- ------------------------------------------------------------------------------
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, 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 (IRS Employer Identification No.)
of 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 June
30, 1999 was 3,361,983.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
---------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Consolidated balance sheets - June 30, 1999 (unaudited) and December 31, 1998 2
Consolidated statements of operations (unaudited) - Three months ended
June 30, 1999 and 1998 3
Consolidated statements of operations (unaudited) - Six months ended
June 30, 1999 and 1998 4
Consolidated statements of cash flows (unaudited) - Six months ended
June 30, 1999 and 1998 5
Notes to consolidated financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
</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 six months ended June
30, 1999 is calculated as follows:
Common shares outstanding 3,361,983
Common shares equivalents outstanding 20,000
Net Income $ 958,543
Per share - Basic $ .30
Per share - Diluted $ .30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None
<PAGE>
DIRECTOM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 3,668,290 $ 3,026,447
Accounts receivable, net of allowance for doubtful accounts of $205,266
and $188,218 as of June 30, 1999 and December 31, 1998, respectively 2,790,895 2,448,507
Inventory 426,805 509,009
Prepaid and other current assets 266,252 249,300
------- -------
Total current assets 7,152,242 6,233,263
PROPERTY, PLANT AND EQUIPMENT, Net 7,036,510 7,373,467
OTHER ASSETS 601,890 691,410
------------ ------------
TOTAL ASSETS $ 14,790,642 $ 14,298,140
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt 404,910 404,910
Accounts payable 146,228 372,047
Accounts payable-related company 1,006,625 1,107,941
Income taxes payable 262,659 214,909
Accrued expenses and other current liabilities 457,772 473,334
Deferred revenue - 30,000
------------ ------------
Total current liabilities 2,278,094 2,603,141
LONG-TERM DEBT 5,284,990 5,464,101
DEFERRED INCOME TAXES 533,000 574,000
MINORITY INTEREST 969,601 900,083
------- -------
TOTAL LIABILITIES 9,065,685 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: 3,681,983 and 3,421,983 shares, respectively of which 320,000
shares are held as treasury stock 37 34
Paid-in capital 659,777 650,181
Retained earnings 5,370,143 4,411,600
------------ ------------
6,029,957 5,061,815
Less treasury stock, at cost (305,000) (305,000)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 5,724,957 4,756,815
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,790,642 $ 14,298,140
------------ ------------
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
DIRECTOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30,
(UNAUDITED)
1999 1998
---- ----
REVENUES
Database $ 2,341,404 $ 2,963,459
Printing 1,875,285 2,535,650
Printing - related company 372,527 597,362
------------ ------------
Total revenues 4,589,216 6,096,471
COST OF REVENUE
Database - related company 1,354,183 1,245,898
Database - other 445,266 482,759
Printing 1,155,545 1,741,799
Printing - related company 144,040 92,510
------------ ------------
Total cost of revenue 3,099,034 3,562,966
Selling, general and
administrative expenses 710,357 1,196,627
Administrative fee - related party 324,308 445,755
Depreciation and amortization 214,973 194,224
------------ ------------
Total costs and expenses 4,348,672 5,399,572
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (82,132) (101,148)
Gain on sale of equipment - 190,000
Miscellaneous income 60,122 81,726
------------ ------------
Total other income (expense) (22,010) 170,578
------------ ------------
Income from operations before income taxes
and minority interest 218,534 867,477
Provision for income taxes 69,000 344,000
------------ ------------
Income from operations before minority
interest 149,534 523,477
Minority interest in income of subsidiary 15,552 27,443
------------ ------------
Net income $ 133,982 $ 496,034
------------ ------------
BASIC EARNINGS PER SHARE $ 0.04 $ 0.16
------------ ------------
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.16
------------ ------------
See notes to consolidated financial statements.
