<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: COMMISSION FILE NUMBER:
JUNE 30, 1997 000-21049
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4578632
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
5548 LINDBERGH LANE, BELL, CALIFORNIA 90201-6410
(Address and zip code of principal executive offices)
213-980-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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
the filing requirements for at least the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at August 8, 1997
----- -----------------
Common Stock, $.01 par value 13,011,947
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997
(Unaudited) and December 31, 1996.......................... 3
Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and 1996
(Unaudited)................................................ 5
Consolidated Statements of Operations for the Three
Months Ended June 30, 1997 and 1996
(Unaudited)................................................ 7
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996
(Unaudited)................................................ 8
Notes to Unaudited Consolidated
Financial Statements...................................... 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 22
Item 2. Changes in Securities..................................... 22
Item 3. Defaults Upon Senior Securities........................... 22
Item 4. Submission of Matters to a Vote of Security Holders....... 22
Item 5. Other Information......................................... 23
Item 6. Exhibits and Reports on Form 8-K.......................... 24
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<PAGE>
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS.
- -------------------------------------------------------------------------------
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 32,248
Accounts receivable -- trade, net of allowance for doubtful accounts and
returns of $2,523,069 and $2,506,893 at June 30, 1997 and December 31, 1996,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,260,110 4,667,818
Inventories (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,624,877 2,560,603
Prepaid royalty advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716,136 576,347
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . 406,057 643,791
Note receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,575,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,089,248 1,089,248
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,096,428 11,145,055
PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150,338 1,149,775
GOODWILL, net of accumulated amortization of $469,532 and $222,724 at June 30,
1997 and December 31, 1996, respectively . . . . . . . . . . . . . . . . . . . . . . 4,296,074 4,550,531
DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,960 189,659
------------ ------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,715,800 $ 17,035,020
------------ ------------
------------ ------------
(CONTINUED)
</TABLE>
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<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Revolving line of credit. . . . . . . . . . . . . . . . . . . . . . . . $ 2,766,380 -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,427,656 $ 4,826,256
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003,744 723,016
Royalties payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,792,099 1,382,549
Due to customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,809 253,536
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . 53,042 53,042
Current maturities of:
Capitalized lease obligations . . . . . . . . . . . . . . . . . . . . 100,041 95,254
Subordinated long-term debt . . . . . . . . . . . . . . . . . . . . . 300,000 675,000
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 10,693,771 8,008,653
------------ ------------
REVOLVING LINE OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . - 3,813,334
CAPITALIZED LEASE OBLIGATIONS,
less current maturities . . . . . . . . . . . . . . . . . . . . . . . . 51,979 55,612
SUBORDINATED LONG-TERM DEBT,
less current maturities . . . . . . . . . . . . . . . . . . . . . . . . 1,694,556 1,731,904
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 30,000,000 shares, issued
and outstanding, 13,011,947 and 13,010,947 shares at June 30, 1997
and December 31, 1996, respectively . . . . . . . . . . . . . . . . . 130,1961 30,109
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 10,661,874 10,639,439
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (9,516,576) (7,344,031)
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 1,275,494 3,425,517
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,715,800 $ 17,035,020
------------ ------------
------------ ------------
(CONCLUDED)
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
NET SALES. . . . . . . . . . . . . . . $ 10,603,858 $ 20,329,801
------------- -------------
COST OF SALES:
Cost of goods sold. . . . . . . . . 4,467,049 11,132,974
License and royalty expense . . . . 1,836,068 2,163,371
------------- -------------
Total cost of sales . . . . . . . 6,303,117 13,296,345
------------- -------------
GROSS PROFIT . . . . . . . . . . . . . 4,300,741 7,033,456
------------- -------------
OPERATING EXPENSES:
Warehouse and selling . . . . . . . 3,696,409 5,277,889
Warehouse relocation (Note 6) . . . 110,000 --
General and administrative. . . . . 2,262,377 3,088,020
------------- -------------
Total operating expenses. . . . . 6,068,786 8,365,909
------------- -------------
OPERATING LOSS . . . . . . . . . . . . (1,768,045) (1,332,453)
INTEREST EXPENSE . . . . . . . . . . . 403,443 596,451
------------- -------------
LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST. . . . . . . . . . (2,171,488) (1,928,904)
INCOME TAX PROVISION . . . . . . . . . 1,054 58,000
------------- -------------
LOSS BEFORE MINORITY INTEREST. . . . . (2,172,542) (1,986,904)
MINORITY INTEREST IN INCOME
OF SUBSIDIARIES. . . . . . . . . . . -- 93,726
------------- -------------
NET LOSS . . . . . . . . . . . . . . . $ (2,172,542) $ (1,893,178)
------------- -------------
------------- -------------
</TABLE>
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<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
-------------- --------------
<S> <C> <C>
NET LOSS DATA (1996 PRO FORMA):
Loss before income taxes, as reported. . $ (2,171,488) $ (1,928,904)
Provision (benefit) for income taxes . . 1,054 (603,630)
Minority interest in income of
subsidiaries . . . . . . . . . . . . . -- 93,726
------------- -------------
Net loss . . . . . . . . . . . . . . $ (2,172,542) $ (1,231,548)
------------- -------------
------------- -------------
NET LOSS PER SHARE (1996 PRO
FORMA) (Note 5):
Loss from operations . . . . . . . . . . $ (0.17) $ (0.16)
Minority interest in income of
subsidiaries . . . . . . . . . . . . . -- 0.01
------------- -------------
Net loss . . . . . . . . . . . . . . $ (0.17) $ (0.15)
------------- -------------
Weighted average shares outstanding . . 13,011,947 8,036,602
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
NET SALES........................... $ 5,477,322 $11,389,143
------------ -------------
COST OF SALES:
Cost of goods sold............... 2,418,191 6,785,657
License and royalty expense...... 1,146,642 1,241,165
------------ -------------
Total cost of sales.......... 3,564,833 8,026,822
------------ -------------
GROSS PROFIT........................ 1,912,489 3,362,321
------------ -------------
OPERATING EXPENSES:
Warehouse and selling................. 1,913,482 2,500,926
Warehouse relocation (Note 6)...... (970,000) -
General and administrative......... 1,013,222 2,060,134
