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 September 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
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 October 31, 1997, there were issued and outstanding
12,887,000 shares of common stock of the issuer.
<PAGE>
DECHTAR DIRECT INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Balance Sheet at September 30, 1997............................. 1
Statements of Income for the Three-Month
and the Nine-Month Periods Ended September 30, 1997
and September 25, 1996.......................................... 3
Statements of Cash Flows for the
Nine Months Ended September 30, 1997
and September 25, 1996.......................................... 4
Notes to Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 10
Item 2. Changes in Securities........................................... 10
Item 3. Defaults Upon Senior Securities................................. 10
Item 4. Submission of Matters to a Vote of
Security Holders................................................ 10
Item 5. Other Information............................................... 10
Item 6. Exhibits and Reports on Form 8-K................................ 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECHTAR DIRECT INC.
Balance Sheet (Unaudited)
ASSETS
September 30,
1997
-------------
Current assets:
Cash $ 7,702
Accounts receivable, net 424,699
Due from affiliates 622,755
Prepaid marketing expense 1,043,360
Prepaid expenses 15,868
----------
Total current assets 2,114,384
Property and equipment, net 919,448
Other assets:
Mailing list development costs, net 1,414,318
Purchased mailing lists, net 291,196
Deferred stock offering costs 1,093,501
Deposits 41,499
Deferred income taxes 0
Other assets 2,431
----------
Total other assets 2,842,945
----------
Total assets $5,876,777
==========
See accompanying notes to financial statements.
1
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DECHTAR DIRECT INC.
Balance Sheet (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
1997
-------------
Current liabilities:
Notes payable $ 521,546
Note payable, stockholder 8,422
Capital leases 28,224
Accounts payable and accrued expenses 3,035,020
Deferred income taxes 219,880
-----------
Total current liabilities 3,813,092
Notes payable 24,245
Capital leases 33,104
Deferred revenue 633,500
Deferred income taxes 35,461
Common stock subject to redemption,
1,680,000 shares at September 30, 1997 5,033
Stockholders' equity:
Common stock, 25,000,000 shares authorized,
11,207,000 shares issued and outstanding at
September 30, 1997 433,626
Preferred stock A, $10 par value, 10,000,000
shares authorized, 58,130 shares issued and
outstanding at September 30, 1997 474,478
Preferred stock B, $3 par value, 300,000 shares
authorized, 180,000 shares issued and
outstanding at September 30, 1997 533,978
Retained earnings (109,740)
-----------
Total stockholders' equity 1,332,342
-----------
Total liabilities and stockholders' equity $ 5,876,777
===========
See accompanying notes to financial statements.
2
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<TABLE>
DECHTAR DIRECT INC.
Statements of Income (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 1,722,072 $ 1,906,321 $ 5,988,576 $ 7,026,230
Cost of revenue 1,396,882 1,490,179 4,214,810 5,054,045
------------ ------------ ------------ ------------
Gross profit 325,190 416,142 1,773,766 1,972,185
Selling, general and
administrative expense 791,393 527,446 2,504,451 2,010,736
------------ ------------ ------------ ------------
Income (loss) from operations (466,203) (111,304) (730,685) (38,551)
Interest expense, net 25,219 19,945 63,683 50,201
------------ ------------ ------------ ------------
Net income (loss) before income taxes (491,422) (131,249) (794,368) (88,752)
Provision (benefit) for income taxes (216,944) 49,277 (312,062) 28,041
------------ ------------ ------------ ------------
Net income (loss) $ (274,478) $ (81,972) $ (482,306) $ (60,711)
============ ============ ============ ============
Net income (loss) per share $ (0.01) $ 0.00 $ (0.01) $ 0.00
============ ============ ============ ============
Weighted average common
shares outstanding 13,473,848 13,216,089 13,473,848 13,216,089
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
3
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DECHTAR DIRECT INC.
Statements of Cash Flows (Unaudited)
Nine Months Ended
--------------------------
Sept. 30, Sept. 25,
1997 1996
----------- -----------
Cash flows provided by (used for)
operating activities:
Net income (loss) $ (482,306) $ (60,711)
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization:
Mailing list development costs 247,725 200,673
Purchased mailing lists 49,315 49,311
Property and equipment 184,768 151,557
Deferred income taxes (benefit) (312,062) (28,841)
Common stock issued as compensation -- 21,000
Preferred stock issued for services rendered -- 30,000
Bad debts 2,500 2,500
(Increase) decrease in operating assets:
Accounts receivable 99,472 (183,748)
Due from affiliates 58,936 (366,805)
Prepaid marketing expense 388,170 14,284
Prepaid expenses 1,152 22,613
Deposits (7,309) (5,168)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 1,096,456 170,995
Deferred revenue (149,060) 454,998
----------- -----------
Net cash provided by operating activities 1,177,757 472,658
----------- -----------
Cash flows provided by (used for)
investing activities:
Costs for development of mailing lists (274,777) (482,600)
Payments to acquire property and equipment (239,207) (316,349)
Payments from (advances to) stockholder (24,166) 60,010
Costs for purchases of mailing lists -- (5,495)
Payments to acquire other assets (250) (2,087)
----------- -----------
Net cash used for investing activities (538,400) (746,521)
----------- -----------
(CONTINUED)
See accompanying notes to financial statements.
