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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, 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 incorporation or organization) (IRS Employer
Identification No.)
20 Maple Avenue
Armonk, New York 10504
(Address of principal executive offices)
(914) 273-8620
(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, 1999 was 3,361,983.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
---------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Consolidated balance sheets - September 30, 1999 (unaudited) and December 31, 1998 2
Consolidated statements of operations (unaudited) - Three months ended
September 30, 1999 and 1998 3
Consolidated statements of operations (unaudited) - Nine months ended
September 30, 1999 and 1998 4
Consolidated statements of cash flows (unaudited) - Nine months ended
September 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
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 nine months ended September 30, 1999 is calculated as
follows:
Common shares outstanding 3,361,983
Common shares equivalents outstanding 68,000
Net Income $1,088,217
Per share - Basic $ .34
Per share - Diluted $ .34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIRECTCOM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash $ 4,097,768 $ 3,026,447
Accounts receivable, net of allowance for doubtful accounts of $207,266 and
$188,218 as of September 30, 1999 and December 31, 1998, respectively 2,148,799 2,448,507
Inventory 201,565 509,009
Prepaid and other current assets 231,312 249,300
------- -------
Total current assets 6,679,444 6,233,263
PROPERTY, PLANT AND EQUIPMENT, Net 6,847,922 7,373,467
OTHER ASSETS 774,877 691,410
------- -------
TOTAL ASSETS $14,302,243 $14,298,140
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt 404,910 404,910
Accounts payable 125,356 372,047
Accounts payable - related company 251,812 1,107,941
Income taxes payable 409,659 214,909
Accrued expenses and other current liabilities 498,944 473,334
Deferred revenue - 30,000
-------- ------
Total current liabilities 1,690,681 2,603,141
LONG-TERM DEBT 5,220,326 5,464,101
DEFERRED INCOME TAXES 519,000 574,000
MINORITY INTEREST 1,017,605 900,083
--------- -------
TOTAL LIABILITIES 8,447,612 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 5,499,817 4,411,600
--------- ---------
6,159,631 5,061,815
Less treasury stock, at cost (305,000) (305,000)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 5,854,631 4,756,815
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,302,243 $14,298,140
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
---- ----
REVENUES
<S> <C> <C>
Database $ 1,219,078 $ 2,905,813
Printing 2,099,979 2,095,841
Printing - related company 779,508 544,317
------- -------
Total revenues 4,098,565 5,545,971
COST OF REVENUE
Database - related company 946,518 1,179,379
Database - other 188,969 475,912
Printing 1,492,983 1,507,528
Printing - related company 62,267 -
------ ----------
Total cost of revenue 2,690,737 3,162,819
Selling, general and
administrative expenses 570,555 998,492
Administrative fee - related party 294,719 376,972
Depreciation and amortization 212,369 222,811
------- -------
Total costs and expenses 3,768,380 4,761,094
--------- ---------
OTHER INCOME (EXPENSE)
Interest expense (80,557) (98,078)
Gain on sale of equipment 6,864 9,749
Miscellaneous income 45,187 68,096
------ ------
Total other income (expense) (28,506) (20,233)
-------- --------
Income from operations before income taxes
and minority interest 301,679 764,644
Provision for income taxes 124,000 312,000
------- -------
Income from operations before minority interest 177,679 452,644
Minority interest in income of subsidiary 48,004 21,331
------ ------
Net income $ 129,675 $ 431,313
========= =========
BASIC EARNINGS PER SHARE $ 0.04 $ 0.14
========= =========
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.14
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
---- ----
REVENUES
<S> <C> <C>
Database $9,117,279 $8,914,391
Printing 6,457,692 7,275,717
Printing - related company 1,705,501 1,825,371
--------- ---------
Total revenues 17,280,472 18,015,479
COST OF REVENUE
Database - related company 5,556,655 3,930,296
Database - other 1,190,579 1,503,803
Printing 4,274,824 4,830,285
Printing - related company 206,308 251,040
------- -------
Total cost of revenue 11,228,366 10,515,424
Selling, general and
