UNITED STATES SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended May 31, 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 Number 000-21211
___________________
ML DIRECT INC.
(Name of small business issuer in its charter)
DELAWARE 13-3842020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3001 Executive Drive, Suite 120, Clearwater, Florida 34622
(Address of principal executive offices)
(813) 572-8703
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
Total number of shares of outstanding Common Stock as of July 3, 1997 was
4,224,000.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ML DIRECT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
May 31, 1997 November 30, 1996
------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 535,255 $ 2,562,227
Inventory 1,163,172 1,150,590
Accounts Receivable, Net 738,477 437,432
Accounts Receivable from Related Party 431,525 -
Prepaid Expenses 412,482 588,455
Prepaid Expenses to Related Party 22,500 -
----------- -----------
Total Current Assets 3,303,411 4,738,704
----------- -----------
FIXED ASSETS, NET 395,000 290,234
OTHER ASSETS
Organization Costs, Net 16,440 17,240
Unsecured Non-Transferable Convertible Promissory
Note Receivable, Net of Allowance for Loss of $500,000 - -
Security Deposit 85,000 130,400
Other 120,000 100,000
----------- -----------
Total Other Assets 221,440 247,640
----------- -----------
TOTAL ASSETS $ 3,919,851 $ 5,276,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 1,172,383 $ 1,162,359
Accrued Returns and Allowances 124,057 73,654
Accrued Expenses 174,022 133,840
Accrued Royalty to Related Party 191,329 108,517
----------- -----------
Total Current Liabilities 1,661,791 1,478,370
----------- -----------
COMMITMENTS - -
STOCKHOLDER'S EQUITY
Common Stock 422 422
Paid in Capital - Common 7,687,669 7,605,851
Retained Earnings (Deficit) (4,864,840) (3,146,815)
Deferred Compensation Expense (565,191) (661,250)
----------- -----------
Total Stockholder's Equity 2,258,060 3,798,208
----------- -----------
$ 3,919,851 $ 5,276,578
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
2
<PAGE>
ML DIRECT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Revenues $ 722,469 $ 59,618 $ 1,072,982 $ 88,842
Revenues from Related Party 756,729 - 1,190,729 -
----------- ----------- ----------- -----------
Net Revenues 1,479,198 59,618 2,263,711 88,842
Cost of Sales 906,008 56,255 1,510,668 84,536
----------- ----------- ----------- -----------
Gross Profit 573,190 3,363 753,043 4,306
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling Expenses 165,797 86,759 585,958 163,749
General and Administrative Expenses 958,556 244,565 1,721,836 360,409
Related Party Expenses 90,940 105,059 169,464 183,418
Depreciation and Amortization Expenses 15,966 - 25,476 -
----------- ----------- ----------- -----------
Total Operating Expenses 1,231,259 436,383 2,502,734 707,576
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (658,069) (433,020) (1,749,691) (703,270)
----------- ----------- ----------- -----------
Interest Income 10,029 1,091 31,666 2,389
NET LOSS ($ 648,040) ($ 431,929) ($1,718,025) ($ 700,881)
=========== =========== =========== ===========
Weighted Average Number of Shares 4,224,000 3,120,000 4,224,000 3,060,493
NET LOSS PER SHARE ($ 0.15) ($ 0.14) ($ 0.41) ($ 0.23)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
3
<PAGE>
ML DIRECT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common
Stock Additional Retained Deferred Total
$0.0001 Paid-in Earnings Compensation Stockholders'
Par Value Capital (Deficit) Expense Equity
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1996 $ 422 $ 7,605,851 $ (3,146,815) $ (661,250) $ 3,798,208
Stock Options Issued to Related Party - 81,818 - (81,818) -
Amortization of Deferred Compensation
Expense Resulting from Issuance of
Stock Options - - - 177,877 177,877
Net Loss for the Six Months Ended
May 31, 1997 - - (1,718,025) - (1,718,025)
---------------------------------------------------------------------------
Balance at May 31, 1997 $ 422 $ 7,687,669 $ (4,864,840) $ (565,191) $ 2,258,060
===========================================================================
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
4
<PAGE>
ML DIRECT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
MAY 31, MAY 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOW- OPERATING ACTIVITIES :
Net Income (Loss) ($1,718,025) ($ 700,880)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities :
Depreciation and Amortization 25,476 3,462
Deferred Compensation 177,877 52,000
Changes in Assets and Liabilities
(Increase) in Inventory (12,582) (49,887)
(Increase) in Accounts Receivable (301,045) (14,250)
Decrease in Prepaid Expenses 175,973 4,255
(Increase) in Prepaid Expenses to Related Parties (22,500) -
(Increase) Decrease in Related Party Receivable (431,525) 48,982
(Increase) in Other Assets (20,000) -
Increase (Decrease) in Accounts Payable and Payroll Taxes 10,024 199,846
Increase (Decrease) in Accounts Payable to Related Party - 94,182
Increase (Decrease) in Accrued Royalty to Related Party 82,812 -