----------- ------------
Total operating expenses....... 1,956,704 4,561,060
----------- ------------
OPERATING LOSS........................ (44,215) (1,198,739)
INTEREST EXPENSE...................... 207,000 328,792
------------ ------------
LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST.................. (251,215) (1,527,531)
INCOME TAX PROVISION.................. 797 (9,323)
------------ --------------
LOSS BEFORE MINORITY INTEREST......... (252,012) (1,518,208)
MINORITY INTEREST IN INCOME
OF SUBSIDIARIES................... - 139,146
------------ --------------
NET LOSS.............................. $ (252,012) $(1,379,062)
------------ --------------
------------ --------------
NET LOSS DATA (1996 PRO FORMA):
Loss before income taxes, as reported.. $ (251,215) $(1,527,531)
Provision (benefit) for income taxes... 797 (518,516)
Minority interest in income of
subsidiaries.......................... - 139,146
------------- --------------
Net loss................. $ (252,012) $ (869,869)
-------------- --------------
NET LOSS PER SHARE (1996 PRO
FORMA)(Note 5):
Loss from operations.................. $ (.02) $ (0.13)
Minority interest in income of
subsidiaries........................ .00 .02
-------------- --------------
Net loss.......................... $ (.02) $ (0.11)
------------- --------------
------------- --------------
Weighted average shares outstanding... 13,011,947 8,036,602
------------- --------------
------------- --------------
(CONTINUED)
</TABLE>
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<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................. $ (2,172,542) $ (1,893,178)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 464,541 164,488
Provision for warehouse relocation... 110,000 0
Minority interest in income of
subsidiaries..................... - (93,744)
Changes in operating assets and
liabilities:
Accounts receivable................ 407,708 (106,465)
Inventories........................ 935,726 (1,130,336)
Prepaid royalty advances........... (139,789) (399,795)
Prepaid expenses and other current
assets........................... 237,734 (365,706)
Accounts payable................... (398,600) 2,039,400
Accrued expenses................... 170,728 126,764
Royalties payable.................. 409,550 137,997
Due to customers................... (2,727) (25,903)
Income taxes payable............... - (202,189)
------------- -------------
Net cash provided by (used in)
operating activities......... 22,329 (1,748,667)
------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment... (152,650) (105,857)
Deposits............................. 16,699 -
-------------- ---------------
Net cash used in investing
activities.................... (135,951) (105,857)
-------------- ----------------
-------------- ----------------
(CONTINUED)
</TABLE>
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<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment) borrowings on line of credit. . . $(1,046,954) $2,086,627
Payments on subordinated debt . . . . . . . . . . (412,348) (31,460)
Proceeds of note receivable . . . . . . . . . . . 1,575,000 -
Dividends paid. . . . . . . . . . . . . . . . . . - (99,753)
Proceeds from exercise of stock options . . . . . 22,522
Payment on capital lease obligations. . . . . . . (56,846) (40,243)
----------- ----------
Net cash provided by financing activities . . 81,374 1,915,171
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS. . . . . . . . . . . . . . . . . . . . (32,248) 60,647
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . 32,248 74,828
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . $ - $ 135,475
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . $ 305,692 $ 522,004
Income taxes. . . . . . . . . . . . . . . . . . $ 0 $ 7,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTION
Capital lease obligations of approximately $58,000 were incurred in
1997 when the Company entered into an agreement for the purchase of
new equipment.
(CONCLUDED)
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<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
_______________________________________________________________
1. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1997 and the related
consolidated statements of operations and of cash flows for the six months
ended June 30, 1997 and 1996 have been prepared by Global One Distribution &
Merchandising Inc. ("Global One" or the "Company") without audit. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) have been made which are necessary to present fairly the financial
position, results of operations and cash flows of the Company at June 30,
1997 and for the six-month period then ended.
Although the Company believes that the disclosure in the consolidated
financial statements is adequate for a fair presentation thereof, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The December 31, 1996 audited statements
were included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 15, 1997. These consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto contained in that document.
The results of operations for the three- and six-month periods ended June 30,
1997 are not necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
JUNE 30, DECEMBER 31,
1997 1996
---------- -----------
Products in process $ 74,786 $ 252,893
Finished products 1,158,562 1,796,604
Packaging materials 391,529 511,106
---------- -----------
$1,624,877 $2,560,603
---------- -----------
---------- -----------
3. MERGER AND PRIVATE PLACEMENT
On March 27, 1996, OSP Publishing, Inc. ("OSP") entered into an agreement to
acquire Kelly Russell Studios, Inc. ("KRSI"), a publicly-traded entity.
Global One was formed to serve as a holding company for OSP and its
subsidiaries and to acquire KRSI. On August 28, 1996, the Company acquired
KRSI through a merger of KRSI into a wholly owned subsidiary of the Company
(the "KRSI Merger"). In connection with the KRSI Merger, the Company issued
2,041,189 shares of Common Stock to the former shareholders of KRSI.
Concurrently with the KRSI Merger, the Company acquired its affiliates, OSP
and The Button Exchange, Inc., through a merger of those companies into
wholly owned subsidiaries of the Company (the "Reorganization"). In
connection with the Reorganization, the Company issued 6,448,442 shares to
the former shareholders of OSP. Also concurrently with the KRSI Merger and
the Reorganization, the Company issued 4,324,238 shares of Common Stock to
investors in a private placement (the "Private Placement" and, together with
the "KRSI Merger" and the "Reorganization," the "Transactions"). Net
proceeds (less commissions and expenses and distributions) to the Company as
a result of the Private Placement were $2,824,000. The Company's Common
Stock commenced trading on the NASDAQ
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<PAGE>
SmallCap Market effective August 28, 1996.
4. SALE OF SDI AND PRO FORMA RESULTS OF OPERATION
In 1996, OSP entered into an agreement with the minority shareholder and
President of Stanley DeSantis, Inc. ("SDI") under which the minority
shareholder had an option to purchase the 51% ownership of SDI held by OSP at
a determined price. Effective December 31, 1996, the minority shareholder
exercised the option and purchased the 51% of the common stock of SDI held by
OSP for total consideration of $1,575,000. The consolidated financial
statements of the Company include the statement of operations for SDI for
only the six months ended June 30, 1996. The consolidated balance sheet at
December 31,1996 reflected the sale of SDI. Net sales and the net loss of
SDI for the six months ended June 30, 1996 were approximately $9.7 million
and $191,000, respectively.
