<PAGE>
SPECIAL FINANCIAL REPORT
ON FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
[ ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
* Special Financial Report Filed Pursuant to Rule 15d-2 of the Securities
Exchange Act of 1934--Contains only Financial Statements for the fiscal
year ended December 25, 1996.
Commission File Number: 0-28818
----------------------
DECHTAR DIRECT INC.
-------------------
(Exact name of registrant as specified in its charter)
California 94-3100168
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
245 11th Street, San Francisco, California 94103
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 863-3005
Securities registered pursuant to Section 12(b) or 12(g) of the Exchange Act:
None
---------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State registrant's revenues for its most recent fiscal year: $9,229,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a date within the past 60 days: N/A
(initial public offering not completed)
The number of shares outstanding of the registrant's Common Stock was 12,887,000
as of April 15, 1997.
-1-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 22, 1997 DECHTAR DIRECT INC.
By: /s/ Terri N. Hess
---------------------------------
Terri N. Hess
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Terri N. Hess Director, Chief Executive April 22, 1997
- ------------------------ Officer, Secretary
Terri N. Hess (principal Executive Officer)
/s/ Thomas L. Lackman Director, President, Chief April 22, 1997
- ------------------------ Financial Officer (Principal
Thomas L. Lackman Financial and Accounting
Officer)
* /s/ Brian M. Wright Director April 22, 1997
- ------------------------
Brian M. Wright
* /s/ Melissa J. Shane Director April 22, 1997
- ------------------------
Melissa J. Shane
* /s/ Andrew A. August Director April 22, 1997
- ------------------------
Andrew A. August
* /s/ John C. Gibson Director April 22, 1997
- ------------------------
John C. Gibson
*By: /s/ Thomas L. Lackman
-------------------------
Attorney-in-Fact
-2-
<PAGE>
DECHTAR DIRECT, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . 6
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . 10
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 27, 1995, and December 25, 1996, 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 27, 1995, and December 25, 1996, 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
March 7, 1997
2
<PAGE>
DECHTAR DIRECT, INC.
BALANCE SHEETS
ASSETS
DECEMBER 27, DECEMBER 25,
1995 1996
------------ ------------
CURRENT ASSETS:
Cash $ 194,329 $ 11,003
Accounts receivable, net 245,585 511,730
Due from affiliates 353,090 681,691
Prepaid marketing expense 1,208,311 1,280,989
Prepaid expenses 46,029 17,020
------------ ------------
Total current assets 2,047,344 2,502,433
PROPERTY AND EQUIPMENT, NET 617,952 865,009
OTHER ASSETS:
Mailing list development costs, net 1,128,082 1,418,276
Purchased mailing lists, net 400,769 340,510
Deferred stock offering costs - 425,508
Deposits 28,600 34,190
Other assets - 2,181
------------ ------------
Total other assets 1,557,451 2,220,665
------------ ------------
Total assets $ 4,222,747 $ 5,588,107
------------ ------------
------------ ------------
See accompanying independent auditors' report and notes to financial statements.
3
<PAGE>
DECHTAR DIRECT, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 27, DECEMBER 25,
1995 1996
------------ ------------
CURRENT LIABILITIES:
Notes payable $ 241,579 $ 254,632
Note payable, stockholder 7,839 32,588
Capital leases 15,895 40,600
Accounts payable and accrued expenses 1,591,084 1,787,765
Deferred income taxes 484,722 514,584
----------- -----------
Total current liabilities 2,341,119 2,630,169
NOTES PAYABLE 352,755 240,705
CAPITAL LEASES 18,150 49,848
DEFERRED INCOME TAXES 183,212 58,554
DEFERRED REVENUE 208,176 782,560
COMMON STOCK SUBJECT TO REDEMPTION,
1,680,000 SHARES AT DECEMBER 27, 1995, AND
DECEMBER 25, 1996 5,033 5,033
STOCKHOLDERS' EQUITY:
Common stock, 25,000,000 shares authorized,
10,920,000 and 11,207,000 shares issued
and outstanding at December 27, 1995, and
December 25, 1996, respectively 12,626 433,626
Preferred stock A, $10 par value, 10,000,000
shares authorized, 60,630 and 57,730 shares
issued and outstanding at December 27, 1995,
and December 25, 1996 552,691 470,478
Preferred stock B, $3 par value, 300,000 shares
authorized, 180,000 shares issued and
outstanding at December 25, 1996 - 533,978
Retained earnings 548,985 383,156
----------- -----------
Total stockholders' equity 1,114,302 1,821,238
----------- -----------
Total liabilities and stockholders' equity $ 4,222,747 $ 5,588,107
----------- -----------
----------- -----------
See accompanying independent auditors' report and notes to financial statements.