Increase (Decrease) in Accrued Expenses 40,182 70,187
Increase (Decrease) in Returns and Allowances 50,403 2,083
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,942,930) (290,020)
----------- -----------
CASH FLOWS - INVESTING ACTIVITIES :
Purchase of Displays and Equipment (129,442) (125,359)
Organization Costs - (4,761)
Notes Receivable - Related Party - 50,000
Notes Payable - Related Party - 36,500
Deposits 45,400 (5,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (84,042) (48,620)
----------- -----------
CASH FLOWS - FINANCE ACTIVITIES :
Proceeds from Issuance of Preferred Stock - 100,000
Offering Costs - (70,100)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 29,900
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENT (2,026,972) (308,740)
Cash and Cash Equivalents - Beginning of Periods 2,562,227 336,884
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 535,255 $ 28,144
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements
5
<PAGE>
ML DIRECT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
GENERAL
ML Direct, Inc. (the "Company"), a Delaware corporation, was incorporated
on June 22, 1995. In that same month, June of 1995, the Company entered into a
binding letter of intent with HSN Direct Joint Venture ('HSND') which provided
for the creation of a new entity, KN2B, Inc., which operates under the name
"Home Shopping Showcase(TM)" ('HSS'). HSS was organized to establish display
programs in retail venues through which a variety of consumer products, all of
which had already been successfully marketed via direct response television
(DRTV) programming and/or advertising, could be offered for sale. At the time of
execution of the binding letter of intent, HSND was a subsidiary of the Home
Shopping Network, Inc. HSND is now a majority-owned subsidiary of Flextech,
P.L.C. (a UK Company, which itself is a subsidiary of Telecommunications
Company, Inc.). Home Shopping Network, Inc. continues to hold a minority equity
position in HSND. The binding letter of intent between the Company and HSND has
been twice amended, first in August of 1995 in connection with the Company's
initial funding of HSS, and then in February of 1996, in connection with the
change in majority ownership of HSND.
The Company contributed $4,000,000 in cash to HSS, as well as its
existing and future retail rights to products and services, in exchange for the
1,500 shares of Class A Common Stock of HSS it was issued pursuant to the letter
of intent. The Company funded the $4,000,000 from the proceeds of the completed
public offering in September 1996. HSND, on the other hand, contributed the
right to use the name "Home Shopping Showcase(TM)" and certain related
trademarks, logos and service marks, as well as its existing and future retail
rights to products and services, in exchange for the 1,499 shares of Class B
Common Stock of HSS it was issued pursuant to the letter of intent.
NOTE 2 - BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include both
the accounts of the Company and KN2B, Inc. All intercompany transactions and
accounts have been eliminated. The Condensed Consolidated Financial Statements
are unaudited and should be read in conjunction with the audited Consolidated
Financial Statements and notes thereto for the fiscal year ended November 30,
1996.
In the opinion of management, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist only of normal recurring items. Interim
results are not necessary indicative of results for a full year. The Condensed
Consolidated Financial Statements and notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's annual Consolidated Financial Statements and notes
thereto as discussed above.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the quarter ended May 31, 1997 the Company and HSS reimbursed a
partnership in which one of the partners is the Chairman of the Board for
approximately $11,791 for travel and entertainment expenses and office expenses
expended on behalf of the Company.
On January 1, 1997, the Company entered into a Consulting Agreement with
The Columbus Circle ("TCC"), a New York partnership of which one of the two
general partners is owned and controlled by the Company's Chairman, pursuant to
which TCC agrees to provide certain general management and other services to the
Company. This agreement, which expires on December 31, 1999, provides that the
Company pay to TCC an initial fee of $120,000 and a monthly amount equal to
6
<PAGE>
$15,000. KN2B, Inc. also entered into a Consulting Agreement with TCC in
January, 1997, pursuant to which TCC agrees to provide certain general
management and other services to KN2B, Inc. This agreement, which expires on
December 31, 1999 provides that KN2B, Inc. pay to TCC an initial fee of $60,000
and a monthly amount equal to $7,500. The initial fees totaling $180,000 will be
capitalized and amortized over the three-year term. The consulting agreements
may be terminated by either party for non-performance. Under the terms of this
agreement the Company expensed $137,500 for five months of services for the
period ended May 31, 1997.
