<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from _________to ___________
Commission file number: 000-21049
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4578632
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
5548 LINDBERGH LANE 90201-6410
BELL, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (213) 980-4300
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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 such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 24, 1997 based on the closing price on
the NASDAQ National Market System of such stock on such date was $15,383,215.
Registrant's Common Stock outstanding at March 24, 1997 was 13,011,947 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
-----------------------
CAPTION PAGE
- ------- ----
PART I
Item 1. - BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. - PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. - LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . 11
PART II
Item 5. - MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . 11
Item 6. - SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . 12
Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 14
Item 8. - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. . . . . . . . . . . 22
Item 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . 22
PART III
Item 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . 22
Item 11. - EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 24
Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 31
PART IV
Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 32
<PAGE>
PART I
ITEM 1. - BUSINESS
GENERAL
Global One Distribution & Merchandising Inc. ("GLOBAL ONE" or the
"COMPANY") was formed in April 1996 for the purpose of serving as a holding
company for OSP Publishing, Inc. ("OSP"), a privately-held company incorporated
in 1989, and its subsidiaries and acquiring Kelly Russell Studios, Inc.
("KRSI"), a publicly traded company. 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 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 SmallCap Market effective August 28, 1996.
The Company designs and produces licensed trend merchandise which it
markets for sale in gift and stationary stores, video stores, music stores, toy
stores, bookstores and mass retailers. The Company's products consist of
posters, T-shirts, framed and unframed wall decor, buttons, key chains,
stickers, collectible movie scripts and sports related collectible art.
Substantially all of the Company's net sales during 1996 were attributable to
products incorporating some licensed material. These products incorporate
primarily licensed images and characters from motion pictures, television, comic
books, music, sports and popular culture. Management believes that the Company
is the leading domestic publisher and distributor of licensed posters, and a
leading distributor of licensed T-shirts, buttons, key chains, stickers and
collectible movie scripts.
The Company's licenses encompass over 200 properties, including: (i)
Disney's SPACE JAM, THE HUNCHBACK OF NOTRE DAME, POCAHONTAS and THE LION KING
animated movies, MICKEY UNLIMITED characters and HOME IMPROVEMENT television
program; (ii) Warner Bros.'s LOONEY TUNES characters and BAYWATCH television
program; (iii) other television programs, including FRIENDS, MELROSE PLACE,
SEINFELD and BEAVIS & BUTT-HEAD; (iv) other motion pictures, including
INDEPENDENCE DAY, PULP FICTION and BABE; and (v) various musicians and
personalities, including Madonna, Boyz II Men, The Doors, Marilyn Monroe and
Whitney Houston. See "-- Operations and Licensing."
In 1996, the Company's business was conducted through the Company's
subsidiaries, OSP, BEx Corp. ("BEx"), 51%-owned Stanley DeSantis, Inc. ("SDI")
and, since August 28, 1996, KRSI. See "-- Products and Operating Subsidiaries."
OSP publishes licensed and non-licensed posters, and also manufactures Book
Bites-TM-, Wallet Cards, movie scripts and other trend gift items. BEx designs
and markets licensed and non-licensed buttons, stickers, key rings and magnets.
SDI designs and markets a line of T-shirts, sweatshirts, hats and other apparel
to department and specialty stores and other retail outlets, including mass
merchants, based on both licensed and non-licensed designs. KRSI creates,
markets and distributes sports related art for the collectible market. On
December 31, 1996, the Company sold its 51% ownership in SDI to SDI's President.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Company's products incorporate designs created by its staff of artists
and approved by the licensor. See "-- Design and Development; Production." All
of the Company's products are produced according to its specifications by
unaffiliated manufacturers located in the greater Los Angeles area. See
"--Manufacturing." The Company also commissions original artwork for the
production of its lithographs and autograph ready art. See "--Design and
Development; Production."
The Company's products are sold primarily through in-house sales
representatives and multi-line independent sales representatives and secondarily
through distributors to a diversified group of over 45,000 retail outlets,
primarily in the mass merchandise, gift, music, bookstore, toy, grocery, framing
and video markets. The
1
<PAGE>
Company's customers include K-Mart, Wal-Mart, Musicland, Walden Books,
Blockbuster Entertainment, Toys R' Us and J.C. Penney. Musicland accounted for
10% of the Company's net sales during 1996. International sales, which are
conducted primarily through a network of distributors, comprised 5% of total
sales during 1996. See "-- Sales and Marketing."
BUSINESS STRATEGY; GLOBAL ONE
Global One's business strategy is to generate revenue and earnings growth
through further penetration of domestic and international markets for sale of
the Company's existing products, and the introduction of new product lines that
complement and supplement existing product lines which can be sold through the
same channels of distribution.
To accomplish its strategic objectives, Global One may seek to: (i) acquire
producers of other lines of trend merchandise; (ii) increase sales to mass
retailers; (iii) further expand into international markets; (iv) develop and
introduce new and ancillary product categories utilizing existing licenses; (v)
continue to acquire licenses from licensors with whom the Company currently has
relationships and from new licensors; (vi) enter into partnerships with
retailers to develop new products; (vii) develop relationships with "anchor"
retailers who will commit to purchase items in new product categories and (viii)
develop and expand sales of products through "tie in" or "premium" sales.
On November 15, 1996, the Company acquired the licensed wall decor assets
and distribution network of Zanart Entertainment, Inc. The licenses include STAR
WARS, STAR TREK, X-FILES, MARVEL COMICS, LOONEY TUNES, BATMAN, ANIMANIACS AND
SUPERMAN. As a result of the acquisition, OSP has commenced producing
lithographed and chromium prints which feature such licensed cartoon and movie
art direct from the studios.
OVERVIEW OF THE LICENSED MERCHANDISE INDUSTRY
Royalties on sales of licensed merchandise provide an important source of
supplemental revenue for licensors, primarily in the entertainment and sports
industries. According to THE LICENSING LETTER, sales of licensed merchandise in
the U.S. and Canada in 1994 were approximately $102.2 billion. The Company
operates in the trend, novelty or gift segment of the licensed merchandise
industry which management believes accounted for approximately $27.0 billion in
sales in the U.S. and Canada in 1994. Management believes that the growth in
sales of licensed merchandise during the past five years is principally the
result of the rapid growth and globalization of the U.S. motion picture,
television, music and sports industries, during this period. Management believes
that a continuation of these trends and the continued domination of worldwide
markets by the U.S. film and entertainment industries will provide significant
opportunities for future expansion of international sales of licensed
merchandise.
Management believes that trend, novelty and gift items, such as the
products marketed by the Company, have a high turnover rate and provide
retailers with higher returns per square foot than most other retail
merchandise. The low cost of production of the Company's products permit
retailers to sell such products at lower price points that appeal to a wide
range of consumers. Disposable wall products incorporating standard characters,
such as MICKEY MOUSE and BUGS BUNNY, classic icons, such as Marilyn Monroe and
James Dean, contemporary and classic musicians, such as Alanis Morrissette and
The Doors, or hit films and television productions, such as THE LION KING and
FRIENDS, are an inexpensive way for consumers, particularly children, teens and
young adults, to express themselves and identify with their favorite aspects of
popular culture. Retailers that sell the Company's merchandise frequently
utilize integrated product displays to generate a higher volume of "impulse
sales" of licensed promotional products.
COMPETITION
Management believes that OSP is currently the leading domestic publisher of
licensed posters. OSP's primary competitors in the poster publishing business
are Day Dream Publishing, Inc., Western Graphics, Inc., Portal Publications Co.
and Funky Enterprises. Although the Company is unable to obtain published
financial and other data with respect to production and sales volumes of its
competitors, most of which are private companies, based on their experience and
knowledge of the licensed poster industry, the Company's management believes
2
<PAGE>
that OSP, with annual sales of over $20 million, accounts for 20% to 30% of
total annual production volume in the licensed poster industry of between $75
million and $100 million. The Company's management further believes, based on
its knowledge of the licensed poster industry, that the Company's next largest
competitor has annual sales of approximately $20 million. The Company and its
four major competitors collectively account for an estimated 80% share of the
market for licensed posters.
With respect to KRSI's Legends and Superstars-TM- products (see "--
Products and Operating Subsidiaries"), the Company competes on two different
levels. The framed product competes with other entertainment collectibles and
memorabilia, in addition to lower cost artwork and lithographs in general.
The autograph ready product sells at a lower price point and competes with
sports trading cards and less expensive sports collectibles and memorabilia.
KRSI's autograph-ready Legends and Superstars product is priced higher than
most sports trading cards. Direct competitors with similar product lines
include Dream Team Collectibles, Inc. In the area of sports trading cards,
those competitors include Topps, Inc., The Upper Deck Company, Fleer Corp.
and The Scoreboard, Inc.
The Company competes for licenses with other producers of licensed
merchandise on the basis of its multiple product categories, such as posters,
T-shirts, framed and unframed wall decor, buttons, stickers, key chains and
collectible movie scripts. Management believes the use of multiple product
categories, which often can be sold through the same retail facility, is
attractive to licensors because it provides a more efficient distribution and
more royalties based upon a popular licensed property. In addition, the Company
offers a large and diversified distribution network. The variety of products
offered by the Company, the quality and experience of its art department and its
strong relationships with key licensors and major studios have enabled the
Company to acquire a portfolio of approximately 200 major licenses.
The Company competes for retail floor space on the basis of its portfolio
of licenses, which allow it to offer the greatest selection of titles. The
Company has approximately 1,100 shelf keeping units ("SKUs") while its
competitors are believed to offer only between 200 and 400 SKUs. The Company has
in place over 18,000 poster racks of varying sizes at its customer locations,
and the Company's sales staff provides ordering and stocking services. In
addition, the Company's multiple product lines enable it to provide retailers
with integrated product displays incorporating each subsidiaries' products, thus
offering retailers a more effective way to capitalize on a popular trend.
PRODUCTS AND OPERATING SUBSIDIARIES
The Company publishes and distributes licensed posters, T-shirts, framed
and unframed wall decor, buttons, key chains, stickers and collectible movie
scripts Classic Commemoratives-TM-, ChromArt-TM- and limited edition collectible
prints through OSP, SDI, BEx, and KRSI. Substantially all of the Company's net
sales during 1996 were attributed to products incorporating some licensed
material. The following table sets forth the Company's net sales by subsidiary:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1994 1995 1996
----------------------- --------------------------- ------------------------
AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
OSP . . . . . . . $ 23.6 55.9% $ 25.2 66.0% $ 21.9 51.8%
SDI . . . . . . . 11.1 26.3% 10.1 26.4% 17.6 41.6%
KRSI (1). . . . . 1.0 2.3%
BEx . . . . . . . 7.5 17.8% 2.9 7.6% 1.8 4.3%
------ ------ ------ ------ ------ ------
Company . . . . . $ 42.2 100.0% $ 38.2 100.0% $ 42.3 100.0%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
- -----------------------------------
(1) Acquired on August 28, 1996.
3
<PAGE>
OSP
OSP develops and markets posters incorporating primarily licensed images
and characters from motion pictures, television, animation, music and popular
culture. OSP's product lines are designed principally around four main
categories of consumers: pre-teens, teens, college students and adults.
Non-licensed posters published by OSP include generic posters of models, cars,
airplanes and popular phrases. OSP's typical poster consists of a color image
printed on 23"x 35", 80 lb. paper.
OSP also develops and markets products utilizing licensed and
non-licensed material, including Wallet Cards, Book Bites-TM-, movie scripts
and other trend gift items to independent retailers. Wallet Cards are
informative cards shaped like credit cards and Book Bites-TM- are die-cut
bookmarks bearing images of OSP's licensed characters.
In order to expand OSP's products aimed at adults, OSP developed AVALON
EDITIONS-TM- in March 1995 and CLASSIC COMMEMORATIVES-TM- in August 1995.
AVALON EDITIONS-TM- and CLASSIC COMMEMORATIVES-TM- are contemporary framed
and unframed wall decor lithographed on premium grade, museum weight paper.
AVALON EDITIONS-TM- feature reproductions of favorite fine art pieces,
generic themes and humorous renditions of fine art. CLASSIC
COMMEMORATIVES-TM- are newly created proprietary art featuring standard
licensed characters, such as MICKEY MOUSE. OSP's main poster and trend
product lines generally retail for between $5.00 and $10.00 each, while
AVALON EDITIONS-TM- and CLASSIC COMMEMORATIVES-TM- generally retail for
approximately $20.00 each.
OSP's five largest licensors based on 1996 net sales were Warner
Brothers/LCA (17%), Disney (14%), 20th Century Fox (7%), Winterland (7%) and No
Fear (3%). OSP's leading products during the past 12 months have included
posters and other items based on characters and images from THE HUNCHBACK OF
NOTRE DAME, 101 DALMATIANS, SPACE JAM, INDEPENDENCE DAY AND BANANAS IN PAJAMAS.
SDI
SDI designs and markets licensed and non-licensed T-shirts, sweatshirts,
mugs, hats and boxer shorts in the $20.00 and under retail price range for sale
primarily in department stores, such as J.C. Penney, gift shops and music
stores, such as Musicland, apparel stores, such as Miller's Outpost and
Spencers, and mass retailers such as Wal-Mart and K-Mart. Such products
generally retail at the $15.00 price level.
