<PAGE>
As filed with the Securities and Exchange Commission on February 6, 1997.
Registration No. 333-5680-LA
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-2
AMENDMENT NO. 4 TO
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------------
DECHTAR DIRECT INC.
(Exact name of registrant as specified in its charter)
California 7331 94-3100168
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
245 11th Street
San Francisco, CA 94103
(415) 863-3005
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-----------------------
Thomas L. Lackman
President
DechTar Direct Inc.
245 11th Street
San Francisco, CA 94103
(415) 863-3005
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
COPIES TO:
Horace L. Nash, Esq.
Richard G. Costello, Esq.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, CA 94111
-----------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
-----------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Number of the earlier effective
Registration Date for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Number of the earlier effective Registration Statement for the same
offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
-----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
DECHTAR DIRECT INC.
3,850,000 SHARES
COMMON STOCK
Of the 3,850,000 shares of Common Stock of DechTar Direct Inc. ("DechTar"
or the "Company") being offered by this Prospectus, 2,306,840 are being offered
by the Company and 1,543,160 are being offered on behalf of the Selling
Shareowners (the "Offering"). See "Principal and Selling Shareowners." The
Company will receive no proceeds from sales by Selling Shareowners. The shares
are being sold directly by the Company on a "Minimum/Maximum" basis subject to
subscription and payment for not less than 480,000 shares (the "Minimum") and
not more than 3,850,000 shares (the "Maximum"). Until subscriptions for the
Minimum are received, all subscription payments will be held in escrow and will
be refunded to subscribers in the event the Minimum is not sold. Until the
Minimum is sold, purchases by officers, directors and other employees of the
Company will be limited to 10% of the Minimum. There is no corresponding limit
on shareowners. The minimum purchase is 100 shares. See "Use of Proceeds" and
"Plan of Distribution."
Prior to the Offering, there has been no public market for shares of the
Company's Common Stock; therefore, the public offering price has been determined
by the Company. There can be no assurance that the Common Stock will be approved
for listing on any stock exchange or that any active trading market will develop
or be sustained. See "Risk Factors" and "Shares Eligible for Future Resale."
The Offering will be terminated upon the earliest of: The sale of the
Maximum, twelve months after the date of this Prospectus, or the date on which
the Company decides to terminate the Offering.
THE OFFERING INVOLVES SPECULATIVE SECURITIES SUBJECT TO A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 4.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREOWNERS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $6.25 None $6.25 $6.25
- ----------------------------------------------------------------------------------------------------
Total Minimum (480,000 shares) $3,000,000 None $1,337,844 $1,662,156
- ----------------------------------------------------------------------------------------------------
Total Maximum (3,850,000 shares) $24,062,500 None $14,417,750 $9,644,750
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) The shares will be sold through the Company's President, who will not
receive any commission. See "Plan of Distribution."
(2) Before deducting estimated offering expenses payable by the Company of
$450,000 at the Minimum and $976,500 at the Maximum.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 6, 1997.
<PAGE>
Overlay to Cover Page of Prospectus - Graphical
representation representing "DECHTAR DIRECT INTIMATE
TREASURES LOVE STUFF CHAIN MALE" in various sequences.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . 15
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . 16
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Principal and Selling Shareowners. . . . . . . . . . . . . . . . . . . . 38
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . 42
Shares Eligible for Future Resale. . . . . . . . . . . . . . . . . . . . 43
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . 47
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . F-1
The Company is not currently subject to the informational filing
requirements of the Securities Exchange Act of 1934, as amended ("Exchange
Act"). As a result of the Offering, the Company expects to become subject to
such requirements and, in accordance therewith, will file periodic reports,
proxy materials and other information with the Securities and Exchange
Commission. The Company will furnish its shareowners with annual reports
containing financial statements audited by an independent public accounting firm
after the end of its fiscal year and quarterly reports with unaudited financial
information for the first three quarters of each fiscal year. The Company's
fiscal year ends on the fourth Wednesday in December; commencing in 1997 the
Company will report its results on a calendar year basis.
UNTIL MAY 7, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
INTIMATE TREASURES-Registered Trademark- and MAIL ORDER USA-Registered
Trademark- are registered trademarks of the Company. CHAIN MALE, LOVE STUFF and
WEBGUARD are trademarks of the Company. This Prospectus also includes
tradenames and trademarks of companies other than the Company.
<PAGE>
Photograph of DechTar corporate headquarters - exterior.
[PHOTO]
DechTar Direct, Inc. is the largest advertising company in North America
specializing in the adult entertainment and mail order industries.
Photographs of DechTar staff at work.
[PHOTOS]
Photograph of DechTar personnel and guests at social function.
[PHOTO]
The Company provides clients with full advertising agency services including
creative design, pre-press production and desktop publishing.
Photograph of Dechtar personnel gathered for group photo at corporate
headquarters.
[PHOTO]
Management includes marketing, computer engineering and design professionals
with extensive experience in the adult marketplace.
<PAGE>
Photograph of computer equipment.
[PHOTO]
All Company advertisements are produced in-house on a Macintosh based publishing
system which includes color separation and digitizing capabilities.
Photograph of DechTar senior management team.
[PHOTO]
Management includes marketing, computer engineering and design professionals
with extensive experience in the adult marketplace.
Photograph of covers of five magazines in which DechTar has placed
advertisements.
[PHOTO]
In 1996, DechTar placed 585 full-page, four-color advertisements in 65 national
magazines and mailed 125 million pages of it's catalog-of-catalogs advertising.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THEIR NOTES, APPEARING LATER IN THIS PROSPECTUS. SEE "RISK FACTORS"
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
THE OFFERING.
THE COMPANY
DechTar Direct Inc. (the "Company") is the largest advertising company in
North America specializing in the adult entertainment and adult mail-order
industries. The Company provides catalog lead generation and response services,
provides full-service advertising agency services, and sells advertising space
to clients throughout the United States and Canada. The Company also is
developing access blocking software for use by adult-oriented sites on the
Internet and the World Wide Web.
CATALOG REQUEST PROGRAMS. The Company's catalog request programs generate
leads for direct mail clients by advertising client catalogs, primarily in
national magazines, package inserts and the Company's INTIMATE TREASURES
catalog-of-catalogs. The Company's clients are mail-order and publishing
companies which contract with the Company for inclusion in the Company's
advertisements, inserts and mailings. The Company currently has over 300 active
clients offering approximately 700 catalogs and publications through its catalog
advertising program. In 1996, the Company's catalog program advertising
included 585 full-page, four-color advertisements in 65 national magazines,
including COSMOPOLITAN, PLAYBOY, PENTHOUSE and AMERICAN WOMAN. In addition, the
Company mailed approximately 125 million pages of its catalog-of-catalogs
advertising.
AGENCY SERVICES. The Company provides clients with traditional advertising
agency services, including: Creative design; pre-press production; desktop
publishing; print and advertising space brokerage; media and circulation
planning; and list rental. The Company also sells advertising space in its
catalog-of-catalogs and supplements.
ACCESS BLOCKING SOFTWARE. In June 1996, the Company announced the
development of proprietary software designed to help providers of adult
materials on the Internet and the World Wide Web block the access to these
materials by minors. This service, to be marketed under the name WEBGUARD, also
will permit providers of adult materials through the Internet and the World Wide
Web to block access to such materials by persons in those U.S. communities where
standards may be inconsistent with the materials offered. This software and
related service currently is being tested and the Company currently expects it
to be available in 1997.
The Company was incorporated in the State of California on July 24, 1989.
Its corporate offices are located at 245 Eleventh Street, San Francisco, CA
94103; telephone 415-863-3005; facsimile 415-863-3004; email at
[email protected]; and the Company's site on the World Wide Web at
http://www.dechtar.com.
1
<PAGE>
THE OFFERING MINIMUM MAXIMUM
Common Stock Offered by
the Company . . . . . . . . . . . . . 214,055 shares 2,306,840 shares
Common Stock Offered by
the Selling Shareowners . . . . . . . 265,945 shares 1,543,160 shares
Offering Price . . . . . . . . . . . . $6.25 per share
Common Stock Outstanding
After the Offering (1). . . . . . . . 13,687,965 shares 15,780,750 shares
Plan of Distribution . . . . . . . . . The Company is selling shares of Common
Stock on behalf of the Company and
certain Selling Shareowners, subject to
a Minimum Offering of 480,000 shares and
a Maximum Offering of 3,850,000 shares.
See "Plan of Distribution."
Use of Proceeds . . . . . . . . . . . For expansion of catalog advertising and
mailings; expansion of agency services
marketing; development and marketing of
proprietary software products; potential
acquisitions; and working capital. See
"Use of Proceeds."
- ------------
(1) Excludes 1,645,897 shares of Common Stock issuable upon exercise of
outstanding options and warrants and 809,103 shares of Common Stock
reserved for issuance and available for grant under the Company's stock
option plan.
Except as otherwise noted, information in this Prospectus assumes the
conversion of all of the Company's outstanding shares of Series A and Series B
Convertible Preferred Stock (together, the "Preferred Stock") into Common Stock,
and is adjusted to reflect a 16-for-1 common stock split on December 20, 1995,
and a 7-for-1 common stock split on April 26, 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF SHARES SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION IN THIS PROSPECTUS IS
CORRECT AFTER THE DATE HEREOF.
2
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 25,
STATEMENTS OF OPERATIONS DATA: 1994 1995 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . $6,146,488 $7,742,585 $6,213,835 $7,026,230
Cost of revenues . . . . . . . . . . . 4,108,388 5,038,230 3,954,197 5,054,045
------------- ------------- ------------- -------------
Gross profit. . . . . . . . . . . . . 2,038,100 2,704,355 2,259,638 1,972,185
Selling, general and administrative expense 1,497,748 2,311,497 1,671,684 2,010,736
------------- ------------- ------------- -------------
Income (loss) from operations 540,352 392,858 587,954 (38,551)
Interest expense, net. . . . . . . . . . . . . 165,018 163,765 138,374 50,201
------------- ------------- ------------- -------------
Net income (loss) before income taxes . . 375,334 229,093 449,580 (88,752)
Provision (benefit) for income taxes . 167,904 107,920 211,786 (28,041)
------------- ------------- ------------- -------------
Net income (loss) . . . . $ 207,430 $ 121,173 $ 237,794 $ (60,711)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings (loss) per share. . . . . . . $0.02 $0.01 $0.02 $(0.01)
Weighted average common shares outstanding 11,200,000 12,635,368 11,200,000 13,216,089
<CAPTION>
SEPTEMBER 25, 1996
DECEMBER 27, 1995 -----------------------------------------------------
ACTUAL ACTUAL AS ADJUSTED(1) PRO FORMA (2)
-------- -------- ---------------- -----------------------
BALANCE SHEET DATA: MINIMUM MAXIMUM
------- -------
<S> <C> <C> <C> <C> <C>
Working capital. . . . . $ (501,951) $ (591,324) $ (251,924) $ 635,920 $13,189,326
Total assets . . . . . . 4,222,747 5,427,967 5,767,367 6,655,211 19,208,617
Long-term debt . . . . . 554,117 477,230 477,230 477,230 477,230
Shareowners' equity. . . 1,114,302 1,595,421 1,934,821 2,822,665 15,376,071
</TABLE>
- -----------
(1) Includes $14,400 and $325,000 received subsequent to September 25, 1996, in
connection with the sale of Series A and Series B Convertible
Preferred Stock, respectively.
(2) Reflects the application of the estimated Minimum and Maximum net proceeds
of the Offering. See "Use of Proceeds."
3
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED BY THIS PROSPECTUS INVOLVES A
HIGH DEGREE OF RISK AND SHOULD ONLY BE MADE BY PERSONS WHO CAN AFFORD TO RISK
THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE
FOLLOWING RISK FACTORS, IN ADDITION TO OTHER INFORMATION CONCERNING THE COMPANY
AND ITS BUSINESS CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING SHARES.
OFFERING RISKS
POSSIBLE LACK OF PUBLIC MARKET
The shares offered hereby have been registered with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), and will be freely tradable under federal securities laws.
However, the shares have not been registered or qualified under the securities
laws of all fifty states and may not be sold to persons who are residents of any
such state unless they are subsequently registered or qualified or there exists
an exemption from the applicable state's registration requirements with respect
to such sale or transfer. The Company does not currently meet the requirements
for listing or quotation on a national securities exchange or in the Nasdaq
market. There can be no assurance that the Common Stock will be approved for
listing on any stock exchange or that any active trading market will develop or
be sustained. Until the Offering is terminated, any potential purchaser of
Common Stock will be able to purchase shares from the Company at the initial
offering price; therefore, the Company does not anticipate that the market price
will exceed the initial offering price until the Offering is terminated, if
ever.
NO PROCEEDS TO THE COMPANY FROM SALES BY SELLING SHAREOWNERS
Of the shares offered by this Prospectus, the Company will sell only
214,055 shares for its own account in the event the Minimum Offering is
completed, and only 2,306,840 shares for its own account in the event the
Maximum Offering is completed. The other shares sold in the Offering will be
sold on behalf of the Selling Shareowners (265,945 shares in the event the
Minimum Offering is completed and 1,543,160 shares in the event the Maximum
Offering is completed). The Company will receive no proceeds from any sales by
Selling Shareowners. Shares may be offered and sold on behalf of the Company
and the Selling Shareowners in any number of closings after the Minimum has been
sold, until the Offering is terminated. At the Minimum, approximately 45% of
the shares will be sold for the account of the Company. In each subsequent
closing, approximately 57% of the shares will be sold on behalf of the Company
until an aggregate of 2,760,800 shares have been sold in the Offering.
Approximately 71% of the shares sold in the Offering in any closing thereafter
will be sold for the Company's account. At the time of any closing subsequent
to the Minimum, an investor will be unable to determine from this Prospectus the
precise aggregate number of shares sold to that date, and accordingly the
investor will be uncertain whether approximately 57% or approximately 71% of the
shares being sold in such closing are being sold for the Company's account. The
Company will provide a supplement to this Prospectus at such time as the Minimum
Offering has been sold, and a further supplement to this Prospectus at such time
as 2,760,800 shares have been sold. Such supplements will include statements
(i) that at least such number of shares
4
<PAGE>
have been sold, (ii) that until an aggregate of 2,760,800 shares are sold,
approximately 57% of the shares sold in any subsequent closing will be sold for
the Company's account, and (iii) that after 2,760,800 shares have been sold,
approximately 71% of the remaining shares sold in any subsequent closing will be
sold for the Company's account. See "Plan of Distribution" and "Use of
Proceeds."
RISK OF MARKET SATURATION
Shares sold in the Offering will be sold on behalf of both the Company and
the Selling Shareowners. The Company will receive no proceeds of any sales by
Selling Shareowners. Only a limited market, if any, exists for shares of the
Company's Common Stock. As a result, shares sold on behalf of the Selling
Shareowners could deprive the Company of an opportunity to sell shares for its
own account, and the potential net proceeds to the Company could be reduced
accordingly. There can be no assurance that the Minimum or any other number of
shares will be sold in the Offering. See "Plan of Distribution," "Use of
Proceeds" and "Dilution."
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no market for the Company's Common
Stock. The initial offering price was determined by the Company based upon
several factors. See "Plan of Distribution--Determination of Offering Price"
for a discussion of the factors considered in determining the initial public
offering price. The trading price of the Company's Common Stock could be
subject to wide fluctuations.
RESALES OF SHARES
Sales of a substantial number of shares of Common Stock in a public trading
market, if any is established, following the Offering could adversely affect the
market price for the Company's Common Stock. Upon completion of the Offering
and assuming the sale of the Maximum, the Company will have 15,780,750 shares of
Common Stock outstanding. Of these, the 3,850,000 shares sold in the Offering
will be available for immediate sale in the public market. Ninety days after
the date of this Prospectus, 10,472,000 shares of Common Stock will be eligible
for resale under Rule 144 under the Securities Act, subject to the notice,
volume and other limitations of Rule 144 (other than holding period
limitations). An additional 1,022,000 shares of Common Stock will be eligible
for sale under Rule 144 subject to the foregoing limitations within one year of
the date of this Prospectus. In addition, ninety days after the date of this
Prospectus, up to 1,127,000 shares issuable under then-exercisable options could
be resold in the public market under Rule 701 under the Securities Act, subject
to certain limitations set forth in Rule 701. See "Shares Eligible for Future
Resale."
DILUTION
The initial public offering price is substantially higher than the book
value per outstanding share of Common Stock prior to the Offering. Accordingly,
purchasers in the Offering will suffer an immediate and substantial dilution of
$6.04 (or 97%) if the Minimum is sold to $5.17 (or 83%) if the Maximum is sold
in the net book value per share of the Common Stock from the initial public
offering price. Additional dilution will occur upon exercise of outstanding
options. See "Dilution."
5
<PAGE>
NO DIVIDENDS
The Company has not paid dividends from its inception and it anticipates
that it will not pay dividends for the foreseeable future. See "Dividend
Policy."
ESCROW PERIOD BEFORE SHARES MAY BE ISSUED OR FUNDS RETURNED
This Offering is a Minimum/Maximum offering. Only until the Minimum is
sold, all subscription payments will be deposited into an escrow account. The
escrowed funds will be released to the Company and the Selling Shareowners when
the Minimum is sold, or will be refunded to the subscribers without interest and
without any deduction for expenses if the Minimum is not sold. Until the
Company accepts funds for the Minimum, purchasers will be subscribers and not
shareowners of the Company. During the Escrow Period, subscribers will have no
right to a return of their subscription payment and could be without funds for
up to twelve months. See "Plan of Distribution--Escrow of Minimum Proceeds."
CONTROL OF COMPANY BY MANAGEMENT
The current management of the Company holds a substantial majority of the
Company's Common Stock. The owners of Common Stock are entitled to one vote
for each share held, with cumulative voting for directors; provided, however,
that the Company's Bylaws provide for the termination of cumulative voting upon
the Company's listing on a national exchange or national market quotation
system. This means that the owners of a majority of the shares voting for the
election of directors can elect a majority of the directors to be elected if
they choose to do so. The officers and directors of the Company currently hold
88.8% of the outstanding shares of the Company's Common Stock (84.9% assuming
conversion of the outstanding Preferred Stock). After completion of the
Offering, if the Maximum is sold, the officers and directors will hold 67.8% of
the outstanding shares of the Company's Common Stock (82.9% if the Minimum is
sold) and will continue to control the Company as well as the outcome of any
matters submitted to a vote of the Company's shareowners and have the power to
determine all management policy and financing decisions. See "Management" and
"Description of Capital Stock."
NO SPECIFIC USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering primarily for
general corporate purposes, including working capital and potential acquisitions
and strategic investments. Accordingly, management will have significant
discretion in allocating the net proceeds of the Offering. See "Use of
Proceeds."