4
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DECHTAR DIRECT INC.
Statements of Cash Flows (Unaudited) - continued
Nine Months Ended
----------------------
Sept. 30, Sept. 25,
1997 1996
--------- ---------
Cash flows provided by (used for)
financing activities:
Proceeds from notes payable $ 90,000 $ 400,000
Payments on notes payable (39,547) (386,436)
Payments on capital leases (29,118) (18,072)
Payments on notes payable, shareholder -- (12,000)
Proceeds from issuance of preferred stock,
net of $0 and $47,529, respectively,
of stock offering costs 4,000 490,830
Common stock issuance costs (667,993) (306,926)
--------- ---------
Net cash used for financing activities (642,658) 167,396
--------- ---------
Net increase (decrease) in cash (3,301) (106,467)
Cash at beginning of period 11,003 194,329
--------- ---------
Cash at end of period $ 7,702 $ 87,862
========= =========
Supplemental Disclosures of
Cash Flow Information:
Interest paid $ 80,570 $ 72,161
========= =========
Income taxes paid $ 800 $ 800
========= =========
Supplemental Disclosure of Non-Cash
Financing Activities:
Preferred stock issued for services rendered $ -- $ 30,000
========= =========
Common stock issued as compensation $ -- $ 21,000
========= =========
Converted preferred stock to common stock $ -- $ 400,000
========= =========
See accompanying notes to financial statements.
5
<PAGE>
DECHTAR DIRECT INC.
Notes to Financial Statements (Unaudited)
For the Three and Nine Month Periods Ended
September 25, 1996 and September 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 September 30,
1997, and the interim results of operations and cash flows for the nine months
then ended. Certain reclassifications have been made in the financial statements
for the period ended September 25, 1996, to conform to the September 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 nine-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 nine-month period ended September
30, 1997, includes the days December 26, 1996, through September 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 nine-month periods
ending September 30, 1997, and September 25, 1996, respectively.
Note 3 - Correction of Error
During the third quarter of 1997, it was discovered that certain 1996 printing
costs for catalogs had not been billed to the Company or recorded on the
Company's books. Correction of this error has the effect of restating retained
earnings and other balance sheet amounts as follows:
6
<PAGE>
RETAINED EARNINGS AT BEGINNING OF YEAR
As previously reported, December 26, 1996 $ 383,156
Understatement of accounts payable and accrued expenses (150,800)
Overstatement of current portion of deferred income tax liability 71,580
Understatement of long-term deferred income tax liability (65,843)
Understatement of accounts receivable 14,941
Understatement of prepaid marketing expense 150,541
Overstatement of mailing list development costs (31,009)
---------
Retained earnings as adjusted, December 31, 1996 372,566
Net income, September 30, 1997 (482,306)
---------
Retained earnings at September 30, 1997 $(109,740)
=========
7
<PAGE>
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 September 30, 1997, Compared to Three Months Ended September
25, 1996
Total revenues for the three-month period ended September 30, 1997, decreased
10% to $1.7 million compared to $1.9 million for the three-month period ended
September 25, 1996, primarily due to a disruption in the Company's catalog
mailing schedule. The disruption was caused during the quarter when the
Company's primary printing vendor unexpectedly modified previously available
credit terms following a change of ownership. This event required the Company to
seek a new printer on short notice for its Fall mailing campaign at a time of
year when few catalog printers have schedule availability. In addition, the
Company's secondary printer broker filed Chapter 11 bankruptcy during the
quarter, further delaying the Company's catalog mailing schedule. These events
contributed to a decrease in the Company's catalog circulation. Resulting
catalog request program revenues decreased 42%, from $883,000 to $513,000 for
the quarter. Catalog advertising space revenues decreased 65%, from $225,000 to
$78,000, due to the reduced catalog mailings. Agency services revenues increased
66% for the quarter, from $602,000 to $1.0 million, primarily as a result of
increases in consulting fees, order processing fees and print brokerage revenue.