As noted in Note 3, the Company merged with a public entity effective August
28, 1996. The following table sets forth (in thousands, except per share
data) the unaudited pro forma results of operations as if the acquisition of
KRSI and disposition of SDI were consummated at the beginning of 1996. The
unaudited results of operations data consists of historical results of the
Company as adjusted to give effect to (1) amortization of the excess of the
purchase price over the net assets acquired for KRSI, (2) elimination of the
allocation of the profit to the minority shareholder of SDI and (3) pro forma
effect of income taxes as if OSP had been taxed as a C Corporation. The
unaudited pro forma results of operations do not include cost reductions from
the elimination of duplicated operating expenses such as personnel, rent and
warehouse operations. The unaudited pro forma weighted average number of
common and common equivalent shares outstanding give effect to the
Transactions described in Note 3 for all periods presented.
Six Months Ended
June 30, 1996
----------------
Net sales .................................. $12,247
Cost of sales............................... 7,173
----------------
Gross profit ............................... 5,074
Operating expenses.......................... 7,326
----------------
Operating loss ............................. (2,252)
Interest expense ........................... 488
----------------
Loss before taxes .......................... (2,740)
Provision for income taxes.................. 185
----------------
Net loss ................................... $(2,925)
----------------
----------------
Net loss per share ......................... $ (0.23)
----------------
----------------
Weighted average shares outstanding......... 12,994
----------------
----------------
5. PRO FORMA NET LOSS PER SHARE
In connection with the organization of Global One as the parent company of
OSP, the stockholders of OSP received 6,448,442 shares of common stock of
Global One in exchange for the common stock outstanding at December 31, 1995.
The pro forma weighted average shares outstanding for 1996 assumes that this
exchange had occurred throughout the period presented, includes the dilutive
common equivalent shares from stock warrants (using the treasury stock
method) and also gives effect to 1,393,550 shares deemed to be outstanding in
1996. These shares represent the approximate number of shares deemed to be
sold by the Company (at the net offering proceeds of $1.26 per share) to fund
the S corporation distribution of $2,350,000
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<PAGE>
that was declared prior to the closing of the KRSI acquisition and private
placement offering and was paid from the proceeds of the offering. Common and
common equivalent shares issued during the 12-month period prior to the
offering have been included in the calculation using the treasury stock
method as if they were outstanding for all periods presented.
6. WAREHOUSE RELOCATION
The Company had recorded an accrual for the quarter ended March 31,
1997 in anticipation of entering into an arrangement to outsource its
warehouse facility including the inventory, distribution and shipping
functions as well as certain accounting functions. The accrual was based on
the estimated costs of employee severance arrangements and accrued but unpaid
vacation time for employees to be terminated. It also included the estimated
physical moving and relocation costs as well as the write-off of leasehold
improvements at the Company's current warehouse location. The Company
subsequently entered into an outsourcing arrangement with Prodispak U.S.A.
Inc. ("Prodispak") (see "Liquidity and Capital Resources"); accordingly the
originally anticipated outsourcing did not take place. As a result, the
recorded accrual has been significantly reduced (from $1,080,000 to $110,000)
because the relocation was within California and not to New Jersey. The
current accrual is based on expected equipment and warehouse reconfiguration
costs associated with the Prodispak arrangement. Alan Saloner who owns
250,000 shares of Common Stock (or 1.9% of the outstanding Common Stock)
and is the general partner of The Saloner Family Investment Limited
Partnership (see "Note 7"), is the President of Prodispak.
7. RELATED PARTY TRANSACTIONS
In September, 1996, the Company entered into an agreement with
several persons for the formation of a company, The Speedway, LLC, a
California limited liability company ("Speedway"), to engage in the business
of developing, advertising, marketing and promoting a chain of racing themed
entertainment restaurants and the sale of merchandise in connection
therewith. The Company contributed approximately $85,000 in cash to Speedway
for an approximately 25% interest in the enterprise.
On July 28, 1997, the Company sold its economic interest in Speedway
for $200,000 to The Saloner Family Investment Limited Partnership ("TSFILP").
The Company received payment on the sale date, and will record a gain in the
third quarter period. Alan Saloner who owns 250,000 shares of Common Stock
(or 1.9% of the outstanding Common Stock) and is the President of Prodispak
(see "Note 6"), is the general partner of TSFILP.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock. This
statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. In June 1997 the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 130, Reporting for Comprehensive Income and No. 131,
Disclosures about Segments of an Enterprise and Related Information. These
statements are effective for financial statements issued for periods
beginning after December 15, 1997. The Company has not yet analyzed the
impact of adopting these statements.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
RESULTS OF OPERATIONS
The business of the Company is conducted through the Company's
subsidiaries, OSP Publishing, Inc. ("OSP"), BEx Corp. ("BEx") and, since
August 28, 1996, Kelly Russell Studios, Inc. ("KRSI"), each of which conducts
a distinct business. OSP develops and markets posters incorporating
primarily licensed images and characters from motion pictures, television,
animation, music, sports and popular culture. BEx develops and markets
licensed and non-licensed buttons, key rings and stickers. KRSI creates,
markets and distributes sports related art for the collectible market. Prior
to 1997, the Company owned 51% of Stanley DeSantis, Inc. ("SDI"). SDI was
sold on December 31, 1996 to the minority stockholder. SDI developed and
marketed licensed and non-licensed T-shirts, sweatshirts, hats, boxer shorts
and mugs.