BUSINESS RISKS
MANAGEMENT OF POTENTIAL GROWTH
The Company's potential growth is expected to place a significant strain on
its managerial, operational and financial resources. To manage growth, the
Company must continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. To support such
growth, the Company's operating expenses may increase faster than its revenues
for the foreseeable future, which may result in operating losses. There can be
no assurance that the Company will be able to manage effectively the expansion
of its operations. Any inability to manage growth
6
<PAGE>
effectively could have a material adverse effect upon the Company's business,
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--Future
Plans."
DEPENDENCE UPON KEY PERSONNEL
The Company's performance is substantially dependent upon the performance
of its senior management team, which currently is composed of a small number of
individuals. The loss of the services of any of its senior management personnel
could have a material adverse effect upon the business, results of operations
and financial condition of the Company. The Company has no employment
agreements with its key personnel, other than an "at-will" agreement with Thomas
L. Lackman, President of the Company. The Company also maintains "key-life"
insurance on certain of its executive officers.
The Company's future success also depends upon its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material adverse
effect upon the Company's business, results of operations and financial
condition. See "Business--Employees" and "Management."
NO ASSURANCE OF AVAILABILITY OF FINANCING
The Company has had negative working capital in each of the last three
fiscal years. If the proceeds of the Offering, together with funds generated by
operations and other sources of liquidity, are insufficient to finance the
Company's continued growth, additional funds may need to be raised from public
or private financing sources. If additional funds are raised by issuing equity
securities, existing shareowners will have their proportionate ownership
diluted. If debt financing is obtained, the interest expense and repayment will
reduce earnings and cash flow. There can be no assurance that equity or debt
financing will be available. Should the Company not be able to secure
additional debt or equity financing, it may be forced to limit growth. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
UNDEVELOPED MARKET
An element of the Company's business strategy is the development and
introduction of WEBGUARD, its proprietary software and access blocking service
for adult sites on the Internet and the World Wide Web. The market for these
services only recently has begun to develop and is evolving rapidly. It is
difficult to predict the future growth rate, if any, and size of this market.
There can be no assurance either that the market for the Company's WEBGUARD
services will develop or that demand for WEBGUARD will emerge or become
sustainable. If the market fails to develop, develops more slowly than expected
or becomes saturated with competitors, the Company's business, results of
operations and financial condition could be materially adversely affected. See
"Business--WEBGUARD Access Blocking Software."
7
<PAGE>
UNCERTAIN PRODUCT DEVELOPMENT
The Company's WEBGUARD software and service is only in the testing phase,
and is unproven. Any failure of the Company effectively to develop and
introduce this software and service could materially adversely affect the
Company's business, results of operations and financial condition. See
"Business--WEBGUARD Access Blocking Software."
LEGAL RESTRICTIONS
A significant portion of the Company's clientele distributes sexually
oriented materials. Accordingly, the Company may be subject to heightened
scrutiny by officials seeking to enforce federal obscenity laws or similar laws
in existence in the states where the Company does business. Becoming the object
of enforcement proceedings could be expensive for the Company, and the Company's
business, results of operations and financial condition could be materially
adversely affected. See "Business--Legal Restrictions."
DEPENDENCE UPON MAJOR CUSTOMER
During fiscal 1995 and 1996, the Company's largest customer, Voyages
Catalog Group, Inc. ("VCG"), accounted for approximately 27% and 39%,
respectively, of the Company's revenues. VCG is owned 100% by Terri N. Hess,
Chief Executive Officer of the Company. If VCG were to cease being a client of
the Company, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Certain Transactions."
TRANSACTIONS WITH INSIDERS
The Company has engaged in several transactions with Voyages Catalog Group,
Inc. ("VCG"), which is owned by Terri N. Hess, the Company's Chief Executive
Officer and principal shareowner. See "Certain Transactions." It is possible
that the Company may enter into transactions with VCG in the future and certain
conflicts of interest may arise in connection with such transactions.
OBLIGATIONS TO REPURCHASE MANAGEMENT STOCK
The Company has entered into agreements with two of its senior executives
pursuant to which it is obligated to repurchase the shares of the Company's
Common Stock owned by such persons. The repurchase obligation is incurred upon
the termination of employment of such persons, including voluntary termination.
If the Company is required to repurchase such shares, it could have a material
adverse effect upon the Company's business, results of operations or financial
condition. See "Management--Employment Agreements."
COMPETITION
The Company's competitors and potential competitors include: Large
lead-generation and advertising agency concerns which generally do not currently
service a significant portion of the adult entertainment market; large adult
entertainment industry companies which currently do not provide the services
that the Company provides; and a number of smaller companies which currently
compete with the Company. There can be no assurance that one or more major
agencies or large adult entertainment companies will not choose to enter this
market, applying greater financial and
8
<PAGE>
marketing resources, operating experience and name recognition than the Company,
or that smaller competitors will not expand faster and more successfully than
the Company. In addition, the Company may face competition from newly
developing direct marketing channels, such as interactive home computers and
television home shopping. See "Business--Market Conditions and Competition."
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its trademarks, trade dress, service marks, trade
secrets and similar intellectual property as important to its success, and
relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's copyrights, trademarks, trade dress and similar proprietary rights.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
INTEGRATION OF POTENTIAL UNSPECIFIED ACQUISITIONS
In the event the Company sells the Maximum, the Company may utilize up to
$4 million to acquire, or make significant investments in, complementary
companies, products or technologies, although no such acquisitions or
investments currently are pending. Shareowners would not be able to review the
financial statements of any unspecified acquisitions that may be made by the
Company. Any such future acquisitions would be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
additional expense associated with amortization of acquired intangible assets,
the maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions. See "Use of Proceeds" and
"Business--Future Plans."
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced, and expects to experience in the future,
significant fluctuations in revenues and operating results from quarter to
quarter. Factors that could cause the fluctuations include: Lag times between
the incurrence of advertising expense and the realization of revenue; mix of
products and services sold; timing of delivery of new products and services by
the Company and its competitors; regulatory developments; general industry and
economic conditions; and the costs associated with catalog production,
distribution and advertising. See "Risk Factors--Dependence upon Major
Customers" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results of Operations."
Due to the foregoing and other factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
It is possible that, in some future
9
<PAGE>
quarters, the Company's operating results will be below the expectations of
investors. In such event, the investment made hereby in the Common Stock could
be materially and adversely affected.
LIMITING LIABILITY OF DIRECTORS
The Company has adopted provisions in its Articles of Incorporation that
eliminate, to the fullest extent permissible under California law, the liability
of its directors to the Company for monetary damages. See "Description of
Capital Stock--Indemnification of Directors and Officers."
AVAILABILITY OF "BLANK CHECK" PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to
10,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without further vote or action by the
shareowners. The rights of the owners of Common Stock will be subject to, and
may be adversely affected by, the rights of the owners of any Preferred Stock
that may be issued in the future. While the Company has no present intention to
issue shares of Preferred Stock, such issuance could have the effect of making
it more difficult for a third party to acquire a majority of the outstanding
stock of the Company. See "Description of Capital Stock."
10
<PAGE>
USE OF PROCEEDS
The net proceeds available to the Company from the sale of the shares in
the Offering are estimated to be approximately $887,844 if the Minimum is sold
(214,055 shares sold on behalf of the Company) and $13,441,250 if the Maximum is
sold (2,306,840 shares sold on behalf of the Company), after deducting expenses
of the Offering (estimated to be $450,000 at the Minimum and $976,500 at the
Maximum). In addition, for purposes of example, if 2,165,000 shares are sold in
the Offering (1,151,527 shares sold on behalf of the Company), the net proceeds
available to the Company are estimated to be approximately $6,497,044 after
deducting estimated expenses of $700,000. The Company will not receive any
proceeds from the sales of any shares by the Selling Shareowners. The Company
expects to use the net proceeds for the purposes outlined below.
<TABLE>
<CAPTION>
MINIMUM(1) MIDPOINT(2) MAXIMUM(3)
---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1. Expansion of catalog
program advertising . . . . . . . . . . . . . $ 440,000 50% $ 2,500,000 38% $ 5,000,000 37%
2. Expansion of agency
services. . . . . . . . . . . . . . . . . . . 175,000 20% 1,000,000 15% 2,000,000 15%
3. Software development
and marketing . . . . . . . . . . . . . . . . 90,000 10% 500,000 8% 1,000,000 7%
4. Potential acquisitions. . . . . . . . . . . . - 0% 1,500,000 23% 4,000,000 30%
5. Working capital . . . . . . . . . . . . . . . 182,844 20% 997,044 16% 1,441,250 11%
---------------------- ---------------------- ----------------------
$ 887,844 100% $ 6,497,044 100% $13,441,250 100%
---------------------- ---------------------- ----------------------
---------------------- ---------------------- ----------------------
</TABLE>
- ------------
(1) At the Minimum Offering, 480,000 shares will be sold, of which 214,055
shares will be sold on behalf of the Company.
(2) If 2,165,000 shares are sold in the Offering, 1,151,527 will be sold on
behalf of the Company.
(3) At the Maximum Offering, 3,850,000 shares will be sold, of which 2,306,840
shares will be sold on behalf of the Company.
EXPANSION OF CATALOG PROGRAM ADVERTISING. The Company intends to expand
its catalog programs by: Increasing its media advertising of catalog programs;
more frequent mailings of its INTIMATE TREASURES catalog-of-catalogs; developing
new catalog lead-generation programs; and increasing sales and marketing efforts
to expand its client base.
EXPANSION OF AGENCY SERVICES. The Company plans to expand its agency
services by adding sales and marketing staff, office facilities and technical
equipment to increase its client base and strengthen its technical capabilities
to deliver additional services to existing clients.
SOFTWARE DEVELOPMENT AND MARKETING. The Company intends to develop a
specialized sales and marketing group to market WEBGUARD nationally. It also
will continue to develop the WEBGUARD software to expand its applications.
POTENTIAL ACQUISITIONS. The Company will seek to acquire businesses with
technical capabilities and lines of business complementary to those now
performed in-house. The Company expects that any such acquisitions would be
related to the adult
11
<PAGE>
entertainment industry, potentially including publishing companies and technical
service providers. The Company currently has no plans, proposals, agreements,
understandings or negotiations with respect to potential acquisitions.
WORKING CAPITAL. Proceeds of the Offering also will be used for working
capital purposes, such as general office equipment upgrade and expansion,
general corporate purposes and contingency reserves.
The Company does not anticipate changes in the proposed allocation of
estimated net proceeds of the Offering. However, the Company reserves the right
to make changes, if management believes those changes are in the best interests
of the Company.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception. The Board of Directors currently intends to reinvest any earnings in
the Company's business. Therefore, the Company does not expect to pay any cash
dividends in the foreseeable future.
12
<PAGE>
CAPITALIZATION
The following table shows the capitalization of the Company on September
25, 1996, as adjusted for the subsequent issuances of Preferred Stock, and pro
forma to reflect the sale of the Minimum and the Maximum number of shares being
offered and the application of the estimated net proceeds as described under
"Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 25, 1996
-------------------------------------------------------
ACTUAL AS ADJUSTED(1) PRO FORMA (2)
---------- -------------- -------------------------
MINIMUM MAXIMUM
------- -------
<S> <C> <C> <C> <C>
Short-term debt:
Notes payable $ 407,955 $ 407,955 $ 407,955 $ 407,955
Current capital lease obligations 38,088 38,088 38,088 38,088
---------- ---------- ---------- ----------
Total short-term debt 446,043 446,043 446,043 446,043
---------- ---------- ---------- ----------
Long-term debt:
Notes payable 255,791 255,791 255,791 255,791
Long-term capital lease obligations 61,335 61,335 61,335 61,335
---------- ---------- ---------- ----------
Total long-term debt 317,126 317,126 317,126 317,126
---------- ---------- ---------- ----------
Common stock subject to redemption,
1,680,000 shares issued and outstanding 5,033 5,033 4,939 4,278
Shareowners' equity:
Common stock, no par value,
25,000,000 shares authorized,
11,207,000 issued and outstanding 433,626 433,626 2,334,391 14,887,797
Preferred stock, no par value, 10,000,000
shares authorized:
Series A convertible preferred stock,
56,690 shares issued and outstanding,
actual; and 58,130 shares issued and
outstanding, as adjusted 459,338 472,921 0 0
Series B convertible preferred stock,
71,667 shares issued and outstanding,
actual; and 180,000 shares issued and
outstanding, as adjusted 214,183 540,000 0 0
Retained earnings 488,274 488,274 488,274 488,274
---------- ---------- ---------- ----------
Total shareowners' equity 1,595,421 1,934,821 2,822,665 15,376,071
---------- ---------- ---------- ----------
Total capitalization $2,363,623 $2,703,023 $3,590,773 $16,143,518
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------
(1) Includes $14,400 and $325,000 received subsequent to September 25, 1996, in
connection with the sale of Series A and Series B Convertible Preferred
Stock, respectively.
(2) Pro forma to reflect the application of the estimated net proceeds of the
Offering at the Minimum and the Maximum. See "Use of Proceeds."
13
<PAGE>
DILUTION
The net book value of the Company on September 25, 1996, as adjusted to
reflect subsequent sales of Common Stock and Preferred Stock, was $1,934,821 or
$0.15 per share of Common Stock. Assuming the sale of the Minimum and the
Maximum shares and the application of the net proceeds to the Company, the pro
forma net book value of the Company on September 25, 1996, would be $2,822,664
and $15,376,070, or $0.21 and $1.08 per share, respectively. This represents an
immediate increase in net book value per share to existing shareowners of $0.06
and $0.93, respectively, and an immediate dilution per share of $6.04 (97%) and
$5.17 (83%), respectively, to new investors purchasing in the Offering.
The following table illustrates the per-share dilution in net tangible book
value per share to new investors:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
480,000 SHARES 3,850,000 SHARES
------------------- ------------------
<S> <C> <C> <C> <C>
Public offering price per share . . . . . . . . . . . . . . $6.25 $6.25
Pro forma net tangible book value per share
as of September 25, 1996 . . . . . . . . . . . . . . $0.15 $0.15
Increase in net tangible book value per share
attributed to new investors. . . . . . . . . . . . . 0.06 0.93
---- ----
Pro forma net tangible book value per share
as of September 25, 1996, after the Offering . . . . . . 0.21 1.08
---- ----
Net tangible book value dilution per share
to new investors . . . . . . . . . . . . . . . . . . . . $6.04 $5.17
---- ----
---- ----
</TABLE>
The following table sets forth on a pro forma basis as of September 25,
1996, the difference between existing shareowners (net of shares sold in the
Offering) and new investors purchasing shares in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
MINIMUM SOLD:
Existing shareowners . . 13,207,965 98% $ 1,433,222 52% $0.1085
New investors. . . . . . 214,055 2 1,337,844 48 6.2500
---------- ------- ---------- -------
Total . . . . . . . . 13,422,020 100% $ 2,771,066 100%
---------- ------- ---------- -------
---------- ------- ---------- -------
MAXIMUM SOLD:
Existing shareowners . . 11,930,750 84% $ 1,294,629 8% $0.1085
New investors. . . . . . 2,306,840 16 14,417,750 92 6.2500
---------- ------- ---------- -------
Total . . . . . . . . 14,237,590 100% $15,712,379 100%
---------- ------- ---------- -------
---------- ------- ---------- -------
</TABLE>
14
<PAGE>
SELECTED FINANCIAL DATA
The statements of operations for fiscal years 1995 and 1994 have been
derived from the audited Financial Statements contained herein. The statements
of operations for fiscal years 1990-1993 and for the nine-month periods ended
September 25, 1996, and September 27, 1995, and the balance sheet data at
September 25, 1996, and September 27, 1995, have been derived from unaudited
financial statements of the Company and reflect, in management's opinion, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for these periods. Results of
operations for any interim period are not necessarily indicative of results to
be expected for the full fiscal year. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and their
Notes included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
---------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues . . . . . . . . . . $ 1,479,143 $ 3,249,307 $ 3,700,127 $ 5,166,314 $ 6,146,488 $ 7,742,585
Cost of revenues . . . . . . 948,255 2,200,258 2,395,635 3,578,645 4,108,388 5,038,230
Gross profit . . . . . . . . 530,888 1,049,049 1,304,492 1,587,669 2,038,100 2,704,355
Selling, general and
administrative and
interest expense . . . . . 381,442 851,781 912,147 1,362,937 1,662,766 2,475,262
Net income (loss) before
income taxes . . . . . . . 149,446 197,268 392,345 224,732 375,334 229,093
Provision (benefit) for
income taxes . . . . . . . 60,493 79,562 165,389 93,155 167,904 107,920
Net income (loss). . . . . . 88,953 117,706 226,956 131,577 207,430 121,173
Net income (loss) per share. 0.01 0.02 0.02 0.01 0.02 0.01
Weighted average shares
outstanding. . . . . . . . 6,720,000 6,720,000 11,200,000 10,873,333 11,200,000 12,635,368
BALANCE SHEET DATA:
Working capital. . . . . . . 60,601 96,218 (36,666) (84,796) (584,229) (501,951)
Total assets . . . . . . . . 540,646 1,496,517 1,768,587 2,331,075 2,926,570 4,222,747
Total liabilities. . . . . . 434,371 1,272,536 1,317,650 2,098,560 2,486,624 3,103,412
Shareowners' equity. . . . . 106,275 223,048 450,004 231,582 439,013 1,114,302
Debt/equity ratio. . . . . . 4.1 5.7 2.9 9.0 5.7 2.8
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 25,
1995 1996
------------- -------------
<S> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues . . . . . . . . . . $ 6,213,835 $ 7,026,230
Cost of revenues . . . . . . 3,954,197 5,054,045
Gross profit . . . . . . . . 2,259,638 1,972,185
Selling, general and
administrative and
interest expense . . . . . 1,810,058 2,060,937
Net income (loss) before
income taxes . . . . . . . 449,580 (88,752)
Provision (benefit) for
income taxes . . . . . . . 211,786 (28,041)
Net income (loss). . . . . . 237,794 (60,711)
Net income (loss) per share. 0.02 (0.01)
Weighted average shares
outstanding. . . . . . . . 11,200,000 13,216,089
BALANCE SHEET DATA:
Working capital. . . . . . . (1,109,157) (591,324)
Total assets . . . . . . . . 4,508,435 5,427,967
Total liabilities. . . . . . 3,830,695 3,827,513
Shareowners' equity. . . . . 676,807 1,595,421
Debt/equity ratio. . . . . . 5.7 2.4
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS,
INCLUDING THEIR NOTES, AND "CAPITALIZATION" AND "SELECTED FINANCIAL DATA"
APPEARING ELSEWHERE IN THIS PROSPECTUS. OPERATING DATA PRESENTED IN THIS
DISCUSSION ARE UNAUDITED.