SDI's five largest licensors based on 1996 net sales were Anheuser-Busch
(25%), Fox Television (18%), MTV Networks (15%), Hanna Barbera (9%) and Disney
(6%). SDI's leading products during the past 12 months have included T-shirts
and other items based on BUDWEISER, INDEPENDENCE DAY and BEAVIS & BUTTHEAD.
The Company sold its 51% ownership in SDI effective December 31,1996.
BEX
BEx designs and markets licensed and non-licensed buttons, key rings and
stickers for sale as novelty and impulse purchase items in a wide range of
retail stores, including gift-oriented card shops, mass merchandisers, music
and video stores and convenience stores. Non-licensed products include
buttons and key rings bearing phrases or slogans, seasonal buttons and
tourist/souvenir buttons targeted at specific regions. Retail prices for
BEx's products range from $1.29 to $3.99. Sales of key rings accounted for
34% of BEx's net sales in 1996 and stickers accounted for 21% of BEx's net
sales. Other products produced by BEx include licensed and non-licensed
buttons and magnets.
BEx's four largest licensors based on 1996 net sales were Warner
Brothers/LCA (52%), Disney (11%), MTV Network (9%) and 20th Century Fox (4%).
BEx's leading products during the past 12 months have included items based on
characters and images from INDEPENDENCE DAY, THE HUNCHBACK OF NOTRE DAME,
BANANAS IN PAJAMAS and LOONEY TUNES standard characters.
4
<PAGE>
KRSI
KRSI creates, markets and distributes sports and entertainment-related art
for the collectible market. KRSI's primary strategy is to use its collection of
original art to create innovative, affordable products with an artistic look,
quality and presentation that differentiates them from other entertainment
products, such as posters and trading cards. KRSI focuses on products with a
wide range of appeal that can be quickly created, produced and sold through mass
merchants, distributors and specialty retail stores. Almost all of KRSI's
products are produced and sold under non-exclusive licenses from major national
sports franchises and their related players' associations.
KRSI's sales in 1996 were comprised primarily of The Legends and
Superstars-TM- wall hangings. The Legends and Superstars product is a wall
hanging that measures approximately 11" x 14" and consists of a framed mat
with three openings. The largest opening displays a lithographic print of
KRSI's original art. The two smaller openings contain a photographic picture
and biographical information or a brief description of the pictured item or
personality. Each piece is individually numbered. The framed Legends and
Superstars product was designed for memorabilia consumers who prefer higher
priced, higher quality products than trading cards and posters. However, at a
suggested retail price of $19.99 to $24.99, it is priced below many other
memorabilia items.
KRSI also sells an unframed, "autograph ready" version of its Legends and
Superstars product. The unframed product is substantially the same as the framed
product, except that it is shrink wrapped rather than framed. The plastic shrink
wrap makes it easier for purchasers to remove the product from the packaging and
have it autographed or personalized. If desired, the product can then be framed
at the owner's expense. The autograph ready Legends and Superstars products sell
for a suggested retail price of $9.99 to $12.99.
During 1996, KRSI offered approximately 100 different images in both the
framed and autograph-ready Legends and Superstars product lines. The number of
images offered is periodically adjusted due to seasonality and customer demand.
KRSI's products also include full size lithographic prints from KRSI's
original art and original art produced by independent artists. The Company is
not currently emphasizing its prints products; however, it will continue to
commission and purchase additional pieces of original art, based primarily on
recently popular sports personalities or events, for the development of
additional products.
KRSI intends to focus its new product development on expanding and updating
the images in its existing product lines. The ability to quickly introduce
images of recently popular subject matter, such as the star athletes in the
World Series or the Super Bowl, is important to maintaining the commercial
viability of KRSI's product lines. When necessary, KRSI has been able to create,
obtain approval from licensors, produce and ship products with new images within
six weeks of identifying the new subject matter. The more typical time frame is
approximately two months from conception to delivery. If new licenses are
necessary, KRSI's ability to introduce new product may be slowed significantly.
Obtaining a new license may require from two months to a year. See "--
Licensing."
KRSI's four largest licensors based on 1996 net sales since August 28, 1996
were National Football League (47%), National Basketball Association (19%),
Major League Baseball (11%) and National Hockey League (8%).
LICENSING
The Company's licenses permit the Company to produce and market products
based on characters and images which already possess their own popular identity
through media exposure such as television, films, cartoons, comic books and
music. Most licenses permit the Company to develop multiple products through its
various operating subsidiaries. In addition to licenses for sales in the
domestic market, the Company is increasingly pursuing international licenses for
sales in Canada, Europe, and the Pacific Rim. International rights exist in
approximately 10% of all licenses obtained by the Company.
5
<PAGE>
Licensed products include Promotional Properties, Standard Properties and
seasonal properties. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--General." Promotional Properties include
products containing scenes or images connected with a current film, television
program or popular performer, such as THE HUNCHBACK OF NOTRE DAME, HOME
IMPROVEMENT and Madonna. Standard Properties include products based on standard
characters, including MICKEY MOUSE and LOONEY TUNES characters such as BUGS
BUNNY, TAZ, FOGHORN LEGHORN and MARVIN THE MARTIAN. Seasonal properties include
products consisting of characters or images with a holiday or seasonal theme.
Standard Properties typically generate relatively consistent sales over time
while Promotional Properties typically involve higher initial sales but shorter
product life-spans. Licensed promotional products are those that accompany a
major promotional campaign, typically timed to coincide with the theatrical or
video release of a large-budget film. Generally, three to six such promotional
campaigns occur during a fiscal year, and the shelf life of licensed promotional
products is typically 60-120 days. Seasonal products provide additional sales
during holiday periods. Sales of Promotional Properties also tend to be
seasonal, due to the seasonality of major theatrical releases of films. Film
studios typically release the majority of major films during the months of May
through September, which has historically resulted in higher sales volumes by
the Company during this period. The fourth quarter of 1996 represented 30% of
total sales. In the past, the second quarter has typically had higher net sales;
however, the major films, SPACE JAM and 101 DALMATIANS, were released in the
fourth quarter. See "--Seasonality."
The successful marketing of Promotional Properties generally requires the
Company to anticipate and evaluate the popularity of licensed properties, most
of which are media related, and to capitalize on the success of such properties
in a timely manner. A determination to acquire a license must frequently be made
before the commercial introduction of the property in which a licensed character
appears. The licensing staff must evaluate many criteria, including the actors,
script, actual footage, demographics and the licensor's marketing budget to
determine whether to acquire a new license. As Promotional Properties are
typically marketed successfully only for a limited period of time, the success
of the Company's marketing program is dependent upon its ability to continually
acquire new, popular promotional licenses. Potential licensors typically contact
the Company directly to negotiate a new license, in most cases 6 to 18 months
before release of a film or other project. In cases where the Company does not
own a license for a hit property, the Company may seek to distribute such
products for its competitors.
KRSI presently has non-exclusive license agreements with Major League
Baseball Properties, Major League Baseball Players Association, Major League
Baseball Properties Canada Inc., National Football League Properties, Inc.,
National Football League Players, Inc., National Hockey League Enterprises,
Inc., National Hockey League Enterprises Canada Inc., National Hockey League
Players' Association, the National Basketball Association, several drivers and
their sponsors, several individual athletes, the estates of several deceased
athletes, and several entertainment companies or related organizations. KRSI's
business is largely dependent upon its ability to continue to obtain and
maintain these existing licenses and to obtain additional licenses necessary for
the expansion of its activities. Obtaining new licenses to expand KRSI's
activities may delay KRSI's ability to introduce new products.
KRSI's agreement with the various players, players' associations or
entertainment companies may enable KRSI to use an individual's name, picture,
facsimile signature, biographical description or entertainment related title or
logo. Pursuant to the terms of these licenses, KRSI is permitted to produce and
sell, in the United States, the original art, lithographs, framed and unframed
Legends and Superstars products and original art posters. Most of the agreements
do not allow KRSI to sell the subject products outside the United States.
Royalties to the Company's licensors typically range from 10% to 25% of net
sales, with an average consolidated royalty rate of 11.3% in 1996, 12.3% in 1995
and 13.7% in 1994. Royalty rates during 1996 for sales by OSP, SDI, BEx and KRSI
averaged 12.1%, 9.0% , 9.4% and 17.2% of net sales, respectively. Royalty rates
tend to be lower to the extent sales are made directly to retailers rather than
to distributors. See "-- Sales and Marketing." License arrangements generally
require the payment of non-refundable advances and guaranteed minimum royalties.
As a result of increased competition for licenses, Global One may, in the
future, be required to pay licensors higher royalties and higher minimum
guaranteed payments in order to obtain attractive properties for marketing
through its existing and new product lines.
6
<PAGE>
Typically, the licenses held by OSP, BEx and SDI are for a period of two
years. Major licensors in the entertainment and media industries generally do
not grant exclusive licenses, and most of the Company's major licenses are
non-exclusive. Major licensors generally do not grant competitive licenses
within a territory largely due to the limited life-span of promotional
properties and the transaction costs associated with granting duplicate
licenses. However, no assurances can be given that such licensors will not grant
competing licenses in the future.
The terms of KRSI's licenses extend for one to three year periods. All of
these licenses are non-exclusive. Substantially all of the licenses from the
estates of deceased athletes expired on December 31,1995 and were renewed in
1996. These agreements are generally renewable for one year periods, unless
notice is given by either party to the agreements not to renew. The majority of
the licenses from the various leagues, players associations and entertainment
companies expire between 1996 and 1998. Some of the licenses contain renewal
provisions which provide for additional one year extensions as long as Kelly
Russell has fulfilled its obligations under the agreements, upon notice or upon
written agreement between the parties.
Management believes that the Company maintains excellent relationships and
an excellent reputation with its licensors.
The Company's portfolio of over 200 major licenses includes the following
properties:
DISNEY ENTERPRISES INC. MUSIC
- - 101 Dalmatians - Alanis Morrisette
- - The Hunchback of Notre Dame - The Doors
- - Mickey Unlimited - Madonna
- - Pocahontas - Jerry Garcia
- - The Lion King - Weezer
- - Disney Babies - Michael Bolton
- Marilyn Manson
WARNER BROS./LCA - Hole
- - Space Jam - Beastie Boys
- - Looney Tunes - Whitney Houston
- - Batman and Robin - Jimi Hendrix
- The Who's Tommy
ANIMATION - Bruce Lee
- - Marvel Comics
- - D.C. Comics PERSONALITIES
- - Superman - Jenny McCarthy
- - The Adventures of Batman & Robin - Babe Ruth
- - Betty Boop - Martin Luther King
- - Aeon Flux - James Dean
- - Peanuts - Marilyn Monroe
- Pamela Anderson
- Claudia Schiffer
TELEVISION - Bob Marley
- - The X-Files - Elvis
- - Bananas in Pajamas
- - Baywatch SPORTS
- - Star Trek: Original Series - National Footbal League
- - Beavis & Butt-head - Major League Baseball
- - Melrose Place - National Basketball Association
- - Friends - NASCAR
- - Lois & Clark: The New Adventures
BRANDS
- - No Fear
- - Budweiser
- - Hawaiian Tropic
- - Caesars' Palace
7
<PAGE>
- - Maui & Sons
FILMS
- - Men in Black
- - Jurassic Park II
- - Barb Wire
- - Pulp Fiction
- - Batman Forever
- - Legends of the Fall
- - Babe
- - Desperado
- - Ace Ventura II
- - Independence Day
- - Casper
- - Star Trek Generations
- - Goldeneye
- - Forrest Gump
- - The Wizard of Oz
- - Mission Impossible
- - Gone With The Wind
DESIGN AND DEVELOPMENT; PRODUCTION
The imagery for the Company's products is custom designed from concept to
final art by the Company's staff of 12 in-house artists and freelance artists
utilizing computerized design techniques. The art department also designs
integrated retail displays utilizing the licensed properties. The Company's art
department is equipped with state-of-the art production facilities, providing
the Company total quality control over the entire production process, including
the actual layout and design of products.
Artwork for licensed products is typically subject to approval by the
licensor. Licensors also typically retain the right to approve any packaging,
promotional material or advertising used in connection with a particular
license. Such approval is in the licensors' sole discretion and may be
time-consuming. In many cases, the Company's artists utilize style guides
furnished by the licensor. Artists create concept sketches that are presented to
the licensor for discussion and direction before final art work is prepared. The
art department's experience in working with the Company's licensors enables
department staff to prepare illustrations, sketches and drawings to maintain a
competitive edge over other producers in delivering product to the licensor in a
more timely fashion.