-13-
<PAGE>
The following tables set forth the net sales, total cost of sales and gross
profit of OSP, SDI, KRSI, BEx and the Company for the three months and six
months ended June 30, 1996 and 1997.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
% OF % OF % OF % OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES AMOUNT SALES
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
NET SALES
OSP . . . . . . . . $ 5.4 100.0 $4.3 100.0 $10.0 100.0 $ 9.1 100.0
SDI (1) . . . . . . 5.6 100.0 0.0 0.0 9.7 100.0 0.0 0.0
KRSI (2). . . . . . 0.0 100.0 0.4 100.0 0.0 0.0 0.6 100.0
BEx . . . . . . . . 0.4 100.0 0.8 100.0 0.6 100.0 0.9 100.0
----- ---- ----- -----
Company . . . . . . $11.4 100.0 $5.5 100.0 $20.3 100.0 $10.6 100.0
----- ---- ----- -----
----- ---- ----- -----
COST OF GOODS SOLD
OSP . . . . . . . . $ 2.6 48.2 $2.0 46.5 $ 4.4 44.0 $ 3.8 41.8
SDI (1) . . . . . . 3.8 67.9 0.0 0.0 6.2 63.9 0.0 0.0
KRSI (2). . . . . . 0.0 0.0 0.1 25.0 0.0 0.0 0.2 33.3
BEx . . . . . . . . 0.4 100.0 0.4 50.0 0.5 83.3 0.5 55.6
----- ---- ----- -----
Company . . . . . . $ 6.8 59.7 $2.5 45.5 $11.1 54.7 $ 4.5 42.5
----- ---- ----- -----
----- ---- ----- -----
LICENSE AND ROYALTY
EXPENSE
OSP . . . . . . . . $ 0.6 11.1 $0.9 20.9 $ 1.2 12.0 $ 1.6 17.6
SDI (1) . . . . . . 0.6 10.7 0.0 0.0 0.9 9.3 0.0 0.0
KRSI (2). . . . . . 0.0 0.0 0.1 25.0 0.0 0.0 0.1 16.7
BEx . . . . . . . . 0.1 25.0 0.1 12.5 0.1 16.7 0.1 11.1
----- ---- ----- -----
Company . . . . . . $ 1.3 11.4 $1.1 20.0 $ 2.2 10.8 $ 1.8 17.0
----- ---- ----- -----
----- ---- ----- -----
TOTAL COST OF SALES
OSP . . . . . . . . $ 3.2 59.3 $2.9 67.4 $ 5.6 56.0 $ 5.4 59.3
SDI (1) . . . . . . 4.4 78.6 0.0 0.0 7.1 73.2 0.0 0.0
KRSI (2). . . . . . 0.0 0.0 0.2 50.0 0.0 0.0 0.3 50.0
BEx . . . . . . . . 0.5 125.0 0.5 62.5 0.6 100.0 0.6 66.7
----- ---- ----- -----
Company . . . . . . 8.1 71.1 $3.6 65.5 $13.3 65.5 $ 6.3 59.4
----- ---- ----- -----
----- ---- ----- -----
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GROSS PROFIT
OSP . . . . . . . . 2.2 40.7 $1.4 32.6 $ 4.4 44.0 $ 3.7 40.7
SDI (1) . . . . . . 1.2 21.4 0.0 0.0 2.6 26.8 0.0 0.0
KRSI (2). . . . . . 0.0 0.0 0.2 25.0 0.0 0.0 0.3 50.0
BEx . . . . . . . . (0.1) (25.0) 0.3 37.5 0.0 0.0 0.3 33.3
----- ---- ----- -----
Company . . . . . . 3.3 29.0 $1.9 34.6 $ 7.0 34.5 $ 4.3 40.6
----- ---- ----- -----
----- ---- ----- -----
_____________________________________
(1) Sold effective December 31,1996
(2) Acquired on August 28, 1996
The following tables set forth the percentage of net sales of certain income
and expense items for the three months and six months ended June 30, 1996 and
1997.
PERCENTAGE OF
NET SALES
THREE MONTHS ENDED *PERIOD TO PERIOD
JUNE 30, PERCENTAGE CHANGE
------------------ -----------------
1996 1997 1996 VS. 1997
------ ------ -----------------
Net sales . . . . . . . . . . . . 100.0% 100.0% -51.9
Cost of goods sold. . . . . . . . 59.7 45.5 -64.4
License and royalty expense . . . 11.4 20.0 -7.6
Gross profit. . . . . . . . . . . 29.0 34.5 -43.1
Warehouse and selling expenses. . 22.0 34.9 -23.5
Warehouse relocation. . . . . . . 0.0 -17.7 -100.0
General and administrative. . . . 18.1 18.5 -50.8
Operating loss. . . . . . . . . . -10.5 -0.8 -96.3
Interest expense. . . . . . . . . 2.9 3.8 -37.0
Minority interest in income
of subsidiaries . . . . . . . . 1.2 0.0 -100.0
Net loss. . . . . . . . . . . . . -4.2 -4.6 -81.7
______________________________________
* Based on dollar amounts on page 5.
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PERCENTAGE OF
NET SALES
SIX MONTHS ENDED *PERIOD TO PERIOD
JUNE 30, PERCENTAGE CHANGE
------------------ -----------------
1996 1997 1996 VS. 1997
------ ------ -----------------
Net sales . . . . . . . . . . . . 100.0% 100.0% -47.8
Cost of goods sold. . . . . . . . 48.3 42.5 -59.9
License and royalty expense . . . 10.1 17.0 -15.1
Gross profit. . . . . . . . . . . 41.6 40.6 -38.9
Warehouse and selling expenses. . 26.3 34.9 -30.0
Warehouse relocation. . . . . . . 0.0 1.0 100.0
General and administrative. . . . 16.3 21.3 -26.7
Operating loss. . . . . . . . . . -1.5 -16.7 32.7
Interest expense. . . . . . . . . 3.0 3.8 -32.4
Minority interest in income
of subsidiaries . . . . . . . . -0.5 0.0 -100.0
Net loss. . . . . . . . . . . . . -5.8 -20.5 14.8
_______________________________________
* Based on dollar amounts on page 7.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
The Company's net sales decreased $9.7 million, or 47.8%, for the
six months ended June 30, 1997 compared to the six months ended June 30,
1996. This decrease was primarily a result of the sale of SDI on December
31, 1996, which contributed sales of $9.7 million in the six months ended
June 30, 1996. OSP experienced decreased sales of $872,393, or 6.1%, for the
six months ended June 30, 1997 compared with 1996. This decrease can be
attributed to an accrual recorded in anticipation of returns from a major
customer. The decrease was offset by sales of products acquired from Zanart
Entertainment in late 1996, which consisted primarily of STAR WARS framed
prints associated with the re-release of the trilogy of movies produced by
Lucasfilms. BEx's sales increased $ 221,155, or 34.7%, for the two quarters
compared with the comparable period in 1996 as a result of the redirection of
marketing and sales efforts which focuses on sales of products produced for
major movie promotions. KRSI was merged into the Company effective August
28, 1996 and contributed sales of $621,184 for the six months ended June 30,
1997.