OVERVIEW
DechTar Direct Inc. commenced operations in 1989, marketing lead generation
and response services for catalog mail-order clients. Since 1989, the Company
has expanded its lines of business to include advertising agency services,
advertising space sales and name list rental. In 1996, the Company entered into
Internet-related services and expanded audiotext marketing.
The Company recognizes revenues and costs for its catalog request program
over the estimated advertising response period, which is generally six months.
Catalog advertising space revenues are recognized at the time of publication.
List rental and agency services revenues are recognized as services are rendered
and the related costs are expensed as incurred.
The Company's revenues and gross profits have increased each year since it
was founded. Revenues have increased by a compounded annual growth rate of 48%
per year since 1989. Although the Company has experienced significant growth in
revenues each year since its inception, prior growth rates are not necessarily
indicative of future operating results. Moreover, there can be no assurance
that profitability or significant revenues on either a quarterly or an annual
basis will be realized in the future. Gross profit margins increased in fiscal
1994 and 1995 after declining in 1993. Increases in gross profits have been
offset by increases in selling and operating expenses, particularly in 1995 as
the Company expanded its sales and marketing activities and administrative
infrastructure to accommodate planned growth. The Company expects that
operating expenses may increase faster than revenues for the foreseeable future
and, as a result, the Company may incur operating and net losses. There can be
no assurance that the Company can maintain or increase its revenues in the
future to offset increased operating expenses.
Increases in selling, general and administrative expenses may result in the
Company incurring a net loss in 1996.
RESULTS OF OPERATIONS
The following table sets forth the percentage of sales represented by
certain items in the Company's statements of operations for the periods
indicated:
16
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER ----------------------------
----------------------------------- SEPTEMBER 27, SEPTEMBER 25,
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
Revenues:
Catalog request program 68.1% 63.1% 56.9% 56.3% 42.6%
List rental 8.8 9.0 6.4 6.6 6.1
Catalog ad space 2.3 4.6 5.3 4.8 10.6
Agency services 19.6 22.6 30.2 31.5 38.6
Other 1.2 0.7 1.2 0.8 2.1
----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0
Cost of revenues 69.3 66.8 65.1 63.6 71.9
----- ----- ----- ----- -----
Gross profit 30.7 33.2 34.9 36.4 28.1
Selling, general and
administrative expense 24.2 24.4 29.9 26.9 28.6
Interest expense, net 2.2 2.7 2.0 2.2 0.7
----- ----- ----- ----- -----
Net income (loss) before income taxes 4.3 6.1 3.0 7.3 (1.2)
Provision (benefit) for income taxes 1.8 2.7 1.4 3.4 (0.4)
----- ----- ----- ----- -----
Net income (loss) 2.5% 3.4% 1.6% 3.9% (0.8)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
NINE MONTHS ENDED SEPTEMBER 25, 1996, COMPARED TO NINE MONTHS ENDED SEPTEMBER
27, 1995
Revenues for the first nine months of fiscal 1996 were approximately $7
million, an increase of 13% over revenues of $6.2 million for the first nine
months of 1995. This included increases in all revenue categories except
catalog request program revenues. Catalog request program revenues decreased
14% from $3.5 million to $3.0 million due primarily to a temporary decrease in
the availability of package insert circulation. Agency services revenues
increased 38% from $2 million to $2.7 million as a result of increased sales
activity and expanding client circulation. Catalog ad space revenues increased
151% from $297,000 to $746,000 because of the addition of new clients and
expanding existing client circulation. Other revenues increased 215% from
$47,000 to $149,000 due primarily to increases in audiotext advertising sales.
Cost of revenues increased 27% from approximately $4 million for the first
nine months of 1995 to $5.1 million for the first nine months of 1996, while
gross profit margins declined from 36.4% in 1995 to 28.1% in 1996. Margins
declined primarily on catalog request program revenues in part because a large
increase in new client advertisements did not generate response rates equivalent
to those of more seasoned client catalogs. In addition, per-piece mailing costs
rose approximately 13% in 1996 over 1995.
Selling, general and administrative expense increased 20% from $1.7 million
for the first nine months of 1995 to $2 million for the first nine months of
1996. This was attributable primarily to an increase in payroll and office
expenses as a result of additional hiring and staff restructuring in connection
with revenue growth expected in
17
<PAGE>
1997. Payroll expense also increased as a result of steps taken to improve the
Company's financial controls, reporting capabilities and legal compliance
procedures. Interest expense declined 64% from $138,000 for the first nine
months of 1995 to $50,000 for the first nine months of 1996 because of
reductions in outstanding debt and to reduced interest rates.
The Company incurred a net loss of $60,711 for the first nine months of
1996 compared to net income of $237,794 for the first nine months of 1995.
YEAR ENDED DECEMBER 27, 1995, COMPARED TO YEAR ENDED DECEMBER 28, 1994
Total revenues for fiscal 1995 increased 26% to $7,742,585, compared to
$6,146,488 for fiscal 1994. Catalog request program revenues were $4,406,713
for fiscal 1995, representing a 14% increase compared to $3,875,232 for
fiscal 1994. Catalog request program revenues represented 57% of total
revenue for fiscal 1995, compared to 63% of total revenue for fiscal 1994.
The increase in catalog request program revenues was the result of increases
in catalog circulation, media advertising, the number of orders received, and
average order size. Agency services revenue increased 68% to $2,335,233 in
fiscal 1995, compared to $1,388,595 for fiscal 1994. It represented 30% of
the Company's total revenue for fiscal 1995, compared with 23% of total
revenue for fiscal 1994, as a result of increases in all categories of agency
services. Revenues from list rental, catalog advertising space sales and
other sources totaled $1,000,639 for 1995, compared to revenues of $882,661
for 1994, representing an increase of 13%. Catalog advertising space sales
grew 47% because of increased demand for advertising supplements to the
Company's catalog-of-catalogs mailings, while list rental revenues declined
slightly.
Cost of revenues was 65% in fiscal 1995 compared to 67% in fiscal 1994,
reflecting higher agency services margins, offset in part by a decline in
catalog request program margins due to a decrease in advertising response rates.
Selling, general and administrative expenses were $813,749 higher in fiscal
1995 than 1994, a 54% increase, primarily due to an increase in payroll as the
Company expanded its sales, marketing and administrative staff to accommodate
growth. Selling, general and administrative expenses also grew due to: Higher
occupancy costs as the Company moved to larger corporate offices in November
1994; higher postage and credit card discount charges; and increased
professional services. Total selling, general and administrative expenses
represented 30% of total revenues in fiscal 1995 compared to 24% in fiscal 1994.
Fiscal 1995 net income decreased 42% to $121,173, compared to $207,430 for
fiscal 1994.
YEAR ENDED DECEMBER 28, 1994, COMPARED TO YEAR ENDED DECEMBER 29, 1993
Total revenues for fiscal 1994 increased 19% to $6,146,488, compared to
$5,166,314 for fiscal 1993. Catalog request program revenues were $3,875,232
for fiscal 1994, representing an increase of 10% compared to $3,520,749 for
fiscal 1993. Catalog request program revenues accounted for 63% of total
revenue for fiscal 1994, compared to 68% of total revenue for fiscal 1993. The
increase in catalog request
18
<PAGE>
program revenues was the result of higher average order size. Catalog
circulation, media advertising and the number of orders declined slightly in
fiscal 1994 from 1993 levels. Agency services revenue increased 37% to
$1,388,595 in fiscal 1994 compared with $1,012,993 for 1993, as a result of
increased demand for such services. Agency services rose to 23% of total
revenues in 1994 from 20% in 1993, primarily as a result of increases in print
brokerage and order processing revenues following increased marketing efforts.
Revenues from list rental, catalog advertising space sales and other sources
totaled $882,661 in fiscal 1994, representing an increase of 40% over $632,572
in 1993. Catalog advertising space sales and list rental revenues grew 140% and
22%, respectively, due to increased marketing efforts.
Cost of revenue was 67% in 1994 compared to 69% in 1993, reflecting
improvement in both catalog request program and agency services margins. This
improvement was attributable in part to higher advertising response rates,
offset in part by lower catalog mailing response rates.
Selling, general and administrative expenses were $1,497,748 in fiscal
1994, representing an increase of 20% over 1993, primarily due to increases in
payroll, office, occupancy and depreciation expenses. Payroll increased
approximately 14% in fiscal 1994 over 1993 due to staff additions, primarily in
the agency services area. Office and occupancy expenses increased 25% in fiscal
1994 over 1993 due in part to the Company relocating its corporate offices to
larger facilities in November 1994. Depreciation increased as a result of
additions to leasehold improvements and equipment in 1994. Total selling,
general and administrative expenses represented approximately 24% of total
revenues in both fiscal 1994 and 1993.
Interest expense rose 23% in fiscal 1994 over 1993, to $170,160, due to
increases in notes payable and the interest rates paid on such notes.
Fiscal 1994 net income rose 58% to $207,430, compared to $131,577 for
fiscal 1993.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain results of operations and data
expressed in dollars and as a percentage of revenues for each of the last seven
fiscal quarters. This information has been derived from unaudited financial
statements which, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. The results of operations for any interim
period are not necessarily indicative of the results to be expected for an
entire year.
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<TABLE>
<CAPTION>
QUARTER ENDED (IN THOUSANDS)
-------------------------------------------------------------------------------
MAR 25, JUNE 28, SEPT 27, DEC 27, MAR 27, JUNE 26, SEPT 25,
1995 1995 1995 1995 1996 1996 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Catalog request program $1,288 $1,236 $ 977 $ 906 $1,020 $1,092 $ 883
List rental 70 117 224 81 155 138 132
Catalog ad space 84 67 146 117 134 313 300
Agency services 710 537 711 378 958 1,225 527
Other 4 11 31 46 36 49 64
------ ------ ------ ------ ------ ------ ------
Total revenues 2,156 1,968 2,089 1,528 2,303 2,817 1,906
Cost of revenues 1,273 1,335 1,348 1,084 1,562 2,002 1,490
------ ------ ------ ------ ------ ------ ------
Gross profit 883 633 741 444 741 815 416
Selling, general and
administrative expense 483 586 601 641 730 754 527
Interest expense, net 40 42 57 23 16 14 20
Net income (loss) before
income taxes 360 5 83 (220) (5) 47 (131)
Provision (benefit) for
income taxes 170 2 39 (103) (3) 23 (48)
------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 190 $ 3 $ 43 $ (117) $ (2) $ 24 $ (83)
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
-------------------------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------------------------------
MAR 25, JUNE 28, SEPT 27, DEC 27, MAR 27, JUNE 26, SEPT 25,
1995 1995 1995 1995 1996 1996 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Catalog request program 59.7% 62.8% 46.8% 59.2% 44.3% 38.8% 46.3%
List rental 3.3 6.0 10.7 5.3 6.7 4.9 6.9
Catalog ad space 3.9 3.4 7.0 7.7 5.8 11.1 15.7
Agency services 32.9 27.2 34.0 24.7 41.6 43.5 27.7
Other 0.2 0.6 1.5 3.1 1.6 1.7 3.4
------ ------ ------ ------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues 59.0 67.8 64.5 70.9 67.8 71.1 78.2
------ ------ ------ ------ ------ ------ ------
Gross profit 41.0 32.2 35.5 29.1 32.2 28.9 21.8
Selling, general and
administrative expense 22.4 29.8 28.7 42.0 31.7 26.7 27.7
Interest expense, net 1.9 2.1 2.8 1.5 0.7 0.6 1.0
------ ------ ------ ------ ------ ------ ------
Net income (loss) before
income taxes 16.7 0.3 4.0 (14.4) (0.2) 1.6 (6.9)
Provision (benefit) for
income taxes 7.9 0.1 1.9 (6.8) (0.1) 0.8 (2.6)
------ ------ ------ ------ ------ ------ ------
Net income (loss) 8.8% 0.2% 2.1% (7.6)% (0.1)% 0.8% (4.3)%
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
20
<PAGE>
The Company's quarterly operating results fluctuate substantially. The
Company's expense levels are based in part upon expectations of future sales.
If sales levels during a particular quarter do not meet expectations, operating
results could be adversely affected. Factors affecting quarterly operating
results include: (i) the mix of services sold; (ii) changes in demand for
various client catalogs, and the changing mix of client catalogs advertised;
(iii) changes in the number and timing of the Company's advertisements published
and catalogs mailed; (iv) the Company's ability to predict space sales demand;
(v) the ability to predict newsstand sales of magazines in which the Company
advertises; (vi) the ability to maintain or increase advertising base rates;
(vii) the cost of paper and other costs associated with catalog production and
distribution; (viii) changes in the cost of advertising space; and (ix) general
industry and economic conditions.
Total revenues fluctuated from quarter to quarter in 1995 and 1996 as a
result of the above factors. Catalog request program revenues were higher in
the first and second quarters of 1995 and 1996, compared to the third and fourth
quarters of 1995 and to the third quarter of 1996, because catalog mailings were
greater, offset partially by lower response rates. Catalog program revenues
were lower in the third quarter of 1996 primarily because of a temporary
decrease in the availability of package insert circulation and related reduced
response rate. Agency services revenues fluctuated from quarter to quarter due
primarily to fluctuations in client circulation and demand for services.
Catalog ad space revenues increased significantly in the second and third
quarters of 1996 because of the addition of new clients and expanding existing
client circulation.
Gross profit margins fluctuated from quarter to quarter from the first
quarter of 1995 to the third quarter of 1996 primarily because of changes in the
mix of services sold and fluctuations in catalog request program volume and
response rates. Gross profit margins declined in the third quarter of 1996 due
to increases in new client advertisements and accompanying lower response rates,
and to a temporary decrease in the availability of package insert circulation.
Selling, general and administrative expense increased in the second quarter of
1995 through the third quarter of 1996 as revenues trended up, and as a result
of additional hiring and staff restructuring in connection with anticipated
future growth and improved controls and reporting capabilities. Selling,
general and administrative expense declined in the third quarter of 1996 because
of a decrease in sales volume for the quarter and because certain payroll and
other costs related to the Company's proposed stock offering were capitalized.
Interest expense declined beginning the fourth quarter of 1995 because of
reductions in outstanding debt and lower interest rates.
Net income fluctuated by quarter in 1995 and 1996 as revenues and gross
profits rose and fell, and was reduced overall by increases in selling, general
and administra-tive expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal assets consist of prepaid production and marketing
costs, and mailing lists which the Company developed since 1989 both internally
and through acquisition. The Company capitalizes certain direct marketing costs
in connection with
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its catalog advertising and the development of its mailing lists. The majority
of such costs are classified as prepaid production and marketing costs and are
amortized as catalog program revenues are realized within six months of
publication of the Company's advertisements and mailings of its
catalog-of-catalogs. Additional costs are classified as list development costs
and are amortized over an estimated seven-year benefit period. Purchased lists
are recorded by the Company at cost and amortized over seven years.
The Company showed substantial improvement in its financial condition
between September 1995 and September 1996. Total assets increased 17% from $4.5
million as of September 27, 1995, to $5.3 million as of September 25, 1996,
while total liabilities were virtually unchanged between September 1995 and
September 1996. Current assets increased $434,000 (19%) from 1995 to 1996,
while current liabilities decreased by $83,700 (2%). Although total working
capital remained negative, it improved by $517,800 from a negative $1.1 million
as of September 1995 to a negative $591,000 as of September 1996. This compared
to deficits of $502,000 at December 27, 1995, and $584,000 at December 28, 1994.
Total shareowners' equity rose approximately $918,000 (136%) from $677,000
as of September 1995 to $1,595,000 as of September 1996. Shareowners' equity
rose $1.3 million (184%) to $1.9 million, after giving effect to preferred stock
subscriptions not reflected in the nine-month period ended September 1996. The
Company's debt-to-equity ratio improved from 5.6 as of September 1995 to 2.4
(1.9 on a pro forma basis reflecting preferred stock subscriptions) as of
September 1996.
From the inception of the Company to late 1995, the Company was financed
primarily by retained earnings and short-term notes payable. Between December
1995 and March 1996, the Company increased shareowners' equity by approximately
$850,000 through the sales of its Series A Convertible Preferred Stock.
Approximately $500,000 of this amount represented the conversion of existing
short-term debt to equity. The balance was received from new investors in cash
and short-term notes receivable, which subsequently have been paid. Also during
this time period, approximately $450,000 of additional short-term notes were
converted to long-term obligations at significantly reduced rates of interest.
On September 24, 1996, the Company sold 180,000 shares of Series B Convertible
Preferred Stock for $540,000 in cash and short-term notes receivable, $215,000
of which had been paid by September 25, 1996, and all of which was paid by
December 25, 1996. The Company's Preferred Stock is convertible by the owners
to Common Stock at any time, and conversion into Common Stock is mandatory upon
the occurrence of certain events, including closing of the Minimum Offering. If
the Company sells the Minimum pursuant to the Offering, all outstanding shares
of Preferred Stock automatically will be converted into shares of Common Stock.
See "Description of Capital Stock."
Net cash provided by operating activities for the nine months ended
September 25, 1996, was $472,658. Net cash used by investing activities was
$746,521 for the same period. This included $482,600 for the development of
mailing lists and $316,349 for the purchase of property and equipment. Net cash
provided by financing activities for the nine months ended September 25, 1996,
was $167,396. The cash provided
22
<PAGE>
included $490,830 in proceeds from the issuance of Preferred Stock. Cash used
for financing activities included $306,926 in Common Stock issuance costs.
Net cash provided by operating activities for fiscal 1995 was $934,125
compared to $678,105 for fiscal 1994. Net cash used for investing activities
was $1,076,685 for fiscal 1995. This included $45,637 for the purchase of
mailing lists, $423,462 for the development of mailing lists, $419,938 for the
purchase of fixed assets, and a loan to the majority shareowner of $197,648.
Cash of $305,627 was provided for these investment activities by financing
activities, primarily increases in long-term debt, with the balance coming from
operations. Cash used for investing activities was $762,497 for fiscal 1994,
including $414,579 for the development of mailing lists and $246,932 for the
purchase of fixed assets. Cash of $139,927 was provided for these investment
activities by financing activities, primarily increases in long-term debt, with
the balance coming from operations.
In August 1996, the Company established a $300,000 revolving line of credit
with its primary bank, Millennium Bank. Under this agreement the Company pays
interest at a rate of two percentage points above Millennium Bank's base rate
per year on the outstanding balance, which is secured by the Company's accounts
receivable and general intangibles. The Company's obligations under the line of
credit are guaranteed by Terri N. Hess, the Company's Chief Executive Officer,
and Voyages Catalog Group, Inc., a company wholly owned by Terri N. Hess. The
agreement is due to expire in August 1997. Although the Company will seek to
renew this line of credit in 1997, there can be no assurance that it will be
granted such renewal, or that similar financing will be available from other
lenders. If the Company is unable to renew its line of credit financing, it
will rely upon equity financing from the Offering, and other sources of debt and
equity financing, for its future working capital needs.