MANUFACTURING
The Company manufactures substantially all of its products through
unaffiliated manufacturers located in the greater Los Angeles area. Decisions
relating to the choice of manufacturer are based on price, quality of
merchandise, reliability and the ability to meet timing requirements for
delivery. OSP is a party to a contract with a poster printer which obligates OSP
to utilize the printer for at least $3.8 million in printing work at market
rates through June 30, 1997, which amount is expected to constitute
approximately 60% of total outside printing costs during the term of such
contract. OSP's management believes that numerous other manufacturers are
available to produce its products should its existing manufacturers be unable to
do so, and that Global One would be able to obtain high quality merchandise at
competitive prices without significant delays. However, the inability of Global
One to meet its delivery requirements could result in the termination of some of
its licenses and no assurances can be given that this will not occur. Finished
products are returned to the Company's Bell, California warehouse, where
products are packaged for final distribution. Posters are distributed either in
rolled form, shrink-wrapped on poster board to retailers or shipped flat on
pallets to distributors. The minimum poster purchase for manufacturing is
typically 4,000 units, and average poster manufacturing orders are for 8,000
units.
The principal raw materials used in the production and sale of the
Company's products are paper products, finished T-shirts and plastics. Raw
materials are generally purchased by the manufacturers who deliver completed
8
<PAGE>
products to the Company. Paper products and plastics are typically produced in
the United States, while finished T-shirts are produced both domestically and in
East Asia. In certain circumstances, the Company purchases paper and shrink wrap
directly for the packaging of its finished products. The Company believes that
an adequate supply of raw materials used in the manufacture and finishing of its
products are readily available from existing and alternative sources at
reasonable prices.
SALES AND MARKETING
The Company distributes its products directly to retailers primarily
through approximately 80 to 100 commissioned in-house and multi-line,
independent sales representatives, and through 10 distributors, in the United
States. A network of over 100 distributors are used to sell products to Canada,
Europe, Japan, Hong Kong, Australia, New Zealand, Mexico and South America.
Approximately 80% of net sales are directly to retailers, including corporate
buyers for national chains and individual stores, and 20% of net sales are to
distributors. OSP's sales force reports to OSP's Vice President of Sales. SDI
and BEx each have independent sales representatives who sell their products. In
addition, OSP's sales representatives sell SDI and BEx merchandise. KRSI markets
its products through independent sales representatives, two in-house sales
employees, and, as of February 1996, KRSI hired a national sales organization to
manage KRSI's sales functions. KRSI markets to national and regional retailers
(including mass merchant retailers, department stores, specialty retailers,
discount retailers, and toy stores), distributors of sports memorabilia and a
cable television programming network. KRSI also promotes its products through
various advertising programs which may include retailers.
The Company distributes to over 45,000 retail accounts worldwide. The
Company's management believes that no single retailer or group of retailers
accounts for a significant portion of the market for licensed posters, T-shirts
and buttons. The Company's distribution channels include general retail stores,
gift and print shops, video and record stores, toy stores, comic book and
baseball card stores, mass retailers, department stores, supermarkets, framing
shops, drug stores, mail-order and home shopping company and school book clubs.
International sales comprised 5% of total sales during 1996.
The Company distributes its products to the following chain stores, among
others:
MASS MARKET MUSIC/VIDEO GIFT/TOY/BOOK
K-Mart Musicland Toys R' Us
Meijer Transworld Kay Bee Toys
Target Wherehouse Entertainment Claire's Boutiques
Wal-Mart Tower Records Waldenbooks
Fred Meyer Blockbuster Coach House Gifts
Shopco Hollywood Video Spencer Gifts
DRUG/SUPERMARKET DEPARTMENT STORE/HOME SHOPPING STORES/CATALOGS
Osco's Macy's Michael's
Payless J.C. Penney AaronBrothers
Albertson's QVC Standard Brands
Smiths Home Shopping Network Fingerhut
Randalls Hammacher & Schlemmer Deck the Walls
9
<PAGE>
The Company has placed over 18,000 proprietary poster display racks of
various sizes in retail establishments. The Company's sales force typically
visits retailers every one to six weeks to ensure that display racks are
adequately stocked with the Company's products, and to offer promotional
materials and integrated product displays for upcoming releases. The Company
participates in the electronic data interchange ("EDI") program maintained by
many of its largest customers, including Toys R' Us, Wal-Mart, K-Mart, Target
and J.C. Penney. The EDI program allows the Company to monitor store inventory
and schedule production to meet anticipated reorders, which are generally
fulfilled within 3 days. Additionally, the Company has expanded its in-store
service capabilities by offering a custom retail management system, which tracks
both promotional program and individual product sales, enabling the Company and
the retailer to more accurately evaluate sales per square foot and annual sales.
This enables the Company to maximize the productivity of each individual retail
location.
The Company also sells its products through mail-order catalogs and
promotional and merchandising tie-ins with fast-food chains and other
organizations. The Company has established a special premium and promotion
department to focus on such sales. Premium sales typically involve non-retail
sales of properties to promotional partners of a licensor, including companies
such as Food Maker (Jack-in-the-Box) Pillsbury and Kraft, often in conjunction
with a rebate or other special pricing. Premium sales constituted approximately
4% of OSP's net sales during 1996.
The Company has also secured the rights from Sprint to distribute telephone
cards with licensed graphics as a new premium product. In addition, Global One
is considering establishing a website on the Internet with full color images of
Global One's products as an additional catalog-type distribution channel for its
products.
RETURNS POLICY
The Company accepts product exchanges for credit from its retail accounts
on all posters, buttons and key chains for which there is a paid invoice.
Management believes that the Company's policy of exchanges for credit ensures
that unsuccessful titles will be replaced with titles that may generate sales.
During 1996, the average return rate was 11%. The Company generally obtains a
credit on royalties and commissions paid on product exchanges. Exchanges are not
accepted from distributors, framers, international or premium sales. In general,
T-shirts are not returnable, except where the merchandise is flawed.
BACKLOG
Due to the promotional nature of the Company's licensed products, the
limited selling period for promotional materials and the Company's ability to
quickly fill orders, the Company's customers order backlog has not been
material.
GOVERNMENT REGULATION; TARIFFS AND DUTIES
In the United States, the Company is subject to the provisions of, among
other laws, the Federal Consumer Product Safety Act and the Federal Hazardous
Substances Act (the "ACTS" ). The Acts empower the Consumer Product Safety
Commission (the "CONSUMER COMMISSION") to protect the public against
unreasonable risks of injury associated with consumer products, including toys
and other articles. Some of the Company's products may be deemed to be toys. The
Consumer Commission has the authority to exclude from the market articles which
are found to be hazardous and can require a manufacturer to repair or repurchase
such articles under certain circumstances. Any such determination by the
Consumer Commission is subject to court review. Violations of the Acts may also
result in civil and criminal penalties. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world. In
addition, the Company maintains product liability insurance in the amount of
$2,000,000.
EMPLOYEES
As of December 31, 1996, the Company had 143 full-time employees, including
10 employees at BEx, 40 employees at SDI and one at KRSI. During periods of high
production volume (May through September), the Company typically hires up to 100
additional temporary employees to assist in production. The Company's
employees are not covered by any collective bargaining agreements. The
Company believes its relationship with
10
<PAGE>
its employees is satisfactory.
TRADEMARKS
The Company utilizes several trademarks and logos in connection with the
marketing and sale of its products. The Company believes that the strength of
the Company's trademarks and logos are of considerable value to its business and
intends to continue to protect them. The Company has seven registered trademarks
with the United States Patent and Trademark Office. To management s knowledge,
none of these trademarks is the subject of a legal proceeding.
SEASONALITY
The Company has historically had higher net sales as a percentage of annual
sales in the second quarter. In 1996, the Company recorded 27% of its sales in
the second quarter and 30% in the fourth quarter. Management believes that the
Company's seasonal sales are primarily due to the seasonal release of major
films which correspond to sales of promotional products related to such films.
Although films that are anticipated to be major hits are often released in the
summer, film distribution companies frequently release major films in the autumn
or during the holidays. Such fluctuations in sales typically result in
corresponding fluctuations in the Company's profitability which is anticipated
to continue in the foreseeable future.
ITEM 2. - PROPERTIES
The Company's headquarters is a 105,000 square foot leased facility located
at 5548 Lindbergh Lane, Bell, California 90201. The majority of the Company's
operations, such as corporate offices, in-house sales staff, art department,
accounting and warehouse operations, including all of OSP's and KRSI's
operations and BEx's administrative and warehousing functions, are based at such
location. BEx also leases approximately 3,000 square feet of offices at 200
Diversion, Rochester, Michigan 48307. SDI conducts all of its operations out of
approximately 20,000 square feet of leased office space at 10615 Vanowen St.,
Burbank, CA 91505.
ITEM 3. - LEGAL PROCEEDINGS
The Company is from time to time a party to routine litigation incidental
to its business. Based upon the advice of its counsel, management does not
believe that the outcome of any litigation, individually or in the aggregate,
will have a material adverse effect on Global One's results of operations or
financial condition.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded in the NASDAQ SmallCap Market
under the symbol "GOGO" since August 28, 1996. Prior to that time, there was no
market for the Common Stock. The initial opening offering price was $3.75 per
share, and the high and low bid price for transactions in the NASDAQ SmallCap
Market for the quarters ended September 30 and December 31, 1996 were $4.25 and
$1.50, respectively.
At March 24, 1997, there were approximately 180 holders of record of the
Company's Common Stock and 700 beneficial holders. On March 24, 1997, the
closing price of the Company's Common Stock on the NASDAQ SmallCap Market was
$2.34 per share.
In connection with the Transactions, the Company paid a cash dividend on
its Common Stock in the aggregate amount of $2,350,000 to the former
shareholders of OSP, Joseph C. Angard and Michael A. Malm. Except for these
dividends, for the foreseeable future, Global One does not intend to pay any
cash dividends.
11
<PAGE>
Global One presently expects to retain its earnings, if any, to finance the
development and expansion of its business. The payment by Global One of cash
dividends, if any, on the Global One Common Stock in the future is subject to
the discretion of the Board of Directors.
Global One's ability to pay dividends is subject to restrictions set forth
in the Delaware General Corporation Law. The Delaware Corporation Law provides
that a Delaware corporation may pay dividends either (i) out of the
corporation s surplus (as defined in Delaware law), or (ii) if there is no
surplus, out of the corporation's net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
Pursuant to Section 2115 of the California General Corporation Law (the
"CALIFORNIA GCL"), under certain circumstances, certain provisions of the
California GCL may be applied to foreign corporations qualified to do business
in California notwithstanding the law of the jurisdiction where the corporation
is incorporated. Such corporations are referred to herein as "QUASI-California"
corporations. Global One will be qualified to do business in the State of
California. Section 2115 is applicable to foreign corporations which have more
than half of their shareholders residing in California and more than half of
their business deriving from California. Global One s Management believes that
more than half Global One's shareholders reside outside California, and that
Global One would therefore not be deemed to be a QUASI-California corporation.
If Global One were determined to be a QUASI-California corporation, however, it
would have to comply with California law with respect to, among other things,
distributions to shareholders. Under the California GCL, a corporation is
prohibited from paying dividends unless (i) the retained earnings of the
corporation immediately prior to the distribution exceeds the amount of the
distribution; (ii) the assets of the corporation exceed 1 1/4 times its
liabilities; or (iii) the current assets of the corporation exceed its current
liabilities, but if the average pre-tax net earnings of the corporation before
interest expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current assets
of the corporation must exceed 1 1/4 times its current liabilities.
In connection with the Transactions (see "BUSINESS--General"), on August
28, 1996, the Company sold 4,324,237 shares of common stock at $1.50 per share
in a private placement exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. In conjunction with the Transactions, the Company issued
warrants to purchase an aggregate of 1,098,672 shares of Common Stock to various
consultants for the Transactions at an exercise price of $1.50 per share in a
private placement exempt from registration under Section 4(2) of the Securities
Act of 1933. The warrants were recorded at their fair value of $621,742 in the
accompanying financial statements.