4
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF INCOME
DECEMBER 27, DECEMBER 25,
1995 1996
------------ ------------
Revenue $7,742,585 $9,229,063
Cost of revenue 5,038,230 6,650,490
---------- ----------
Gross profit 2,704,355 2,578,573
Selling, general and
administrative expense 2,311,497 2,768,966
---------- ----------
Income (loss) from operations 392,858 (190,393)
Interest expense, net 163,765 69,428
---------- ----------
Net income (loss) before income taxes 229,093 (259,821)
Provision (benefit) for income taxes 107,920 (93,992)
---------- ----------
Net income (loss) $ 121,173 $ (165,829)
---------- ----------
---------- ----------
Net income (loss) per share $ 0.01 $ (0.01)
---- -----
---- -----
Common equivalent shares outstanding
for 1995; weighted average common
shares outstanding for 1996 12,600,000 13,234,789
---------- ----------
---------- ----------
See accompanying independent auditors' report and notes to financial statements.
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 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
(CONTINUED ON NEXT PAGE)
See accompanying independent auditors' report and notes to financial statements.
6
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<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, year ended
December 25, 1996 - - - - - - $(165,829)
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 - - 34,100 341,000 - - -
Issuance of Series B
preferred stock -
cash - - - - 180,000 $540,000 -
Conversion of Series A
preferred stock to
common stock 280,000 400,000 (40,000) (400,000) - - -
Stock offering costs - - - (53,213) - (6,022) -
---------- --------- ----------- --------- ----------- --------- ---------
Balance, December 25,
1996 11,207,000 $433,626 57,730 $470,478 180,000 $533,978 $383,156
---------- --------- ----------- --------- ----------- --------- ---------
---------- --------- ----------- --------- ----------- --------- ---------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
7
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 27, DECEMBER 25,
1995 1996
------------ ------------
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income (loss) $ 121,173 $ (165,829)
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization:
Mailing list development costs 198,895 276,174
Purchased mailing lists 38,744 65,753
Property and equipment 185,230 208,458
Deferred income taxes 107,120 (94,796)
Loss on asset disposal 11,522 9,333
Preferred stock issued for services rendered - 30,000
Common stock issued as compensation 5,525 21,000
Bad debts 6,705 8,783
(Increase) decrease in operating assets:
Accounts receivable (100,371) (274,928)
Due from affiliates (296,966) (328,601)
Prepaid marketing expense (183,106) (72,678)
Prepaid expenses 84,763 29,009
Deposits 6,000 (5,590)
Increase in operating liabilities:
Accounts payable and accrued expenses 661,629 196,681
Deferred revenue 87,262 574,384
---------- ----------
Net cash provided by operating activities 934,125 477,153
---------- ----------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Costs for development of mailing lists (423,462) (566,368)
Payments to acquire property and equipment (419,938) (396,827)
Advances to (payments from) stockholder (197,648) 36,749
Costs for purchases of mailing lists (45,637) (5,494)
Proceeds from sale of property and equipment 10,000 15,450
Payments to acquire other assets - (2,181)
---------- ----------
Net cash used for investing activities (1,076,685) (918,691)
---------- ----------
(CONTINUED ON NEXT PAGE)
See accompanying independent auditors' report and notes to financial statements.