The Company has no material capital expenditure commitments as of January
1, 1997. However, the Company expects that its capital expenditures will
increase as the Company's employee base continues to grow.
23
<PAGE>
BUSINESS
THE COMPANY
DechTar Direct Inc. is the largest advertising company in North America
specializing in the adult entertainment and adult mail-order industries. The
Company provides catalog lead generation and response services, provides
full-service advertising agency services, and sells advertising space to clients
throughout the United States and Canada. The Company also is developing access
blocking software for use by adult-oriented sites on the Internet and the World
Wide Web.
BACKGROUND
The Company was founded in 1989 to provide high-quality, high-visibility
catalog advertising for clients in the adult entertainment and adult mail-order
industries under its trademark INTIMATE TREASURES. In 1990 the Company
developed its INTIMATE TREASURES catalog-of-catalogs and other catalog programs,
and in 1991 the Company first offered mailing list rental and other advertising
agency services. In 1993 the Company developed LOVE STUFF advertising
supplements in which clients purchase advertising space for their products and
catalogs. In 1995 the Company began offering its INTIMATE TREASURES
catalog-of-catalogs on the World Wide Web. In 1996 the Company announced the
development of WEBGUARD, proprietary software designed to help providers of
adult materials on the Internet and the World Wide Web block access to these
materials by minors and by persons of any age in U.S. communities whose
standards may be inconsistent with the materials offered.
CATALOG LEAD GENERATION
The Company's catalog request programs generate leads for direct-mail
clients by offering client catalogs through space advertisements, primarily in
national magazines, package inserts, and the Company's catalog-of-catalogs. The
Company's clients are mail-order catalog and other direct mail and publishing
companies which contract with the Company for inclusion in the Company's
advertisements, mail and package inserts and catalogs. The advertised price for
each catalog and the shipping and handling charges are retained by the Company
as an advertising fee. The Company processes the resulting catalog requests and
provides the client mail-order business with catalog buyer names and addresses,
and the client ships the requested catalogs to the buyers. The Company also
receives additional advertising fees and per-name lead generation fees from its
mail-order clients.
The industry providing adult entertainment products to adult buyers is
highly fragmented, consisting largely of small companies with limited resources
for marketing and advertising. Generating high-quality names of persons
interested in receiving product catalogs is important to these businesses. The
Company believes that adult catalog companies value the names generated by paid
catalog request programs such as the Company's for the following reasons:
- DechTar generates lists of names of persons who have purchased adult
product catalogs.
24
<PAGE>
- Response rates for such lists are significantly higher than for
general lists; because the individual requester previously has
purchased an adult-oriented catalog, another adult-oriented catalog is
not as likely to be considered junk mail.
- Response rates to mailings by a particular client catalog company to
names generated by DechTar's programs specifically for that client
company are even higher. Prompt mailings to individuals who have
responded to DechTar's advertisements for a catalog typically yield 3%
to 10% response rates, while unsolicited mailings to rented general
lists typically yield less than a 1% response rate.
- The average catalog order by persons whose names were generated by the
Company in response to advertisements for catalogs is larger than the
average order by persons from rented name lists because individuals
who request catalogs tend to be more active mail-order buyers.
- The client mail-order catalog company "owns" the names provided by
DechTar through its various advertising programs. Thus, the catalog
company can mail additional catalogs and other solicitations to these
names an unlimited number of times. Repeated mailings increase the
chance of converting the individual who requests a catalog to a buyer
of the catalog's merchandise.
- The catalog company can rent the names of individuals who respond to
the catalog to other mailers, offsetting the cost of acquiring the
name through DechTar's advertising.
DechTar currently has over 300 catalog program clients offering
approximately 700 mail-order catalogs and publications. In 1996, the Company's
catalog program advertising appeared in 585 full-page, four-color advertisements
in 65 national magazines including COSMOPOLITAN, PLAYBOY, PENTHOUSE and AMERICAN
WOMAN. In addition, the Company mailed approximately 125 million pages of its
catalog-of-catalogs advertising. The INTIMATE TREASURES catalog program
consists of advertisements and a catalog marketing catalogs primarily in the
adult marketplace, including adult toys, marital aids, videos, leather and
fetish products, lingerie, swim wear and casual clothing. CHAIN MALE is a
similar program targeting a gay male audience. LOVE STUFF is a paid advertising
supplement distributed with the INTIMATE TREASURES catalog-of-catalogs, in which
clients advertise their own products and catalogs.
The Company's catalog request program accounted for approximately 63% of
total revenues in 1994 and 57% in 1995. Advertising revenues in the Company's
LOVE STUFF catalog accounted for approximately 5% of revenues in 1994 and 1995.
25
<PAGE>
AGENCY SERVICES
DechTar provides its clients with traditional advertising agency services,
including: Creative design; pre-press production; desktop publishing; space and
circulation planning; print and advertising space brokerage; and list rental.
The Company also sells advertising space in its catalog-of-catalogs and
supplements. The Company believes that one of its unique features is its
ability to deliver fully integrated agency services to clients in the adult
entertainment industry. These services are performed on a fee or cost-plus-fee
basis and serve both as a profit center and as a means of strengthening the
relationship between the Company and its catalog program clients.
The Company's significant investments in desktop publishing and imaging
equipment include a Linotype-Hell Topaz scanner capable of scanning both
transparent and reflective media at resolutions of up to 6100 DPI, a
Linotype-Hell 560 image setter with a RIP 50 image processor, and a Kodak match
printing system for creating color accurate prints for use by clients and
printers.
The Company rents names from its mailing list to adult industry and
mainstream mailer clients. The Company has a large mailing list organized by
name, category of purchase, source and date of purchase. It includes
approximately 800,000 individuals who have purchased adult catalogs through the
Company. The Company prospects for new names through its catalog programs, and
acquires names from third-party mailing lists.
Advertisement design and production services accounted for approximately
23% of total revenues in 1994 and increased to approximately 30% in 1995. List
rentals represented approximately 9% of total revenues in 1994 and 6% in 1995.
Expanding the Company's design and production client base is an important goal
in the expansion of the Company's business.
WEBGUARD ACCESS BLOCKING SOFTWARE
The Communications Decency Act ("CDA") was enacted in February 1996. The
Act applied existing federal obscenity law to the Internet environment and
imposed civil and criminal liability on providers of "indecent or patently
offensive" material through the Internet or World Wide Web to persons under age
eighteen. As of January 1997, the CDA is not being enforced pending judicial
review. However, there is strong public pressure to enact some form of federal
legislation to apply existing obscenity law to the Internet environment and to
prevent minors from obtaining access to certain materials. In addition, certain
states have passed legislation to regulate online content and other states have
bills pending.
In response to these legislative developments, in June 1996 the Company
announced the development of its proprietary WEBGUARD software designed to help
providers of adult materials on the Internet and the World Wide Web block the
availability of such materials to minors. In addition, WEBGUARD allows adult
website providers to block access to persons of any age in U.S. communities
where standards may be inconsistent with the materials offered. This geographic
screening capability permits providers to tailor the accessibility of their
content, based upon the projected
26
<PAGE>
acceptability of such content in different locales. The software was developed
by the Company in-house, under the direction of the Company's Vice President
Operations and New Technology, Brian M. Wright, with most of the coding provided
by third parties under contract with the Company.
The Company believes as many as five service providers currently offer some
form of access blocking services with respect to minors. The Company is aware
of only one provider that offers instant access service such as that to be
offered by WEBGUARD, and none that provide similar geographic screening
capabilities. The Company currently is beta-testing the WEBGUARD software and
plans full implementation in 1997.
FUTURE PLANS
The Company seeks to increase catalog program revenues by increasing paid
advertising in national publications, expanding its catalog-of-catalogs
mailings, and increasing package insert and ride-along distribution. In
addition, the Company plans to increase advertising space sales by expanding its
LOVE STUFF program.
The Company plans to increase agency services and advertising sales through
aggressive trade advertising, direct-mail solicitation, and expansion of its
sales force and support staff.
The Company intends to complete beta-testing of its WEBGUARD software in
early 1997 and to begin national marketing efforts in 1997. The Company also
will seek to develop and introduce enhancements to the WEBGUARD system,
including potential applications for non-adult-oriented markets.
MARKET CONDITIONS AND COMPETITION
The growth of catalog shopping over the past decade has been well received
by both buyers and providers within the adult products marketplace. Consumers
of these products tend to be mature, successful, decisive buyers who want
sensual/sexual information, catalogs and products, and who appreciate the
privacy offered by this medium. The Company believes that the Internet and the
World Wide Web offer similar attraction to these consumers.
The Company's review of demographics of its mailing lists indicates the
following profile of its catalog buyers:
- INTIMATE TREASURES buyers primarily are males (71.9%) who are single
and ages 25-44 (62.1%). Females comprise 28.1% of the buyer file and,
like the males, are single but mainly fall into the 18-44 age category
(81.3%).
- INTIMATE TREASURES buyers are distributed fairly evenly across the
United States, with slightly higher concentrations in Atlanta,
Chicago, Los Angeles and San Francisco.
- For males and females, the married group falls strongest in
professional and technical occupations, while the single group has
strong concentrations in the professional and technical, middle
management, and blue-collar occupations.
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<PAGE>
- Males and females alike are very interested in listening to music,
watching videos, and do-it-yourself electronics. Other popular
activities for the males are photography and physical
fitness/exercise, while for the females these include
self-improvement, physical fitness/exercise and fashion clothing.
As the mail-order industry has become more competitive, mail-order
companies increasingly seek alternative means of generating qualified leads,
including telemarketing, space advertising, list rental and third-party
lead-generation services. Repeated mailings to names generated by individual
catalog companies and to rented names are no longer sufficient for most
companies to compete effectively, particularly given escalating postage, paper
and printing costs.
At present, there are several other catalog request programs in the U.S.
marketplace. The two most significant are: Publishers Inquiry Services, Inc.
(PIS), and Belcaro Group, Inc., dba Shop at Home Directory, both of which target
mainstream audiences and include a wide range of catalogs from home and crafts
to fashion. In early 1995, PIS started competing with the Company by offering a
limited number of adult-oriented catalogs. However, their ratio of adult to
mainstream catalogs remains relatively low. Although PIS is substantially
larger than the Company, the Company believes that its adult industry catalog
request programs are smaller than those of the Company. Other adult catalog
programs smaller than the Company's have advertised regionally and/or
periodically since 1992, but none of these is considered by the Company to be a
serious competitive threat at this time.
To the Company's knowledge, no other advertising company offers
comprehensive services to a broad base of adult catalog mail-order companies.
The majority of adult catalogers presently create and produce their materials
in-house or obtain such services from various local sources not dedicated to the
adult product marketplace. The Company has become well known in the adult
industry for its catalog program and advertising agency services.
EMPLOYEES
As of January 1, 1997, the Company employed 60 employees on a full-time
basis and 9 on a part-time basis. None of these employees is subject to a
collective bargaining agreement and there is no union representation within the
Company. The Company maintains various employee benefit plans and believes its
employee relations are good.
INTELLECTUAL PROPERTY RIGHTS
The Company has registered the following service marks and trademarks:
INTIMATE TREASURES Name California, United States
INTIMATE TREASURES Design California
INTIMATE TREASURES Treasure Chest Design United States
MAIL ORDER USA Name & Design California, United States
Applications have been filed to protect the service marks or trademarks
CHAIN MALE, LOVE STUFF and WEBGUARD.
28
<PAGE>
INVESTMENT IN PLANT
The Company's offices consist of approximately 16,300 square feet located
at 245 Eleventh Street, San Francisco, California, pursuant to a lease with a
term ending January 31, 2000.
Equipment consists primarily of computer hardware and image processing
equipment. The Company operates on (1) a Novell wide-area network with two
Pentium-based, 90-megahertz file servers, one with 90 megabytes of RAM and the
other with 144 megabytes of RAM, with approximately 28 gigabytes of storage
capacity, including 12 gigabytes in a fault-tolerant disk array; and (2) a
Windows NT network using a Pentium-based 150-megahertz file server with 128
megabytes of RAM and 2 gigabytes of storage capacity. Sixty-one PC-based and 18
Macintosh workstations are on the network. The system is backed up on tape
nightly with tape media retained at all times, including one copy stored
offsite. All computers and peripherals are protected by a comprehensive
uninterruptible power supply which conditions incoming power to offset power
surges, and will operate the entire system for several hours on battery power.
In addition, the Company has developed an Internet presence using four in-house
servers (a Sun Netra, a Sun Sparcstation 5 and two Pentium PCs) connected to the
Internet with a T-1 digital connection. The network is continually being
expanded and upgraded to accommodate the Company's growth.
All Company advertisements, package inserts, catalogs and collateral
materials are produced in-house on a Macintosh-based publishing system which
includes color separation and digitizing capabilities. The Company also has the
necessary equipment to print film, matchprints and color keys needed by
printers. The Company believes this in-house system is less expensive to
operate than obtaining outside services, and allows for flexibility, quality
control and client services superior to those provided by the Company's
competitors.
CUSTOMER SERVICE SOFTWARE
The Company has invested over $450,000 over the past five years in its
order processing and customer service software which forms the backbone of the
Company's catalog programs. This software system is capable of handling up to
99 separate catalog programs; the current utilization is nine. It includes
modules for order entry, order tracking and demographics, list management and
list rental, invoicing and accounts receivable, client and product tracking,
on-line credit card verification and employee productivity. A catalog and
advertising database used by the Creative Services department helps maintain a
"fresh" look in the Company's advertisements and catalogs. Future enhancements
may include a customer service information database to give the customer access
to catalog and product information and related products.
LEGAL PROCEEDINGS
Since inception, no significant legal actions have been filed by or against
the Company, except that on November 9, 1993, the Department of Corporations of
the State of California issued a Desist and Refrain Order against the Company
and its President, William T. Hess, with respect to the offer of sale of certain
securities which were offered for sale without first being qualified in
California. The violation involved a newspaper advertisement placed by the
Company in 1993 offering its securities.
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<PAGE>
After a meeting between the Company, its counsel and an attorney from the
Department of Corporations, no additional action was taken.
LEGAL RESTRICTIONS
The Company has not been and is not now subject to any law enforcement
proceeding. A significant portion of the Company's clientele distributes
sexually oriented materials. Accordingly, the Company may be vulnerable to
scrutiny by officials seeking to enforce federal or state obscenity laws.
Becoming the object of enforcement proceedings could be expensive for the
Company, and the Company's business, results of operations and financial
condition could be materially adversely affected.
Despite the abundance of obscenity statutes throughout the nation,
obscenity prosecutions are rare because of the difficulty of establishing the
violation. Due to restrictive United States Supreme Court decisions, the
definition of "obscenity" is determined by local community standards.
Therefore, what constitutes obscene matter varies over time and by location, and
is not determinable until adjudged obscene by a jury. Presently, law
enforcement and political authorities are not aggressively pursuing enforcement
against discreet purveyors of adult material to a mature, consenting clientele,
nor is the Company aware of prosecution previously directed at other than the
primary producers and distributors of adult material.
The Company follows legal compliance procedures in the form of, among other
things, controls and written policies to assure adherence to applicable federal,
state and local laws and regulations. Entities currently most vulnerable to
enforcement activity are those engaged in distributing sexually explicit
material involving minors, or distributing sexually explicit material to minors,
or those engaged in displaying such material to unwilling consumers. The
Company operates its business strictly to preclude aiding the dissemination of
sexually explicit material involving minors or to minors. The Company's sales
operation solicits business only from adults who the Company believes have
indicated a desire to receive adult materials.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
---- --- --------
Terri N. Hess 48 Chief Executive Officer, Secretary,
Chairperson of the Board
Thomas L. Lackman (1) 53 President, Chief Operating Officer,
Chief Financial Officer, Director
Brian M. Wright 34 Vice President Operations and New
Technology, Director
Melissa J. Shane (2) 33 Vice President Marketing and New
Business Development, Director
Andrew A. August (1)(2) 39 Director
John C. Gibson (1)(2) 57 Director
- ------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
TERRI N. HESS (formerly William T. Hess) founded DechTar Direct Inc. and
has been Chief Executive Officer and a director of the Company since its
inception in 1989. Between 1982 and 1989, Ms. Hess was a principal and an
officer with DechTar Trading Company, an importer active in trade with the Far
East, and its successor companies, and, in 1984, co-founded JDC Classics
Corporation, a direct marketing and catalog mail-order company doing business as
Voyages Magazine/Catalog ("VCG"). Ms. Hess continues to operate VCG, which is a
major client of the Company's catalog programs and agency services. Ms. Hess is
a 1971 graduate of Bowling Green State University with a Bachelor of Science in
Marketing and Sales Management.
THOMAS L. LACKMAN has served as a director and Chief Financial Officer
since joining the Company in October 1995. He was elected President and Chief
Operating Officer in April 1996. From 1990 to October 1995, he was a partner in
the accounting firm of Berg, Lackman & Company, which served as the Company's
primary outside accountants from 1994 to 1995. Prior to 1990, Mr. Lackman
served as Executive Vice President and Chief Financial Officer for a San
Francisco architecture, real estate development and property management company
for approximately eight years. Mr. Lackman is a certified public accountant and
1970 graduate of Portland State University.
BRIAN M. WRIGHT has served as Vice President Operations and New Technology
of the Company since 1990, and was elected a director in October 1995. Mr.
Wright has over ten years experience in operations management and computer
consulting,
31
<PAGE>
primarily within the direct marketing industry. His former employers include
Macy's California, Loric Corporation and JDC Classics Corporation. Mr. Wright
is a 1986 graduate in economics from California Polytechnic State University.
MELISSA J. SHANE has been Vice President Marketing and New Business
Development since joining the Company in 1991. She was elected a director in
October 1995. Ms. Shane has eleven years experience in direct marketing
including five years employment with Leonard & Associates, a Los Angeles video
distribution and direct marketing development firm.
ANDREW A. AUGUST has served as a director since April 1996. Mr. August has
been a partner in the San Francisco law firm Bayer, Everett, August, & Belote
since 1990 concentrating on real estate and business litigation. He formerly
practiced with the law firms Buchalter, Nemer, Fields & Younger and Rubin, Eager
& Feder, both in Los Angeles, California. Mr. August graduated from the
University of Colorado in 1979 and received his law degree from the University
of San Francisco in 1983.
JOHN C. GIBSON has served as a director since August 1996. Mr. Gibson, a
graduate of the University of San Francisco Law School, has been a practicing
attorney since 1971. He has been a partner with the law firm of Adams & Gibson,
and predecessor firms since 1979. He formerly served as General Counsel for
Fidelity Savings and Loan Association, and as Counsel for Union Bank and Great
Western Savings Bank.