On January 1, 1997, pursuant to the above described Consulting Agreement
between the Company and TCC, the Company entered into a Stock Option Agreement
(the "ML Option Agreement") with TCC. Pursuant to the ML Option Agreement, the
Company granted TCC an option to purchase 54,545 Shares exercisable from January
1, 1997 through January 1, 2002 at an exercise price of $4.50 per share. In
addition, the ML Option Agreement provides that the Company issue to TCC the
following options to purchase the Company's common stock ("Shares") at an
exercise price of $4.50 per share: (i) if the Consulting Agreement shall be in
effect at any time during the 120-day period ending on January 1, 1999, an
option to purchase an additional 54,545 Shares exercisable from January 1, 1999
through January 1, 2004; (ii) if the Consulting Agreement shall be in effect at
any time during the 120-day period ending on January 1, 2000, an option to
purchase an additional 54,545 Shares exercisable from January 1, 2000 through
January 1, 2005; (iii) if the Company closes any transaction whereby the Company
receives an infusion or infusions of cash (either equity or debt), or it
acquires (directly or indirectly) another company, an option to purchase the
number of Shares obtained by dividing by 4.5, the total consideration received
by the Company in the case of a cash infusion, or the total consideration given
by the Company in the case of an acquisition, and (iv) if Consulting Agreement
shall be in effect at any time within the 120-day period ending on the last day
of the Company's 1997, 1998 and 1999 fiscal years, an option to purchase the
number of shares obtained by multiplying 54,545 by the percentage increase in
earnings per share from the Company's 1996 fiscal year end earnings per share.
To the extent not exercised, all options terminate on the day immediately
following the fifth anniversary of the date of grant. The ML Option Agreement
permits either party to terminate the agreement upon 90 days' notice without
cause.
On January 1, 1997, pursuant to above described Consulting Agreement
between KN2B, Inc. and TCC, the Company entered into a Stock Option Agreement
with TCC (the "KN2B Option Agreement"). Pursuant to the KN2B Option Agreement,
the Company granted TCC an option to purchase 27,273 Shares exercisable from
January 1, 1997 through January 1, 2002 at an exercise price of $4.50 per share.
In addition, the KN2B Option Agreement provides that the Company issue to TCC
the following options to purchase Shares at an exercise price of $4.50 per
share: (i) provided that the Consulting Agreement shall be in effect at any time
during the 120-day period ending on January 1, 1999, an option to purchase
27,273 Shares exercisable from January 1, 1999 through January 1, 2004; (ii)
provided that the Consulting Agreement shall be in effect at any time during the
120-day period ending on January 1, 2000, an option to purchase 27,273 Shares
exercisable from January 1, 2000 through January 1, 2005; (iii) in the event
that KN2B closes any transaction whereby the Company receives an infusion or
infusions of cash (either equity or debt), or KN2B acquires (directly or
indirectly) another company, and such transaction was initiated by TCC and
closed prior to the termination of the Consulting Agreement or within the
120-day period following the termination of the Consulting Agreement, an option
to purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
provided that the Consulting Agreement shall be in effect at any time within the
120-day period ending on the last day of the Company's 1997, 1998 and 1999
fiscal years, an option to purchase the number of shares obtained by multiplying
27,273 by the percentage increase in KN2B's earnings per share from KN2B's 1996
fiscal year end earnings per share. To the extent not exercised, all options
terminate on the day immediately following the fifth anniversary of the date of
grant. The KN2B Option Agreement permits either party to terminate the agreement
upon 90 days' notice without cause.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of material changes in the consolidated
results of operations of ML Direct, Inc. and its 50.02% owned subsidiary KN2B,
Inc. The following discussion should be read in conjunction with the
consolidated financial statements of the Company and notes thereto included
elsewhere herein.
A. RESULTS OF OPERATIONS
QUARTER ENDED MAY 31, 1997 COMPARED TO THE QUARTER ENDED MAY 31, 1996 AND SIX
MONTHS ENDED MAY 31, 1997 COMPARED TO THE SIX MONTNS ENDED MAY 31, 1996
REVENUES AND COST OF SALES
Revenues for the quarter and six months ended May 31, 1997 were
approximately $1,479,000 and $2,263,711 respectively compared to approximately
$60,000 and $88,000 respectively for the quarter and six months ended May 31,
1996. The 1997 increase in revenues is primarily due to HSS's sale of
approximately $693,000, or 47% of revenues for the quarter, and $1,129,000 or
50% of revenues for the six months ended May 31, 1997 of product to Home
Shopping Network Direct ("HSND") in connection with a third party distribution
agreement. The gross profit percentage of these sales was 20.3%. In addition the
Company recognized an increase in sales resulting from securing distribution
rights to additional products and selling them to various chain retailers. The
Company achieved a gross profit percentage of 39% and 33% for the quarter and
six months ended May 31, 1997 respectively, compared to 6% and 5% for the
corresponding periods in 1996. The increase in gross profit percentages for the
quarter and six months ended May 31, 1997 compared to the same periods in 1996
were from the sale of one HSS product which accounted for approximately 67% and
69% of sales and 73% and 75% in gross profit for the quarter and six months
ended May 31, 1997 respectively.
