<PAGE> 1
UNITED STATES SECURITIES EXCHANGE COMMISSION
WASHINGTON, DC 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 August 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 (IRS 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 September 30, 1997 was
4,224,000.
<PAGE> 2
ML DIRECT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
August 31, 1997 November 30, 1996
<S> <C> <C>
CURRENT ASSETS
Cash $ 134,222 $ 2,562,227
Accounts Receivable 1,130,965 437,432
Accounts Receivable-Related Party --
Inventory & Supplies 1,079,692 1,150,590
Prepaid Expenses 146,466 588,455
Prepaid Expenses-Related Party 136,667 --
----------- -----------
Total Current Assets $ 2,628,011 $ 4,738,704
FIXED ASSETS, NET 292,529 290,234
OTHER ASSETS
Organizational Costs, Net 13,631 17,240
Unsecured Promissory Note Receivable-
Related Party, Net of Loss Allowance of $500,000
Security Deposit 85,233 130,400
Other -- 100,000
----------- -----------
Total Other Assets $ 98,864 $ 247,640
----------- -----------
Total Assets $ 3,019,404 $ 5,276,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 1,014,852 $ 1,162,359
Payable - Related Party --
Accrued Returns & Allowances 170,927 73,654
Accrued Expenses 149,390 133,840
Accrued Royalty to Related Parties 224,386 108,517
----------- -----------
Total Current Liabilities $ 1,559,554 $ 1,478,370
STOCKHOLDER'S EQUITY
Common Stock Subscribed 422 422
Additional Paid in Capital 7,687,669 7,605,851
Accumulated Deficit (5,615,020) (3,146,815)
Deferred Compensation (613,221) (661,250)
----------- -----------
Total Stockholder's Equity $ 1,459,850 $ 3,798,208
----------- -----------
Total Liabilities & Equity $ 3,019,404 $ 5,276,578
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
<PAGE> 3
ML DIRECT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, NINE MONTHS ENDED AUGUST 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Revenues $ 716,551 $281,459 $ 1,789,533 $ 370,301
Revenues From Related Parties 1,180 -- 1,191,909 --
----------- ----------- ----------- -----------
Net Revenues $ 717,731 $281,459 $ 2,981,442 $ 370,301
Cost of Sales 420,340 123,910 1,931,008 208,446
----------- ----------- ----------- -----------
Gross Profit $ 297,391 $ 157,549 $ 1,050,434 $ 161,855
OPERATING EXPENSES
Selling Expense 287,458 7,069 873,416 170,818
General & Admin. Expenses 671,923 656,444 2,393,759 1,016,853
Related Party Expenses 25,306 52,040 194,770 235,458
Depreciation & Amort 51,861 7,055 77,337 7,055
----------- ----------- ----------- -----------
Total Operating Expenses $ 1,036,547 $ 722,608 $ 3,539,281 $ 1,430,184
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS $ (739,157) $ (565,059) $(2,488,848) $(1,268,329)
Interest Income (Expense) 3,976 (9,531) 35,642 (7,142)
----------- ----------- ----------- -----------
NET LOSS $ (735,180) $ (574,590) $(2,453,205) $(1,275,471)
=========== =========== =========== ===========
Weighted Average Number of Shares 4,224,000 4,442,400 4,224,000 4,442,400
NET LOSS PER SHARE $ (0.17) $ (0.13) $ (0.58) $ (0.29)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
<PAGE> 4
<TABLE>
<CAPTION>
ML DIRECT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common
Stock Additional Deferred Total
$ 0.0001 Paid in Accumulated Compensation Stockholders'
Par Value Capital (Deficit) Expense Equity
--------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of November 30, 1996 $ 422 $7,605,851 $ (3,146,815) $ (661,250) $ 3,798,208
Stock Options to Related Parties 81,818 (81,818) -
Amortization of Deferred Compensation Expense
Resulting from Stock Option Issuance 129,847 129,847
Net Loss for the Quarter Ended 2/28/97 (1,084,985) (1,084,985)
Net Loss for the Quarter Ended 5/31/97 (648,040) (648,040)
Net Loss for the Quarter Ended 8/31/97 - - (735,180) - (735,180)
--------- ---------- ------------ ---------- -----------
Balance as of August 31, 1997 $ 422 $7,687,669 $ (5,615,020) $ (613,221) $ 1,459,850