NUMBER OF DIRECTORS AND TERM OF OFFICE
The Company has six directors including two non-employee directors. All
directors hold office until the annual meeting of shareowners of the Company
next following their election, and until their successors have been elected and
qualified. Officers serve at the discretion of the Board of Directors.
DIRECTOR COMPENSATION
Directors receive $250 for each Board meeting they attend. Mr. August and
Mr. Gibson received grants of 3,500 shares of Common Stock each and options to
purchase an additional 3,500 shares of Common Stock each upon their initial
election. For each subsequent year they are elected, they will receive an
option to purchase an additional 3,500 shares each of Common Stock. The options
are exercisable at fair market value (as of the date of grant) and expire five
years after the date of grant.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee consists of Andrew A. August, John
C. Gibson and Thomas L. Lackman and serves to: (i) make recommendations to the
Board of Directors with respect to the independent auditors who conduct the
annual examination of the Company's accounts; (ii) review the scope of the
annual audit and meet periodically with the Company's independent auditors to
review their findings and recommendations; (iii) approve major accounting
policies or changes thereto; and (iv) periodically review the Company's
principal internal financial controls.
32
<PAGE>
The Compensation Committee consists of Andrew A. August, John C. Gibson and
Melissa J. Shane and serves to: (i) review the compensation of the executive
officers of the Company and make recommendations regarding such compensation to
the Board of Directors; and (ii) administer, on behalf of the Board of
Directors, the Company's stock option plan.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid for
services rendered to the Company in all capacities during the fiscal year ended
December 25, 1996, to the Company's Chief Executive Officer and the Company's
three other most highly compensated executive officers (the "Named Executive
Officers") during such periods:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME & PRINCIPAL POSITION SALARY BONUS OTHER OPTIONS
- ------------------------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
Terri N. Hess,
Chief Executive Officer
1996 $ 78,500 (1) - - -
Thomas L. Lackman,
President and Chief
Operating Officer
1996 $ 160,500 $ 4,540 - 21,334
Brian M. Wright,
Vice President
Operations & New
Technology
1996 $ 94,250 - - 11,667
Melissa J. Shane,
Vice President
Marketing & New Business
Development
1996 $ 107,300 - $ 28,189 (2) 332,426
</TABLE>
- ------------
(1) Paid to VCG which is owned 100% by Terri N. Hess (see
"Management--Employment Agreements").
(2) Other compensation in 1996 consists of sales commissions.
33
<PAGE>
STOCK OPTIONS
The following table sets forth certain information concerning grants of
stock options to the Named Executive Officers during fiscal year 1996:
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF SHARES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION
OPTIONS GRANTED IN FISCAL YEAR PER SHARE DATE
---------------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
Thomas L. Lackman . . . . . . . . 10,667 2.1% $3.00 4/26/01
President and Chief 10,667 2.1% $3.00 9/24/01
Operating Officer
Melissa J. Shane . . . . . . . . 300,000 60.3% $3.00 9/24/06
Vice President Marketing 7,426 1.5% $3.00 4/26/01
& New Business Development 25,000 5.0% $3.00 9/24/01
Brian M. Wright . . . . . . . . . 5,000 1.0% $3.00 4/26/01
Vice President Operations 6,667 1.3% $3.00 9/24/01
& New Technology
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table provides certain information with respect to the Named
Executive Officers concerning the exercise of stock options during fiscal year
1996 and unexercised stock options held as of December 25, 1996:
AGGREGATED OPTION EXERCISES IN 1996
AND OPTION VALUES AS OF DECEMBER 25, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 25, 1996 DECEMBER 25, 1996 (1)
ON VALUE ---------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas L. Lackman. . . . . . 0 $ - 1,120,000 21,334 $5,400,000 $ 69,336
President and
Chief Operating
Officer
Melissa J. Shane . . . . . . 0 - - 332,426 0 1,080,385
Vice President
Marketing & New
Business Development
Brian M. Wright . . . . . . 0 - - 11,667 0 39,918
Vice President
Operations & New
Technology
</TABLE>
- ---------------
(1) Based upon the Offering price of the Company's Common Stock of $6.25 per
share.
34
<PAGE>
EMPLOYEE STOCK OPTION PLAN
The Company has adopted an employee stock option plan (the "Plan"). Under
the Plan, all full-time employees of the Company with at least three months of
service are eligible to receive grants of options intended to qualify as
incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended). An aggregate of 1,000,000 shares has been
reserved for issuance under the Plan.
The Plan is administered by the Compensation Committee on behalf of the
Board of Directors. The Committee has the authority, subject to the terms of
the Plan, to determine the terms of options granted under the Plan, including
among other things, the employees to be granted options, the number of shares
subject to each option, the exercise price of options and the dates options
become exercisable. The exercise price of an option may not be less than 100%
of the fair market value of the Common Stock on the day of the grant. The
exercise price of any share covered by an option granted to a person owning more
than 10% of the voting power of all classes of stock of the Company cannot be
less than 110% of the fair market value on the day of the grant.
In April 1996 the Company granted options under the Plan to purchase
101,521 shares of Common Stock at an exercise price of $3.00 per share to a
total of 60 employees. In September 1996 the Company granted options to
purchase 89,376 shares of Common Stock at an exercise price of $3.00 per share
to a total of 16 employees.
EMPLOYMENT AGREEMENTS
Terri N. Hess is employed by VCG which, in turn, provides services to
DechTar Direct Inc. under a written agreement. In return, the Company pays VCG
$6,500 per month. See "Certain Transactions."
The Company has an "at-will" employment agreement with Thomas L. Lackman to
serve as its President and Chief Operating Officer. Mr. Lackman's agreement
provides for an annual base salary of $160,000 plus an annual bonus of five
percent of the Company's income before taxes. As a part of Mr. Lackman's
agreement, he was granted 1,120,000 shares of Common Stock, and an option to
purchase 10,000 shares of Series A Convertible Preferred Stock, or a comparable
series of preferred stock, convertible into 1,120,000 shares of Common Stock, at
an adjusted exercise price of $1.43 per share of Common Stock. The option
expires October 1, 2000. Terri N. Hess and the Company have an obligation to
repurchase Mr. Lackman's grant shares (excluding shares acquired under the
option agreement) in the event of the termination of his employment with the
Company for any reason. The amount of such repurchase will be based upon the
number of shares tendered and the then book value or trading price per share,
recent public offering price per share or the Company's annual net earnings per
share.
The Company has entered into an Incentive Stock Repurchase Agreement with
Brian M. Wright. Mr. Wright's agreement provides that, in the event of the
termination of his employment, the Company will repurchase his 560,000 shares of
Common Stock. The amount of such repurchase will be based upon a formula
related to the then fair
35
<PAGE>
market value of the shares, depending upon the circumstances of Mr. Wright's
termination.
CERTAIN TRANSACTIONS
Since its inception, the Company's largest client has been Voyages Catalog
Group, Inc. ("VCG"), a company which markets adult-oriented products. VCG is
owned by Terri N. Hess, the principal shareowner and Chief Executive Officer of
the Company.
The Company has entered into the following agreements with VCG:
- Agreement for Agency Services dated January 1, 1996. The Company
agreed to provide to VCG certain services and granted VCG certain
pricing discounts of up to 15% below the rates normally charged to the
Company's other clients, primarily based upon volume. VCG agreed to
use the Company as its first resource for such services.
- Catalog Request Fulfillment Agreement dated January 1, 1996. The
Company agreed to address and mail all VCG paid catalog requests
generated through the Company's catalog request programs. VCG agreed
to pay on a per-catalog basis at the Company's standard rates.
- Order Entry and Front-End Processing Agreement dated January 1,
1996. The Company agrees to receive and electronically process
telephone, facsimile and mail-order requests for VCG catalog products.
VCG agreed to pay on a per-order basis at the Company's standard
rates.
- Mailing List Purchase and Joint Ownership Agreement dated May 24,
1993. The Company and VCG agreed to the joint ownership of names
purchased from Federal Pharmacal, Inc. Both the Company and VCG were
to share equally in the costs associated with such purchases. The
contract with Federal Pharmacal was terminated by VCG in March 1996.
- Equipment Rental Agreement dated April 24, 1995. The Company has a
three-year rental agreement for a Linotype-Hell Topaz Scanner and
certain peripheral equipment owned by VCG. The Company pays market
rates for the rental of such equipment.
- Management Consulting Agreement dated January 1, 1996. VCG agreed to
provide management consulting services to the Company including
assistance in developing catalog marketing and advertising
strategies. These services, among others, were to be provided
primarily by Terri N. Hess.
Pursuant to the foregoing agreements, VCG purchased services from the
Company in an aggregate amount of approximately $3.6 million during fiscal year
1996. The
36
<PAGE>
Company believes that each of its contracts with VCG was entered into on terms
and at prices no less favorable than the Company could have received from an
unaffiliated party.
On July 1, 1995, Terri N. Hess sold various lists of names to the Company
for $322,000, or approximately $0.50 per name. These names previously had been
made available to the Company at no cost. The Company accrues interest at 8% on
the unpaid balance. The Company intends to offset outstanding advances made to
Terri N. Hess against payments as they become due under the purchase agreement.
As of December 25, 1996, the outstanding balance was $231,000.
The Company advanced various amounts to Terri N. Hess during the period
1990 through December 25, 1996. As of December 25, 1996, the outstanding
balance was $198,412. The Company accrues interest at 8% on unpaid amounts.
The net balance due to Terri N. Hess at December 25, 1996, was $32,588.
All future transactions between the Company and its officers, directors and
principal shareowners and their affiliates will be approved by a majority of the
disinterested members of the Company's Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unrelated third
parties.
37
<PAGE>
PRINCIPAL AND SELLING SHAREOWNERS
The following table sets forth certain information about the ownership of
the Company's Common Stock as of December 25, 1996, as adjusted to reflect the
sale of the Maximum number of shares of Common Stock offered hereby, of: (i)
each of the Company's executive officers and directors; (ii) all shareowners
known by the Company to own beneficially more than 5% of its outstanding Common
Stock; (iii) each Selling Shareowner; and (iv) all officers and directors as a
group. All outstanding shares of the Preferred Stock are assumed to be
converted into shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING NUMBER OF SHARES BEING OFFERED OFFERING
------------------- --------------------------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT AT MINIMUM AT 2,760,800 AT MAXIMUM NUMBER PERCENT
- ------------------------ -------- ------- ---------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C>
Directors and officers:
Terri N. Hess (c)(1) . . . . . . . 9,520,000 70.76% 59,346 341,335 476,000 9,044,000 57.31%
Thomas L. Lackman (c)(2) . . . . . 2,240,000 16.62 20,945 120,471 168,000 2,072,000 13.13
Brian M. Wright (c). . . . . . . . 560,000 4.16 10,473 60,236 84,000 476,000 3.02
Melissa J. Shane (c) . . . . . . . 224,000 1.66 4,189 24,094 33,600 190,400 1.21
Andrew A. August (3) . . . . . . . 7,000 * - - - 7,000 *
John C. Gibson (3) . . . . . . . . 7,000 * - - - 7,000 *
All directors and executive ---------- ------ ------ ------- ------- ---------- -----
officers as a group (six persons) 12,558,000 93.20% 94,952 546,136 761,600 11,796,400 74.67%
Other Selling Shareowners:
Linda A. Hess (c)(4) . . . . . . . 1,120,000 8.32% 20,945 120,471 168,000 952,000 6.03%
Piper-444 Associates (a)(5). . . . 177,100 1.32 27,992 161,000 161,000 16,100 *
Offer Assis (b). . . . . . . . . . 83,333 * 41,666 41,666 41,666 41,667 *
Lawrence E. Inman (a)(c) . . . . . 73,500 * 2,568 14,774 17,150 56,350 *
Richard Cohen (a). . . . . . . . . 70,000 * 6,085 35,000 35,000 35,000 *
</TABLE>
(CONTINUED ON NEXT PAGE)
38
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING NUMBER OF SHARES BEING OFFERED OFFERING
------------------- --------------------------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT AT MINIMUM AT 2,760,800 AT MAXIMUM NUMBER PERCENT
- ------------------------ -------- ------- ---------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C>
David A. Sturman (a) . . . . . . . 70,000 * 6,085 35,000 35,000 35,000 *
Frank Cannella, Jr. (a). . . . . . 66,612 * 11,581 66,612 66,612 - -
Gary Roller IRA (a)(6) . . . . . . 46,054 * 7,279 41,867 41,867 4,187 *
Michael Nelson IRA (a)(7). . . . . 45,661 * 7,217 41,510 41,510 4,151 *
Ralph J. Powell IRA (a)(8) . . . . 27,866 * 4,404 25,333 25,333 2,533 *
Frances C. Stritzinger and Chris
Stritzinger UDT dated 4/5/90 (a) 22,869 * 3,976 22,869 22,869 - -
Vladimir Ventsko (a) . . . . . . . 14,000 * 2,434 14,000 14,000 - -
Kenneth C. Allen, Jr. (a). . . . . 14,000 * 913 5,250 5,250 8,750 *
Donna Marie Panzeca Trust
dated 8/27/91 (a). . . . . . . . 12,929 * 2,248 12,929 12,929 - -
Leila B. Robinson IRA (a)(9) . . . 11,319 * 1,789 10,290 10,290 1,029 *
Michael C. Perlmuter (a) . . . . . 10,500 * 1,826 10,500 10,500 - -
Michael C. Berg (b). . . . . . . . 8,334 * 8,334 8,334 8,334 - -
Donna Marie Panzeca Trust, dated
8/27/91 and Paul V. Signorella,
Tenants in Common (a). . . . . . 7,000 * 1,217 7,000 7,000 - -
Andrew J. Luparello (a). . . . . . 7,000 * 1,217 7,000 7,000 - -
Harlan Shapers and/or Thelma
Imperio (a). . . . . . . . . . . 7,000 * 1,217 7,000 7,000 - -
</TABLE>
(CONTINUED ON NEXT PAGE)
39
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING NUMBER OF SHARES BEING OFFERED OFFERING
------------------- --------------------------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT AT MINIMUM AT 2,760,800 AT MAXIMUM NUMBER PERCENT
- ------------------------ -------- ------- ---------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C>
Mary Dowdell and Timothy
O'Connell, Tenants in Common (a) 7,000 * 1,217 7,000 7,000 - -
Fhelica Nafe (a) . . . . . . . . . 7,000 * 1,217 7,000 7,000 - -
Jeffrey and Vicki Kennedy (a). . . 7,000 * 1,217 7,000 7,000 - -
Juno Enterprises, Inc. (a) . . . . 7,000 * 1,217 7,000 7,000 - -
Alan D. Cohen (a). . . . . . . . . 7,000 * 913 5,250 5,250 1,750 *
Charles Robert Gatewood (a). . . . 7,000 * 609 3,500 3,500 3,500 *
Michael and Jacqueline Warner (a). 7,000 * 609 3,500 3,500 3,500 *
Fred L. Cohen (b). . . . . . . . . 5,000 * 3,000 3,000 3,000 2,000 *
</TABLE>
- ---------------
* Less than 1%
(a) Former owner of Series A Convertible Preferred Stock.
(b) Former owner of Series B Convertible Preferred Stock.
(c) Non-Contractual Selling Shareowner.
(1) Excludes 1,120,000 shares held by Terri N. Hess' wife, Linda A. Hess.
(2) Includes an option to purchase 1,120,000 shares of Common Stock at an
exercise price of $1.43 per share which is exercisable within 60 days.
(3) Includes an option to purchase 3,500 shares of Common Stock at an exercise
price of $3.00 per share which is exercisable within 60 days.
(4) Excludes 9,520,000 shares held by Ms. Hess' husband, Terri N. Hess.
(5) Includes a warrant to purchase 16,100 shares of Common Stock at an exercise
price of $1.143 per share which is exercisable within 60 days.
(6) Includes a warrant to purchase 4,187 shares of Common Stock at an exercise
price of $1.143 per share which is exercisable within 60 days.
(7) Includes a warrant to purchase 4,151 shares of Common Stock at an exercise
price of $1.143 per share which is exercisable within 60 days.
(8) Includes a warrant to purchase 2,533 shares of Common Stock at an exercise
price of $1.143 per share which is exercisable within 60 days.
(9) Includes a warrant to purchase 1,029 shares of Common Stock at an exercise
price of $1.143 per share which is exercisable within 60 days.
40
<PAGE>
ALLOCATION OF SHARES SOLD AMONG SELLING SHAREOWNERS
At the Minimum Offering (480,000 shares), an aggregate of 265,945 shares
will have been sold on behalf of the Selling Shareowners; if 2,760,800 shares
are sold in the Offering, an aggregate of 1,277,791 shares will have been sold
on behalf of the Selling Shareowners; and at the Maximum Offering (3,850,000
shares), an aggregate of 1,543,160 shares will have been sold on behalf of the
Selling Shareowners. The particular amounts sold on behalf of each Selling
Shareowner at such points in the Offering are set forth under the table above.
Pursuant to certain contractual registration rights previously granted to
the former owners of Series A Convertible Preferred Stock ("Series A Selling
Shareowners"), 20% of the shares offered hereunder will be offered on behalf of
Series A Selling Shareowners until such persons have sold a total of 552,160
shares of Common Stock. Sales of shares will be allocated among the Series A
Selling Shareowners in proportion to the number of shares offered for sale by
each such person in the Offering. At the Minimum, 96,000 shares will have been
sold on behalf of Series A Selling Shareowners; 20% of the shares sold in the
Offering thereafter will be sold on behalf of such persons until an aggregate of
2,760,800 shares have been sold in the Offering.
Pursuant to certain similar contractual registration rights granted to
former owners of Series B Convertible Preferred Stock ("Series B Selling
Shareowners"), an additional 20% of the shares offered hereunder will be offered
on behalf of Series B Selling Shareowners until such persons have sold an
aggregate of 53,000 shares of Common Stock. Sales of shares will be allocated
among the Series B Selling Shareowners in proportion to the number of shares
offered for sale by each such person in the Offering. At the Minimum, all
53,000 shares offered by such persons will have been sold, and such persons will
have no further participation in the Offering.
The Company also granted other shareowners the opportunity to include their
shares of Common Stock in the Offering. Accordingly, the Offering includes
938,000 shares of Common Stock owned by other shareowners ("Non-Contractual
Selling Shareowners"), some of whom are executive officers of the Company.
Approximately 29% of the shares sold in the Offering other than pursuant to
contractual registration rights will be sold on behalf of Non-Contractual
Selling Shareowners. Sales of shares will be allocated among the Non-
Contractual Selling Shareowners in proportion to the number of shares offered
for sale by each such person in the Offering. At the Minimum Offering, 116,945
shares will be sold on behalf of Non-Contractual Selling Shareowners. If
2,760,800 shares are sold in the Offering, 623,141 shares will have been sold on
behalf of Non-Contractual Selling Shareowners. At the Maximum Offering, 938,000
shares will have been sold on behalf of Non-Contractual Selling Shareowners.