8
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
DECEMBER 27, DECEMBER 25,
1995 1996
------------ ------------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Proceeds from notes payable $ 444,000 $ 400,000
Payments on notes payable (149,800) (498,997)
Payments on notes payable, stockholder - (12,000)
Payments on capital leases (14,964) (27,048)
Proceeds from issuance of preferred stock,
net of $53,609 and $59,235, respectively,
of stock offering costs 26,391 821,765
Deferred stock offering costs - (425,508)
---------- ----------
Net cash provided by financing activities 305,627 258,212
---------- ----------
Net increase (decrease) in cash 163,067 (183,326)
Cash at beginning of period 31,262 194,329
---------- ----------
Cash at end of period $ 194,329 $ 11,003
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 168,733 $ 90,458
---------- ----------
---------- ----------
Income taxes paid $ 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 $ -
---------- ----------
---------- ----------
Capital lease obligations incurred $ 20,894 $ 83,451
---------- ----------
---------- ----------
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
---------- ----------
---------- ----------
9
<PAGE>
DECHTAR DIRECT, INC.
STATEMENTS OF CASH FLOWS
See accompanying independent auditors' report and notes to financial statements.
10
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
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 57% for 1995 and 43% for 1996 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 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.
11
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Statement of
Financial Standards No. 121 (Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of). 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 1995 and 1996, the Company's largest customer, an entity owned
by the Company's majority stockholder, accounted for approximately 27% and 39%,
respectively, of the total revenue for the year. Services to this entity are
billed monthly and are paid in accordance with standard credit terms.
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 were excluded because their effect
was immaterial.
12
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Beginning with 1996, the Company discloses 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 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.
RECLASSIFICATION
Certain reclassifications have been made to the December 27, 1995, financial
statements in order to conform to the 1996 presentation.
NOTE 2 - RELATED PARTIES
Due from affiliates year-end balances consists of the following:
1995 1996
---- ----
Active company owned by the majority
stockholder, for services rendered $324,803 $664,604
Inactive company owned by the majority
stockholder 18,287 17,087
Active company owned by the majority
stockholder, for note payable 10,000 -
-------- --------
13
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
$353,090 $681,691
-------- --------
-------- --------
NOTE 2 - RELATED PARTIES (CONTINUED)
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 stockholder 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 and $3,545,958 during 1995 and
1996, respectively. 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 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:
1995 1996
---- ----
Media advertising expenditures $15,509,166 $19,770,869
Less accumulated amortization 14,300,855 18,489,880
----------- -----------
$ 1,208,311 $ 1,280,989
----------- -----------
----------- -----------
Amortization totaled $3,319,369 and $4,189,025 for 1995 and 1996, respectively.
14
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1995 1996
---- ----
Computer equipment and software $ 493,188 $ 880,388
Equipment 208,052 241,852
Leasehold improvements 145,279 156,562
Furniture and fixtures 137,396 143,194
Automobiles 58,415 15,659
----------- -----------
1,042,330 1,437,655
Less accumulated depreciation and amortization 424,378 572,646
----------- -----------
$ 617,952 $ 865,009
----------- -----------
----------- -----------
NOTE 5 - MAILING LISTS
Mailing lists consist of the following:
1995 1996
---- ----
Developed mailing lists:
Beginning balance $ 1,123,795 $ 1,547,253
----------- -----------
External marketing costs capitalized:
Advertising - space ads 211,425 279,457
List rental and insert fees 64,321 113,804
Printing and mailing 56,742 48,725
Catalog postage 34,265 79,186
Internal direct marketing costs capitalized:
Payroll 39,622 31,415
Office, occupancy and depreciation 17,087 13,785
----------- -----------
Total costs capitalized 423,462 566,372
----------- -----------
Less accumulated amortization:
Beginning balance 220,280 419,175
Current amortization 198,895 276,174
----------- -----------
Accumulated amortization 419,175 695,349
----------- -----------
Ending balance $ 1,128,082 $ 1,418,276
----------- -----------
----------- -----------
(CONTINUED ON NEXT PAGE)
15
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
NOTE 5 - MAILING LISTS (CONTINUED)
1995 1996
---- ----
Purchased mailing lists:
Beginning balance $ 131,877 $ 499,514
Additions 367,637 5,494
----------- -----------
499,514 505,008
----------- -----------
Less accumulated amortization:
Beginning balance 60,001 98,745
Current amortization 38,744 65,753
----------- -----------
98,745 164,498
----------- -----------
Ending balance $ 400,769 $ 340,510
----------- -----------
----------- -----------
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 25, 1996, the remaining unpaid amount was $32,588.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
1995 1996
---- ----
Unsecured note payable to a partnership,
interest only at 11% payable monthly, due
January 1998. $ 152,930 $ 152,930
Unsecured note payable to an individual,
interest only at 11% payable monthly, due
January 1998. 125,000 50,000
Bank line of credit, secured by substantially
all Company assets under the loan agreement.