Cost of goods sold decreased $6.6 million, or 59.5%, for the six
months ended June 30, 1997 to $4.5 million compared with $11.1 million for
the same period in 1996. As a percentage of net sales, cost of goods sold
decreased to 42.5% for the six months ended June 30, 1997 from 54.7% for the
six months ended June 30, 1996. The Company's cost of goods sold decreased
primarily because SDI, which historically has had a higher cost of goods sold
percentage, had costs of $6.2 million for the six months ended June 30, 1996.
OSP's cost of goods sold decreased $0.6 million, or 13.6%, for the
six months ended June 30, 1997 to $3.8 million compared to $4.4 million for
the same period in 1996. For the first two quarters of 1997, OSP's costs of
goods
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<PAGE>
sold as a percentage of net sales was 41.8% compared with 44.0% in the first
two quarters of 1996. This is primarily due to the sales of STAR WARS
products which were purchased at a discount from Zanart Entertainment's
historical costs and therefore carried higher margins for OSP.
BEx's cost of goods sold for the first two quarters of 1997 was $0.5
million, or 44.4% of net sales, compared with $0.5 million, or 55.6% of net
sales, for the first two quarters of 1996. The decrease in cost of goods
sold as a percentage of net sales is due primarily to the relocation of the
Company's manufacturing and sales operations from Michigan to Bell,
California in 1996 and the write-down of certain inventory at the time.
KRSI's cost of goods sold as a percentage of net sales for the six month
period was 33.3%.
License and royalty expense as a percentage of net sales increased to
17.0% for the six months ended June 30, 1997 from 10.8% for the six months
ended June 30, 1996. OSP's royalty rate increased to 17.6% for the six
months ended June 30, 1997 from 12.0 % for the same period in 1996 due
primarily to the increased sales under Disney licenses which have higher
royalty rates. Additionally, SDI, which has historically had the lowest
royalty rate, had a royalty rate of 9.3% in the six-month period ended
June 30, 1996, which lowered the Company's combined royalty rate. Since SDI
was sold on December 31, 1996, this effect was not present in the six-month
period ended June 30, 1997.
Warehouse and selling expenses decreased $1.6 million, or 30.0%, to
$3.7 million for the six months ended June 30, 1997 from $5.3 million for the
same period in 1996. SDI had costs of approximately $1.0 million which
represented approximately 10.6% of net sales. The remaining decreases after
removing the effect of SDI were primarily the result of lower salaries and
wages as well as efficiencies with the cost reductions of BEx, which more
than offset the increase associated with the addition of KRSI. Warehouse and
selling expenses as a percentage of net sales increased to 34.9% for the six
months ended June 30, 1997 from 26.3% for the same period in 1996 due to the
sale of SDI which had lower warehouse and selling expenses as a percentage of
net sales than OSP.
Warehouse relocation expense represents an estimated $100,000 accrual for
the costs associated with the outsourcing arrangement with Prodispak U.S.A,
Inc. (see "Liquidity and Capital Resources").
General and administrative expenses decreased by $825,643, or 26.7%, to
$2.3 million for the six months ended June 30, 1997 from $3.1 million for the
same period in 1996 due primarily to the sale of SDI. SDI contributed
approximately $1.1 million in general and administrative costs in the
six-month period ended June 30, 1996. Offsetting that decrease were
increases in general and administrative costs primarily as a result of higher
amortization due to the goodwill from the KRSI acquisition, which totaled
$229,204 for the six months ended June 30, 1997. Other increased costs were
insurance and professional fees as a result of being a public entity.
Interest expense decreased $193,008, or 32.4%, to $403,443 for the six
months ended June 30, 1997 from $596,451 for the same period in 1996. The
decrease in interest expense is due primarily to the sale of SDI.
The Company recorded income tax expense of approximately $58,000 in the
first two quarters of 1996 as a result of the profits of the Company's 51%
owned subsidiary, SDI, which was sold on December 31, 1996. There was only
a $1,054 provision in the first two quarters of 1997 as a result of operating
losses and no income tax benefit was recognized for the losses since the
additional deferred tax asset from the net operating loss carryforwards was
offset by an increased valuation allowance.
For the six months ended June 30, 1996, 49% of the income of SDI was
allocated to the minority stockholder and totaled $93,726. Since SDI was
sold on December 31, 1996, there was no allocation of profit or loss in 1997.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996
The Company's net sales decreased $5.9 million, or 51.8%, for the three
months ended June 30, 1997 compared to the three months ended June 30, 1996.
This decrease was primarily a result of the sale of SDI on December 31, 1996,
which contributed sales of $5.6 million in the three months ended June 30,
1996. OSP experienced decreased sales of
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<PAGE>
$1.1 million, or 20.4%, for the three months ended June 30, 1997 compared
with 1996. This decrease can be attributed to processing of a backlog of
credits for returns and an accrual recorded in anticipation of returns from a
major customer. BEx's sales increased $400,000, or 100%, for the quarter
compared with the comparable period in 1996 as a result of the redirection of
marketing and sales efforts which focuses on sales of products produced for
major movie promotions. KRSI was merged into the Company effective August
28, 1996 and contributed sales of $400,000 for the quarter ended June 30,
1997.
Cost of goods sold decreased $4.3 million, or 64.4%, for the three months
ended June 30, 1997 to $2.5 million compared with $6.8 million for the same
period in 1996. As a percentage of net sales, cost of goods sold decreased
to 45.5% for the three months ended June 30, 1997 from 59.7% for the three
months ended June 30, 1996. The Company's cost of goods sold decreased
primarily because SDI, which historically has had a higher cost of goods sold
percentage, had costs of $3.8 million for the three months ended June 30,
1996.
OSP's cost of goods sold decreased $600,000, or 23.19%, for the three
months ended June 30, 1997 to $2.0 million compared to $2.6 million for the
same period in 1996. For the second quarter of 1997, OSP's costs of goods
sold as a percentage of net sales was 46.5% compared with 48.2% in the first
quarter of 1996. This is primarily due to the sales of STAR WARS products
which were purchased at a discount from Zanart Entertainment's historical
costs and therefore carried higher margins for OSP.