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and the related
notes and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY" included elsewhere herein. The selected
consolidated balance sheet data presented below as of December 31, 1995 and 1996
and of the consolidated statement of operations data presented below for the
years ended December 31, 1994, 1995 and 1996 are derived from the consolidated
financial statements of the Company included elsewhere herein, which financial
statements have been audited by Deloitte & Touche LLP, independent certified
public accountants. The selected consolidated balance sheet data presented below
as of December 31, 1993 and 1994 are derived from financial statements of the
Company not included herein which have been audited by Deloitte & Touche LLP,
independent certified public accountants. The selected consolidated balance
sheet data presented below as of December 31, 1992 and consolidated statement of
operation data presented below for the year ended December 31, 1992 are derived
from financial statements of the Company audited by other auditors not included
herein.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . . . . . . . . . $ 17,126 $ 38,108 $ 42,168 $ 38,228 $ 42,371
Cost of sales. . . . . . . . . . . . . . . . . . . . 9,297 22,335 25,140 21,647 27,384
---------- ---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . 7,829 15,773 17,028 16,581 14,987
Operating expenses . . . . . . . . . . . . . . . . . 7,143 13,797 16,636 15,172 17,719
---------- ---------- ---------- ---------- ----------
Income (loss) from operations. . . . . . . . . . . . 686 1,976 392 1,409 (2,732)
Interest expense . . . . . . . . . . . . . . . . . . 429 605 685 841 1,328
Gain on sale of subsidiary . . . . . . . . . . . . . - - - - (702)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations . . . . . . $ 257 $ 1,371 $ (293) $ 568 $ (3,358)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PRO FORMA INCOME FROM CONTINUING OPERATIONS DATA (1, 2):
Income (loss) before income taxes, minority
interest and discontinued operations, as
reported . . . . . . . . . . . . . . . . . . . . . . $ 257 $ 1,371 $ (293) $ 568 $ (3,358)
Pro forma provision (benefit) for income
taxes (2). . . . . . . . . . . . . . . . . . . . . . 266 344 (43) 114 (672)
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss) (2). . . . . . . . . . . $ (9) $ 1,027 $ (250) $ 454 $ (2,686)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Pro forma (loss) income from continuing
operations per share . . . . . . . . . . . . . . . . $ 0.06 $ (0.27)
---------- ----------
---------- ----------
Weighted average shares outstanding (3). . . . . . . $ 8,037 $ 9,987
---------- ----------
---------- ----------
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA (1):
Working capital (deficiency) . . . . . . . . . . . . $ 1,587 $ 2,337 $ (197) $ 3,311 $ 3,136
Total assets . . . . . . . . . . . . . . . . . . . . 6,427 13,464 13,841 11,698 17,035
Total debt, including current portion. . . . . . . . 2,896 5,129 6,724 5,989 6,371
Stockholders' equity (deficiency). . . . . . . . . . 266 637 (1,408) (1,299) 3,426
</TABLE>
- -----------------------------------
(1) In December 1994, the Company discontinued its Top Banana division. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY -- Discontinued Operations" and Note 15 of Notes
to Consolidated Financial Statements.
(2) The Company has been taxed as an S Corporation for federal and state income
tax purposes since 1989. Pro forma income taxes, pro forma loss from
continuing operations and pro forma loss from continuing
13
<PAGE>
operations per share reflect the pro forma effect of income taxes as if the
Company had been taxed as a C Corporation for all periods presented. Upon
consummation of the Transactions, Global One became subject to federal and
state income taxes. See Note 12 of Notes to Consolidated Financial
Statements.
(3) Assumes as outstanding, 1,963,799 and 1,393,550 shares for 1996 and 1995,
respectively, of the shares sold by Global One in the August 28, 1996
private placement, which represent the approximate number of shares deemed
to be sold by Global One to fund the $2,350,000 and $1,750,000 S
Corporation distributions assumed in 1996 and 1995, respectively. See
Note 16 of Notes to Consolidated Financial Statements.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto included elsewhere
herein.
The business of the Company is conducted through the Company's
subsidiaries, OSP, SDI (which was sold effective December 31, 1996 and comprised
41.6% of net sales in 1996), BEx and, since August 28, 1996, 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. SDI develops and markets licensed
and non-licensed T-shirts, sweatshirts, hats, boxer shorts and mugs. 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. See "BUSINESS OF THE COMPANY."
The Company derives a significant portion of its revenues from properties
which have demonstrated continuing market appeal year after year, such as
Disney's and Warner Bros.' standard characters, including MICKEY MOUSE and BUGS
BUNNY, television programs, Playboy's PLAYMATE OF THE YEAR and classic icons,
such as Marilyn Monroe and the Doors ("Standard Properties"). During the last
three years, OSP has experienced increased sales of products attributable to its
Standard Properties due to the wider distribution of display racks to retailers.
Approximately 3,000, 3,500 and 4,000 new display racks were put in service in
1994, 1995 and 1996, respectively. Additional revenues are derived each year
from other promotional products associated with hit films and television shows
which generally have a much shorter product life ("Promotional Properties"). The
Company attempts to identify and acquire licenses for Promotional Properties to
capitalize on popular culture trends. However, whether or not a Promotional
Property achieves significant sales depends on a number of factors that are out
of the control of the Company, including marketing efforts by licensors and the
appeal of such Promotional Properties to the target market. Promotional
Properties have accounted for a larger percentage of SDI's and BEx's revenues
than Standard Properties. Accordingly, variations in the Company's revenues from
year to year are largely attributable to the success achieved by Promotional
Properties in any given year. The Company's business strategy includes
increasing its core business on Standard Properties as a percentage of net sales
by increasing the number of display racks supplied to mass retailers, increasing
the number of Standard Properties and expanding its international business.
Management anticipates continuing fluctuations from year to year to the extent
the Company s Promotional Products achieve success in any given year. See
"BUSINESS OF THE COMPANY -- Business Strategy." No assurances can be given that
the Company will be successful in these efforts.
14
<PAGE>
The following tables set forth the net sales, total cost of sales and gross
profit of OSP, SDI, BEx, KRSI and the Company for the years ended December 31,
1994, 1995 and 1996.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------------------------------------
1994 1995 1996
--------------------------- ------------------------- ------------------------
% OF % OF % OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES
---------- ---------- -------- ---------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES
OSP. . . . . . . . . . . $ 23.6 100.0% $ 25.2 100.0% $ 21.9 100.0%
SDI (1). . . . . . . . . $ 11.1 100.0 $ 10.1 100.0 $ 17.6 100.0
KRSI (2) . . . . . . . . - 0.0 - 0.0 $ 1.0 100.0
BEx. . . . . . . . . . . $ 7.5 100.0 $ 2.9 100.0 $ 1.8 100.0
-------- -------- --------
Company. . . . . . . . . $ 42.2 100.0 $ 38.2 100.0 $ 42.3 100.0
-------- -------- --------
-------- -------- --------
COST OF GOODS SOLD
OSP. . . . . . . . . . . $ 9.7 41.1 $ 9.8 38.9 $ 10.1 46.1
SDI (1). . . . . . . . . $ 6.8 61.3 $ 5.9 58.4 $ 10.8 61.4
KRSI (2) . . . . . . . . - 0.0 - 0.0 $ 0.5 50.0
BEx. . . . . . . . . . . $ 2.9 38.7 $ 1.3 44.8 $ 1.2 66.7
-------- -------- --------
Company. . . . . . . . . $ 19.4 46.0 $ 17.0 44.5 $ 22.6 53.4
-------- -------- --------
-------- -------- --------
LICENSE AND ROYALTY EXPENSE
OSP. . . . . . . . . . . $ 3.7 15.7 $ 3.5 13.9 $ 2.8 12.8
SDI (1). . . . . . . . . $ 1.2 10.8 $ 0.9 8.9 $ 1.6 9.1
KRSI (2) . . . . . . . . - 0.0 - 0.0 $ 0.2 20.0
BEx. . . . . . . . . . . $ 0.9 12.0 $ 0.3 10.3 $ 0.2 11.1
-------- -------- --------
Company. . . . . . . . . . . $ 5.8 13.7 $ 4.7 12.3 $ 4.8 11.3
-------- -------- --------
-------- -------- --------
TOTAL COST OF SALES
OSP. . . . . . . . . . . $ 13.4 56.8 $ 13.3 52.8 $ 12.9 58.9
SDI (1). . . . . . . . . $ 8.0 72.1 $ 6.8 67.3 $ 12.4 70.5
KRSI (2) . . . . . . . . - 0.0 - 0.0 $ 0.7 70.0
BEx. . . . . . . . . . . $ 3.8 50.7 $ 1.6 55.2 $ 1.4 77.8
-------- -------- --------
Company. . . . . . . . . . . $ 25.2 59.7 $ 21.7 56.8 $ 27.4 64.8
-------- -------- --------
-------- -------- --------
GROSS PROFIT
OSP. . . . . . . . . . . $ 10.2 43.2 $ 11.9 47.2 $ 9.0 41.1
SDI (1). . . . . . . . . $ 3.1 27.9 $ 3.3 32.7 $ 5.2 29.5
KRSI (2) . . . . . . . . - 0.0 - 0.0 $ 0.3 30.0
BEx. . . . . . . . . . . $ 3.7 49.3 $ 1.3 44.8 $ 0.4 22.2
-------- -------- --------
Company. . . . . . . . . . . $ 17.0 40.3 $ 16.5 43.2 $ 14.9 35.2
-------- -------- --------
-------- -------- --------
</TABLE>
- --------------------------------------
(1) Sold effective December 31, 1996
(2) Acquired on August 28, 1996
15
<PAGE>
The following tables set forth the percentage of net sales of certain
income and expense items for the years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
Percentage of Net Sales Period to Period Percentage
Year Ended December 31, Change
------------------------------------ ------------------------------
1994 1995 1996 1994 vs. 1995 1995 vs. 1996
------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% (9.5) 10.8
Cost of goods sold . . . . . . . . . . . . . . . . . 46.0 44.5 53.4 (12.4) 32.9
License and royalty expense . . . . . . . . . . . . . 13.7 12.3 11.3 (19.0) 2.1
Gross profit . . . . . . . . . . . . . . . . . . . . 40.3 43.2 35.2 (2.9) (9.7)
Warehouse and selling expenses . . . . . . . . . . . 25.7 26.7 25.9 (5.8) 7.5
General and administrative . . . . . . . . . . . . . 13.8 13.0 15.9 (14.5) 35.9
Operating income . . . . . . . . . . . . . . . . . . 0.8 3.5 (6.4) 259.5 (293.9)
Interest expense . . . . . . . . . . . . . . . . . . 1.6 2.2 3.1 22.7 57.9
Gain on sale of subsidiary. . . . . . . . . . . . . . - - (1.7) - N/A
Minority interest in (income) loss of subsidiaries. . 0.4 (0.6) 0.2 (264.2) (138.7)
Income (loss) before discontinued operations. . . . . (0.6) 1.1 (5.2) 255.5 (649.2)
Discontinued operations . . . . . . . . . . . . . . . 1.8 - - - -
Net income (loss) . . . . . . . . . . . . . . . . . . (2.4) 1.1 (5.2) 139.1 (649.2)
</TABLE>
The following tables set forth the quarterly results of operation of the
Company for the two years ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31, Total
1995 1995 1995 1995 1995
--------- -------- --------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
QUARTERLY FINANCIAL INFORMATION:
Net sales. . . . . . . . . . . . . . $ 7,422 $ 12,566 $ 9,242 $ 8,998 $ 38,228
Gross profit . . . . . . . . . . . . 3,329 5,566 3,807 3,879 16,581
Operating expenses . . . . . . . . . 3,503 4,333 3,682 3,654 15,172
Income (loss) from operations. . . . (174) 1,233 125 225 1,409
Interest expense . . . . . . . . . . 173 209 220 239 841
Income (loss) before income taxes. . (347) 1,024 (95) (14) 568
Pro forma provision (benefit)
for income taxes . . . . . . . . . (70) 206 (19) (3) 114
-------- -------- -------- -------- --------
Pro forma income (loss) from
continuing operations. . . . . . . $ (277) $ 818 $ (76) $ (11) $ 454
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------
March 31, June 30, September 30, December 31, Total
1996 1996 1996 1996 1996
--------- ------- --------- -------- -----
(in thousands)
<S> <C> <C> <C> <C> <C>
QUARTERLY FINANCIAL INFORMATION:
Net sales . . . . . . . . . . . . . $ 8,941 $ 11,388 $ 8,999 $ 13,043 $ 42,371
Gross profit. . . . . . . . . . . . 3,671 3,363 2,777 5,176 14,987
Operating expenses. . . . . . . . . 3,805 4,561 4,419 4,934 17,719
Income (loss) from operations . . . (134) (1,198) (1,642) 242 (2,732)
Interest expense. . . . . . . . . . 267 330 397 334 1,328
Gain on sale of subsidiary. . . . . -- -- -- (702) (702)
Income (loss) before income taxes . (401) (1,528) (2,039) 610 (3,358)
Pro forma provision (benefit) for
income taxes. . . . . . . . . . . (85) (519) (190) 122 (672)
-------- -------- -------- -------- --------
Pro forma income (loss) from
continuing operations . . . . . . $ (316) $ (1,009) $ (1,849) $ 488 $ (2,686)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
DISCONTINUED OPERATIONS
In 1991, the Company started the Top Banana division which primarily
developed and marketed licensed children's electronic banks and clocks, which
were manufactured exclusively in the Far East. In December 1994, the Company
decided to wind down the division due to large losses attributable primarily to
the financing of Top Banana's working capital needs through letters of credit,
excessive time to source products from the Far East and a distribution system
that was distinct from its distribution system for posters, T-shirts and
buttons. This process was substantially completed in 1995.
The loss from discontinued operations was $770,000 on sales of $3.5 million
in 1994. Of the loss from discontinued operations recognized during 1994,
$424,000 was due to an operating loss and $346,000 was due to the estimated loss
on disposal of the operation. No additional loss from discontinued operations
was recognized in 1996 or 1995 as the reserve for loss on disposal established
in 1994 was sufficient. These operations have been accounted for as a
discontinued operation for all periods presented.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
The Company's net sales increased $4.1 million, or 10.8%, during 1996
compared with 1995. This increase resulted primarily from a $7.5 million, or
74.3%, increase in net sales by SDI (which was sold December 31, 1996) which
more than offset a $3.3 million, or 13.1%, decrease in net sales by OSP and a
$1.1 million, or 37.9%, decrease in net sales by BEx. The popularity of the
Anheuser-Busch licenses ("I Love You Man" and "Frogs") and the MTV Networks
license for BEAVIS AND BUTT-HEAD was the principal reason for the increase in
net sales by SDI.