3
<PAGE>
DIRECTOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
1999 1998
---- ----
REVENUES
Database $ 7,898,201 $ 6,008,577
Printing 4,357,713 4,989,875
Printing - related company 925,993 1,281,054
------------ --------------
Total revenues 13,181,907 12,279,506
COST OF REVENUE
Database - related company 4,610,137 2,750,918
Database - other 854,029 993,668
Printing 2,781,841 3,322,757
Printing - related company 144,040 251,040
------------ --------------
Total cost of revenue 8,390,047 7,318,383
Selling, general and
administrative expenses 1,636,211 2,044,721
Administrative fee - related party 931,051 881,625
Depreciation and amortization 429,668 481,248
------------ --------------
Total costs and expenses 11,386,977 10,725,977
------------ --------------
OTHER INCOME (EXPENSE)
Interest expense (161,685) (194,741)
Gain on sale of equipment - 190,000
Miscellaneous income 93,816 125,132
------------ --------------
Total other income (expense) (67,869) 120,391
------------ --------------
Income from operations before income taxes
and minority interest 1,727,061 1,673,920
Provision for income taxes 699,000 668,000
------- -------
Income from operations before minority interest 1,028,061 1,005,920
Minority interest in income of subsidiary 69,518 59,187
------------ ----------
Net income $ 958,543 $ 946,733
---------- ----------
BASIC EARNINGS PER SHARE $ 0.30 $ 0.31
---------- ----------
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.30
---------- ----------
4
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 958,543 $ 946,733
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 429,668 481,248
Bad debt expense 17,048 36,000
Minority interest 69,518 59,187
Deferred taxes (41,000) (66,300)
Gain on sale of equipment (190,000)
(Increase) decrease in:
Accounts receivable (359,436) (1,482,348)
Inventory 82,204 785
Prepaid and other current assets (16,952) 293,130
Other assets 89,520 (208,992)
Restricted cash - 66,250
Increase (decrease) in:
Accounts payable (225,819) (24,226)
Accounts payable - related company (101,416) 450,760
Income taxes payable 47,750 (34,338)
Accrued expenses and other current liabilities (15,562) 35,215
Deferred revenue (30,000) 5,324
-------- -----
Net cash provided by operating activies 904,066 368,428
------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment (92,712) (1,524,425)
Proceeds from sale of equipment - 190,000
Change in restricted cash - 1,333,750
-------- ---------
Net cash used in investing activities (92,712) (675)
-------- -----
Cash flows from financing activities:
Repayments of long-term debt (179,111) (560,334)
Issuance of common stock under stock option plan 9,600 -
------- --------
Net cash used in financing activities (169,511) (560,334)
--------- ---------
Net Increase (decrease) in cash 641,843 (192,581)
Cash at beginning of period 3,026,447 2,837,427
---------- ---------
Cash at end of period $ 3,668,290 $ 2,644,846
----------- -----------
See notes to consolidated financial statements.
5
<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 six months ended June 30, 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:
June 30, 1999 December 31, 1998
------------- -----------------
Paper $ 196,351 $ 282,706
Other raw materials 85,514 67,178
Work-in-process 144,940 159,125
------------ ------------
$ 426,805 $ 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 June 30, 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 $247,782 as of June
30, 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 June 30, 1999 related to this fee was $324,308.
6
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
NOTE 4 - SHAREHOLDERS' EQUITY
During the second quarter of 1999, 240,000 shares of common stock under option
were exercised at $.04 per share.
NOTE 5 - 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 40% for the six months ended June 30,
1999 and 1998, respectively. The provision for the six month period ended June
30, 1999 reflects management's estimate of the expected annual effective rate
for the year ending December 31, 1999.
NOTE 6 - 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 7 - 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 8 - 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 for the three
months ended June 30, 1999.
JUNE 30, 1999 DATABASE AGENCY PRINTING TOTAL
-------- ---------- -------- -----
REVENUES $ 625,107 $ 1,716,297 $ 2,291,572 $ 4,632,976
EBITDA (163,873) 361,898 581,800 779,825
JUNE 30, 1998 DATABASE AGENCY PRINTING TOTAL
-------- ---------- -------- -----
REVENUES $ 1,054,676 $ 1,908,783 $ 3,195,326 $ 6,158,785
EBITDA 192,760 544,319 265,799 1,002,878
7
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - 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 June 30, 1999 and 1998 is as follows:
REVENUES JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Total segment revenues $ 4,632,976 $ 6,158,785
Elimination of intercompany revenue (43,760) (62,314)
------------- -------------
Consolidated revenues $ 4,589,216 $ 6,096,471
------------ ------------
EBITDA JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Total EBITDA for reportable segments $ 779,825 $ 1,346,878
Management fee (324,308) (455,755)
Interest expense (82,132) (101,148)
Depreciation and amortization (214,973) (194,224)
Other income 60,122 271,726
------------ -------------
Consolidated income before taxes $ 218,534 $ 867,477
------------ -------------
The table below presents information about the Company's segments for the six
months ended June 30, 1999.