BEx's cost of goods sold for the second quarter of 1997 was $0.4 million,
or 50.0% of net sales, compared with $0.4 million, or 100.0% of net sales,
for the second quarter of 1996. The decrease in cost of goods sold as a
percentage of net sales is due primarily to the relocation of the Company's
manufacturing and sales operations from Michigan to Bell, California in 1996
and the write-down of certain inventory at the time.
KRSI's cost of goods sold as a percentage of net sales for the second
quarter was 25.0%.
License and royalty expense as a percentage of net sales increased to
20.0% for the three months ended June 30, 1997 from 11.4% for the three
months ended June 30, 1996. OSP's royalty rate increased to 20.9% for the
three months ended June 30, 1997 from 11.1% for the same period in 1996 due
primarily to the increased sales under Disney licenses which have higher
royalty rates and the write-off of prepaid royalties on expired licenses.
Additionally, SDI, which has historically had the lowest royalty rate, had a
royalty rate of 10.7% in the second quarter of 1996, which lowered the
Company's combined royalty rate. Since SDI was sold on December 31, 1996,
this effect was not present in the second quarter of 1997.
Warehouse and selling expenses decreased $587,444, or 23.5%, to $1.9
million for the three months ended June 30, 1997 from $2.5 million for the
same period in 1996. SDI had costs of approximately $575,556 which
represented approximately 10.3% of net sales. The remaining decreases after
removing the effect of SDI were primarily the result of lower salaries and
wages as well as efficiencies with the cost reductions of BEx, which more
than offset the increase associated with the addition of KRSI. Warehouse and
selling expenses as a percentage of net sales increased to 34.9% for the
three months ended June 30, 1997 from 22.0% for the same period in 1996 due
to the sale of SDI which had lower warehouse and selling expenses as a
percentage of net sales than OSP.
Warehouse relocation expense represents an estimated $100,000 accrual for
the costs associated with the outsourcing deal arranged with Prodispak
U.S.A., Inc. (see "Liquidity and Capital Resources").
General and administrative expenses decreased by $1,046,912, or 50.8%, to
$1.0 million for the three months ended June 30, 1997 from $2.1 million for
the same period in 1996 due primarily to the sale of SDI. SDI contributed
approximately $756,047 in general and administrative costs in the second
quarter of 1996. Offsetting that decrease were increases in general and
administrative costs primarily as a result of higher amortization due to the
goodwill from the KRSI acquisition, which totaled $112,000 for the three
months ended 1997. Other increased costs were insurance and professional
fees as a result of being a public entity.
-18-
<PAGE>
Interest expense decreased $121,792, or 37.0%, to $207,000 for the three
months ended June 30, 1997 from $328,792 for the same period in 1996. The
decrease in interest expense is due primarily to the sale of SDI.
The Company recorded income tax expense of approximately $58,000 in the
first two quarters of 1996 as a result of the profits of the Company's 49%
owned subsidiary, SDI, which was sold on December 31, 1996. There was no
provision in the second quarter of 1997 as a result of operating losses and
no income tax benefit was recognized for the losses since the additional
deferred tax asset from the net operating loss carryforwards was offset by an
increased valuation allowance.
In the second quarter of 1996, 49% of the income of SDI was allocated to
the minority stockholder and totaled $139,146. Since SDI was sold on
December 31, 1996, there was no allocation of profit or loss in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, working capital was a deficit of approximately $2.6
million primarily as a result of the Company's line of credit being
classified as a current liability for the reasons set forth below.
Net cash provided by operating activities during the six months ended June
30, 1997 was $22,329 due primarily to the reductions in inventories and
increase in royalties payable, which were partially offset by increases in
prepaid royalty advances and reductions in accounts receivable and accounts
payable. Net cash used in investing activities was $135,951 primarily as a
result of the purchase of property and equipment. Net cash provided by
financing activities during the six months ended June 30, 1997 was $81,374
due primarily to proceeds from the collection of the note receivable from the
sale of SDI partially offset by repayment of a portion of the revolving line
of credit as well as payment of subordinated debt to a vendor.
On August 28, 1996, the Company acquired KRSI through a merger and
effected a reorganization of OSP Publishing, Inc. and The Button Exchange,
Inc. Concurrently with these transactions, the Company issued 4,324,237
shares of common stock to investors in a private placement (the "Private
Placement"). Net proceeds (less commissions and expenses and distributions)
to the Company as a result of the Private Placement were $2,824,000. Prior
to the effectiveness of the Transactions, OSP paid a dividend of $2,350,000
to Joseph C. Angard and Michael Malm, former OSP shareholders and the
Chairman of the Board and Chief Executive Officer and the Chief Operating
Officer of the Company, respectively.
On December 31, 1996, the Company consummated the sale of its 51%-owned
subsidiary, SDI, pursuant to a redemption of all of the SDI stock held by OSP
(the "SDI Stock"). Following the redemption, Stanley DeSantis, SDI's
President and the owner of the remaining 49%, was the sole stockholder of
SDI. In consideration of the SDI Stock, the Company received an aggregate of
$1.575 million, $417,000 of which was paid upon the redemption and
$1,158,000 of which was paid on February 28, 1997. The consideration for
the SDI Stock was based upon a formula relating to SDI's prior four years of
operating income.
In September, 1996, the Company entered into an agreement with several
persons for the formation of a company, The Speedway, LLC, a California
limited liability company ("Speedway"), to engage in the business of
developing, advertising, marketing and promoting a chain of racing themed
entertainment restaurants and the sale of merchandise in connection
therewith. The Company contributed approximately $85,000 in cash to Speedway
for an approximately 25% interest in the enterprise.
On July 28, 1997, the Company sold its economic interest in Speedway for
$200,000 to The Saloner Family Investment Limited Partnership. The Company
received payment on the sale date, and will record a gain in the third
quarter period. Alan Saloner who owns 250,000 shares of Common Stock (or
1.9% of the outstanding Common Stock) and is the President of Prodispak, is
the general partner of TSFILP.
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<PAGE>
In July 1997, one of the Company's major customers indicated its refusal
to pay $700,000 of its account with the Company. This refusal seriously
impaired the Company's cash flow and, as discussed below, resulted in the
Company's inability to obtain financing under its line of credit. The
Company has booked a reserve with respect to such receivable; however, the
Company may decide to pursue legal or other means against the customer so
that a portion or all of the delinquent account is paid. The Company has a
line of credit with Foothill Capital Corporation ("Foothill") which provides
for maximum borrowings of $7,500,000 subject to certain conditions.