============================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ML DIRECT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
THREE MONTHS ENDED AUGUST 31, AUGUST 31,
1997 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net Loss $ (735,180) $ (574,590) $(2,453,205)
Reconciling Adjustments from Operations
Depreciation and Amortization 51,861 7,055 77,337
Deferred Compensation (48,030) (5,000) 48,029
Changes in Current Assets and Liabilities
(Increase) Decrease in Accounts Receivable (392,488) (281,262) (693,533)
(Increase) Decrease in Accounts Receivable-Related Party 431,525 -- --
(Increase) Decrease in Inventory 83,480 (160,143) 70,898
(Increase) Decrease in Prepaid Expenses 266,016 14,682 441,989
(Increase) Decrease in Prepaid Expenses - Related Party (114,167) -- (136,667)
Increase (Decrease) in Accounts Payable (157,531) 440,392 (147,507)
Increase (Decrease) in Accounts Payable-Related Party -- 52,182 --
Increase (Decrease) in Accrued Returns & Allowances 46,870 (17,438) 97,273
Increase (Decrease) in Accrued Expenses (24,632) 198,726 15,550
Increase (Decrease) in Accrued Expenses-Related Party 33,057 54,429 115,869
Increase (Decrease) in Note Payable - Related Party -- 505,500 --
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES $ (559,220) $ 234,533 $(2,563,968)
CASH FLOWS - INVESTING ACTIVITIES
Fixed Assets and Organizational Costs 53,420 (66,461) (76,022)
Security Deposits (233) (120,400) 45,167
Other 120,000 (58,816) 100,000
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $ 173,187 $ (245,677) $ 69,145
CASH FLOWS - FINANCING ACTIVITIES
Common Stock Subscribed -- 12 --
Change in Retained Deficits (15,000) (35,000) (15,000)
Additional Paid in Capital -- 17,988 81,818
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES $ (15,000) $ (17,000) $ 66,818
Decrease in Cash and Cash Equivalents (401,033) (28,144) (2,428,005)
Cash and Cash Equivalents - Beginning of the Periods 535,255 28,144 2,562,227
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 134,222 $ -- $ 134,222
=========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
<PAGE> 6
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 that 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 "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.
The Company is currently planning to close its Florida office and
discontinue or sell the operation focused on sourcing products for direct TV
(home shopping channels, infomercials). This move is being undertaken in an
effort to enhance the focus of the Company's efforts and resources on the
expansion of the retail operations of Home Shopping Showcase.
<PAGE> 7
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 necessarily 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 August 31, 1997, the Company and HSS
reimbursed a partnership, The Columbus Circle, in which one of the partners is
the Chairman of the Board for approximately $879 for travel and office expenses
expended on behalf of the Company. The Company also incurred $67,500 in
management fees to The Columbus Circle, under the terms of the Consulting
Agreement dated January 1, 1997.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of material changes in the Condensed
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 Condensed Consolidated Financial Statements of the Company and notes
thereto included elsewhere herein.
<PAGE> 8
A. RESULTS OF OPERATIONS
Quarter Ended August 31, 1997, compared to the Quarter Ended August 31,
1996, and Year Ended August 31, 1997, compared to Year Ended August 31, 1996
REVENUES AND COST OF SALES
Revenues for the quarter and year ended August 31, 1997, were
approximately $718,000 and $2,981,000, respectively, compared to approximately
$281,000 and $370,000, respectively, for the quarter and year-to-date ended
August 31, 1996. The 1997 increase in revenues is primarily due to HSS's sales
of approximately $672,000, or 94% of total revenues for the quarter, and
$2,677,000 or 90% of total revenues for the year-to-date ended August 31, 1997.