OSP's net sales decrease is related to the significant sales generated by
LEGENDS OF THE FALL- Brad Pitt and LION KING in the first quarter as well as
POCAHONTAS and BATMAN FOREVER in the second and third quarters of 1995. In
addition to the decrease in sales under certain licenses, OSP has been
experiencing an effective higher sales return rate of approximately 16% of
products sold in 1996 compared with 1995's rate of approximately 12%. OSP did,
however, record a $4.0 million, or 44.9%, increase in sales in the fourth
quarter of 1996 compared with the same quarter in 1995 as a result of the SPACE
JAM, 101 DALMATIANS and BEAVIS AND BUTT-HEAD movie properties released in the
quarter. It is expected that the timing of releases of significant movies during
the holidays may continue.
17
<PAGE>
BEx's decrease in net sales is primarily due to the reorganization of the
Company's management, redirection of sales and marketing efforts toward products
geared with the timing of major film releases and relocation of the Company's
operations to Bell, California from Michigan.
KRSI, which was merged into the Company effective August 28, 1996,
contributed net sales of $1.0 million.
Cost of good sold increased $5.6 million, or 32.9%, to $22.6 million in
1996 compared to $17.0 million in 1995. As a percentage of net sales, cost of
goods sold increased from 44.5% in 1995 to 53.4% in 1996. The Company's cost of
goods as a percentage of net sales increased since SDI, which has the highest
cost of goods as a percentage of net sales, comprised 41.6% of the Company's
total net sales in 1996 compared with 26.4% in 1995.
OSP's cost of goods sold increased $300,000, or 31%, to $10.1 million in
1996 from $9.8 million for the same period in 1995. OSP's cost of goods sold as
a percentage of net sales increased to 46.1% compared with 38.9% for the years
ended 1996 and 1995, respectively. This increase can be attributed to the
higher product returns experienced by OSP in 1996, which results in the product
costs being spread over a lower net sales amount as well as the lower net sales
being spread over the fixed cost of goods sold components.
SDI's cost of goods sold increased by $4.9 million, or 83.1%, to $10.8
million in 1996 from $5.9 million in 1995. SDI's cost of goods sold as a
percentage of net sales for the year ended December 31, 1996 was 61.4% compared
with 58.4% for the same period in 1995. SDI's sales increased significantly,
thereby contributing to the large increase in the overall cost of goods sold.
The increase in SDI's cost of goods sold as a percentage of net sales is
primarily due to the increase in sales of products to mass retailers, which are
typically sold at a lower per unit price compared to specialty and gift
retailers.
BEx's cost of goods sold decreased by $100,000, or 7.7%, to $1.2 million
for the year ended December 31, 1996 compared to $1.3 million for the same
period last year. BEx's cost of goods sold as a percentage of net sales
increased to 66.7% for the year ended December 31, 1996 from 44.8% in 1995 due
primarily to decreased efficiency as a result of the reorganization of
management. Additionally, write-downs of inventory have increased due to the
elimination of certain products being sold and the Company's relocation to Bell,
California in April 1995.
KRSI's cost of goods sold was $500,000, or 50.0% as a percentage of net
sales. KRSI was merged with the Company effective August 28,1996.
License and royalty expense as a percentage of sales decreased to 11.3% for
the year ended December 31, 1996 from 12.3% for the year ended December 31, 1995
due to the increase in sales of products under lower royalty rate licenses as a
percentage of total sales of licensed products. Additionally, SDI's license
and royalty rates are lower than OSP's and, with the sales of SDI representing
41.6% versus 26.4% of total net sales for 1996 compared with 1995, overall
license and royalty expenses as a percentage of net sales has declined. OSP's
royalty rate decreased to 12.8% for 1996 from 13.9% for the same period in 1995
due primarily to a decrease in sales in Disney licenses which have higher
royalty rates. Disney represented 14% of OSP's net sales in 1996 compared with
26% in 1995 which were attributed to the LION KING and POCAHONTAS properties
which generated significant sales. SDI's royalty rate increased to 9.1% for
1996 from 8.9% for the same period in 1995.
Warehouse and selling expenses increased $800,000, or 7.5%, to $11.0
million in 1996 from $10.2 million for the same period in 1995. The increase in
warehouse and selling costs was primarily attributed to increased commissions to
sales representatives of approximately $400,000 as a result of the increased
sales as well as increased art department salaries and product design costs of
$200,000. Warehouse and selling expenses as a percentage of sales decreased to
25.9% for the year ended December 31, 1996 from 26.7% for the same period in
1995.
General and administrative expenses increased by $1.8 million, or 36.0%, to
$6.8 million for 1996 from $5.0 million for the same period in 1995. This
increase was due primarily to an increase of $1.5 million in salaries and wages
including compensation to the President of SDI, which increased by $1.0
million, and increases of approximately $600,000 in insurance, legal and other
professional fees primarily as a result of the costs of being a public company
and the investigation of potential acquisitions by the Company. Additionally,
amortization of the KRSI goodwill totaled $180,000 for the four months ended
December 31, 1996 following KRSI's acquisition.
18
<PAGE>
Interest expense increased $500,000, or 62.5%, to $1.3 million for 1996
from $800,000 for the same period in 1995. Interest expense was higher due to
higher average outstanding borrowings in 1996 as well as amortization expense of
the loan organization fees for the refinanced line of credit. Additionally,
SDI's interest expense increased due to additional factoring of accounts
receivable resulting from the increase in sales.
The Company realized a $700,000 gain on the sale of its 51% ownership in
SDI to the minority stockholder and President of SDI.
The Company's income tax benefit for 1996 was $1.1 million compared with
$77,000 recorded for the same period in 1995. During the third quarter, the
Company recorded a $1.1 million benefit for the change in income tax status from
an S Corporation to a C Corporation in connection with the completion of the
Transactions effective August 28, 1996 (see "--Liquidity and Capital
Resources"). The benefit was a result of the net deferred tax assets in excess
of the liabilities consisting mainly of the allowances for doubtful accounts,
sales returns and inventory obsolescence. In addition, $128,000 of the tax
benefit in 1996 was attributable to the net loss of SDI, while in 1995 the
benefit was due to the net loss of BEx offset by a provision of $213,000 for
SDI.
In 1996, of the net loss recorded by SDI, 49% was allocated to the minority
stockholder and totaled $94,000, while in 1995 net income of $243,000 was
allocated to the minority stockholder.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
The Company s net sales decreased $3.9 million, or 9.3%, during 1995
compared with 1994. This decrease resulted primarily from a $4.6 million
decrease in net sales by BEx and a $956,000 decrease in net sales by SDI which
more than offset a $1.6 million increase in net sales by OSP. The 61.1% decrease
in the BEx net sales was principally due to BEx not having a uniquely popular
licensed property to generate sales during 1995, as contrasted to sales of
products based on THE LION KING and MIGHTY MORPHIN POWER RANGERS licenses in
1994. OSP s net sales increased 6.8% in 1995 from 1994 primarily due to new
products and more retailers selling its products. In 1995, SDI s net sales
decreased 9.0% because SDI did not have a licensed property that generated broad
appeal to customers who purchase from mass retailers.
Cost of goods sold decreased $2.4 million, or 12.4%, to $17.0 million in
1995 compared to $19.4 million in 1994, due primarily to the decrease in cost of
goods as a percentage of net sales of OSP and SDI, which more than offset the
increase in the cost of goods as a percentage of net sales of BEx. As a
percentage of net sales, cost of goods sold dropped from 46.0% in 1994 to 44.5%
in 1995. The Company s cost of goods as a percentage of net sales improved since
OSP, which has the lowest cost of goods as a percentage of sales, comprised
66.0% of the Company s total net sales in 1995, compared with 55.9% in 1994.
Although OSP s cost of goods sold increased by $160,000, or 1.7%, to $9.8
million in 1995 from $9.7 million in 1994, OSP's cost of goods as a percentage
of net sales decreased from 41.1% in 1994 to 38.9% in 1995, primarily because
OSP sold more products and was able to charge more for its products by selling
them directly to retailers rather than through distributors. In 1995, the amount
of sales to retailers was 70.9% of total OSP sales, compared to 68.0% of total
OSP sales in 1994.
SDI s cost of goods decreased by $944,000, or 13.8%, to $5.9 million in
1995 from $6.8 million in 1994. SDI's cost of goods as a percentage of net sales
in 1995 was 58.4% compared to 61.3% in 1994. Although SDI's net sales decreased,
thereby contributing to a decrease in the overall cost of goods sold, the
decrease in the cost of goods as a percentage of net sales was largely
attributable to SDI's ability to sell more of its products to specialty and gift
retailers at a higher price than it would typically obtain from sales to mass
retailers. During 1995, SDI sold approximately 70% of its products to specialty
and gift retailers in 1995 compared to approximately 60% in 1994.
BEx s cost of goods decreased by $1.6 million, or 55.2%, to $1.3 million
in 1995 from $2.9 million in 1994. However, BEx's cost of goods as a percentage
of net sales in 1995 was 44.8% compared to 38.7% in 1994. The increase in the
cost of goods as a percentage of net sales was due to continued selling of
BEx s products at low prices as part of a concerted effort to reduce excess
inventory levels, and since a significant amount of BEx s sales were at a
lower price to OSP, for inclusion of BEx s products in OSP s integrated
product displays, rather than directly to retailers.
19
<PAGE>
License and royalty expense decreased $1.1 million or 19.8% to $4.7 million
in 1995 from $5.8 million in 1994. As a percentage of sales, royalties were
12.3% in 1995 compared with 13.7% in 1994. This was due to the increase in sales
of products under lower royalty rate licenses as a percentage of total sales of
licensed products. The most significant royalty reduction occurred in OSP,
despite an increase in sales of $1.6 million. OSP's royalties decreased by
approximately $200,000 in 1995 compared with 1994. As a percentage of net sales,
OSP's royalty rate decreased to 13.9% in 1995 from 15.7% in 1994, primarily due
to a reduction in sales of products created under higher royalty rate licenses
such as Disney and Nike. These two licensors represented 26.6% of OSP's net
sales in 1995, compared with 44.3% of OSP's net sales in 1994. Sales under
Disney licenses decreased in 1995 because the popularity of the POCAHONTAS
licensed merchandise in 1995 was not as great as the popularity of THE LION KING
licensed merchandise in 1994. The Company did not renew the license to sell Nike
products. In addition, OSP increased distribution of competitors s products, for
which it does not pay royalties.
Warehouse and selling expenses decreased $623,000, or 5.8%, to $10.2
million in 1995 from $10.8 million in 1994. Factors contributing to this
reduction included a decrease of $458,000 in commissions and a decrease of
$160,000 in freight expenses. Because these expenses are generally directly
related to sales volume, warehouse and selling expenses remained relatively
constant as a percentage of sales at 26.7% in 1995, compared with 25.7% in 1994.
During 1995, the Company consolidated its warehouse operations in its Bell,
California facilities, and it is anticipated that this consolidation will have
the effect of decreasing warehouse and selling expenses as a percentage of sales
in the future.
General and administrative expenses decreased by $842,000, or 14.5%, to
$5.0 million in 1995 compared with $5.8 million in 1994, due primarily to a
decrease of $494,000 in salaries and related employee expenses, a decrease of
$203,000 in legal, accounting and other professional fees and a decrease of
$263,000 in the bad debt provision, which decreases were offset by a $134,000
increase in other outside services. The decrease reflects certain one time
expenses incurred during 1994, including bonuses paid to the Presidents of SDI
and BEx and additional legal expenses relating to an abandoned attempt to
acquire a poster distributor. As a percentage of net sales, general and
administrative expenses decreased slightly, from 13.8% of net sales in 1994 to
13.0% of net sales in 1995.
Operating income increased by $1.0 million, or 259.5%, in 1995 to $1.4
million in 1995 compared with $392,000 in 1994, despite the 9.3% decrease in net
sales. The increase in operating income was attributable to the lower operating
expenses discussed above. As a percentage of net sales, operating income
increased to 3.7%, compared with 0.9% of net sales in 1994.
Interest expense increased $156,000, or 22.8%, to $841,000 in 1995 from
$685,000 in 1994. The increase in interest expense was due primarily to an
increase in the contractual interest rate charged on the borrowings by OSP and
BEx due to their violation of certain covenants under their loan agreement.
Additionally, total outstanding borrowings were higher in 1995, including
subordinated debt issued in the fourth quarter. As a percentage of net sales,
interest expense was 2.2% in 1995, compared with 1.6% in 1994. The credit line
was refinanced in February 1996. See "-- Liquidity and Capital Resources."