Effective July 22, 1997, Foothill ceased advancing funds to the Company under
the Company's revolving line of credit because the Company was no longer in
compliance with the lending formulas under the line. As a result of one of
the Company's receivables discussed in the preceding paragraph no longer
qualifying under the line, the Company was over advanced approximately
$700,000 as of July 22, 1997. The Company is currently in negotiations with
Foothill to determine the future of their lending relationship.
The Company has been seeking ways to reduce the Company's cash
requirements. Effective July 1, 1997, the Company outsourced all warehousing,
assembly, shipping, distribution, data entry and other MIS functions of the
Company to Prodispak U.S.A. Inc. ("Prodispak"). The Company had previously
signed a letter of intent with a New Jersey-based corporation for this
purpose, but an agreement was never reached. Under the outsourcing
agreement, Prodispak receives 7-1/4% of the Company's gross sales for
providing these services. The arrangement relieves some cash flow
limitations on the Company because it reduces the Company's fixed costs. In
addition, the arrangement improves inventory management control by, among
other things, expediting shipping. The Company has significantly reduced its
administrative and warehouse personnel and discontinued many non-performing
poster titles, and plans to reduce the number of new licenses signed in 1997.
This will reduce the initial cash outlays of pre-production, art and design
costs and effort. Alan Saloner who owns 250,000 shares of Common Stock (or
1.9% of the outstanding Common Stock) and is the general partner of The
Saloner Family Investment Limited Partnership (see "Note 7" and "Liquidity
and Capital Resources"), is the president of Prodispak.
On June 6, 1997, the Company entered into a 10-year distribution agreement
(the "Distribution Agreement") with 2d Interactive, Inc. ("2d"), a media
company with an electronic merchandising kiosk used in the display and sale
of posters and advertising images ("PosterCruisers") and other media
programs. The Distribution Agreement provides that the Company will serve as
2d's exclusive placement agent for PosterCruisers and certain
merchandise-based products. The Company has agreed to place and maintain a
minimum number of PosterCruisers each year at various retailer distributors
and to manage all aspects of 2d's poster distribution program. In addition,
2d will serve as the Company's exclusive placement agent for certain of the
Company's media programs and advertising, with such media advertising being
placed on PosterCruisers as well as other media programs. The Company will
receive all revenues from the sale of posters to the Company's retail
accounts under the Distribution Agreement and 2d will receive a royalty of
6-1/2% of the net sales of all of 2d's products distributed and sold to the
Company's accounts. In addition, 2d will pay the Company a media fee for the
placement of PosterCruisers and non-PosterCruisers media programs and the
sale of media advertising through existing Company displays in an amount
ranging from 8% to 50% of the revenues from such programs (based on the type
of media program and 2d's allocation of total media advertising between
advertisers, media programs and locations), a portion of which the Company
may be required to pass on to the retailers. Subsequent to entering into the
Distribution Agreement, verbal modifications to the Distribution Agreement
were made by the parties throughout July 1997. Management anticipates that
final documentation will be completed and the transaction closed during the
Company's third fiscal quarter.
In connection with the Distribution Agreement, on June 6, 1997, the
Company entered into a Share Purchase and Sale Agreement (the "Stock Exchange
Agreement") which provides for, among other things, (i) the Company's
issuance to 2d of an aggregate of 550,00 shares of common stock to be issued
upon 2d's raising (A) $2,500,000 on or prior to within 18 months of closing
the transaction and (B) $5,000,000 (including the amount set forth in clause
(A)) within 24 months of closing the transactions, (ii) 2d's issuance to the
Company of an aggregate of 78,500 shares of 2d in equal installments upon the
occurrence of the above financings and the Company's performance of various
covenants under the Distribution Agreement (the shares issued pursuant to
clauses (i) and (ii) shall be referred to as "Shares"), (iii) 2d's repurchase
right in the event that the Company does not perform such covenants, (iv)
piggyback registration rights for the Shares, (v) the Company's right of
first refusal in the event that 2d sells 51% of its common stock to a third
party, (vi) the Company's right to elect one Board member to 2d's Board so
long as the Company owns 5% or more of 2d's
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<PAGE>
outstanding common stock, (vii) 2d's right to send a representative to
participate, but not vote, at the Company's Board meetings, (viii) the
Company's and 2d's right of first refusal with respect to the Shares and (i)
2d's option to repurchase the Company's Shares under certain circumstances.
Subsequent to entering into the Stock Exchange Agreement, verbal
modifications to the Stock Exchange Agreement were made by the parties
throughout July 1997. Management anticipates that final documentation will be
completed and the transaction closed during the Company's third fiscal
quarter.
The Company is negotiating an agreement which provides for a $900,000
financing of the Company's operations in connection with the resignation from
the Company and partial buy-out of Joseph C. Angard, the Company's Chairman
of the Board and Chief Executive Officer and a 35.7% stockholder. The
primary terms of the transaction are: (i) the resignation of Mr. Angard and
the termination of his employment agreement with the Company, (ii) Mr.
Angard's loan of $900,000 to the Company at an interest rate of prime plus 2%
secured by certain of the Company's receivables, (iii) Mr. Angard's surrender
of 920,000 shares of the Company's common stock ("Common Stock") to the
Company, and (iv) the Company's 10-year option to purchase up to 970,000
shares of Common Stock held by Mr. Angard at a purchase price of $1.00 per
share. The transaction will be conditioned upon, among other things, the
purchase by means of a private placement, facilitated by Miller, Johnson &
Kuehn, Incorporated, as selling agent, the Company's placement agent in
connection with its private placement of Common Stock effected as of August
1996, of 2,000,000 shares of Common Stock held by Mr. Angard for $0.50 per
share. Following the transaction, Mr. Angard will own 1,723,192 shares of
Common Stock (or 14.3% of the outstanding Common Stock) and options to
purchase 199,998 and 100,002 shares at exercise prices of $1.65 and $1.50,
respectively. In addition, Mr. Angard will be retained as a consultant to
the Company for three years with aggregate payment of $220,000 plus certain
benefits. The Company believes the transaction will be finalized and closed
shortly.
The Company has experienced operating losses for the first six months
of 1997. Although, the Company's sales typically fluctuate based on seasonal
releases of major films and the Company has continued to focus and has moved
aggressively to reduce its operating costs, the Company cannot continue to
sustain losses or continue to operate without financing in the near future.