Interest at prime plus two percentage points
payable monthly, due July 1997. Borrowings
are guaranteed by the majority stockholder and
a company owned by the majority stockholder. 99,000 200,000
16
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
NOTE 6 - NOTES PAYABLE (CONTINUED)
1995 1996
---- ----
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. $ 58,333 $ -
Unsecured note payable to an individual,
payable in monthly installments of $1,007,
including interest at 10%, due December 2000. 47,372 39,685
Unsecured note payable to trust, payable in
monthly installments of $1,234, including
interest at 11%, due April 1998. 40,000 19,323
Unsecured notes payable to an individual and
a trust, payable in monthly installments totaling
$1,797, including interest at 10%, due
January 1998. 38,956 22,061
Unsecured notes payable to an individual,
payable in monthly installments of $997,
including interest at 10%, due January 1998. 21,600 11,338
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. 6,944 -
Note payable to bank, secured by automobile,
monthly payment of $232 including interest,
due August 1997. 4,199 -
--------- ---------
594,334 495,337
Less current maturities 241,579 254,632
--------- ---------
$ 352,755 $ 240,705
--------- ---------
--------- ---------
The following schedule summarizes the aggregate maturities of the notes payable
at December 25, 1996:
YEAR ENDING DECEMBER AMOUNT
-------------------- ------
1997 $ 254,632
1998 218,893
17
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
1999 10,363
2000 11,449
---------
$ 495,337
---------
---------
NOTE 7 - COMMON STOCK SUBJECT TO REDEMPTION
As part of the President and Chief Operating Officer's employment agreement, he
was granted an option to purchase 1,120,000 shares of common stock at $1.43 per
share (as adjusted for subsequent stock splits). The option to purchase these
shares expires on October 1, 2000. The Company is obligated to repurchase these
shares in the event of the termination of his employment 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.
In addition, as part of the Vice President Operations and New Technology
officer's incentive stock repurchase agreement, he was granted 560,000 shares of
common stock (as adjusted for subsequent stock splits). The Company is
obligated to repurchase these shares based upon a formula related to the then
fair market value of the shares, and depending upon the circumstances of his
termination.
NOTE 8 - CAPITAL LEASES PAYABLE
Obligations under capital leases represent the present value of future net
minimum lease payments under agreements with a cost of $55,650 and $139,100 and
accumulated depreciation of $16,153 and $34,855 as of December 27, 1995, and
December 25, 1996, 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 27, 1995, and December 25, 1996:
YEAR ENDING DECEMBER 1996
-------------------- ----
1997 $ 51,450
1998 30,186
1999 26,845
--------
Total minimum lease payments 108,481
Less amount representing interest 18,033
--------
Present value of net minimum lease payments 90,448
Less current maturities 40,600
--------
Non-current maturities $ 49,848
--------
--------
NOTE 9 - PREFERRED STOCK
18
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
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
NOTE 9 - PREFERRED STOCK (CONTINUED)
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.
During August 1996, 180,000 shares of Preferred Stock were designated as Series
B Convertible Preferred Stock.
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.
NOTE 10 - 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 -
Stock subject to redemption (240,000) (1,680,000)
---------- ----------
Balance, December 27, 1995 1,560,000 10,920,000
---------- ----------
---------- ----------
19
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
NOTE 11 - 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
such 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. 195,706 shares were
outstanding under this Plan at December 25, 1996.