Prior to consummation of the Transactions on August 28, 1996, OSP had a 79%
interest in BEx and a 51% interest in SDI. Accordingly, the minority
stockholders interest in income of the subsidiaries has the effect of reducing
the Company s net income when a subsidiary is profitable. When a subsidiary is
unprofitable, a portion of the loss may be allocated to the minority interest,
if the minority stockholder's basis in his stock has not already been reduced to
zero. In 1995, BEx had a net loss of $329,000 and SDI had net income of
$556,000. After allocating a portion of these amounts to the minority interest,
the minority interest in income of subsidiaries on a consolidated basis was
$243,000 in 1995, which had the effect of reducing the Company s consolidated
net income by the same amount. Global One acquired 100% of the shares of BEx in
connection with the Transactions.
Prior to consummation of the Transactions on August 28, 1996, OSP had been
taxed as an S Corporation for federal and state income tax purposes since 1989.
Pro forma income taxes, pro forma loss from continuing operations, and pro forma
loss from continuing operations per share reflect the pro forma effect of income
taxes as if OSP had been taxed as a C Corporation for all periods presented.
Global One is subject to federal and state income taxes.
20
<PAGE>
Net income increased to $403,000 in 1995 compared with a net loss of $1.0
million in 1994. This increase was the result of decreased cost of goods,
royalties and operating expenses discussed above and the absorption in 1994 of
the discontinued operations. As a percentage of net sales, net income was 1.1%
of net sales in 1995 compared with a loss of 2.4% of net sales in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital remained relatively unchanged at December 31,
1996 decreasing by approximately $200,000 to $3.1 million from $3.3 million at
December 31, 1995. This was despite the significant events in 1996, including
the Private Placement, KRSI Merger and sale of SDI.
Net cash used in operating activities during 1996 was approximately $1.8
million due primarily to a loss of $2.2 million. For the year, the Company
experienced an increase in cash flow of $1.0 million from inventory decreases
and $1.6 million from accounts payable offset by decreases of $1.1 million from
deferred income tax assets, $700,000 in accrued liabilities and $400,000 in
royalties payable.
Net cash used in investing activities was $800,000 primarily as a result of
payment for costs totaling $600,000 to acquire KRSI and property additions of
$200,000. Net cash provided by financing activities during the year was
approximately $2.5 million due primarily to net proceeds of approximately $5.2
million from the issuance of common stock in connection with the Transactions
reduced by $2.35 million in dividends paid to the former OSP shareholders in
connection with the Transactions. The Company also obtained $1.0 million in
cash flow through a contribution by the Chairman of the Board in 1996 and
$500,000 in net cash flow through additional borrowings of $1.0 million on the
line of credit offset by repayment of subordinated debt of $500,000. Also, there
was net cash used in financing activities of $1.6 million as a result of the
sale of SDI effective December 31, 1996.
The Company has a line of credit with a financial institution which
provides for maximum borrowings of $7,500,000 subject to certain conditions.
The outstanding balance at December 31, 1996 was approximately
$3.8 million. The outstanding balance under the line of credit bears interest
at the bank s prime rate plus 1.75% and is payable monthly. Under its line of
credit, the Company is required to maintain certain financial ratios and, as of
December 31, 1996, the Company was in compliance with its financial covenants.
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 formula relating to SDI s prior four years of operating income.
At December 31, 1996, the Company had an account receivable with its
largest customer which totaled approximately $686,000, or 9.6% of consolidated
gross accounts receivable. The customer is substantially current with the
Company s payment terms.
The Company has experienced operating losses for the fiscal year of 1996.
In 1997, the Company has continued to focus and has moved aggressively to reduce
its operating costs. The Company has significantly reduced its administrative
and warehouse personnel. Also, the Company has 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. The Company believes that its credit facility, together with
the sale of SDI which will provide $1,575,000 in cash flow in the first quarter
of 1997, will be sufficient to fund its working capital requirements throughout
1997. Additional financing will be required to provide for any business or
21
<PAGE>
product line acquisitions and significant expansion of the Company s
international business.
EFFECTS ON INFLATION
Global One's management believes that inflation will not have a significant
effect on the Global One's operations.
SEASONALITY
The Company has historically had higher net sales as a percentage of annual
sales in the second quarter. In 1996 and 1995, the Company recorded 27% and
33%, respectively, of its sales in the second quarter. In the fourth quarter
of 1996, the Company recorded 30% of total annual sales as a result of the
timing of major film releases such as SPACE JAM and 101 DALMATIANS by the movie
studios. The Company's seasonal sales are primarily due to the seasonal release
of major films which correspond to sales of promotional products related to such
films. Although films that are anticipated to be major hits are often released
in the summer, film distribution companies frequently release major films in the
autumn or during the holidays. Such fluctuations in sales typically result in
corresponding fluctuations in the Company's profitability which is anticipated
to continue in the foreseeable future.
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other
historical information, the statements made in this filing, including statements
made 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.
ITEM 8. - FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The Financial Statements of the Company and financial statement schedule
filed as part of this report on Form 10-K are listed in Item 14(a).
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company s Board of Directors is divided into three classes of
directors, with the directors in each class elected for three-year staggered
terms. The terms of the current Class I, II and III directors expire at the
annual meetings of stockholders in 1997, 1998 and 1999, respectively. Officers
serve at the pleasure of the Board of Directors, subject to restrictions set
forth in their employment agreements. See "EXECUTIVE COMPENSATION--Employment
Agreements."
22
<PAGE>
The following table sets forth information with respect to each director
and executive officer of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION CLASS DIRECTOR SINCE
- ---- --- -------- ----- --------------
<S> <C> <C> <C> <C>
Joseph C. Angard 55 Chairman and Chief III August 28, 1996
Executive Officer
Michael A. Malm 34 Chief Operating Officer III August 28, 1996
Edward Sacks 57 Director I August 29, 1996
Mark Hauser 38 Director II August 28, 1996
George J. Vrabeck 34 President
Walter M. Lacher 33 Chief Financial Officer
and Secretary
</TABLE>
JOSEPH C. ANGARD is a Class III Director, Chairman and Chief Executive
Officer of Global One. Mr. Angard is also Chairman of OSP, BEx and KRSI. Mr.
Angard joined OSP, formerly One Stop Posters, in 1983 as an independent
consultant to acquire licenses and advise on product development. In 1989, Mr.
Angard led the senior management buyout of OSP. Prior to joining One Stop
Posters, Mr. Angard served as director of licensing for Entertainment
Merchandise Marketing Corp., a tour merchandising company. His experience also
includes over eight years with national talent agencies, including William
Morris and International Creative Management. Mr. Angard received a B.A. degree
in English and History from Syracuse University.
MICHAEL A. MALM is a Class III Director and Chief Operating Officer of
Global One and Chief Executive Officer and President of OSP. Mr. Malm joined One
Stop Posters in 1984 as Director of Sales and was promoted to Vice President of
Sales and Marketing in 1987. Under his management, the Company established a
national sales network which contributed to the growth of the Company s retail
account base. Prior to 1984, Mr. Malm founded and owned Golden Era Posters, a
college poster distribution company. Mr. Malm studied economics at the
University of Southern California.
EDWARD SACKS is a Class I Director of the Company. Mr. Sacks has been the
Chairman and Chief Executive Officer of E & B Giftware, Inc., a product
development, marketing and sales company since 1983. Prior to that, Mr. Sacks
was the President of Crown Creation, a subsidiary of Ideal Toy Corporation, a
manufacturer of pool and table tennis games, swimming and scuba gear and indoor
and outdoor sports games. He was with Crown Creation from 1966 to 1977. Mr.
Sacks was also a Tax Manager at Coopers and Lybrand from 1963 to 1966. He has
his economics degree from the Wharton School at the University of Pennsylvania
and received his JD from New York University Law School.
MARK S. HAUSER is a Class II Director of Global One. Mr. Hauser is a
founder and Managing Director of Tamarix Capital Corporation, an international
investment and merchant banking firm. Previously, Mr. Hauser was a Managing
Director at Hauser, Richard & Company and Ocean Capital Corporation, both
private international investment banking firms. Prior to joining Ocean Capital
Corporation in 1986, Mr. Hauser was a corporate finance and banking attorney at
the New York office of Rogers & Wells. Before joining Rogers & Wells, Mr. Hauser
worked as a corporate and tax solicitor for Simons & Baffsky in Sydney and for
Simmons & Simmons in London. Mr. Hauser is Vice Chairman of Holmes Protection
Group, a security alarm systems company; a Director of ICC Technologies, a high
technology air conditioner manufacturer; a Director of EA Industries, Inc., an
electronic contract manufacturing company; and a Director of Direct Language
Communications, Inc., a multilingual communications services company. Mr. Hauser
is a member of the New York Bar and is admitted to practice law as a solicitor
to the Supreme Court of New South Wales in Australia. He has economics and law
degrees from Sydney University and a Master of Law degree from the London School
of Economics and Political Science.
GEORGE J. VRABECK is the President of Global One and a Director of OSP, BEx
and KRSI. Mr. Vrabeck has served as Kelly Russell Studio, Inc. s President since
November 1994. Mr. Vrabeck also served as Kelly Russell Studio, Inc. s Chief
Financial Officer from March 1995 to February 1996, as Chief Executive Officer
from November 1994 to October 1995 and as Chief Operating Officer from October
1994 to November 1994 and
23
<PAGE>
from October 1995 to February 1996. Mr. Vrabeck served as President of
Minneapolis Coffee Corporation, a group of specialty coffee retail stores, from
January 1991 to July 1994. He was an associate with Morgan Stanley & Co. Inc.,
an international investment banking firm, from June 1989 to January 1991, and he
was a Senior Staff Member, of Ernest & Young from June 1983 to July 1987. Mr.
Vrabeck is a CPA and received his M.B.A. from the University of Michigan, J.D.
from the University of Minnesota Law School and B.S. in accounting from Long
Island University.
WALTER M. LACHER has been the Chief Financial Officer and Secretary of
Global One since October 1996. He has also served as the Chief Financial Officer
and Secretary of OSP, BEx and KRSI and a Director of BEx since October 1996. Mr.
Lacher was the Corporate Controller of OSP from July to October 1996. Prior to
joining the Company, Mr. Lacher worked at Deloitte & Touche LLP from July 1988
to July 1996. Mr. Lacher is a CPA and received his M.B.A. from the University of
Southern California.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company s officers and directors and persons who own more than ten percent
(10%) of a registered class of the Company s equity securities to file reports
of ownership and changes in ownership on Forms 3,4 and 5 with the Securities and
Exchange Commission. Based solely on the Company s review of the copies of such
forms it has received and written representations from certain reporting persons
that they were not required to file Form 5 for fiscal year 1996, the Company
believes that all its officers, directors and greater than ten percent (10%)
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during 1996.
ITEM 11. - EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company for the fiscal year ended December
31, 1996 to or on behalf of the Chief Executive Officer of the Company and the
Company s four most highly compensated executive officers whose compensation in
1996 exceeded $100,000 (the "NAMED OFFICERS").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(4) BONUS COMPENSATION
(a) (b) (c) (d) (i)
- ---------------------------------------- ---- -------- ----------- ------------
<S> <C> <C> <C> <C>
Joseph C. Angard--Chairman and Chief 1996 $258,654 $ - $28,598(5)
Executive Officer
Michael A. Malm--Chief Operating Officer 1996 258,654 - 16,148(5)
George J. Vrabeck--President (1) 1996 143,846 - 1,600(5)
Christopher B. Lucas--Vice President 1996 160,096 2,500 12,220(5)(6)
Finance and Chief
Financial Officer (2)
Stanley DeSantis--President of Stanley 1996 250,000 1,051,159 21,900(5)
DeSantis, Inc. (3)
</TABLE>
- -------------------------
(1) Includes Mr. Vrabeck s compensation from Kelly Russell Studios, Inc. prior
to the merger on August 28, 1996.
(2) Resigned October 11, 1996.
(3) SDI was sold December 31, 1996.
24
<PAGE>
(4) Excludes compensation in the form of other personal benefits, which, for
each of the executive officers, did not exceed the lesser of $50,000 or 10%
of the total of annual salary and bonus reported for the year.
(5) Represents for each of Messrs. Angard, Malm, Vrabeck, Lucas and DeSantis
(i) automobile allowances of $10,909, $12,148, $1,600, $9,820 and $21,900,
respectively, and (ii) premium payments of $17,889 and $4,000,
respectively, for Messrs. Angard and Malm.
(6) Includes a $2,400 home office allowance.
EMPLOYMENT AGREEMENTS
Effective August 28, 1996, Global One entered into a three-year employment
agreement with Joseph C. Angard as Chairman and Chief Executive Officer,
pursuant to which Mr. Angard receives a base salary of $275,000 per year plus
the ability to earn a bonus of up to $137,500 per year based upon performance
criteria established by the Board of Directors at the beginning of each year. In
addition, Global One granted to Mr. Angard options to purchase up to 181,818
shares of Global One Common Stock at $1.65 per share and 60,606 shares at $1.50
per share, which vest in three equal annual installments commencing on the first
anniversary of the agreement and which are exercisable for five years from the
time of vesting.