See "Plan of Distribution" and "Use of Proceeds."
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, without par value, and 10,000,000 shares of Preferred Stock,
without par value.
COMMON STOCK
Owners of shares of Common Stock are entitled to one vote per share on all
matters to be voted on by shareowners. Shareowners are entitled to cumulate
their votes in any election of directors, but currently the Company's Bylaws
provide for the termination of cumulative voting upon the Company's listing of
its Common Stock on a national securities exchange or national market quotation
system. Thereafter, the owners of a majority of the shares voting for the
election of directors would be able to elect a majority of the directors.
Subject to preferences that may be applicable to any outstanding shares of
Preferred Stock that may be issued, the owners of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available for the payment of dividends.
See "Dividend Policy." In the event of a liquidation or dissolution of the
Company, owners of Common Stock are entitled to share in all assets remaining
after payment of liabilities and the liquidation preference of any outstanding
Preferred Stock. The Common Stock has no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares. All of the shares of Common Stock
presently outstanding are fully paid and nonassessable.
In October and November 1995, Thomas L. Lackman, Brian M. Wright, Melissa
J. Shane, Lawrence E. Inman and Linda A. Hess granted proxies to Terri N. Hess
to vote their respective shares of Common Stock. The proxies are effective for
seven years or until the Company completes its second public offering of Common
Stock, whichever occurs first.
Assuming the conversion of Preferred Stock into Common Stock, there are
approximately 39 owners of the Company's Common Stock as of December 25, 1996.
The Company's Common Stock is not listed or quoted on any organized stock
exchange or other trading market. There can be no assurance that the Common
Stock will be approved for listing on any stock exchange or that any active
trading market will develop or be sustained. See "Risk Factors--Possible Lack
of Public Market."
PREFERRED STOCK
Upon the sale of the Minimum, all currently outstanding shares of Preferred
Stock will convert automatically into shares of Common Stock. The Board of
Directors has the authority, without further action by the shareowners, to
designate and issue up to 10,000,000 shares of Preferred Stock in one or more
series and to designate the dividend rate, voting rights and other rights,
preferences and restrictions of each series, any or all of which may be greater
than the rights of the Common Stock. It is not possible to state the actual
effect of the issuance of the shares of Preferred Stock upon the rights of
owners of the Common Stock until the Board of Directors determines the specific
rights of the owners of such Preferred Stock. However, the rights might
42
<PAGE>
include, among other things, restricting dividends to the Common Stock,
impairing the liquidation rights of the Common Stock and delaying or preventing
a change in control of the Company without further action by the shareowners.
The Company has no present plans to issue any shares of Preferred Stock. The
Board of Directors is authorized, without action by the shareowners, to
determine the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund terms
of any series of Preferred Stock, the number of shares constituting any such
series, and the designation thereof.
WARRANTS
Purchasers of Series A Convertible Preferred Stock who voluntarily
converted their shares of Series A Convertible Preferred Stock into shares of
Common Stock received a warrant to purchase seven shares of Common Stock for
each ten shares of Preferred Stock converted. The warrants have an exercise
price of $1.143 per share and expire on May 23, 1999. Warrants to purchase
28,000 shares of Common Stock were outstanding as of December 25, 1996.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer & Trust, Inc., of Denver, Colorado.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Articles of Incorporation that
eliminate to the fullest extent permissible under California law the liability
of its directors to the Company for monetary damages. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
California law, including circumstances in which indemnification is otherwise
discretionary under California law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
may, therefore, be unenforceable.
SHARES ELIGIBLE FOR FUTURE RESALE
Upon completion of the Offering, assuming the sale of the Maximum and the
conversion of the Preferred Stock into shares of Common Stock, the Company will
have 15,780,750 shares of Common Stock outstanding, assuming no grants or
exercises of options to purchase Common Stock. Of these, the 3,850,000 shares
sold in the Offering will be freely tradable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act ("Rule
144"). Sales of outstanding shares to residents of certain states or
jurisdictions may only be effected pursuant to a
43
<PAGE>
registration in or applicable exemption from the registration provisions of the
securities laws of such states or jurisdictions.
The 12,887,000 outstanding shares of Common Stock which are held of record
by 13 shareowners prior to the Offering, and the 253,350 shares of Common Stock
issued upon the conversion of the Preferred Stock as a result of the Offering
(excluding the 333,560 shares registered hereunder) are "restricted securities"
and may not be sold in a public distribution except in compliance with the
registration requirements of the Securities Act or an applicable exemption under
the Securities Act, including an exemption pursuant to Rule 144. Ninety days
after the date of this Prospectus, 10,472,000 shares of Common Stock will be
eligible for sale under Rule 144 under the Securities Act, subject to the
notice, volume and other limitations (other than holding period limitations).
An additional 1,022,000 shares of Common Stock will be eligible for sale under
Rule 144 subject to the foregoing limitations one year after the date of this
Prospectus. In addition, ninety days after the date of this Prospectus up to
1,127,000 shares issuable under then-exercisable options could be sold in the
public market under Rule 701 under the Securities Act, subject to certain
limitations set forth in Rule 701.
In general, under Rule 144 as currently in effect, if a period of at least
two years has elapsed between the later of the date restricted shares were
acquired from the Company and the date on which they were acquired from an
affiliate (as that term is defined in Rule 144), then the holder of such
restricted shares (including an affiliate) is entitled to sell a number of
shares within any three-month period that does not exceed the greater of: (i)
One percent of the outstanding shares of the Common Stock (approximately 156,500
shares immediately after the Offering if the Maximum is sold); and (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding the date on which the notice of such sale is filed with
the Securities and Exchange Commission. Sales under Rule 144 also are subject
to certain requirements pertaining to the manner of such sales, notices of such
sales, and the availability of certain public information concerning the
Company.
Sales of substantial amounts of shares in the public market could adversely
affect prevailing market prices and could impair the Company's future ability to
raise capital through subsequent offerings of its equity securities.
PLAN OF DISTRIBUTION
GENERAL
The shares of Common Stock offered hereby will be sold directly to members
of the public residing in selected states. Such shares are offered and sold on
behalf of both the Company and the Selling Shareowners, and may be sold in any
number of closings after the Minimum has been sold, until the Offering is
terminated.
At a closing on the Minimum Offering, the Company will sell 214,055 shares
(approximately 45%) for its own account and 265,945 shares (approximately 55%)
for the accounts of the Selling Shareowners. Thereafter, until an aggregate of
2,760,800
44
<PAGE>
shares are sold, approximately 57% of the shares sold in any subsequent closing
will be sold for the Company's account and approximately 43% will be sold for
the accounts of the Selling Shareowners. After 2,760,800 shares have been sold,
approximately 71% of the remaining shares sold in any subsequent closing will be
sold for the Company's account and approximately 29% will be sold for the
accounts of the Selling Shareowners. At a closing on the Maximum Offering, the
Company will have sold 2,306,840 shares (approximately 60%) for its own account
and 1,543,160 shares (approximately 40%) for the accounts of the Selling
Shareowners. The Company will provide a supplement to this Prospectus at such
time as the Minimum Offering has been sold, and a further supplement to this
Prospectus at such time as 2,760,800 shares have been sold. Such supplements
will include statements (i) that at least such number of shares have been sold,
(ii) that until an aggregate of 2,760,800 shares are sold, approximately 57% of
the shares sold in any subsequent closing will be sold for the Company's
account, and (iii) that after 2,760,800 shares have been sold, approximately 71%
of the remaining shares sold in any subsequent closing will be sold for the
Company's account. See "Risk Factors--No Proceeds to the Company from Sales by
Selling Shareowners," "Use of Proceeds" and "Principal and Selling Shareowners."
Copies of this Prospectus, with a Stock Subscription Agreement, will be
mailed to selected persons who are customers or have other relationships with
the Company or its officers and who reside in certain states. Copies also will
be available to persons in such states through the Company's site on the World
Wide Web (http://www.dechtar.com). All shares will be sold at the public
offering price of $6.25 per share, and a minimum purchase of 100 shares will be
required. The Company reserves the right to reject any Stock Subscription
Agreement in full or in part.
The Company only will effect offers and sales of shares through its
designated sales representative, Thomas L. Lackman, the Company's President and
Chief Operating Officer, and Joseph Richardson, the Company's Finance
Administrator. Only Mr. Lackman will sign Stock Subscription Agreements on
behalf of the Company and the Selling Shareowners and he will be the only
individual who will conduct activities that involve making oral solicitations or
approval of written communications. Under Rule 3a4-1 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), Mr. Lackman and Mr. Richardson
will not be considered as "brokers," as defined in the Exchange Act, solely by
reason of participation in the Offering, because: (1) Mr. Lackman and Mr.
Richardson are not subject to any of the statutory disqualifications set forth
in Section 3(a)(39) of the Exchange Act; (2) in connection with the sale of the
shares hereby offered, Mr. Lackman and Mr. Richardson will not receive, directly
or indirectly, any commissions or other remuneration based either directly or
indirectly on transactions in securities; (3) neither Mr. Lackman nor Mr.
Richardson is an associated person (partner, officer, director or employee) of a
broker or dealer; and (4) both Mr. Lackman and Mr. Richardson: (a) primarily
perform substantial duties for the issuer otherwise than in connection with
transactions in securities; (b) were not a broker or dealer, or an associated
person of a broker or dealer, within the preceding 12 months; and (c) will not
participate in selling an offering of securities for any issuer more than once
every 12 months. Mr. Richardson has successfully passed the Series 63--Uniform
Securities Agent State Law Examination.
45
<PAGE>
To subscribe for shares of Common Stock, each prospective investor must
complete, date, execute and deliver to the Escrow Agent a Stock Subscription
Agreement and a check or VISA/MasterCard authorization (valid card number,
expiration date and authorized signature) in the amount of the purchase price
payable to DechTar Direct Inc. to be deposited into Millennium Bank. A copy of
the Stock Subscription Agreement, together with a preaddressed return envelope,
is included with this Prospectus.
ESCROW OF MINIMUM PROCEEDS
The shares are hereby offered by the Company on a "Minimum/Maximum" basis
subject to the subscription and payment for not less than 480,000 shares during
the Escrow Period. All subscription payments received during the Escrow Period
will be deposited into an interest-bearing Escrow Account with the Escrow Agent.
If the Minimum has not been subscribed fully before termination of the Offering,
all monies deposited in the Escrow Account will be refunded to the subscribers,
without interest and without any deduction for expenses. Regardless of whether
the Minimum is subscribed, no interest will be paid to subscribers and any
interest earned during the Escrow Period will be paid to the Company. All funds
held in the Escrow Account will be invested in short-term money market accounts.
Upon raising the Minimum, the Escrow Account shall be terminated, the Escrow
Period shall end, subscribers will become shareowners and any subsequent
proceeds from the sale of shares shall go directly to the Company and the
Selling Shareowners.
During the Escrow Period, all subscription payments for shares must be
delivered with a completed Stock Subscription Agreement to the Escrow Agent. A
written confirmation, along with a signed copy of the accepted Stock
Subscription Agreement, will be mailed by the Company to each subscriber within
fifteen business days of receipt. Stock certificates will not be issued to
subscribers until such time as the funds are released from the Escrow Account to
the Company and the Selling Shareowners. Until such time, purchasers will be
deemed subscribers and not shareowners of the Company. During the Escrow
Period, subscribers will have no right to a return of their payment.
If the Minimum has been subscribed fully on or before twelve months after
the date of this Prospectus, the Company and the Selling Shareowners will
continue to offer shares, but not for more than a total of 3,850,000 shares.
The Offering shall be terminated upon the earliest of: (i) The sale of the
Maximum; (ii) twelve months after the date of this Prospectus; or (iii) the date
on which the Company decides to close the Offering. The Company reserves the
right to reject any Stock Subscription Agreement in full or in part and to
terminate the Offering at any time.
Purchases by directors, officers and other employees of the Company before
the Minimum is achieved will be limited to 10% of the Minimum.
DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no market for the Common Stock of the
Company, and there can be no assurance that any trading market for the Common
Stock will develop or be sustained. The Offering price has been determined by
the
46
<PAGE>
Company's Board of Directors. Among factors considered in determining the
Offering price were the Company's results of operations, its current financial
condition, its future prospects, the state of the markets for its products, and
the economics of the industry. This price, however, may not accurately reflect
book value, earnings or other generally recognized indicia of value or the
public market's determination of the value of the Common Stock.
The post-Offering fair market value of the Company's Common Stock, whether
or not any secondary trading market develops, is variable, and may be impacted
by the business and financial condition of the Company, as well as factors
beyond the Company's control. The price also may vary due to economic
conditions and forecasts and general conditions in the adult entertainment and
adult mail-order industries.
LEGAL MATTERS
The validity of the shares of Common Stock hereby offered will be passed
upon for the Company by Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation, San Francisco, California.
EXPERTS
The Financial Statements of the Company as of and for the years ended
December 28, 1994, and December 27, 1995, audited by its independent auditors
Stonefield Josephson Accountancy Corporation, Certified Public Accountants, have
been included in this Prospectus in reliance upon their report appearing
elsewhere herein.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto,
relating to the shares offered hereby has been filed with the Securities and
Exchange Commission. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the shares offered hereby, reference is made to such Registration
Statement, exhibits and schedules. A copy of the Registration Statement may be
inspected by anyone without charge at the Commission's Western Regional office
located at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036-3648. Copies of all or any part thereof also may be obtained from the
Public Reference Room of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon the payment of certain fees prescribed by the Commission.
47
<PAGE>
DECHTAR DIRECT, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . .F-2
Balance Sheets . . . . . . . . . . . . . . . . . . .F-3
Statements of Income . . . . . . . . . . . . . . . .F-5
Statements of Stockholders' Equity . . . . . . . . .F-6
Statements of Cash Flows . . . . . . . . . . . . . .F-8
Notes to Financial Statements. . . . . . . . . . . F-10
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
DechTar Direct, Inc.
San Francisco, California
We have audited the accompanying balance sheets of DechTar Direct, Inc., a
California corporation, as of December 28, 1994, and December 27, 1995, and the
related statements of income, stockholders' equity, and cash flows for the
fiscal years then ended. These financial statements are the responsibility of
the Company management. Our responsibility is to express an opinion on these
financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DechTar Direct, Inc., as of
December 28, 1994, and December 27, 1995, and the results of its operations and
cash flows for the fiscal years then ended in conformity with generally accepted
accounting principles.
STONEFIELD JOSEPHSON
ACCOUNTANCY CORPORATION
San Francisco, California
August 15, 1996
F-2
<PAGE>
DECHTAR DIRECT, INC.
BALANCE SHEETS
ASSETS
(UNAUDITED)
DECEMBER 28, DECEMBER 27, SEPTEMBER 25,
1994 1995 1996
------------ ------------ ------------
CURRENT ASSETS:
Cash $ 31,262 $ 194,329 $ 87,862
Accounts receivable, net 180,660 245,585 426,833
Due from affiliates 56,124 353,090 719,895
Stockholder loan 30,000 - -
Prepaid marketing expense 1,025,205 1,208,311 1,194,027
Prepaid expenses 130,792 46,029 23,416
Deferred stock offering costs - - 306,926
---------- ---------- ----------
Total current assets 1,454,043 2,047,344 2,758,959
PROPERTY AND EQUIPMENT, NET 404,764 617,952 866,195
OTHER ASSETS:
Stockholder loan 57,772 - -
Mailing list development costs, net 903,515 1,128,082 1,410,009
Purchased mailing lists, net 71,876 400,769 356,949
Deposits 34,600 28,600 33,768
Other assets - - 2,087
---------- ---------- ----------
Total other assets 1,067,763 1,557,451 1,802,813
---------- ---------- ----------
Total assets $ 2,926,570 $ 4,222,747 $ 5,427,967
---------- ---------- ----------
---------- ---------- ----------
See accompanying independent auditors' report and notes to financial statements.
F-3
<PAGE>
DECHTAR DIRECT, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
DECEMBER 28, DECEMBER 27, SEPTEMBER 25,
1994 1995 1996
------------ ------------ ------------
CURRENT LIABILITIES:
Notes payable $ 546,900 $ 241,579 $ 352,106
Note payable, stockholder - 7,839 55,849
Capital leases 29,778 15,895 38,088
Accounts payable and
accrued expenses 929,455 1,591,084 1,762,079
Deferred revenue 120,914 208,176 663,174
Deferred income taxes 411,225 484,722 478,987
---------- ---------- ----------
Total current liabilities 2,038,272 2,549,295 3,350,283
NOTES PAYABLE 279,534 352,755 255,791
CAPITAL LEASES 19,231 18,150 61,335
DEFERRED INCOME TAXES 149,587 183,212 160,104
COMMON STOCK SUBJECT TO REDEMPTION,
560,000 SHARES AT DECEMBER 28, 1994,
AND 1,680,000 SHARES AT
DECEMBER 27, 1995, AND
SEPTEMBER 25, 1996 (NOTE 2) 933 5,033 5,033
STOCKHOLDERS' EQUITY:
Common stock, 25,000,000 shares
authorized, 10,640,000,
10,920,000 and 11,207,000
shares issued and outstanding
at December 28, 1994,
December 27, 1995, and
September 25, 1996, respectively 11,201 12,626 433,626
Preferred stock A, $10 par value,
10,000,000 shares authorized,
60,630 and 55,490 shares issued
and outstanding at December 27,
1995, and September 25, 1996,
respectively - 552,691 459,338
Preferred stock B, $3 par value,
180,000 shares authorized,
71,667 shares issued and
outstanding at
September 25, 1996 - - 214,183
Retained earnings 427,812 548,985 488,274
---------- ---------- ----------
Total stockholders' equity 439,013 1,114,302 1,595,421
---------- ---------- ----------
Total liabilities and
stockholders' equity $2,926,570 $4,222,747 $5,427,967
---------- ---------- ----------
---------- ---------- ----------
See accompanying independent auditors' report and notes to financial statements.