Pursuant to Financial Accounting Standard No. 123, the following information is
set forth:
Options outstanding, beginning of year 1,120,000
Options granted, less terminations of 30,191 shares 495,706
----------
Options outstanding, end of year
(1,148,000 of which were exercisable) 1,615,706
----------
----------
Fair value per share on grant date of
stock awarded to employees $1.14-$3.00
WEIGHTED
AVERAGE EXERCISE OPTIONS
OPTIONS REMAINING PRICE EXERCISABLE AT
OUTSTANDING CONTRACTUAL LIFE RANGE DECEMBER 25, 1996
----------- ---------------- -------- -----------------
1,120,000 3.75 Years $1.43 1,120,000
300,000 10.0 Years $3.00 -
195,706 2.5-4.5 Years $1.14-$3.00 28,000
--------- ---------
20
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
1,615,706 1,148,000
--------- ---------
--------- ---------
NOTE 11 - EMPLOYEE STOCK OPTION PLAN (CONTINUED)
1995 1996
---- ----
Net income (loss) As reported $ 121,173 $(165,829)
--------- ---------
--------- ---------
Pro forma $ (54,736) $(400,804)
--------- ---------
--------- ---------
Net income (loss) per share As reported $ 0.01 $ (0.01)
--------- ---------
--------- ---------
Pro forma $ 0.01 $ (0.03)
--------- ---------
--------- ---------
Compensation cost recognized Pro forma $ 80,080 $ 408,185
--------- ---------
--------- ---------
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 $1.43 per
share and expire on May 23, 1999. Warrants to purchase 28,000 shares of Common
Stock were outstanding as of December 25, 1996.
NOTE 12 - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
1995 1996
---- ----
Current tax expense - California $ 800 $ 800
Deferred tax expense (benefit) - federal 77,432 (74,296)
Deferred tax expense (benefit) - California 29,688 (20,496)
--------- ---------
$ 107,920 $ (93,992)
--------- ---------
--------- ---------
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:
1995 1996
---- ----
Tax at highest federal statutory rate $ 77,892 $ (88,339)
Net effect of California tax 14,062 (15,432)
Permanent differences:
21
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
Meals and entertainment 9,897 7,107
Officers' life insurance 1,796 2,672
Net operating loss carryforward limitations 4,273 -
--------- ---------
Provision for income taxes $ 107,920 $ (93,992)
--------- ---------
--------- ---------
NOTE 12 - INCOME TAXES (CONTINUED)
The major components of deferred tax assets and liabilities consist of the
following:
1995 1996
---- ----
Deferred tax assets:
Net operating loss carryforward $ 256,965 $ 500,513
California tax 62,730 54,554
Depreciation 24,032 41,139
----------- -----------
343,727 596,206
----------- -----------
Deferred tax liabilities:
Prepaid marketing expense (523,199) (555,230)
Mailing list development costs (488,462) (614,114)
----------- -----------
(1,011,661) (1,169,344)
----------- -----------
$ (667,934) $ (573,138)
----------- -----------
----------- -----------
Federal and state deferred taxes:
Current $ (484,722) $ (514,584)
Long-term (183,212) (58,554)
----------- -----------
$ (667,934) $ (573,138)
----------- -----------
----------- -----------
The Company has available approximately $1,200,000 and $450,000 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 13 - 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 25, 1996:
YEAR ENDING DECEMBER AMOUNT
-------------------- ------
1997 $ 152,400
1998 153,600
1999 188,800
2000 16,000
---------
$ 510,800
---------
---------
22
<PAGE>
DECHTAR DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended December 27, 1995 and December 25, 1996
Rent expense totaled $145,463 and $163,695 for 1995 and 1996, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 14 - SUBSEQUENT EVENTS
The Company's offering of its Common Stock, as registered with the Securities
and Exchange Commission, became effective on February 6, 1997. Deferred stock
offering costs of $425,508 will be charged against the proceeds of the public
offering.
23