JUNE 30, 1999 DATABASE AGENCY PRINTING TOTAL
-------- ---------- -------- -----
REVENUES $ 1,378,142 $ 6,520,059 $ 5,402,527 $13,300,728
EBITDA (180,565) 1,712,982 1,623,232 3,155,649
JUNE 30, 1998 DATABASE AGENCY PRINTING TOTAL
-------- ---------- -------- -----
REVENUES $ 2,024,307 $ 3,984,270 $ 6,594,404 $12,602,981
EBITDA 1,746,867 330,795 838,740 2,916,402
8
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - 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 six months ended June 30, 1999 and 1998 is as follows:
REVENUES JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Total segment revenues $ 13,300,728 $ 12,602,981
Elimination of intercompany revenue (188,821) (323,475)
------------- -------------
Consolidated revenues $ 13,181,907 $ 12,279,506
------------ ------------
EBITDA JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Total EBITDA for reportable segments $ 3,155,649 $ 2,916,402
Management fee (931,051) (881,625)
Interest expense (161,685) (194,741)
Depreciation and amortization (429,668) (481,248)
Other income 93,816 315,132
------------ -------------
Consolidated income before taxes $ 1,727,061 $ 1,673,920
------------ -------------
At June 30, 1999 and December 31, 1998, approximately 23% 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 47% and 57% of the
Company's total consolidated revenues for the six months ended June 30, 1999 and
1998, respectively.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
DirectCom, Inc. recently concluded a re-evaluation of the Company's direction
and growth strategies. The Company's main focus of attention in this evaluation
process was directed toward its database operations. The current database
operations consist primarily of customer database management and maintenance
services for its clients. The Company has decided to phase out these services,
which is expected to occur prior to the end of August 1999. As part of this
process, the Company will be relocating its headquarters to the executive
offices of NAC in Armonk, New York to reduce costs. The Company intends to
refocus its database expertise in the area of prospect database marketing
systems rather than outsource databased customer management services. In
particular, the Company is developing an Internet-based lead generation and
fulfillment system. The system will allow clients to manage their direct mail
marketing campaigns for lead generation via an online system that DirectCom will
manage.
The Company continues to pursue its goal of providing seamless, integrated
marketing and printing services to direct marketers through its printing and
agency operations. DirectCom's strategy is to provide unmatched values in
consulting, fulfillment, agency creative, production management, printing,
direct mail and 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.
(a) RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
1999
----
Database Printing Total
-------- -------- -----
Revenues $ 2,341,404 $ 2,247,812 $ 4,589,216
Gross profit 541,955 948,227 1,490,182
Operating income 3,748 214,786 218,534
1998
----
Revenues $ 2,963,459 $ 3,133,012 $ 6,096,471
Gross profit 1,234,802 1,298,703 2,533,505
Operating income 474,784 392,693 867,477
Revenues
- --------
Revenues decreased $1,507,255 from $6,096,471 for the three month period ended
June 30, 1998 to $4,589,216 for the three month period ended June 30, 1999. The
revenue decline related to the database operations is due in part to the
directional change of the Company. The agency segment anticipated a reduction in
revenue during the second quarter, due to the loss of a significant customer.
The printing revenue decrease relates to decreased production for a specific
customer, due to the customer restructuring their pricing requirements. Color
Graphics made every effort to meet the competitive pricing structure, but made a
conscious decision not to forego product quality and become a secondary supplier
to the customer. Color Graphics expects to replace this revenue loss through the
establishment of relationships with new customers.
Cost of Revenues
- ----------------
The Company's cost of revenues, as a percentage of revenues, was 67.5% for the
three month period ended June 30, 1999 as compared to 58.4% for the three month
period ended June 30, 1998.
The database cost of revenues for the three months ended June 30, 1999, as a
percentage of database revenues, increased 18.4% from the prior period. The
current period database cost of revenues - related company increased 15.8% and
other database costs increased 2.6%. The related company increase resulted from
an increase in costs associated with the direct mail production. The increase in
other database
10
<PAGE>
costs relates primarily from the outsourcing of a customer project.
The printing cost of revenues for the three month period ended June 30, 1999, as
a percentage of printing revenue, decreased approximately 1% compared to the
prior period.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative
expenses decreased $486,270 for the three month period ended June 30, 1999 as
compared to the prior period. The current period decrease is a result of
approximately $389,250 in moving expenses incurred by the Company in the second
quarter of 1998 related to the Color Graphics relocation to a new facility. No
such expenses were incurred in 1999.
Administration fee - related company
- ------------------------------------
The administrative fee - related company decreased $121,447 for the three month
period ended June 30,1999 as compared to the prior period. The current period
decrease resulted from decreased revenue for the three months ended June 30,
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 increased $20,749 for the three month
period ended June 30,1999. 1999 as compared to the prior period. The increase
resulted primarily from the prior year purchase of property, plant and
equipment.
Interest Expense
- ----------------
Interest expense decreased $19,016 for the three month period ended June 30,
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 current period decrease in interest income is attributed to the
decreased cash balances during the second quarter of 1999 as compared to the
same period in 1998. The current period decrease results primarily from the
decrease in the 1998 restricted cash balance for borrowings associated with the
purchase of a building, related land and renovations for the relocation of Color
Graphics.
Provision for Income Taxes
- --------------------------
The provision for income taxes decreased as a result of the decrease in taxable
income. The effective tax rate was approximately 31.6% and 39.7% for the three
months ended June 30, 1999 and 1998, respectively. The decreased effective rate
in the second quarter 1999 is due to an adjustment to correct the tax accrual in
the first quarter of 1999.