F-4
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------- ----------------------------------
DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 25,
1994 1995 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $6,146,488 $7,742,585 $6,213,835 $7,026,230
Cost of revenue 4,108,388 5,038,230 3,954,197 5,054,045
---------- ---------- ---------- ----------
Gross profit 2,038,100 2,704,355 2,259,638 1,972,185
Selling, general and
administrative expense 1,497,748 2,311,497 1,671,684 2,010,736
---------- ---------- ---------- ----------
Income (loss) from operations 540,352 392,858 587,954 (38,551)
Interest expense, net 165,018 163,765 138,374 50,201
---------- ---------- ---------- ----------
Net income (loss) before income taxes 375,334 229,093 449,580 (88,752)
Provision (benefit) for income taxes 167,904 107,920 211,786 (28,041)
------------ ------------ ------------ ------------
Net income (loss) $ 207,430 $ 121,173 $ 237,794 $ (60,711)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per share $0.02 $0.01 $0.02 $(0.01)
---- ---- ---- ----
---- ---- ---- ----
Weighted average
common shares outstanding 12,600,000 12,600,000 11,200,000 13,355,497
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-5
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------------------
COMMON STOCK SERIES A SERIES B
-------------------------- ---------------------------- ------------------------ RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EARNINGS
------------ ------------ ------------ ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 30,
1993 11,200,000 $12,134 - - - - $220,382
Less shares subject
to redemption (560,000) (933) - - - - -
Net income, 1994 - - - - - - 207,430
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 28,
1994 10,640,000 11,201 - - - - 427,812
Net income, 1995 - - - - - - 121,173
Issuance of common
stock-- non-cash 1,400,000 5,525 - - - - -
Less shares subject
to redemption (1,120,000) (4,100) - - - - -
Issuance of Series A
preferred stock -
non-cash - - 52,630 $526,300 - - -
Issuance of Series A
preferred stock -
cash - - 8,000 80,000 - - -
Stock offering costs - - - (53,609) - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 27,
1995 10,920,000 $12,626 60,630 $552,691 - - $548,985
</TABLE>
(CONTINUED ON NEXT PAGE)
See accompanying independent auditors' report and notes to financial statements.
F-6
<PAGE>
DECHTAR DIRECT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------
COMMON STOCK SERIES A SERIES B
--------------------- --------------------- --------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EARNINGS
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss, nine
months ended
September 25, 1996 - - - - - - $ (60,711)
Issuance of common
stock -- non-cash 7,000 $ 21,000 - - - - -
Issuance of Series A
preferred stock -
non-cash - - 3,000 $ 30,000 - - -
Issuance of Series A
preferred stock -
cash - - 33,060 330,600 - - -
Issuance of Series B
preferred stock -
cash - - - - 71,667 $215,000 -
Conversion of Series A
preferred stock to
common stock 280,000 400,000 (40,000) (400,000) - - -
Stock offering costs - - - (53,953) - (817) -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 25,
1996 (Unaudited) 11,207,000 $433,626 56,690 $459,338 71,667 $214,183 $488,274
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-7
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------- --------------------------------
DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 25,
1994 1995 1995 1996
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income (loss) $ 207,430 $ 121,173 $ 237,794 $ ( 60,711)
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization:
Mailing list development costs 139,034 198,895 137,829 200,673
Purchased mailing lists 38,749 38,744 22,603 49,311
Property and equipment 127,516 185,230 134,521 151,557
Deferred income taxes 167,104 107,120 210,986 (28,841)
Loss on asset disposal 12,837 11,522 8,657 -
Preferred stock issued for
services rendered - - - 30,000
Common stock issued as
compensation - 5,525 - 21,000
Bad debts 6,542 6,705 4,913 2,500
(Increase) decrease in operating assets:
Accounts receivable 65,084 (100,371) (758,217) (183,748)
Due from affiliates (53,388) (296,966) (6,015) (366,805)
Prepaid marketing expense 20,059 (183,106) (292,664) 14,284
Prepaid expenses (118,894) 84,763 122,372 22,613
Deposits (15,000) 6,000 - (5,168)
Increase (decrease) in operating
liabilities:
Accounts payable and
accrued expenses 69,590 661,629 768,158 170,995
Deferred revenue 11,442 87,262 (14,448) 454,998
------------ ------------ ------------- -------------
Net cash provided by
operating activities 678,105 934,125 576,489 472,658
------------ ------------ ------------- -------------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Costs for development of mailing lists (414,579) (423,462) (334,831) (482,600)
Payments to acquire property
and equipment (246,932) (419,938) (381,560) (316,349)
Advances to (payments from)
stockholder (53,187) (197,648) (206,122) 60,010
Costs for purchases of mailing lists (47,799) (45,637) (34,001) (5,495)
Proceeds from sale of property
and equipment - 10,000 - -
Payments to acquire other assets - - - (2,087)
------------ ------------ ------------- -------------
Net cash used for investing activities (762,497) (1,076,685) (956,514) (746,521)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
(CONTINUED ON NEXT PAGE)
See accompanying independent auditors' report and notes to financial statements.
F-8
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 25,
1994 1995 1995 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Proceeds from notes payable $ 150,770 $ 444,000 $ 444,000 $ 400,000
Payments on notes payable - (149,800) (88,909) (386,436)
Payments on notes payable, stockholder - - - (12,000)
Payments on capital leases (10,843) (14,964) (11,508) (18,072)
Proceeds from issuance of
preferred stock, net of $53,609
stock offering costs - 26,391 - 490,830
Common stock issuance costs - - (2,505) (306,926)
---------- ---------- ---------- ----------
Net cash provided by
financing activities 139,927 305,627 341,078 167,396
---------- ---------- ---------- ----------
Net increase (decrease) in cash 55,535 163,067 (38,947) (106,467)
Cash at beginning of period (24,273) 31,262 31,262 194,329
---------- ---------- ---------- ----------
Cash at end of period $ 31,262 $ 194,329 $ (7,685) $ 87,862
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 170,160 $ 168,733 $ 143,699 $ 72,161
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income taxes paid $ 800 $ 800 $ 800 $ 800
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchased mailing lists from majority
stockholder in exchange for:
Notes payable - $ 322,000 - -
Offset of loan - (285,420) - -
Offset of interest receivable - (28,741) - -
---------- ---------- ---------- ----------
$ - $ 7,839 $ - $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Converted notes payable to
preferred stock $ - $ 526,300 $ - $ -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Preferred stock issued for
services rendered $ - $ - $ - $ 30,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Common stock issued as compensation $ - $ 5,525 $ - $ 21,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Converted preferred stock to
common stock $ - $ - $ - $ 400,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-9
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
FISCAL YEAR
The Company's fiscal year ends on the fourth Wednesday in December.
BUSINESS
The San Francisco-based Company provides lead generation, order processing,
administrative, agency, advertising and mailing list rental services for adult
mail-order catalog companies throughout the United States and Canada.
Approximately 63% for 1994 and 57% for 1995 of the Company's revenue was
generated from the catalog lead generation program. This program produces
qualified direct-mail leads for client mail-order companies and other direct-
mail and publishing companies through space advertisements, package inserts and
the Company's "catalog of catalogs."
Respondents to advertisements request specific client catalogs. The Company
processes the resulting orders and provides consumer names and addresses to
participating clients for a fee. Additionally, the Company receives fees for
catalog order processing and related services. Clients mail the requested
catalogs and product orders directly to the consumer, their customer.
The balance of the Company's revenues are from name list rental, advertising
space sales, print and mailing service brokerage, and other agency services
including creative design, prepress production, desktop publishing, advertising
and mail insert resales, space and circulation planning and consulting.
PREPAID MARKETING EXPENSE
Pursuant to the American Institute of Certified Public Accountants' Statement of
Position 93-7, the Company initially capitalizes media advertising expenditure
costs that are designed to generate direct sales for its catalog lead generation
program. These
F-10
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
costs are charged to operations over a six-month period, the time frame in which
the related revenue is expected to be earned.
MAILING LISTS
The Company capitalizes costs relating to development of mailing lists and
records purchased mailing lists at cost. For financial reporting purposes,
mailing lists are amortized over their estimated revenue-producing life of seven
years. For income tax purposes, purchased mailing lists are amortized over
fifteen years and developed mailing list costs are charged to operations when
incurred.
On an ongoing basis, at least quarterly, management reviews the value and period
of amortization of its mailing lists. During this review, the Company
reevaluates the significant assumptions used in determining the original costs
of internally developed lists, together with assumptions regarding revenue
growth, cash flows and other indicators of value in accordance with SFAS 121.
Management then determines whether there has been a permanent impairment of
value of its mailing lists, based upon current circumstances, and records
writedowns as appropriate.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally five years, by the straight-line method for
financial reporting purposes and by accelerated methods for income tax purposes.
For assets included as capital leases, amortization is based upon the lease term
and is included with depreciation expense.
REVENUE RECOGNITION
Revenue is recognized when services are provided. Customer payments received in
advance are deferred until the services are provided.
CONCENTRATION OF CREDIT RISK
Revenue: During 1994 and 1995, the Company's largest customer, an entity owned
by the Company's majority stockholder, accounted for approximately 20% and 27%,
respectively, of the total revenue for the year. Services to this entity are
billed monthly and are paid in accordance with standard credit terms.
F-11
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Source of Supply: Substantially all catalogs are printed and mailed by a
midwest printing company. The Company believes that alternative printing
sources are available without a significant increase in cost or of material
disruption of its mailing services.
INCOME TAXES
Deferred income taxes are provided for the temporary differences between
financial statements and income tax returns. Differences result primarily from
prepaid marketing
expense, mailing lists and utilization of net operating losses.
EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common shares
outstanding during each year. The number of shares outstanding was adjusted to
reflect a 16-for-1 stock split on December 20, 1995, and a 7-for-1 stock split
on April 26, 1996. Common stock equivalents have been excluded because their
effect was immaterial.
The 1,400,000 shares issued during 1995 were at a price significantly less than
the anticipated public offering price. They have been treated as outstanding
for earnings per share computation purposes.
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
During October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which applies the fair-value method of accounting for stock-based
compensation plans. In accordance with this recently issued standard, the
Company expects to continue to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and beginning in 1996 will make the appropriate disclosures
of pro forma net income (loss) and earnings (loss) per share.
LEGAL ENVIRONMENT
Because a portion of the Company's business includes clientele that offer
sexually oriented materials, the Company may be subject to heightened scrutiny
by officials seeking to enforce federal or state obscenity laws. The initiation
of such proceedings could have a material adverse effect upon the Company's
business, results of operations
F-12
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and financial condition. The Company is not now and has not been subject to any
law enforcement proceeding, nor is it aware of any such proceedings previously
directed at entities other than the primary producers of adult materials. The
Company employs compliance procedures in the form of, among other things,
controls and written policies to assure, in management's opinion, adherence to
all applicable federal, state and local laws and regulations.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements for the interim periods ended
June 25, 1995, and June 26, 1996, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Regulation SB. 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-month period ended June 26, 1996, are not necessarily indicative of the
results that may be expected for the year ending December 25, 1996.
NOTE 2 - RELATED PARTIES
Due from affiliates year-end balances consists of the following:
1994 1995
-------- --------
Active company owned by the majority
stockholder, for services rendered $53,604 $324,803
Inactive company owned by the majority
stockholder 2,520 18,287
Active company owned by the majority
stockholder, for note payable - 10,000
-------- --------
$56,124 $353,090
-------- --------
-------- --------
F-13
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 2 - RELATED PARTIES (CONTINUED)
Due from affiliates for the interim period balances consists of the following:
(UNAUDITED) (UNAUDITED)
SEPTEMBER 27, SEPTEMBER 25,
1995 1996
---- ----
Active company owned by the majority
stockholder, for services rendered $ 45,253 $702,808
Inactive company owned by the majority
stockholder 16,886 17,087
-------- --------
$ 62,139 $719,895
-------- --------
-------- --------
Since its inception, the Company's largest client has been Voyages Catalog
Group, Inc. ("VCG"), a company which markets adult-oriented products. VCG is
owned by Terri N. Hess, the principal shareowner and Chief Executive Officer of
the Company.
Under an agreement dated January 1, 1996, the Company agreed to provide to VCG
certain services and granted VCG certain pricing discounts at below the rates
normally charged to the Company's other clients primarily based upon volume.
VCG agreed to use the Company as its first resource for such services. In
addition, the Company, pursuant to an agreement for management consulting
services, pays $6,500 per month to VCG for consulting services, including
assistance with the development of catalog, marketing and advertising
strategies. Pursuant to the foregoing agreements, VCG purchased services from
the Company in an aggregate amount of $2,093,089 during fiscal year 1995. The
Company believes that each of its contracts with VCG was entered into on terms
and at prices no less favorable than the Company could have received from an
unaffiliated party.
The Company's September 1995 employment agreement with its current President and
Chief Operating Officer granted him 1,120,000 shares of common stock, as
adjusted to reflect stock splits in December 1995 and April 1996, and an option
to purchase 10,000 shares of Series A preferred stock, or a comparable series of
preferred stock, convertible into 1,120,000 shares of common stock, for a period
of five years at an adjusted exercise price of $1.43 per share of common stock.
The Company and its majority stockholder together have an obligation to
repurchase the granted shares (but not any shares acquired under the option
agreement) in the event of termination of employment with the Company for any
reason.
During 1991, the Company issued 560,000 shares of common stock, as adjusted to
reflect stock splits in December 1995 and April 1996, to a current officer and
director
F-14
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 2 - RELATED PARTIES (CONTINUED)
under the terms of an incentive stock bonus agreement effective in January 1992.
In the event of death or involuntary termination of employment without cause,
the Company has an obligation to repurchase these shares at the greater of $0.09
per share or fair market value. Lesser amounts are to be paid in the event of
voluntary termination or termination with cause.
NOTE 3 - PREPAID MARKETING EXPENSE
Prepaid marketing expense consists of the following:
1994 1995
---- -----
Media advertising expenditures $15,509,166 $12,006,591
Less accumulated amortization 14,300,855 10,981,386
----------- -----------
$ 1,208,311 $ 1,025,205
----------- -----------
----------- -----------
Amortization totaled $2,981,884 and $3,319,369 for the years 1994 and 1995,
respectively.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1994 1995
----------- -----------
Computer equipment and software $446,115 $ 493,188
Equipment 73,992 208,052
Leasehold improvements 95,230 145,279
Furniture and fixtures 74,345 137,396
Automobiles 8,415 58,415
----------- -----------
748,097 1,042,330
Less accumulated depreciation and amortization 343,333 424,378
----------- -----------
$404,764 $ 617,952
----------- -----------
----------- -----------
NOTE 5 - MAILING LISTS
Mailing lists consist of the following:
F-15
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 5 - MAILING LISTS (CONTINUED)
1994 1995
--------- ----------
Developed mailing lists:
Beginning balance $ 709,214 $1,123,794
External marketing costs capitalized:
Advertising - space ads 281,573 211,425
List rental and insert fees 49,769 64,321
Printing and mailing 33,191 56,742
Catalog postage 22,310 34,265
Internal direct marketing costs capitalized:
Payroll $ 20,129 $ 39,622
Office, occupancy and depreciation 7,608 17,087
--------- ----------
Total costs capitalized 414,580 423,462
Less accumulated amortization:
Beginning balance 81,246 220,280
Current amortization 139,033 198,894
--------- ----------
Accumulated amortization 220,279 419,174
Ending balance $ 903,515 $1,128,082
--------- ----------
--------- ----------
Purchased mailing lists:
Beginning balance $ 84,077 $ 131,877
Additions 47,800 367,637
--------- ----------
131,877 499,514
Less accumulated amortization:
Beginning balance 20,618 60,002
Current amortization 39,383 38,743
--------- ----------
Accumulated amortization 60,001 98,745
--------- ----------
Ending balance $ 71,876 $ 400,769
--------- ----------
--------- ----------
On July 1, 1995, Terri N. Hess sold various lists of names to the Company for
$322,000, or approximately $0.50 per name. These names previously had been made
available to the Company at no cost even though the names had value to the
Company. The purchase price was offset against unsecured loans made to that
stockholder. At December 27, 1995, the remaining unpaid amount was $7,839.
F-16
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
1994 1995
---- ----
Unsecured note payable to a partnership,
interest only at 11% payable monthly, due
January 1998. - $152,930
Unsecured note payable to an individual,
interest only at 11% payable monthly, due
January 1998. - 125,000
Bank line of credit, secured by substantially
all Company assets, interest at prime plus
two percentage points payable monthly, due
July 1996. - 99,000
Note payable to an individual, secured by
30,000 shares of the Company's common
stock, interest at 10% plus principal payments
of $8,333 payable monthly, due July 1996. 158,333 58,333
Unsecured note payable to an individual,
interest only at 10% payable monthly, due
December 2000; replacing unsecured demand
notes requiring monthly interest payments
at 20% and 21% at December 28, 1994. 40,000 47,372
Unsecured note payable to trust, interest only
at 20% payable monthly, due January 1996. 210,000 40,000
Unsecured note payable to an individual,
interest only at 10% payable monthly, due
January 1998. - 38,956
Unsecured notes payable to an individual,
payable in monthly installments of $997,
including interest at 10%, due January 1996;
replacing an unsecured demand note requiring
monthly interest payments at 20% at
December 28, 1994. 24,000 21,600
F-17
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 6 - NOTES PAYABLE (CONTINUED)
1994 1995
---- ----
Note payable to an individual, secured by
5,000 shares of the Company's common stock,
interest at 10% plus principal payments of
$1,389 payable monthly, due May 1996. $23,611 $ 6,944
Note payable to bank, secured by automobile,
monthly payment of $232 including interest,
due August 1997. 6,490 4,199
Unsecured demand note payable to a partner-
ship, interest only at 25% payable monthly;
converted to Series A Preferred Stock during
December 1995. 200,000 -
Unsecured demand notes payable to individuals,
interest only at 20% payable monthly; converted
to Series A Preferred Stock during December 1995. 135,000 -
Unsecured demand notes payable to individuals,
interest only at 24% payable monthly; assigned
to another holder and converted to Series A
Preferred Stock during December 1995. 29,000 -
--------- ----------
826,434 594,334
Less current maturities 546,900 241,579
--------- ----------
$279,534 $352,755
--------- ----------
--------- ----------
The following schedule summarizes the aggregate maturities of the notes payable
at December 27, 1995:
YEAR ENDING DECEMBER AMOUNT
-------------------- ------
1996 $ 241,579
1997 41,849
1998 289,094
1999 10,363
2000 11,449
----------
$ 594,334
----------
----------
F-18
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 7 - CAPITAL LEASES PAYABLE
Obligations under capital leases represent the present value of future net
minimum lease payments under agreements with a cost of $145,333 and $55,650 and
accumulated depreciation of $66,465 and $16,135 as of December 28, 1994, and
December 27, 1995, respectively.