On-going efforts are aimed at increasing the number of products to which
the Company has direct or retail distribution rights and penetrating additional
retail chains with these products. HSS continues to expand its program of
executing permanent store-within-a-store display fixtures in Supermarkets. As of
May 31, 1997, twenty-four such programs were active and commitments have been
obtained to add five new stores in June 1997, to yield a total of twenty-nine
fixtures opened by June 30, 1997.
OPERATING EXPENSES
Operating expenses were approximately $1,231,000 and $2,503,000 for the
quarter and six months ended May 31, 1997 respectively compared to approximately
$437,000 and $708,000 for respective corresponding periods in 1996. The majority
of the increase in expenses for the quarter and six months ended May 31, 1997
were for compensation and benefits of approximately $179,000 and $699,000,
respectively, as a result of the hiring of marketing, sales and administrative
personnel. In order to implement the supermarket kiosk program within Home
Shopping Showcase(TM) and to market the services of ML Direct, additional
expenses were incurred for the quarter and six months ended May 31, 1997 for:
travel and entertainment of approximately $78,000 and $242,000, respectively;
advertising and promotions of approximately $80,000 and $149,000, respectively;
and consulting which includes legal expenses of approximately $66,000 and
$125,000, respectively.
In addition, the Company recorded additional compensation expense
(approximately $178,000) which was recorded as a result of the amortization of
the deferred compensation cost which was recorded as a result of stock options
issued to employees and consultants with exercise prices below fair market value
on the date of grant. The Company also incurred $137,500 in management fees to
The Columbus Circle, a New York partnership of which one of the two general
partners is owned and controlled by the Company's chairman, under the terms of
the Consulting Agreement dated January 1, 1997.
8
<PAGE>
B. LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $1,642,000 at May 31, 1997. Cash used
by operating activities was approximately $1,943,000 for the six months ended
May 31, 1997.
As of May 31, 1997, ML Direct had no material commitments for capital
expenditures. During the six months ended May 31, 1997 the Company used
available cash balances to purchase approximately $129,000 in displays and
equipment. ML Direct has no capital needs for the remainder of fiscal year 1997.
Home Shopping Showcase plans to continue building kiosks in supermarkets in
fiscal year 1998.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amount or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. Management is continuing its
efforts to generate positive cash flows and profits by expanding its sales
through distribution channels such as supermarkets, mass merchandisers, drug
chains, and department stores as well as informercials and shopping networks and
catalogs and print media. The Company's continuation as a going concern is
dependent upon its ability and the ability of its subsidiary to generate
sufficient cash flow to meet their obligations on a timely basis and ultimately
on the Company's and its subsidiary's attaining successful operations.
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K.
None.
9
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ML DIRECT INC.
July 21, 1997 By: /s/ Nancy Shalek
--------------------------
Nancy Shalek
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the date indicated.
/s/ NANCY SHALEK July 21, 1997
- --------------------------
Nancy Shalek
Chairman of the Board
/s/ JAMES M. LAWLESS July 15, 1997
- --------------------------
James M. Lawless
President and
Principal Accounting Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ML DIRECT INC. FOR THE SIX MONTHS ENDED MAY 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 535,255
<SECURITIES> 0
<RECEIVABLES> 756,477
<ALLOWANCES> 18,000
<INVENTORY> 1,163,172
<CURRENT-ASSETS> 3,303,411
<PP&E> 431,166
<DEPRECIATION> 36,166
<TOTAL-ASSETS> 3,919,851
<CURRENT-LIABILITIES> 1,661,791
<BONDS> 0
0
0
<COMMON> 422
<OTHER-SE> 2,257,638
<TOTAL-LIABILITY-AND-EQUITY> 3,919,851
<SALES> 1,072,982
<TOTAL-REVENUES> 2,263,711
<CGS> 1,510,668
<TOTAL-COSTS> 1,510,668
<OTHER-EXPENSES> 2,502,734
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,718,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,718,025)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