The Company is negotiating to enter into a Forbearance Agreement (the
"Forbearance Agreement") with Foothill Capital Corporation ("Foothill")
providing, among other things, that Foothill will refrain from seeking legal
or equitable remedies against the Company for breach of the credit line
provided by Foothill to the Company and will instead be paid amounts
outstanding from the collection of receipts presently outstanding and from
the sale of existing inventory. In connection therewith, Senoral, Inc., a
company controlled by Alan Saloner, who owns 250,000 shares of Common Stock
(or 1.9% of the outstanding Common Stock) and is the general partner of The
Saloner Family Investment Limited Partnership, and is the President of
Prodispak U.S.A. Inc., has orally committed to lend the Company $600,000
secured by new accounts receivable and, Management understands, has agreed to
purchase the outstanding debt, if any, of Foothill from Foothill, existing
ninety (90) days after Foothill's collection period, provided the Forbearance
Agreement is entered into. The Company has been seeking alternative sources
of financing, including short-term lending and seeking investors. However,
there can be no assurances that the Company will be able to reach an
agreement with Foothill on its line of credit or that such other financing
will be available. In the event that the Company is unable to obtain
financing in the near future, the Company may be required to seek relief
pursuant to a restructuring of the Company.
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other
historical information, the statements made in this filing, including in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward looking statements that involve risks and
uncertainties that could affect future results. Such risks and uncertainties
include, but are not limited to: timing and size of orders from large
customers, general economic conditions, inventory management, the health of
the retail environment, supply constraints, supplier performance and other
risks indicated in the Company's filings with the Securities and Exchange
Commission.
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<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In May 1997, the Company filed an action in U.S. District Court in
California against Mark Hauser, a director and financial advisor of
the Company, alleging, among other things, the breach by Mr. Hauser
and Tamarix Capital Corporation (of which Mr. Hauser is a principal)
of financial advisory services agreements with the Company. On
August 11, 1997, effective June 3, 1997, the parties entered into a
Mutual General Release which provided for, among other things: (i)
the dismissal of the lawsuit with prejudice, (ii) the termination of
the financial advisory agreements, (iii) the modification of warrants
to purchase an aggregate of 379,922 shares of the Company's common
stock held by Mr. Hauser and two affiliates of Tamarix to extend the
term from August 28, 1999 to June 3, 2000 and reduce the exercise
price from $1.50 to $1.00 (subject to adjustments), (iv) the
resignation of Mr. Hauser from the Board of Directors, (v) the
Company's payment of approximately $900 of expenses of Tamarix and
(vi) the Company's payment to Tamarix of certain fees in the event that
various transactions are consummated on or before December 3, 1998.
In June 1997, the Company was served with a complaint alleging that
Justman Packaging Company ("Justman") is owed a debt of approximately
$70,000. Justman is a manufacturer of cardboard displays. The case was
filed in Los Angeles County Superior Court in California as Case
No. BC 171512. The Company has filed its answer denying responsibility
for the debt and is investigating potential liability. Management
believes the case, if adversely decided, will not have a material
adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company has a line of credit with Foothill Capital Corporation
("Foothill") which provides for maximum borrowings of $7,500,000
subject to certain conditions. Effective July 22, 1997, Foothill
ceased advancing funds to the Company under the Company's revolving
line of credit because the Company was no longer in compliance with
the lending formulas under the line. As a result of one of the
Company's receivables no longer qualifying under the line, the Company
was overadvanced approximately $700,000 as of July 22, 1997. The
Company is currently in negotiations with Foothill to determine the
future of their lending relationship (see "Liquidity and Capital
Resources").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE>
ITEM 5. OTHER INFORMATION.
On May 16, 1997, the number of directors of Global One was increased
to five (5) and George Vrabeck was elected as a Class I director and
William Kampf was elected as a Class II director. In addition, George
Vrabeck was elected to serve as the Chief Operating Officer of Global
One and the Chief Executive Officer and President of OSP. Effective
July 7, 1997, William Righeimer was elected to serve as the Chief
Financial Officer and Secretary of Global One.
On July 31, 1997, Messrs. Angard and Sacks resigned as directors of
the Company and Mr. Angard resigned as the Chairman of the Board and
Chief Executive Officer. George Vrabeck gave up his titles as
President and Chief Operating Officer to succeed as Chairman of the
Board and Chief Executive Officer. William Righeimer was also elected
as Executive Vice President.
The following business risks as disclosed in the S-4 Registration
Statement No. 333-4655 filed with the Securities and Exchange
Commission on May 29, 1996, are hereby incorporated by reference as
those set forth fully herein:
Reliance on license agreements
Market acceptance of licensed properties
Seasonality and fluctuations in operating results
Risk and fluctuations in operating results
Concentrated customer base
Dependence on key personnel
Control by existing shareholders
Possible insufficiency of working capital
Anti-takeover effect of undesignated preferred stock
Material returns of unsold products
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Final Amended and Restated Agreement and Plan of
Merger incorporated by reference to Exhibit 2.1
of the Company's Registration Statement on Form
S-4 (No. 333-4655)
3(i).1 Certificate of Incorporation of the Company
incorporated by reference to Exhibit 3(i).1 of
the Company's Registration Statement on Form S-4
(No. 333-4655)
3(ii).1 Bylaws of the Company incorporated by reference
to Exhibit 3(ii).1 of the Company's Registration
Statement on Form S-4 (No. 333-4655)
10.1 Mutual General Release, dated as of June 3,
1997, among Global One, Mark Hauser, Ara Cohen,
William Spier and Tamarix Capital Corporation
10.2 Distribution Agreement dated as of June 6, 1997,
between the Company and 2d Interactive, Inc.
10.3 Share Purchase and Sale Agreement dated as of
June 6, 1997 between the Company and
2d Interactive, Inc.
11.1 Statement re: computation of per share earnings
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
DATED: September 4, 1997 By: /s/ WILLIAM RIGHEIMER
-----------------------------
William Righeimer
Chief Financial Officer
(Duly Authorized Officer)
DATED: September 4, 1997 By: /s/ KEVIN W. CVENGROS
-----------------------------
Kevin W. Cvengros
Corporate Controller and
Secretary
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