The majority of HSS's sales come from one customer, Walgreens, which accounted
for 82.7% of quarter sales. The Company achieved a gross profit percentage of
41% and 35% for the quarter and year to date ended August 31, 1997,
respectively, compared to 56% and 44% for the corresponding periods in 1996. The
decrease in gross profit percentages for the quarter and year to date ended
August 31, 1997, compared to the same periods in 1996 were due to expansion of
sales of new items, some of which have lower gross profit margins than Sweet
Simplicity, which accounted for almost all of the 1996 sales.
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 refine its
program of executing permanent store-within-a-store display fixtures in
Supermarkets. As of August 31, 1997, twenty-nine such programs were active in
four markets. To increase penetration in our high potential Southeast market and
free-up resources to focus on the top supermarket chains and enhance the
efficiency and effectiveness of our efforts, plans are currently underway to
terminate operations in Omaha, NE, and Albuquerque, NM.
Operating expenses were approximately $1,037,000 and $3,539,000 for the
quarter and year to date ended August 31, 1997, respectively, compared to
approximately $723,000 and $1,430,000 for respective corresponding periods in
1996. The majority of the increase in expenses were for selling expenses to
increase account presentation and generate revenues and the expenses related to
the establishment of the infrastructure to handle the additional expansion.
In addition, the Company recorded additional compensation expense
(approximately $48,000) 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.
<PAGE> 9
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
$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 was
capitalized and amortized monthly over the three-year term.
B. LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $1,068,000 at August 31, 1997. Cash
used by operating activities was approximately $559,000 for the quarter ended
August 31, 1997.
As of August 31, 1997, ML Direct had no material commitments for
capital expenditures. During the quarter ended August 31, 1997, the Company used
available cash balances to purchase approximately $6,000 in computer equipment.
Home Shopping Showcase plans to continue building kiosks in supermarkets in
fiscal year 1998. There will be no capital needs of this program are expected
for the remainder of fiscal 1997.
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 supermarket
store-within-a-store program and its sales through distribution channels such as
supermarkets, mass merchandisers, drug chains and department stores. The
Company's continuation as a going concern is dependent upon its ability and the
ability of its subsidiary to generate sufficient cash flow and gain additional
outside financing to meet their obligations on a timely basis and ultimately on
the Company's and its subsidiary's attaining successful operations. There can
be no assurance that the company will be successful in doing so.
The Company's stock was delisted from the NASDAQ Small Cap Market on
August 27, 1997 for a failure to maintain a $1 per share price.
<PAGE> 10
C. LEGAL MATTERS
ML Direct is a defendant in an action, pending in the United States
District Court for the Southern District of New York, known as: Petit v.
Sterling Foster, et. al., No. 97-3775 (E.D.N.Y.) (the "Complaint"). The
Complaint concerns the public offerings of the securities of various companies,
including ML Direct. In the Complaint, the plaintiffs allege, among other
things, that the various companies, their chairmen, and other defendants caused
to be issued, and participated in the issuance of, materially false and
misleading registration statements in connection with the companies' public
offerings. The plaintiffs allege that the companies' and the chairmen's actions
were in violation of Section 11 and 12(a)(2) of the Securities Act of 1933
("1933 Act") and Section 10b-5 of the Securities Exchange Act of 1934. The
plaintiffs purport to act on behalf of certain classes of stockholders and seek
damages in unspecified amounts. Based upon its review to date and advice of
counsel, ML Direct believes the claims against it are without merit, and plans
to oppose them vigorously.
<PAGE> 11
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.
October 15, 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 October 15, 1997
- -------------------------------
Nancy Shalek
Chairman of the Board
/s/ James M. Lawless October 15, 1997
- ------------------------------------
James M. Lawless
President and
Principle Accounting Officer
/s/ Alan Kerzner October 15, 1997
- -----------------------------
Alan Kerzner
Executive Vice President of ML Direct
President of Home Shopping Showcase
