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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-28818
DECHTAR DIRECT INC.
(Exact name of small business issuer
as specified in its charter)
California 94-3100168
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
245 Eleventh Street, San Francisco, CA 94103
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (415) 863-3005
Former fiscal year ended on the fourth Wednesday in December
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes \X\ No \ \
As of July 31, 1997, there were issued and outstanding
12,887,000 shares of common stock of the issuer.
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DECHTAR DIRECT INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . Page No.
Balance Sheet at June 30, 1997 . . . . . . . . . . . . . . . . . 1
Statements of Income for the Three-Month
and the Six-Month Periods Ended June 30, 1997
and June 26, 1996 . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the
Six Months Ended June 30, 1997
and June 26, 1996 . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 9
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . 9
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 9
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECHTAR DIRECT INC.
BALANCE SHEET (UNAUDITED)
ASSETS
JUNE 30,
1997
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CURRENT ASSETS:
Cash $ 190,875
Accounts receivable, net 453,591
Due from affiliates 653,715
Prepaid marketing expense 1,039,719
Prepaid expenses 18,265
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Total current assets 2,356,165
PROPERTY AND EQUIPMENT, NET 934,659
OTHER ASSETS:
Mailing list development costs, net 1,488,026
Purchased mailing lists, net 307,634
Deferred stock offering costs 1,002,362
Deposits 37,142
Other assets 2,181
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Total other assets 2,837,345
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Total assets $6,128,169
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See accompanying notes to financial statements.
1
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DECHTAR DIRECT INC.
BALANCE SHEET (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30,
1997
-----------
CURRENT LIABILITIES:
Notes payable $ 572,701
Note payable, stockholder 10,251
Capital leases 32,534
Accounts payable and accrued expenses 2,617,952
Deferred income taxes 417,052
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Total current liabilities 3,650,490
NOTES PAYABLE 26,620
CAPITAL LEASES 38,879
DEFERRED REVENUE 672,997
DEFERRED INCOME TAXES 60,971
COMMON STOCK SUBJECT TO REDEMPTION,
1,680,000 SHARES AT JUNE 30, 1997 5,033
STOCKHOLDERS' EQUITY:
Common stock, 25,000,000 shares authorized,
11,207,000 shares issued and outstanding at
June 30, 1997 433,626
Preferred stock A, $10 par value, 10,000,000
shares authorized, 58,130 shares issued and
outstanding at June 30, 1997 474,478
Preferred stock B, $3 par value, 300,000 shares
authorized, 180,000 shares issued and
outstanding at June 30, 1997 533,978
Retained earnings 231,097
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Total stockholders' equity 1,678,212
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Total liabilities and stockholders' equity $6,128,169
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See accompanying notes to financial statements.
2
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DECHTAR DIRECT INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
JUNE 30, JUNE 26, JUNE 30, JUNE 26,
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue $2,040,109 $2,817,175 $4,264,916 $5,119,909
Cost of revenue 1,404,509 2,002,468 2,760,605 3,563,866
---------- ---------- ---------- -----------
Gross profit 635,600 814,707 1,504,311 1,556,043
Selling, general and
administrative expense 836,484 753,273 1,712,161 1,483,290
---------- ---------- ---------- -----------
Income (loss) from operations (200,884) 61,434 (207,850) 72,753
Interest expense, net 22,084 14,332 39,326 30,256
---------- ---------- ---------- -----------
Net income (loss) before income taxes (222,968) 47,102 (247,176) 42,497
Provision (benefit) for income taxes (87,981) 23,538 (95,117) 21,236
---------- ---------- ---------- -----------
Net income (loss) $ (134,987) $ 23,564 $ (152,059) $ 21,261
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net income (loss) per share $(0.01) $0.00 $(0.01) $0.00
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Weighted average common
shares outstanding 13,473,817 13,164,410 13,473,817 13,164,410
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
3
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DECHTAR DIRECT INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 26,
1997 1996
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CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income (loss) $ (152,059) $ 21,261
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization:
Mailing list development costs 163,125 125,128
Purchased mailing lists 32,877 32,877
Property and equipment 117,848 98,245
Deferred income taxes (benefit) (95,118) 20,436
Common stock issued as compensation - 10,500
Preferred stock issued for services rendered - 30,000
Bad debts 2,500 2,500
(Increase) decrease in operating assets:
Accounts receivable 55,639 (108,778)
Due from affiliates 27,977 (494,940)
Prepaid marketing expense 241,270 (580,735)
Prepaid expenses (1,245) 31,032
Deposits (2,952) (4,585)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 830,187 1,088,744
Deferred revenue (109,563) 97,238
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Net cash provided by operating activities 1,110,486 368,923
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CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Costs for development of mailing lists (232,875) (276,878)
Payments to acquire property and equipment (187,498) (161,011)
Payments from (advances to) stockholder (22,337) 44,840
Costs for purchases of mailing lists - (5,495)
Payments to acquire other assets - (2,087)
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Net cash used for investing activities (442,710) (400,631)
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See accompanying notes to financial statements.