administrative expenses 2,059,185 3,198,991
Administrative fee - related party 1,225,770 1,258,597
Depreciation and amortization 642,037 704,059
------- -------
Total costs and expenses 15,155,358 15,677,071
---------- ----------
OTHER INCOME (EXPENSE)
Interest expense (242,242) (292,820)
Gain on sale of equipment 6,864 199,749
Miscellaneous income 139,003 193,228
------- -------
Total other income (expense) (96,375) 100,157
-------- -------
Income from operations before income taxes
and minority interest 2,028,739 2,438,565
Provision for income taxes 823,000 980,000
---------- ----------
Income from operations before minority interest 1,205,739 1,458,565
Minority interest in income of subsidiary 117,522 80,518
------- ------
Net income $1,088,217 $1,378,047
========== ==========
BASIC EARNINGS PER SHARE $ 0.34 $ 0.44
========== ==========
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.44
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $1,088,217 $1,378,047
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 642,037 704,059
Bad debt expense 19,048 54,000
Minority interest 117,522 80,518
Deferred taxes (55,000) (65,000)
Gain on sale of equipment (6,864) (199,749)
(Increase) decrease in:
Accounts receivable 280,660 (233,155)
Inventory 307,444 46,137
Prepaid and other current assets 17,987 652,626
Other assets 91,533 338,496
Increase (decrease) in:
Accounts payable (246,691) (28,130)
Accounts payable - related company (856,129) (619,395)
Income taxes payable 194,750 (82,847)
Accrued expenses and other current liabilities 25,610 67,241
Deferred revenue (30,000) -
-------- -------
Net cash provided by operating activities 1,590,124 2,092,848
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (116,492) (2,563,461)
Investment in partnership (175,000) -
Proceeds from sale of equipment 6,864 199,749
Change in restricted cash - 1,400,000
--------- ---------
Net cash used in investing activities (284,628) (963,712)
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt (243,775) (616,386)
Issuance of common stock under stock option plan 9,600 -
----- --------
Net cash used in financing activities (234,175) (616,386)
--------- ---------
Net increase (decrease) in cash 1,071,321 512,750
Cash at beginning of period 3,026,447 2,837,427
========= =========
Cash at end of period $4,097,768 $3,350,177
========== ==========
</TABLE>
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 nine months ended September 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:
September 30, 1999 December 31, 1998
------------------ -----------------
Paper $ 95,276 $ 282,706
Other raw materials 64,057 67,178
Work-in-process 42,232 159,125
------ -------
$ 201,565 $ 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 September 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 $412,598 as of
September 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 September 30, 1999 related to this fee was $294,719.
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 40.5% for the nine months ended September 30, 1999
and 1998, respectively. The provision for the nine month period ended September
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 September 30, 1999.
<TABLE>
<CAPTION>
September 30, 1999 Database Agency Printing Total
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Revenues $ 120,729 $1,098,349 $2,991,200 $ 4,210,278
EBITDA (130,180) 7,600 959,853 837,273
September 30, 1998 Database Agency Printing Total
-------- ------ -------- -----
Revenues $ 978,757 $1,927,057 $2,703,534 $ 5,609,348
EBITDA 112,011 600,073 672,575 1,384,659
</TABLE>
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 September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Revenues September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Total segment revenues $ 4,210,278 $ 5,609,348
Elimination of intercompany revenue (111,713) (63,377)
--------- --------
Consolidated revenues $ 4,098,565 $ 5,545,971
=========== ===========
<CAPTION>
EBITDA September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Total EBITDA for reportable segments $ 837,273 $ 1,384,659
Management fee (294,719) (376,972)
Interest expense (80,557) (98,078)
Depreciation and amortization (212,369) (222,811)
Other income 52,051 77,846
------ ------
Consolidated income before taxes $ 301,679 $ 764,644
========== ==========
<CAPTION>
The table below presents information about the Company's segments for the nine
months ended September 30, 1999.