Effective August 28, 1996, Global One entered into a three-year employment
agreement with Michael A. Malm as Chief Operating Officer of Global One and
President of OSP, pursuant to which Mr. Malm receives a base salary of $275,000
per year plus the ability to earn a bonus of up to $82,500 per year based upon
performance criteria established by the Board of Directors at the beginning of
each year. In addition, Global One granted to Mr. Malm options to purchase up to
181,818 shares of Global One Common Stock at $1.65 per share and 60,606 shares
at $1.50 per share, which vest in three equal annual installments commencing on
the first anniversary of the agreement and which are exercisable for five years
from the time of vesting.
The Company entered into an agreement (the "DESANTIS AGREEMENT") with
Stanley DeSantis, President of SDI, which contemplated that the parties would
execute a long form agreement incorporating the terms of the DeSantis Agreement
and that Mr. DeSantis would enter into a four-year employment agreement with
SDI. However, on December 31, 1996, the Company sold its ownership of SDI. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Pursuant to the DeSantis
Agreement, Mr. DeSantis received a base salary of $250,000 per year plus the
ability to earn a bonus based upon the achievement of specified net sales by
SDI.
Effective August 28, 1996, Global One entered into a three-year employment
agreement with George J. Vrabeck as President, pursuant to which Mr. Vrabeck
receives a base salary of $200,000 per year plus a guaranteed bonus of $25,000
payable 90 days after the end of the fiscal year, plus the ability to earn an
additional bonus of up to $25,000 per year based upon performance criteria
established by the Board of Directors at the beginning of each year. In
addition, Global One granted to Mr. Vrabeck options to purchase up to 300,000
shares of Global One Common Stock at $1.50 per share, with 100,000 options
vesting per year at the end of each of the first three years during the term of
the agreement and exercisable for five years from the time of vesting.
Effective August 28, 1996, Global One granted to Mr. Lucas options to
purchase up to 250,000 shares of Global One Common Stock at $1.50 per share,
with 100,000 options vesting immediately and 150,000 vesting in the amount of
50,000 options per year on each of the first three anniversaries of the date of
the grant and exercisable for five years from the time of vesting. Following Mr.
Lucas resignation on October 11,1996, Mr. Lucas 100,000 vested options were
amended to extend the term to December 4, 1998.
In addition to the benefits described above for Messrs. Angard, Malm,
DeSantis, Vrabeck and Lucas, each of the agreements referenced above provide for
certain benefits to the employees, including an automobile allowance,
reimbursement of business expenses, vacation time, life insurance premium
payments and disability benefits.
25
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
Shown below is information concerning grants of options during fiscal 1996
to the Named Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM
OPTIONS IN FISCAL BASE PRICE --------------------
NAME GRANTED (#)(1) YEAR ($/SHARE) EXP. DATE 5% ($) 10%($)
- ----------------- -------------- --------- ----------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph C. Angard $181,818(2) 8.2% $ 1.65 08-28-01 $ 48,077 $ 19,230
60,606(2) 2.7% 1.50 08-28-01 25,116 55,501
Michael A. Malm 181,818(2) 8.2% 1.65 08-28-01 48,077 139,230
60,606(2) 2.7% 1.50 08-28-01 25,116 55,501
George J. Vrabeck 300,000(2) 13.5% 1.50 08-28-01 124,327 274,730
Christopher Lucas 250,000(3) 11.2% 1.50 12-04-98 103,606 228,941
</TABLE>
- -------------------------
(1) All options were granted under the 1996 Stock Option Plan. Pursuant to the
plan, the Compensation Committee or the Company s Board of Directors may
accelerate the time or times at which such options may be exercised, in
whole or part. The options have five-year terms, subject to earlier
termination upon termination of employment. The options may be exercised
by delivery of shares of Common Stock having market value equal equal to
the exercise price of the option.
(2) The options vest 33% per year following the date of grant.
(3) 100,000 of the options vested immediately; the remainder vest 33% per year
following the date of grant. Upon termination of Mr. Lucas employment, his
unvested options terminated. The vested options were extended to December
4, 1998.
26
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Shown below is information with respect to the unexercised options to
purchase the Company s Common Stock granted in fiscal 1996 under the Company s
1996 Stock Option Plan to the Named Officers. None of the Named Officers
exercised any stock options during fiscal 1996.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE
ACQUIRED UNDERLYING UNEXERCISED MONEY OPTIONS AT FY-END ($)
ON OPTIONS OF FY-END (#) (1)
EXERCISE VALUE ------------------------- ----------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph C. Angard - - 60,606 121,212(2) - -
- - 39,394 78,788(3) - -
Michael A. Malm - - 60,606 121,212(2) - -
- - 39,394 78,788(3) - -
George J. Vrabeck - - 50,000 350,000(3) - -
Christopher Lucas - - 100,000 - (3) - -
</TABLE>
- -------------------------
(1) Based upon the closing price on the NASDAQ SmallCap Market of the Company s
Common Stock on December 31, 1996 ($1.50).
(2) Exercise price of $1.65 per share.
(3) Exercise price of $1.50 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has not yet formed a Compensation Committee. No executive
officer of the Company has served as a member of the board of directors or
compensation committee of any company in which another Board member is an
executive officer.
COMPENSATION OF BOARD OF DIRECTORS
The Company pays fees to its non-officer directors for serving on the Board
of Directors and for their attendance at Board and committee meetings. The
Company pays each non-officer director a retainer of $5,000 per annum, plus
$1,500 per board or committee meeting attended. The Company does not pay
directors who are also executive officers for attending board or committee
meetings.
In addition, non-officer directors receive annual grants of 5,000 stock
options under the 1996 Stock Option Plan. Non-officer directors are also
reimbursed for expenses incurred on behalf of the Company.
27
<PAGE>
REPORT ON EXECUTIVE COMPENSATION
The compensation of the executive officers of the Company since its
inception on August 28, 1996 was determined by the Board of Directors as a
whole. The Board contemplates that it will establish a Compensation Committee
and appoint two independent directors of the Company to serve on the Committee.
EXECUTIVE COMPENSATION POLICY
The goals of the Company s executive compensation policy are to attract and
retain qualified executives and to ensure that their efforts are directed toward
the long-term interests of the Company and its stockholders. The Company is
striving to generally position executive salaries at competitive levels and to
rely on variable, performance-based bonuses to play a significant role in
determining total compensation. In addition, by establishing the 1996 Stock
Option Plan, the Company intends to further link executive and stockholder
interests.
The Board of Directors or the Compensation Committee will annually review
salaries, bonuses and other aspects of executive compensation and, in addition,
will consider stock awards under the 1996 Stock Option Plan. In general, the
purpose of such annual reviews is to ensure that the Company s overall executive
compensation program remains competitive with comparable businesses and that
total executive pay reflects both the individual s performance as well as the
overall performance of the Company.
BASE SALARY
Each year, the performance of executives will be reviewed and, based upon
assessment of individual performance and the Company s performance, a
corresponding salary increase may be awarded. At inception of the Company, the
executives salaries were set, based on the predecessor companies' salary
levels.
The salary of Mr. Joseph C. Angard, the Company s Chief Executive Officer,
was determined on the foregoing basis. In addition to consideration of the
salary levels of the chief executive officers of other companies in similar
industries, the Board considered the Company s predecessor s operating results
in fiscal years 1995 and 1996, the effect of the general economy on the
Company s performance and the success of the Company in addressing certain
goals.
BONUSES
In fiscal 1996, no bonuses were earned.
STOCK INCENTIVES
In fiscal 1997, the Compensation Committee will consider stock awards to
the Company s Chief Executive Officer and other executive officers under the
1996 Stock Option Plan. The Compensation Committee will determine the type of
award under the Plan, the size of the grant to each executive officer, the
vesting schedule, if any, applicable to such awards and all other applicable
terms.
THE BOARD OF DIRECTORS
Joseph C. Angard
Michael A. Malm
Edward Sacks
Mark Hauser
28
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
total shareholder returns on the Company's Common Stock against the total
returns of the S&P SmallCap 600 Index and a peer group of 13 companies in
similar industries (assuming reinvestment of dividends) for the period of four
months commencing August 28, 1996 and ending December 31, 1996.
COMPUSTAT COMPARATIVE ANALYSIS
TOTAL SHAREHOLDER RETURNS
8/28/96 12/01/96
GLOBAL ONE DISTR & MDSE INC. $100 $ 40
S&P SMALL CAP 600 INDEX $100 $110
PEER GROUP $100 $100
29
<PAGE>
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 24, 1997 based on 13,011,947
shares outstanding at such date (i) by each person who is known by the Company
to own beneficially more than 5% of the Company's Common Stock, (ii) by each of
the Company's directors, (iii) by each Named Officer and (iv) by all executive
officers and directors as a group.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner(1) Amount and Nature of
Beneficial Ownership (2) Percent
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Joseph C. Angard - Chairman and Chief Executive Officer 6,448,442 (3) 49.6%
Michael A. Malm - Director and Chief Operating Officer 1,805,249 (4) 13.9%
Edward Sacks - Director 5,000 (5) *
Mark S. Hauser - Director 379,904 (6) 2.8%
George J. Vrabeck - President 50,000 (7) *
Christopher B. Lucas - Vice President Finance and
Chief Financial officer 100,000 (8) *
All executive officers and directors as a group
(7 persons) 6,983,346 51.6%
</TABLE>
- ------------------------------------------------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Unless otherwise stated, the address is 5548 Lindbergh Lane, Bell, CA
90201-6410
(2) Except as indicated otherwise in the following notes, shares as
beneficially owned are those to which the named persons possess sole voting
and investment power. Shares not actually outstanding are deemed to be
beneficially owned if the individual has the right to acquire such shares
within 60 days. Shares deemed beneficially owned by virtue of an
individuals s right to acquire them are also treated as outstanding when
calculating the percent of the class owned by such individual or any group
in which the individual is included (including Directors and Officers as a
group) but not for any other individual.
(3) Includes 1,805,249 shares owned by Michael A. Malm. The trustee of Mr.
Angard's trust which holds Mr. Angard's shares will be given a proxy
entitling Mr. Angard's trust to vote all of the shares owned by the trust
which holds Mr. Malm's shares.
(4) The trustee of the trust which holds Mr. Angard's shares will be given a
proxy entitling Mr. Angard's trust to vote all of the shares owned by the
trust which holds Mr. Malm's shares.
(5) Represents options to purchase 5,000 shares.
(6) Represents (i) warrants to purchase 52,500 shares issued pursuant to the
terms of Mr. Hauser's Financial Advisory Agreement with OSP, (ii) warrants
to purchase 322,404 shares issued to Tamarix Capital Corporation, a company
of which Mr. Hauser is a principal and (iii) options to purchase 5,000
shares.
(7) Represents options to purchase 50,000 shares.
(8) Includes options to purchase 100,000 shares.
30
<PAGE>
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pyramid Licensing is a corporation of which Global One's Chairman and Chief
Executive Officer and Global One's Chief Operating Officer are the sole
shareholders. Pyramid Licensing represents licensors of properties, some of whom
may in the future license such properties to Global One. The Company has agreed
to guarantee Pyramid's performance under a lease agreement and to pay some of
its expenses. The annual amount of the lease is $46,000, and the Company has,
through December 31, 1996, paid approximately $147,000 in expenses, mainly
consulting fees, on behalf of Pyramid Licensing. Although no definitive proposal
has been discussed or agreed upon, it is possible that Pyramid Licensing may
become a subsidiary of Global One in the future.
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 in January 1997 and $1,158,000 of which was
paid on February 1997. The consideration for the SDI Stock was based upon
formula relating to SDI s prior four years of operating income.
Prior to the effectiveness of the Transactions, OSP paid aggregate
dividends of $2,350,000 to Joseph C. Angard and Michael A. Malm, OSP
Publishing, Inc. shareholders and the Chairman of the Board and Chief Executive
Officer and the Chief Operating Officer of the Company, respectively. For
purposes of assisting with the Company's cash flow requirements, the
shareholders loaned the funds back to the Company on an interim basis. Mr.
Malm's loan has been repaid in full. In 1996, part of Mr. Angard's loan was
repaid and the remaining $1,000,000 is a capital contribution.
Global One's Chairman and Chief Executive Officer has a 26% interest in
Press One, a printing company, the majority of which is owned by the former
owner of OSP. The Company purchased approximately $654,000, $997,000 and
$1,355,000 of printing services from Press One in 1995 and 1994, respectively.
As of December 31, 1996 and 1995, the Company owed approximately $264,000 and
$278,000, respectively, to Press One.
OSP has an agreement with an outside agency of sales representatives
which provides marketing services to OSP. Pursuant to such agreement, the
agency paid a consulting fee to Joseph C. Angard and Michael A. Malm based
upon the amount of commissions paid to the agency by OSP. During 1996,
approximately $11,000 was paid by the agency to each Messrs. Angard and Malm
under such arrangement.
OSP has entered into an agreement (the "TAMARIX AGREEMENT") with Tamarix
Capital Corporation ("TAMARIX"), a company of which Mark S. Hauser, director of
Global One, is a principal. Under the Tamarix Agreement, Tamarix assisted OSP
with, among other things, the Transactions and received a fee equal to $324,319
(5% of the gross proceeds raised in the private placement in connection with the
Transactions) plus 322,404 warrants to purchase Global One Common Stock at an
exercise price of $1.50 per share.