4
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DECHTAR DIRECT INC.
STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
SIX MONTHS ENDED
-----------------------
JUNE 30, JUNE 26,
1997 1996
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CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Proceeds from notes payable $ 130,000 $ 100,000
Payments on notes payable (26,016) (265,887)
Payments on capital leases (19,033) (6,291)
Proceeds from issuance of preferred stock,
net of $0 and $47,529, respectively,
of stock offering costs 4,000 270,331
Common stock issuance costs (576,854) (118,150)
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Net cash used for financing activities (487,903) (19,997)
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Net increase (decrease) in cash 179,872 (51,705)
Cash at beginning of period 11,003 194,329
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Cash at end of period $ 190,875 $ 142,624
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 38,857 $ 29,788
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--------- ---------
Income taxes paid $ 800 $ 800
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SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Preferred stock issued for services rendered $ - $ 30,000
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--------- ---------
Common stock issued as compensation $ - $ 21,000
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Converted preferred stock to common stock $ - $ 400,000
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See accompanying notes to financial statements.
5
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DECHTAR DIRECT INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 26, 1996 AND JUNE 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of the Company without audit and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position at June 30,
1997, and the interim results of operations and cash flows for the six months
then ended. Certain reclassifications have been made in the financial
statements for the period ended June 26, 1996, to conform to the June 30, 1997,
presentation.
Accounting policies followed by the Company are described in Note 1 to the
audited financial statements included in the Company's special financial report
on Form 10-KSB for the year ended December 25, 1996. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted for
purposes of the financial statements. These quarterly financial statements
should be read in conjunction with the financial statements, including notes
thereto, for the year ended December 25, 1996.
The results of operations for the six-month periods herein presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - CHANGE IN FISCAL YEAR
On March 17, 1997, the Board of Directors changed the Company's fiscal year to
a calendar year. As a result, reporting for the six-month period ended June 30,
1997, includes the days December 26, 1996, through June 30, 1997. The change in
fiscal year has no material effect on the Company's balance sheet, statements of
income and statements of cash flows for the six-month periods ending June 30,
1997, and June 26, 1996, respectively.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information, this Quarterly Report on Form 10-QSB
contains forward-looking statements. These statements refer to, among other
things, liquidity and capital expenditures and are subject to risks and
uncertainties. Factors that could cause the Company's actual results to differ
materially from management's projections, estimates and expectations include,
but are not limited to, success and timing of the Company's current public
offering of securities, amount and timing of expenditures associated with such
public offering, and the factors identified under "Risk Factors--Business
Risks" in the Company's prospectus dated February 6, 1997.
THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THREE MONTHS ENDED JUNE 26, 1996
For the three-month period ended June 30, 1997, total revenues decreased 28% to
$2.0 million compared to $2.8 million for the three-month period ended June 26,
1996. Due to a decrease in the Company's catalog circulation, catalog request
program revenues decreased 30%, from $1.1 million to $761,000, and catalog ad
space revenues decreased 44%, from $313,000 to $176,000. Agency services
revenues decreased 24% for the quarter, from $1.2 million to $927,000, primarily
as a result of decreased print brokerage volume offset in part by increases in
consulting and order processing fees. List rental revenue was approximately
$138,000 in both quarters. Other revenues decreased 24%, from $49,000 to
$38,000, due primarily to a decrease in audiotext advertising sales offset in
part by an increase in Internet revenue from the Company's Web site.