September 30, 1999 Database Agency Printing Total
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Revenues $1,498,871 $7,618,408 $8,393,727 $17,511,006
EBITDA (310,746) 1,720,583 2,583,085 3,992,922
<CAPTION>
September 30, 1998 Database Agency Printing Total
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Revenues $3,003,063 $5,911,327 $9,487,940 $18,402,330
EBITDA 507,539 1,606,527 2,186,997 4,301,063
</TABLE>
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 nine months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Revenues September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Total segment revenues $ 17,511,006 $ 18,402,330
Elimination of intercompany revenue (230,534) (386,851)
--------- ---------
Consolidated revenues $ 17,280,472 $ 18,015,479
============ ============
<CAPTION>
EBITDA September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Total EBITDA for reportable segments $ 3,992,921 $ 4,301,064
Management fee (1,225,770) (1,258,597)
Interest expense (242,242) (292,820)
Depreciation and amortization (642,037) (704,059)
Other income 145,867 392,977
------- -------
Consolidated income before taxes $ 2,028,739 $ 2,438,565
=========== ===========
</TABLE>
At September 30, 1999 and December 31, 1998, approximately 35% 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
42% and 58% of the Company's total consolidated revenues for the nine months
ended September 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 phased out these services, as of
August 31, 1999. As part of this process, the Company relocated their
headquarters to Armonk, New York. The Company intends to focus its database
expertise in the area of prospect, or non-customer, database marketing systems.
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 and
direct mail to deliver 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 SEPTEMBER 30, 1999 AND SEPTEMBER
30, 1998
1999
----
Database Printing Total
-------- -------- -----
Revenues $ 1,219,078 $ 2,879,487 $4,098,565
Gross profit 83,591 1,324,237 1,407,828
Operating income (234,410) 536,089 301,679
1998
----
Revenues $ 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
Revenues
- --------
Revenues decreased $1,447,406 from $5,545,971 for the three month period ended
September 30, 1998 to $4,098,565 for the three month period ended September 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 third quarter, due to the loss of a significant
customer. The printing revenue increased during the current period comparison,
despite the loss of a significant customer during the second quarter of 1999.
The printing revenue increase is representative of the Company's efforts to
establish new customer relationships and increase services to existing
customers.
Cost of Revenues
- ----------------
The Company's cost of revenues, as a percentage of revenues, was 65.6% for the
three month period ended September 30, 1999 as compared to 57% for the three
month period ended September 30, 1998.
The database cost of revenues for the three months ended September 30, 1999, as
a percentage of database revenues, increased 36.2% from the prior period. The
current period database cost of revenues - related company increased 37% and is
offset by a decrease of .8% in other database costs. The related company
increase resulted from an increase in costs associated with the direct mail
production.
10
<PAGE>
The printing cost of revenues for the three month period ended September 30,
1999, as a percentage of printing revenue, decreased 3% compared to the prior
period. The printing cost of revenue decrease resulted from an increase in
customer supplied raw materials and the Company's improvement in operational
efficiency.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased $427,937 for the three
month period ended September 30, 1999 as compared to the prior period. The
current period decrease resulted largely in part to the reduction in operational
costs associated with the closing of the Company's database operation. The
current period decrease also reflects approximately $65,000 in moving expenses
incurred by the Company in the third 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 $82,253 for the three month
period ended September 30,1999 as compared to the prior period. The current
period decrease resulted from decreased revenue for the three months ended
September 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 decreased $10,442 for the three month
period ended September 30, 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 $17,521 for the three month period ended September
30, 1999 as compared to the prior period. The current period decrease resulted
from reduced interest rates and the reduction of long term notes payable.
Other income (expense)
- ----------------------
Miscellaneous income primarily represents interest income on the Company's cash
deposits. The current period decrease is attributed to the receipt of certain
miscellaneous income during the third quarter of 1998 that is not applicable to
the current period.
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 41.1% and 40.8% for the three
months ended September 30, 1999 and 1998, respectively.