11
<PAGE>
(B) RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
1999
----
Database Printing Total
-------- -------- -----
Revenues $ 7,898,201 $ 5,283,706 $ 13,181,907
Gross profit 2,434,035 2,357,825 4,791,860
Operating income 917,887 809,174 1,727,061
1998
----
Revenues $ 6,008,577 $ 6,270,929 $ 12,279,506
Gross profit 2,263,991 2,697,132 4,961,123
Operating income 895,156 778,764 1,673,920
Revenues
- --------
Revenues increased $902,401 from $12,279,506 for the six months ended June 30,
1998 to $13,181,907 for the six months ended June 30, 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 experienced a
reduction in revenues generated from the agency segment, due to the loss of a
significant customer. The revenue decrease related to the database operations is
due in part to the directional change of the Company. The printing revenue
decrease relates to decreased production for a specific customer, due to the
customer restructuring their pricing requirements. Color Graphics made every
effort to meet the competitive pricing structure, but made a conscious decision
not to forego product quality and become a secondary supplier to the customer.
Color Graphics expects to replace this revenue loss through the establishment of
relationships with new customers.
Cost of Revenues
- ----------------
The Company's cost of revenues, as a percentage of revenues, was 63.6% for the
six month period ended June 30, 1999 as compared to 59.6% for the prior period.
The database cost of revenues for the six months ended June 30, 1999, as a
percentage of database revenues, increased 6.9% from the prior period. The
current period database cost of revenues - related company - as a percentage of
database revenues increased 12.6% due to the increased printing and mailing
sales volume, resulting from agency activity. The related party increase is
offset by a 5.7% decrease in other database costs as a percentage of database
revenues, caused primarily from a reduction in salaries and benefits.
The printing cost of revenues for the six month period ended June 30, 1999, as a
percentage of printing revenue, decreased 1.5% 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 $408,510 in 1999 as
compared to the prior period. The current period decrease is a result of
approximately $424,578 in moving expenses incurred by the Company in the first
quarter and second quarter of 1998 related to the Color Graphics relocation to a
new facility. No such expenses were incurred in 1999.
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
12
<PAGE>
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 six month period ended June 30, 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 for the six month period ended June 30, 1999
reflects management's estimate of the expected annual effective rate, of
approximately 40%, for the year ending December 31, 1999.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
6/30/99 12/31/98
------- --------
Working capital $ 4,874,148 $ 3,630,122
Cash 3,668,290 3,026,447
--------- ---------
6/30/99 6/30/98
------- -------
Cash provided by operating activities 904,066 368,428
Cash used in investing activities 93,251 93,815
Cash used in financing activities 65,198 54,862
Working capital increased as of June 30, 1999 by $1,244,026 as compared to the
working capital as of December 31, 1998 due primarily to increased cash flow
from operations which resulted in higher cash levels.
The current period increase in the accounts receivable is attributed to 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
recent internal procedural changes resulting in slow internal payment process.
Although the receivables increased during the current period, they were
substantially less than the prior period comparative, which accounts for the
overall increase in cash flow from operations.
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 current cash used in financing activities resulted from the reduction in the
Company's long-term debt.
At June 30, 1999, the Company had outstanding debt of $5,689,900 primarily in
the form of notes payable. The amount available under the Company's lines of
credit at June 30, 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.
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.
14
<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 third 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
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 3,668,290 3,026,447
<SECURITIES> 0 0
<RECEIVABLES> 2,996,161 2,636,725
<ALLOWANCES> 205,266 188,218
<INVENTORY> 426,805 509,009
<CURRENT-ASSETS> 7,152,242 6,233,263
<PP&E> 9,665,384 9,572,672
<DEPRECIATION> 2,628,873 2,199,205
<TOTAL-ASSETS> 14,790,642 14,298,140
<CURRENT-LIABILITIES> 2,278,094 2,603,141
<BONDS> 0 0
0 0
0 0
<COMMON> 37 34
<OTHER-SE> 659,777 650,181
<TOTAL-LIABILITY-AND-EQUITY> 14,790,642 14,298,140
<SALES> 13,181,907 12,279,506
<TOTAL-REVENUES> 13,181,907 12,279,506
<CGS> 8,390,047 7,318,383
<TOTAL-COSTS> 8,390,047 7,318,383
<OTHER-EXPENSES> 2,550,214 2,890,346
<LOSS-PROVISION> 17,048 36,000
<INTEREST-EXPENSE> 161,685 194,741
<INCOME-PRETAX> 1,727,061 1,673,920
<INCOME-TAX> 699,000 668,000
<INCOME-CONTINUING> 1,028,061 1,005,920
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 958,543 946,733
<EPS-BASIC> .30 .31
<EPS-DILUTED> .30 .30
</TABLE>