Cost of revenues decreased 30%, from approximately $2.0 million for the three-
month period ended June 26, 1996, to $1.4 million for the three-month period
ended June 30, 1997. Gross profit margins increased from 29% in the second
quarter of 1996 to 31% in the second quarter of 1997, primarily because of an
increase in consulting and order processing revenues, which typically have
higher margins, and a decrease in print brokerage revenues.
In the second quarter of 1997, selling, general and administrative expense
increased 11% to $836,000 compared to $753,000 for the second quarter of 1996.
This was attributable primarily to increases in payroll expense and travel
costs.
The Company incurred a net loss of $134,987 for the three-month period ended
June 30, 1997, compared to net income of $23,564 for the three-month period
ended June 26, 1996.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 26, 1996
Total revenues for the first six months of 1997 were approximately $4.3 million,
a decrease of 17% from revenues of $5.1 million for the first six months of
1996. Catalog request program revenues decreased 17%, from $2.1 million to $1.8
million, due primarily to a decrease in the quantity of catalogs mailed by the
Company. Catalog ad space revenues decreased 41%, from $447,000 to $262,000,
primarily because of the same decrease in catalog circulation. Agency services
revenues decreased 12%, from $2.2 million to $1.9 million, as a result of a
decrease in print brokerage volume, partially offset by increases in consulting
and order processing fees. List rental revenue decreased 16%, from $293,000 to
$246,000, due primarily to a decrease in average order size in the first three
months of 1997. Other revenues
7
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decreased 11%, from $85,000 to $75,000, due primarily to decreases in
audiotext advertising sales, offset in part by an increase in Internet
revenues.
Cost of revenues decreased 23%, from approximately $3.6 million for the first
six months of 1996 to $2.8 million for the first six months of 1997, while gross
profit margins increased from 30% in 1996 to 35% in 1997. Margins increased in
the first six months of 1997 primarily because of an increase in consulting and
order processing revenues, which typically have higher margins, and a decrease
in print brokerage revenues.
Selling, general and administrative expense increased 15% from $1.5 million for
the first six months of 1996 to $1.7 million for the first six months of 1997.
This was attributable primarily to increases in payroll expense and travel
costs.
The Company incurred a net loss of $152,059 for the first six months of 1997
compared to net income of $21,261 for the first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased 8% from $5.6 million as of June 26, 1996, to $6.1 million
as of June 30, 1997, while total liabilities increased 6% from $4.2 million as
of June 26, 1996, to $4.4 million as of June 30, 1997. Current assets decreased
$790,000, or 25%, from June 26, 1996, to June 30, 1997, while current
liabilities increased $23,000, or 1%. Total working capital remained negative,
declining by $813,000 from a negative $482,000 as of June 26, 1996, to a
negative $1.3 million as of June 30, 1997. This was attributable to a decrease
in prepaid marketing costs and an increase in the current portion of notes
payable.
Total stockholders' equity rose approximately 16% from $1.5 million as of June
26, 1996, to $1.7 million as of June 30, 1997, primarily as a result of the sale
of Series B Convertible Preferred Stock. The Company's debt-to-equity ratio
improved from 2.9 as of June 26, 1996, to 2.7 as of June 30, 1997.
The Company has no material capital expenditure commitments as of June 30, 1997.
However, the Company expects that its capital expenditures will increase as the
Company's employee base continues to grow. The Company expects to be able to
fund its working capital requirements with a combination of cash flows from
operations, normal trade credit, debt and equity financing arrangements and
continued use of lease financing.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - Not Applicable -
8
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ITEM 2. CHANGES IN SECURITIES
- - Not Applicable -
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not Applicable -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the stockholders of DechTar Direct, Inc. was held on April
22, 1997. An election was held for the six members of the Board of Directors,
as authorized by the corporation's bylaws. The following individuals were
unanimously elected to the Board of Directors:
Terri Nicole Hess
Thomas Lackman
Brian Wright
Melissa Shane
Andrew August
John Gibson
ITEM 5. OTHER INFORMATION
- - Not Applicable -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None.
9
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DECHTAR DIRECT INC.
Name Title Date
---- ----- ----
/S/ Terri N. Hess Chief Executive Officer August 11, 1997
- ---------------------
Terri N. Hess
/S/ Thomas L. Lackman President, Chief Financial Officer August 11, 1997
- ---------------------
Thomas L. Lackman
10