The following is a schedule by years of future minimum lease payments under the
capital leases together with the present value of the minimum lease payments as
of December 28, 1994, and December 27, 1995:
YEAR ENDING DECEMBER 1994 1995
-------------------- ---- ----
1995 $37,663 $ -
1996 10,816 20,533
1997 10,816 19,724
1998 901 901
-------- --------
Total minimum lease payments 60,196 41,158
Less amount representing interest 11,187 7,113
-------- --------
Present value of net minimum lease payments 49,009 34,045
Less current maturities 29,778 15,895
-------- --------
Non-current maturities $19,231 $18,150
-------- --------
-------- --------
NOTE 8 - PREFERRED STOCK
During December 1995, 60,630 shares of $10 par value, non-voting Series A
Convertible Preferred Stock were issued pursuant to a private placement
memorandum. The stock is entitled to receive annual dividends of 8% of the par
value on a cumulative basis when, as and if declared by the Board of Directors,
and is convertible into shares of the Company's Common Stock, no par value, on a
one-to-one basis. Note holders converted $526,300 of their debt into Preferred
Stock and the Company received $26,391 of cash, net of stock offering costs,
which was used to provide additional working capital.
The Company has the right to redeem the stock at any time after the third,
fourth and fifth anniversary of the date of purchase. In addition, the stock is
to be converted automatically into Common Stock, at the then applicable
conversion price, upon the closing of a sale of the Company's Common Stock
pursuant to a public offering greater than $1,000,000.
F-19
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 9 - RECAPITALIZATION
During December 1995, the Company amended its Articles of Incorporation to
increase Common Stock from 1,000,000 shares to 10,000,000 shares, and it
authorized Preferred Stock of 10,000,000 shares. Also as of that date, a 16-
for-1 Common Stock split was declared.
During April 1996, the Articles of Incorporation increased the authorized Common
Stock from 10,000,000 shares to 25,000,000 shares. 200,000 shares of Preferred
Stock were designated as Series A Convertible Preferred Stock. Also as of that
date, a 7-for-1 Common Stock split was declared.
Common Stock has been restated retroactively to reflect the above transactions.
Also, earnings per share have been computed taking into account the changes in
stock, shares authorized and stock splits.
The following is a summary of the restatements:
OUTSTANDING SHARES OF COMMON STOCK
------------------------------------
HISTORICAL BASIS RESTATED BASIS
---------------- ---------------
Balance, December 30, 1993, and
December 28, 1994 100,000 11,200,000
Issuance of Common Stock 12,500 1,400,000
Recapitalization 1,687,500 -
----------- ----------
Balance, December 27, 1995 1,800,000 12,600,000
----------- ----------
----------- ----------
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
1994 1995
---- -----
Current tax expense - California $ 800 $ 800
Deferred tax expense - federal 115,459 77,432
Deferred tax expense - California 51,645 29,688
----------- ----------
$ 167,904 $ 107,920
----------- ----------
----------- ----------
The tax provision differs from the amount that would result from applying the
highest statutory rate to income before taxes because of the effect of certain
permanent tax differences, as explained below:
F-20
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 10 - INCOME TAXES (CONTINUED)
1994 1995
---- ----
Tax at highest federal statutory rate $127,613 $ 77,892
Net effect of California franchise tax 23,039 14,062
Permanent differences:
Meals and entertainment 5,562 9,897
Officers' life insurance 1,139 1,796
Net operating loss carryforward limitations 10,551 4,273
----------- ----------
Provision for income taxes $167,904 $107,920
----------- ----------
----------- ----------
The major components of deferred tax assets and liabilities consist of the
following:
1994 1995
---- ----
Deferred tax assets:
Net operating loss carryforward $ 216,915 $ 256,965
California franchise tax 52,636 62,730
Depreciation 4,773 24,032
----------- ----------
274,324 343,727
----------- ----------
Deferred tax liabilities:
Prepaid marketing expense (443,914) (523,199)
Mailing list development costs (391,222) (488,462)
----------- ----------
(835,136) (1,011,661)
----------- ----------
$ (560,812) $ (667,934)
----------- ----------
----------- ----------
Federal and state deferred taxes:
Current $ (411,225) $ (484,722)
Long-term (149,587) (183,212)
----------- ----------
$ (560,812) $ (667,934)
----------- ----------
----------- ----------
The Company has available approximately $669,000 and $315,000 of federal and
California net operating loss carryforwards, respectively, which can be used to
offset future taxable income until their expiration in the years ending through
2010.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The following is a schedule by years of future minimum rental payments required
under operating leases that have noncancellable lease terms in excess of one
year as of December 27, 1995:
F-21
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
YEAR ENDING DECEMBER AMOUNT
-------------------- ------
1996 $ 138,200
1997 152,400
1998 153,600
1999 188,800
2000 16,000
----------
$ 649,000
----------
----------
Rent expense totaled $76,112 and $145,463 for the years 1994 and 1995,
respectively.
SALES TAX EXAMINATION
The Company currently is being audited by the California State Board of
Equalization and is in the process of appealing a proposed assessment of
approximately $150,000. Management believes that any sales tax liability
imposed by the State of California will have immaterial effect upon its
financial condition and results of operations because its contracts with its
customers permit it to seek reimbursement of such tax. Therefore, no provision
for a liability has been provided for in the financial statements.
NOTE 12 - SUBSEQUENT EVENTS
During April 1996, the Company adopted a non-compensatory Key Employee Stock
Option Plan providing for the grant of up to 1,000,000 shares of Common Stock.
Options may be exercised over a four-year period beginning one year after the
date of grant. Sixty employees were granted the rights to purchase a total of
101,521 shares at the option price of $3.00 per share.
During April and August 1996, two individuals each were granted 3,500 shares of
the Company's Common Stock, and each also was granted an option to purchase an
additional 3,500 shares at an option price of $3.00 per share, as consideration
for agreeing to serve as a member of the Board of Directors.
During January through September 1996, 360,600 additional shares of $10 par
value, non-voting Series A Convertible Preferred Stock were issued and the
Company received $306,647 of additional cash, net of stock offering costs, which
was used to provide additional working capital.
During July 1996, the Company obtained a $300,000 revolving line of credit with
a new bank. The borrowing, which is due July 31, 1997, provides for interest at
the bank's reference rate plus two percentage points. The bank has a security
interest in
F-22
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 28, 1994 and December 27, 1995
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
substantially all Company assets under the loan agreement. Borrowings are
guaranteed by the majority stockholder and a company wholly owned by him.
F-23
<PAGE>
DECHTAR
DIRECT
DechTar's catalog request
programs generate leads
for direct mail clients by
advertisisng client catalogs
in national magazines
and in the company's
catalog-of-catalogs.
Photographs of covers of twelve
client catalogs.
[PHOTO]
<PAGE>
Graphical representation of following
DechTar logos: Love Stuff,
Intimate Treasures, Chain Male
and DechTar Direct.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation and Bylaws provide that the liability of
directors of the Company for monetary damages shall be eliminated to the fullest
extent permissible under California law, except for liability (A)(i) for acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Company or its shareholders, (v) for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Corporations Code, or
(vii) under Section 316 of the California Corporations Code. In addition, the
Company's Articles of Incorporation and Bylaws authorize the Company to provide
indemnification of agents (as defined in Section 317 of the California
Corporations Code) through bylaw provisions, agreements with agents, vote of
shareholders or disinterested directors or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in
Section 204 of the California Corporations Code with respect to actions for
breach of duty to the Company and its shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Stock being registered hereby. All amounts shown, other than the
SEC registration fee, are estimates:
SEC registration fee . . . . . . . . . . . . . . . $ 8,297
Stock exchange application fee . . . . . . . . . . 20,000
Blue Sky fees and expenses . . . . . . . . . . . . 30,000
Printing, mailing, electronic media and
engraving expenses . . . . . . . . . . . . . . . 400,000
Legal fees and expenses. . . . . . . . . . . . . . 125,000
Accounting fees and expenses . . . . . . . . . . . 105,000
Transfer Agent and Registrar fees. . . . . . . . . 20,000
Escrow fees. . . . . . . . . . . . . . . . . . . . 25,000
Miscellaneous. . . . . . . . . . . . . . . . . . . 243,203
--------
Total. . . . . . . . . . . . . . . . . . . . . . . $976,500
--------
--------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since November 1, 1993, the Company has sold the following unregistered
securities without any underwriter and without payment of any selling commission
to any person:
(1) In September 1995, the Company issued 1,120,000 shares of Common Stock
to Thomas L. Lackman in reliance on Section 4(2) of the Securities Act
of 1933, as amended (the "Act"), in connection with his execution of
an Employment Agreement
II-1
<PAGE>
with the Company. The Company believes that the issuance complied
with Section 4(2) in that it did not involve a public offering.
(2) In December 1995, the Company issued 224,000 shares of Common Stock to
Melissa Shane, an executive officer of the Company, in reliance on
Section 4(2) of the Act in exchange for services rendered as an
executive officer of the Company. The Company believes that the
issuance complied with Section 4(2) in that it did not involve a
public offering.
(3) In December 1995, the Company issued 56,000 shares of Common Stock to
Lawrence Inman, an employee of the Company, in reliance on
Section 4(2) of the Act in exchange for services rendered as an
employee of the Company. The Company believes that the issuance
complied with Section 4(2) in that it did not involve a public
offering.
(4) From December 1995 to March 1996, the Company issued 98,130 shares of
Series A Convertible Preferred Stock in reliance on Rule 505 of
Regulation D as promulgated under the Act for aggregate consideration
of $981,300, of which $285,000 was cash consideration, $140,000
reflected the assignment of notes and other assets to the Company,
$526,300 reflected the conversion of outstanding indebtedness, and
$30,000 reflected shares issued in exchange for the provision of
certain consulting services. The Company believes that the issuance
complied with the requirements of Rule 505 in the following manner:
(1) the aggregate offering price of the issuance did not exceed
$5,000,000; (2) the issuance was not made to more than 35 persons; and
(3) offers and sales related to the issuance satisfied the provisions
of Rules 501 and 502 of Regulation D.
(5) In April 1996, the Company issued 3,500 shares of Common Stock to
Andrew August, a director of the Company, in reliance on Section 4(2)
of the Act in exchange for services rendered as a director of the
Company. The Company believes that the issuance complied with
Section 4(2) in that it did not involve a public offering.
(6) In August 1996, the Company issued 3,500 shares of Common Stock to
John C. Gibson, a director of the Company, in reliance on Section 4(2)
of the Act in exchange for services rendered as a director of the
Company. The Company believes that the issuance complied with
Section 4(2) in that it did not involve a public offering.
(7) From September 9, 1996 to September 24, 1996, the Company offered and
issued 180,000 shares of Series B Convertible Preferred Stock in
reliance on Rule 505 of Regulation D for aggregate consideration of
$540,000. The Company believes that the issuance complied with the
requirements of Rule 505 in the following manner: (1) the aggregate
offering price of the issuance did not exceed $5,000,000; (2) the
issuance was not made to more than 35 persons; and (3) offers and
sales related to the issuance satisfied the provisions of Rules 501
and 502 of Regulation D.
II-2
<PAGE>
ITEM 27. EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Company
(including the Certificate of Determination with respect to the
Series B Convertible Preferred Stock)*
3.2 Bylaws of the Company*
4.1 Specimen of Stock Certificate*
5.1 Legal Opinion and Consent of Howard, Rice, Nemerovski, Canady,
Falk & Rabkin, A Professional Corporation*
9.1 Form of Irrevocable Voting Proxy (executed by Thomas L. Lackman on
September 25, 1995)*
9.2 Form of Irrevocable Voting Proxy (executed by each of Brian M.
Wright and Linda A. Hess on November 30, 1995)*
9.3 Form of Irrevocable Voting Proxy (executed by each of Melissa J.
Shane and Laurence E. Inman on December 1, 1995)*
10.1 Agreement of Lease dated April 4, 1994, between the Company and
Jane K. Molyneux Trust, as amended*
10.2 Agreement for Agency Services dated January 1, 1996 between the
Company and Voyages Catalog Group, Inc.*(1)
10.3 Agreement for Management Consulting Services dated January 1, 1996
between the Company and Voyages Catalog Group, Inc.*
10.4 Agreement for Catalog Request Fulfillment dated January 1, 1996
between the Company and Voyages Catalog Group, Inc.*
10.5 Equipment Rental Agreement commencing April 24, 1995 between the
Company and Voyages Catalog Group, Inc.*
10.6 Agreement for Order Entry and Front-End Processing dated January 1,
1996 between the Company and Voyages Catalog Group, Inc.*
10.7 Key Employee Incentive Stock Option Plan*
10.8 Form Key Employee Incentive Stock Option Agreement*
10.9 Letter dated April 12, 1996 from Thomas L. Lackman to Andrew August
detailing director compensation*
10.10 Incentive Stock Bonus Agreement between the Company and Brian
Wright, effective as of January 1, 1992*
- ---------------
* Previously filed.
(1) Confidential treatment requested for portions of this Exhibit.
II-3
<PAGE>
10.11 Incentive Stock Repurchase Agreement between the Company and Brian
Wright, effective as of January 1, 1992*
10.12 Letter dated September 6, 1995 from Thomas L. Lackman to William T.
Hess detailing Mr. Lackman's compensation*
10.13 Director's Stock Option Agreement dated as of April 26, 1996
between the Company and Andrew August*
10.14 Director's Stock Option Agreement dated as of August 14, 1996
between the Company and John C. Gibson*
10.15 Executive Stock Option Agreement dated September 24, 1996 between
the Company and Melissa Shane*
10.16 Disbursement Request and Authorization dated July 29, 1996 between
the Company and Millennium Bank*
10.17 Executive Stock Option Agreement dated October 25, 1996 between the
Company and Thomas L. Lackman*
10.18 Purchase Agreement dated July 1, 1995 between the Company and
William T. Hess*
10.19 Letter Amendment dated November 8, 1996 between the Company,
Terri N. Hess and Thomas L. Lackman*
23.1 Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation*
23.2 Consent of Stonefield Josephson Accountancy Corporation
24.1 Powers of Attorney*
99.1 Form of Escrow Agreement between the Company and Millennium Bank*
99.2 Form of Subscription Agreement*
- ---------------
* Previously filed.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
II-4
<PAGE>
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registration pursuant to Section 13 or Section 15(d) of
the Exchange Act that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described under Item 24, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing Form SB-2 and authorized this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in San
Francisco, California, on this 5th day of February, 1997.
DECHTAR DIRECT INC.,
a California corporation
By: /s/ Terri N. Hess
-------------------------------
Terri N. Hess
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
/s/ Terri N. Hess Director, Chief Executive February 5, 1997
- ------------------------------ Officer, Secretary
Terri N. Hess (Principal Executive
Officer)
/s/ Thomas L. Lackman Director, President, Chief February 5, 1997
- ------------------------------ Financial Officer
Thomas L. Lackman (Principal Financial and
Accounting Officer)
* /s/ Brian Wright Director February 5, 1997
- ------------------------------
Brian Wright
*/s/ Melissa Shane Director February 5, 1997
- ------------------------------
Melissa Shane
*/s/ Andrew August Director February 5, 1997
- ------------------------------
Andrew August
*/s/ John C. Gibson Director February 5, 1997
- ------------------------------
John C. Gibson
*By Thomas L. Lackman, attorney-in-fact.
The undersigned, by signing his name hereto, does sign and execute this
Amendment to the Registration Statement pursuant to Powers of Attorney executed
by the above named officers and directors and previously filed with the
Securities and Exchange Commission.
February 5, 1997
By: /s/ Thomas L. Lackman
--------------------------------
Thomas L. Lackman
Attorney-In-Fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit Page No.
- ------- --------
3.1 Amended and Restated Articles of Incorporation of the Company
(including the Certificate of Determination with respect to the
Series B Convertible Preferred Stock)*
3.2 Bylaws of the Company*
4.1 Specimen of Stock Certificate*
5.1 Legal Opinion and Consent of Howard, Rice, Nemerovski, Canady,
Falk & Rabkin, A Professional Corporation*
9.1 Form of Irrevocable Voting Proxy (executed by Thomas L. Lackman on
September 25, 1995)*
9.2 Form of Irrevocable Voting Proxy (executed by each of Brian M.
Wright and Linda A. Hess on November 30, 1995)*
9.3 Form of Irrevocable Voting Proxy (executed by each of Melissa J.
Shane and Laurence E. Inman on December 1, 1995)*
10.1 Agreement of Lease dated April 4, 1994, between the Company and
Jane K. Molyneux Trust, as amended*
10.2 Agreement for Agency Services dated January 1, 1996 between the
Company and Voyages Catalog Group, Inc.*(1)
10.3 Agreement for Management Consulting Services dated January 1, 1996
between the Company and Voyages Catalog Group, Inc.*
10.4 Agreement for Catalog Request Fulfillment dated January 1, 1996
between the Company and Voyages Catalog Group, Inc.*
10.5 Equipment Rental Agreement commencing April 24, 1995 between the
Company and Voyages Catalog Group, Inc.*
10.6 Agreement for Order Entry and Front-End Processing dated January 1,
1996 between the Company and Voyages Catalog Group, Inc.*
10.7 Key Employee Incentive Stock Option Plan*
10.8 Form Key Employee Incentive Stock Option Agreement*
- ---------------
* Previously filed.
(1) Confidential treatment requested for portions of this Exhibit.
<PAGE>
Exhibit Page No.
- ------- --------
10.9 Letter dated April 12, 1996 from Thomas L. Lackman to Andrew August
detailing director compensation*
10.10 Incentive Stock Bonus Agreement between the Company and Brian
Wright, effective as of January 1, 1992*
10.11 Incentive Stock Repurchase Agreement between the Company and Brian
Wright, effective as of January 1, 1992*
10.12 Letter dated September 6, 1995 from Thomas L. Lackman to William T.
Hess detailing Mr. Lackman's compensation*
10.13 Director's Stock Option Agreement dated as of April 26, 1996
between the Company and Andrew August*
10.14 Director's Stock Option Agreement dated as of August 14, 1996
between the Company and John C. Gibson*
10.15 Executive Stock Option Agreement dated September 24, 1996 between
the Company and Melissa Shane*
10.16 Disbursement Request and Authorization dated July 29, 1996 between
the Company and Millennium Bank*
10.17 Executive Stock Option Agreement dated October 25, 1996 between the
Company and Thomas L. Lackman*
10.18 Purchase Agreement dated July 1, 1995 between the Company and
William T. Hess*
10.19 Letter Amendment dated November 8, 1996 between the Company,
Terri N. Hess and Thomas L. Lackman*
23.1 Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation*
23.2 Consent of Stonefield Josephson Accountancy Corporation
24.1 Powers of Attorney*
99.1 Form of Escrow Agreement between the Company and Millennium Bank*
99.2 Form of Subscription Agreement*
- ---------------
* Previously filed.
<PAGE>
EXHIBIT 23.2
<PAGE>
[LETTERHEAD]
CONSENT
Board of Directors
DechTar Direct, Inc.
245 Eleventh Street
San Francisco, California 94103
We consent to the use of our auditors' report dated August 15, 1996 and to
the reference to us as "Experts" in the registration statement and prospectus
of DechTar Direct, Inc.
/s/ Stonefield Josephson
Accountancy Corporation
San Francisco, California
February 5, 1997
