599 3,226,877
Operating income 914,140 594,388 1,508,528
1998
----
Revenues $ 3,045,118 $ 3,121,138 $ 6,166,256
Gross profit 1,064,347 1,381,650 2,445,997
Operating income 419,316 387,146 806,462
Revenues
Revenues increased $2,426,436 from $6,166,256 for the three months ended
March 31, 1998 to $8,592,692 for the three months ended March 31, 1999.
The growth in revenue is attributed to the agency segment of the
database business. The agency segment experienced a growth pattern in
direct mail production during the first quarter of 1999, however
effective May 1, 1999 the Company anticipates a reduction in revenues
generated from the agency segment, due to the loss of a significant
customer. The Company is exploring opportunities to replace this
anticipated revenue loss with increased production to current customers
and establishment of relationships with new customers. The revenue
portion of the database business decreased approximately 23%, due in
part to a reduction in sales as a result of the fulfillment of prior
contractual obligations. The printing revenue decrease of 3% relates to
decreased production for a specific customer, due to the customer
redefining its current printing programs.
Cost of Revenues
The Company's cost of revenues, as a percentage of revenues, was 62.4%
for the three month period ended March 31, 1999 as compared to 60.3% for
the prior period.
The database cost of revenues for the three months ended March 31, 1999, as a
percentage of database revenues, increased 2.3% from the prior period. The
current period database cost of revenues - related company - as a percentage of
database revenues increased 9.2% due to the increased printing and mailing sales
volume, resulting from agency activity. The related party increase is offset by
a 6.9% decrease in other database costs as a percentage of database revenues,
caused primarily from a reduction in salaries and benefits.
8
<PAGE>
The printing cost of revenues for the three month period ended March 31, 1999,
as a percentage of printing revenue, decreased 2.1% compared to the prior period
as a result of the decrease of cost of raw materials going into production.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $31,277 in 1999
as compared to the prior period. The current period decrease is as a
result of approximately $35,300 in moving expenses incurred by the
Company in the first quarter of 1998 related to the Color Graphics
relocation to a new facility. No such expenses were incurred in 1999.
These costs were partially offset by current increases in advertising
and travel expenses resulting from trade show and promotional activities
to continue building the Company's recognition.
Administration fee - related company
The administrative fee - related company increased $170,893 in 1999 as compared
to the prior period. The current period increase resulted from increased revenue
for the three months ended March 31, 1999. The administrative fee results from a
management agreement with NAC for administrative, consulting and management
support services provided to the Company. This fee is based on 7% of
consolidated revenues.
Depreciation and Amortization
Depreciation and amortization expense decreased $72,329 in 1999 as compared to
the prior period. The decrease resulted primarily from an increasing number of
fully depreciated fixed assets still in use by the Company offset by new
property, plant and equipment purchases.
Interest Expense
Interest expense decreased $14,964 for the three month period ended
March 31, 1999 as compared to the prior period. The current period
decrease resulted from reduced interest rates on a long term note
payable.
Other income (expense)
Miscellaneous income primarily represents interest income on the Company's cash
deposits. The increase in interest income is attributed to the overall increased
cash balances throughout the first quarter of 1999 as compared to the same
period in 1998.
Provision for Income Taxes
The provision for income taxes increased as a result of the increase in
taxable income. The effective tax rate was approximately 41.8% and 40.2%
for the three months ended March 31, 1999 and 1998, respectively. The
higher effective rate in 1999 reflects certain non-deductible expenses
not included in the 1998 first quarter tax provision. The provision for
the three month period ended March 31, 1999 reflects management's
estimate of the expected annual effective rate for the year ending
December 31, 1999.
9
<PAGE>
Liquidity and Capital Resources
3/31/99 12/31/98
------- --------
Working capital $ 4,585,388 $ 3,630,122
Cash 3,627,645 3,026,447
3/31/99 3/31/98
------- --------
Cash provided by operating activities 759,647 202,586
Cash used in investing activities 93,251 93,815
Cash used in financing activities 65,198 54,862
Working capital increased as of March 31, 1999 by $955,266 as compared
to the working capital as of December 31, 1998, primarily as a result of
increased customer receivables, due to increased sales activity during
the first quarter and offset by an increase in accounts payable -
related company. The increase in accounts payable - related party
resulted from increased production demands due to the increased program
activity of the Company's agency.
The current period increase in the accounts receivable resulted from increased
program activity generated by a specific agency customer in the month of March
1999. Also attributing to the increase in the accounts receivable is the
collection activity related to one customer. The collection of funds is not a
result of a dispute relating to provided services, but rather the customer's
slow internal payment process.
The increase in cash flow from operations resulted primarily from the increase
in net income.
The current investing activity resulted from capital expenditures for the
period. The Company expects to continue to invest in capital assets to support
its growth.
The cash used in financing resulted from the reduction in the Company's
long-term debt.
At March 31, 1999, the Company had outstanding debt of $5,803,813 primarily in
the form of notes payable. The amount available under the Company's lines of
credit at March 31, 1999 was approximately $3,500,000. The Company anticipates
that current cash balances will provide sufficient funds to meet its working
capital and capital expenditures through December 31, 1999. 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 customer.
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 has been completed and remediation and compliance testing
are currently being scheduled and executed. 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
all 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.
10
<PAGE>
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.
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 its 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, the Company's cost to becoming Year 2000 compliant
has been minimal and is expected to be less than $35,000 throughout the
remainder of 1999. There can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 3,627,645 3,026,447
<SECURITIES> 0 0
<RECEIVABLES> 5,226,519 2,636,725
<ALLOWANCES> 200,266 188,218
<INVENTORY> 365,041 509,009
<CURRENT-ASSETS> 9,276,882 6,233,263
<PP&E> 9,665,923 9,572,672
<DEPRECIATION> 2,413,900 2,199,205
<TOTAL-ASSETS> 17,219,823 14,298,140
<CURRENT-LIABILITIES> 4,691,494 2,603,141
<BONDS> 0 0
0 0
0 0
<COMMON> 34 34
<OTHER-SE> 650,181 650,181
<TOTAL-LIABILITY-AND-EQUITY> 17,219,823 14,298,140
<SALES> 8,592,692 6,166,256
<TOTAL-REVENUES> 8,592,692 6,166,256
<CGS> 5,365,815 3,720,259
<TOTAL-COSTS> 5,365,815 3,720,259
<OTHER-EXPENSES> 1,446,670 1,301,102
<LOSS-PROVISION> 12,048 18,000
<INTEREST-EXPENSE> 78,630 93,594
<INCOME-PRETAX> 1,508,528 806,462
<INCOME-TAX> 630,000 324,000
<INCOME-CONTINUING> 878,528 482,462
<DISCONTINUED> 0 0
<EXTRAORDINARY> 53,966 28,115
<CHANGES> 0 0
<NET-INCOME> 824,562 454,347
<EPS-PRIMARY> .27 .15
<EPS-DILUTED> .26 .14
</TABLE>