List rental revenue decreased 34% for the quarter from $132,000 to $87,000 due
to a drop in new names related to declines in catalog circulation and space
advertising. Other revenues decreased 32%, from $64,000 to $43,000, due
primarily to a decrease in audiotext advertising sales, offset in part by an
increase in Internet revenue.
Cost of revenues decreased 6%, from approximately $1.5 million for the
three-month period ended September 25, 1996, to $1.4 million for the three-month
period ended September 30, 1997. Gross profit margins decreased from 22% in the
third quarter of 1996 to 19% in the third quarter of 1997, due primarily to
fluctuations in sales mix.
In the third quarter of 1997 selling, general and administrative expense
increased 50% to $791,000 compared to $527,000 for the third quarter of 1996.
This primarily was due to increases in payroll expense and professional fees.
The Company incurred a net loss of $274,478 for the three-month period ended
September 30, 1997, compared to a net loss of $81,972 for the three-month period
ended September 25, 1996.
Nine Months Ended September 30, 1997, Compared to Nine Months Ended September
25, 1996
Total revenues for the first nine months of 1997 were approximately $6.0
million, a decrease of 15% from revenues of $7.0 million for the first nine
months of 1996. Catalog request program revenues decreased 24%, from $3.0
million to $2.3 million, due primarily to a decrease in the quantity of catalogs
mailed by the Company, as explained above. Catalog advertising space revenues
decreased 54%, from
8
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$746,000 to $340,000, primarily because of a 33% decrease in catalog circulation
and a 16% decrease in space advertising. Agency services revenues increased 8%,
from $2.7 million to $2.9 million, as a result of increases in brokered
advertising space revenue, consulting fees and order processing fees, partially
offset by a decrease in print brokerage volume. List rental revenue decreased
21%, from $425,000 to $334,000, due to a drop in new names related to declines
in catalog circulation and space advertising. Other revenues decreased 21%, from
$149,000 to $119,000, due primarily to decreases in audiotext advertising sales,
offset in part by an increase in Internet revenues.
Cost of revenues decreased 17%, from approximately $5.1 million for the first
nine months of 1996 to $4.2 million for the first nine months of 1997, while
gross profit margins increased from 28% in 1996 to 30% in 1997, due to changes
in the sales mix, including decreases in catalog program revenues and increases
in agency services revenues.
Selling, general and administrative expense increased 25% from $2.0 million for
the first nine months of 1996 to $2.5 million for the first nine months of 1997.
This was attributable primarily to increases in payroll expense, telephone and
travel costs.
The Company incurred a net loss of $482,306 for the first nine months of 1997
compared to a net loss of $60,711 for the first nine months of 1996.
Liquidity and Capital Resources
Total assets increased 8% from $5.4 million as of September 25, 1996, to $5.9
million as of September 30, 1997, while total liabilities increased 19% from
$3.8 million as of September 25, 1996, to $4.5 million as of September 30, 1997.
Current assets decreased $337,000, or 14%, from September 25, 1996, to September
30, 1997, while current liabilities increased $1,126,000, or 42%. Total working
capital remained negative, declining by $1.5 million from a negative $235,000 as
of September 25, 1996, to a negative $1.7 million as of September 30, 1997. This
was attributable to an increase in accounts payable and accrued expenses and a
decrease in prepaid marketing costs.
Total stockholders' equity decreased approximately 16% from $1.6 million as of
September 25, 1996, to $1.3 million as of September 30, 1997, primarily as a
result of operating losses incurred during 1997. The Company's debt-to-equity
ratio increased from 2.4 as of September 25, 1996, to 3.4 as of September 30,
1997.
The Company has no material capital expenditure commitments as of September 30,
1997.
Due to significant operating losses and the inability to secure debt or equity
financing on acceptable terms during the first nine months of 1997, the
Company's working capital has declined to a negative $1.7 million. The Company
anticipates that it will not be able to fund its working capital requirements
solely from cash flows from operations during the fourth quarter of 1997 and
through 1998. Therefore, the Company is seeking new debt and equity financing,
including its in-progress public offering and negotiations with other potential
sources of equity capital. There can be no assurance that the Company will be
successful in obtaining adequate financing. Failure to obtain such financing
could have a material adverse effect upon the Company's business, results of
operations and financial condition.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - Not Applicable -
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
- - Not Applicable -
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.
10
<PAGE>
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 November 11, 1997
- -----------------
Terri N. Hess
/S/ Thomas L. Lackman President, Chief Financial Officer November 11, 1997
- ---------------------
Thomas L. Lackman
11