11
<PAGE>
(B) RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER
30, 1998
1999
----
Database Printing Total
-------- -------- -----
Revenues $ 9,117,279 $ 8,163,193 $ 17,280,472
Gross profit 2,370,045 3,682,061 6,052,106
Operating income 683,475 1,345,263 2,028,739
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
Revenues
- --------
Revenues decreased $735,007 to $17,280,472 for the nine months ended September
30, 1999 from $18,018,479 for the nine months ended September 30, 1999. The
revenue decline is attributed to the printing segment 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. 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.
Cost of Revenues
- ----------------
The Company's cost of revenues, as a percentage of revenues, was 64.9% for the
nine month period ended September 30, 1999 as compared to 58.3% for the prior
period.
The database cost of revenues for the nine months ended September 30, 1999, as a
percentage of database revenues, increased 13.1% from the prior period. The
current period database cost of revenues - related company - as a percentage of
database revenues increased 16.9% due to the increased printing and mailing
sales volume during the first quarter of 1999, resulting from agency activity.
The related party increase is offset by a 3.8% decrease in other database costs
as a percentage of database revenues. The database costs will continue to
decline, which is a direct result of closing the database operations.
The printing cost of revenues for the nine month period ended September 30,
1999, as a percentage of printing revenue, decreased 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 $1,139,806 in 1999 as
compared to the prior period. The current period decrease resulted largely in
part to the reduction in operational costs associated with the closing of the
Company's database operation. The current period decrease also reflects
approximately $489,390 in moving expenses incurred by the Company in 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 $32,827 in 1999 as compared
to the prior period. The current period decrease resulted from a decrease in
revenue for the current period. 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.
12
<PAGE>
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense decreased $62,022 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 $50,578 for the nine month period ended September 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 is attributed to certain miscellaneous
income received during the prior period that is not applicable to the current
period.
Provision for Income Taxes
- --------------------------
The provision for income taxes for the nine month period ended September 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
- --------------------------------
9/30/99 12/31/98
------- --------
Working capital $4,988,763 $3,630,122
Cash 4,097,768 3,026,447
9/30/99 9/30/98
------- -------
Cash provided by operating activities 1,590,124 2,092,848
Cash used in investing activities 284,628 963,712
Cash used in financing activities 234,175 616,386
Working capital increased as of September 30, 1999 by $1,358,641 as compared to
the working capital as of December 31, 1998 due primarily to increased cash
levels and a decrease in related party payables.
The decrease in cash provided by operating activities is due primarily to the
decrease in net income.
The current investing activity resulted from additional capital provided in the
Company's partnership investment and capital expenditures. 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 September 30, 1999, the Company had outstanding debt of $5,625,236 primarily
in the form of notes payable. The amount available under the Company's lines of
credit at September 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 will continue testing
internal systems during the fourth quarter of 1999 for any potential issues
associated with the Year 2000. 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
prior to the end of the year. 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> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 4,097,768 3,026,447
<SECURITIES> 0 0
<RECEIVABLES> 2,356,065 2,636,725
<ALLOWANCES> 207,266 188,218
<INVENTORY> 201,565 509,009
<CURRENT-ASSETS> 6,679,444 6,233,263
<PP&E> 9,689,164 9,572,672
<DEPRECIATION> 2,841,242 2,199,205
<TOTAL-ASSETS> 14,302,243 14,298,140
<CURRENT-LIABILITIES> 1,690,681 2,603,141
<BONDS> 0 0
0 0
0 0
<COMMON> 37 34
<OTHER-SE> 659,777 650,181
<TOTAL-LIABILITY-AND-EQUITY> 14,302,243 14,298,140
<SALES> 17,280,472 18,015,479
<TOTAL-REVENUES> 17,280,472 18,015,479
<CGS> 11,228,366 10,515,424
<TOTAL-COSTS> 11,228,366 10,515,424
<OTHER-EXPENSES> 3,284,955 4,457,588
<LOSS-PROVISION> 19,048 54,000
<INTEREST-EXPENSE> 242,242 292,820
<INCOME-PRETAX> 2,028,739 2,438,565
<INCOME-TAX> 823,000 980,000
<INCOME-CONTINUING> 1,205,739 1,458,565
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,088,217 1,378,047
<EPS-BASIC> .34 .44
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