OSP has entered into agreements (the "ADVISORY AGREEMENTS") with Tamarix
and Mr. Hauser (the "ADVISORS") commencing August 28, 1996 and continuing for
periods of 12 months and 36 months, respectively, unless sooner terminated,
pursuant to which the Advisors will continue to provide general financial
advisory services to OSP and Global One. Under the Advisory Agreements, Global
One is required to (a) pay Mr. Hauser $7,500 per month, (b) grant Mr. Hauser a
warrant to purchase 52,500 shares of Global One Common Stock at an exercise
price of $1.50, per share, and (c) pay certain success fees, if any, to Tamarix,
including (i) a cash fee equal to 2% of the amount of funds raised or committed
or obligations assumed through a financing plus warrants equal to 2% of such
amount at the same price per share and (ii) a cash fee equal to 1% of the
consideration paid in an acquisition. In 1996, the Company paid Mr. Hauser fees
of $15,000, but did not issue any warrants.
31
<PAGE>
PART IV
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
PAGE REFERENCE
(a)(1) FINANCIAL STATEMENTS. FORM 10-K
---------
Independent Auditors' Report . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31,
1995 and 1996 . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for each of the
three years in the period ended
December 31, 1996. . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' (Deficiency)
Equity for each of the three years in the period
ended December 31, 1996 . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1996. . F-7
Notes to Consolidated Financial Statements. . . . . . F-10
(a)(2) FINANCIAL STATEMENT SCHEDULE.
Schedule II - Valuation and Qualifying Accounts
(a)(3) EXHIBITS.
Exhibit No. Exhibit
----------- -------
2.1* Final Amended and Restated Agreement and Plan of Merger
2.2*** Agreement for Purchase and Sale of Stock of Stanley
DeSantis, Inc., dated December 31, 1996
3(i).1* Certificate of Incorporation of the Company
3(ii).1* Bylaws of the Company
4.1* Specimen Certificate evidencing shares of the Company's
Common Stock
9.1* Voting Trust Agreement between Joseph C. Angard and
Michael A. Malm
10(i).1* Form of Indemnification Agreement -- Global One
10(ii).1* Form of Indemnification Agreement -- KRSI
10(iii).1* Form of Indemnification Agreement -- OSP
10.2* Form of Global One Distribution & Merchandising Inc.
1996 Stock Option Plan and forms of Stock Option
Agreements
10.3* Form of Employment Agreement for Joseph C. Angard
10.4* Form of Employment Agreement for Michael A. Malm
10.5* Agreement between Stanley DeSantis and OSP
10.6* Form of Employment Agreement of George J. Vrabeck
10.7* Loan and Security Agreement between Foothill Capital
Corporation and OSP Publishing, Inc. and The Button
Exchange, Ltd.
10.8* Amended and Restated Promissory Note of OSP in favor of
Senoral, Inc.
10.9* Amended and Restated Stock Pledge and Escrow Agreement
between OSP, Senoral, Inc. and the Escrow Agent
10.10* Secured Promissory Note of OSP in favor of Robert
Yamasaki
10.11* Restated Secured Promissory Note and Security Agreement
of OSP in favor of Robert Yamasaki
10.12* Warrants to Purchase Common Stock of OSP Publishing,
Inc. in favor of Sutro & Co. Incorporated
10.13* Lease Agreement
10.14* Form of Stock Purchase and Registration Rights
Agreement
10.16* Form of Warrants to Purchase Common Stock of Global One
Distribution &
32
<PAGE>
Merchandising Inc. in favor of Miller, Johnson & Kuehn
10.17* Financial Advisory Agreement between the Company and
Mark S. Hauser dated May 10, 1996
10.18* Financial Advisory Agreement between the Company and
Tamarix Capital Corporation dated July 25, 1996
10.19* Financial Advisory Agreement between the Company and
Tamarix Capital Corporation dated May 19, 1996
10.20*** Promissory Note dated December 31, 1996 by Stanley
DeSantis, Inc. in favor of OSP Publishing, Inc.
10.21*** Limited Continuing Guaranty dated December 31, 1996 by
Stanley DeSantis in favor of OSP Publishing, Inc.
10.22*** Security Pledge Agreement, dated December 31, 1996
10.23*** Management Consulting Agreement dated December 31, 1996
between OSP Publishing, Inc. and Stanley DeSantis, Inc.
10.24** Promissory Note, dated August 27, 1996, in favor of
Joseph C. Angard
11.1 Statement re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- -----------------------------
* Previously filed as an exhibit to Registration Statement on Form S-4 filed
with the SEC on May 29, 1996 (File No. 333-4655) and incorporated herein by
reference.
** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 and incorporated herein by
reference.
*** Previously filed as an exhibit to Current Report on Form 8-K dated
January 15,1997 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K. In the Company's last fiscal quarter ended
December 31, 1996, the Company did not file with the Securities and
Exchange Commission a Current Report on Form 8-K.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Bell,
State of California, on April 11, 1997.
GLOBAL ONE DISTRIBUTION &
MERCHANDISING INC.
By: /s/ Joseph C. Angard
------------------------------------
Joseph C. Angard,
Chief Executive Officer
April 11, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Joseph C. Angard Director, Chairman and April 11, 1997
- ------------------------- Chief Executive Officer
Joseph C. Angard (Principal Executive Officer)
/s/ Walter M. Lacher Chief Financial Officer and April 11, 1997
- ------------------------- Secretary (Principal Financial
Walter M. Lacher Officer and Principal Accounting
Officer)
/s/ Michael A. Malm Director and Chief Operating April 11, 1997
- ------------------------- Officer
Michael A. Malm
/s/ Edward Sacks Director April 11, 1997
- -------------------------
Edward Sacks
/s/ Mark S. Hauser Director April 11, 1997
- -------------------------
Mark S. Hauser
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Global One Distribution & Merchandising Inc.:
We have audited the accompanying consolidated balance sheets of Global One
Distribution & Merchandising Inc. and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Global One Distribution &
Merchandising Inc. and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 31, 1997
F-1
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTES 8 AND 9)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,248 $ 74,828
Accounts receivable - trade, net of allowance for doubtful accounts and
returns of $2,506,893 in 1996 and $1,644,697 in 1995 (Notes 1 and 4) . . . . 4,667,818 5,248,459
Inventories (Notes 1 and 5). . . . . . . . . . . . . . . . . . . . . . . . . . 2,560,603 4,066,012
Prepaid royalty advances (Note 1). . . . . . . . . . . . . . . . . . . . . . . 576,347 555,236
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 643,791 152,147
Deferred income taxes (Notes 1 and 12) . . . . . . . . . . . . . . . . . . . . 1,089,248 38,191
Note receivable (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,575,000 -
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,145,055 10,134,873
PROPERTY AND EQUIPMENT, Net (Notes 1, 6 and 10). . . . . . . . . . . . . . . . . 1,149,775 1,185,799
GOODWILL, Net of accumulated amortization of $222,724 and $43,390 at
December 31, 1996 and 1995, respectively (Note 1). . . . . . . . . . . . . . . 4,550,531 148,493
DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,659 229,311
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,035,020 $11,698,476
----------- -----------
----------- -----------
(CONTINUED)
</TABLE>
F-2
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,826,256 $ 3,002,207
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723,016 1,026,089
Royalties payable (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,382,549 1,918,129
Due to customers (Note 1). . . . . . . . . . . . . . . . . . . . . . . . . . . 253,536 251,903
Income taxes payable (Note 1). . . . . . . . . . . . . . . . . . . . . . . . . 53,042 240,380
Current maturities of:
Capitalized lease obligations (Note 10). . . . . . . . . . . . . . . . . . . 95,254 85,003
Subordinated long-term debt (Note 9) . . . . . . . . . . . . . . . . . . . . 675,000 300,000
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 8,008,653 6,823,711
----------- -----------
REVOLVING LINE OF CREDIT (Note 8). . . . . . . . . . . . . . . . . . . . . . . . 3,813,334 2,816,595
CAPITALIZED LEASE OBLIGATIONS,
Less current maturities (Note 10) . . . . . . . . . . . . . . . . . . . . 55,612 149,302
SUBORDINATED LONG-TERM DEBT,
Less current maturities (Note 9). . . . . . . . . . . . . . . . . . . . . 1,731,904 2,638,364
MINORITY INTEREST (Notes 1 and 3). . . . . . . . . . . . . . . . . . . . . . . . 569,277
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (DEFICIENCY) (Notes 1 and 13):
Common stock, no par value; authorized, 30,000,000 shares; issued and
outstanding, 13,010,947 and 6,448,442 shares in 1996 and 1995,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,109 1,262,500
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 10,639,439 112,500
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,344,031) (2,673,773)
----------- -----------
Total stockholders'equity (deficiency) . . . . . . . . . . . . . . . . . . 3,425,517 (1,298,773)
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,035,020 $11,698,476
----------- -----------
----------- -----------
(CONCLUDED)
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES (Note 1) . . . . . . . . . . . . . $ 42,370,400 $ 38,227,958 $ 42,168,322
------------- ------------- -------------
COST OF SALES:
Cost of goods sold. . . . . . . . . . . . 22,637,880 17,016,038 19,368,726
License and royalty expense . . . . . . . 4,745,977 4,630,843 5,771,188
------------- ------------- -------------
Total cost of sales . . . . . . . . . 27,383,857 21,646,881 25,139,914
------------- ------------- -------------
GROSS PROFIT . . . . . . . . . . . . . . . . 14,986,543 16,581,077 17,028,408
------------- ------------- -------------
OPERATING EXPENSES (Note 1):
Warehouse and Selling . . . . . . . . . . 10,961,910 10,200,344 10,823,310
General and administrative. . . . . . . . 6,757,236 4,971,249 5,812,983
------------- ------------- -------------
Total operating expenses. . . . . . . 17,719,146 15,171,593 16,636,293
------------- ------------- -------------
OPERATING INCOME (LOSS). . . . . . . . . . . (2,732,603) 1,409,484 392,115
INTEREST EXPENSE (Notes 8, 9 and 10) . . . . 1,328,099 841,173 685,294
GAIN ON SALE OF SUBSIDIARY
(Note 3) . . . . . . . . . . . . . . . . . (702,419) - -
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND DISCONTINUED
OPERATIONS . . . . . . . . . . . . . . . . (3,358,283) 568,311 (293,179)
INCOME TAX (BENEFIT) PROVISION
(Notes 1 and 12) . . . . . . . . . . . . . (1,053,106) (77,336) 115,617
------------- ------------- -------------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND DISCONTINUED OPERATIONS . . . (2,305,177) 645,647 (408,796)
MINORITY INTEREST IN (INCOME)
LOSS OF SUBSIDIARIES . . . . . . . . . . . 94,172 (243,055) 148,048
------------- ------------- -------------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS . . . . . . . . . (2,211,005) 402,592 (260,748)
DISCONTINUED OPERATIONS
(Note 14):
Income (loss) from operations of
discontinued operation, less
income tax benefit of $6,454. . . . . (423,814)
Loss on disposal of discontinued
operation, less income tax benefit
of $5,268 . . . . . . . . . . . . . . (345,951)
------------- ------------- -------------
Total discontinued operations . . . . (769,765)
------------- ------------- -------------
NET INCOME (LOSS). . . . . . . . . . . . . . $ (2,211,005) $ 402,592 $ (1,030,513)
------------- ------------- -------------
------------- ------------- -------------
(CONTINUED)
</TABLE>
F-4
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------- -------------- --------------
<S> <C> <C> <C>
PRO FORMA NET INCOME (LOSS)
DATA (Note 12):
Income (loss) before income taxes, as
reported . . . . . . . . . . . . . . . . (3,358,283) $ 568,311 $ (293,179)
Pro forma (benefit) provision for income
taxes. . . . . . . . . . . . . . . . . . (671,657) 113,836 (43,273)
Minority interest in (income) loss of
subsidiaries . . . . . . . . . . . . . . (94,172) 243,055 148,048
Discontinued operations, as reported . . . (1,089,248) 178,716 (758,043)
Pro forma tax effect of discontinued
operations . . . . . . . . . . . . . . . (295,627)
-------------- ------------- --------------
Pro forma net income (loss) . . . . . . $ (2,592,454) $ 211,420 $ (564,274)
-------------- ------------- --------------
PRO FORMA INCOME (LOSS)
PER SHARE (Note 16):
Income (loss) from continuing operations . $ (0.27) $ 0.06
Minority interest in (income) loss of
subsidiaries . . . . . . . . . . . . . . 0.01 (0.03)
-------------- -------------
Pro forma net income (loss). . . . . . . $ (0.26) $ 0.03
-------------- -------------
Weighted average shares outstanding. . . . 9,987,141 8,036,602
-------------- -------------
-------------- -------------
(CONCLUDED)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED NOTE RECEIVABLE -
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER TOTAL
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994 . . . . . 5,731,073 $ 762,500 $ 112,500 $ (112,903) $ (125,000) $ 637,097
Dividends . . . . . . . . (1,140,074) (1,140,074)
Repayment of note
receivable (Note 7) . . 125,000 125,000
Net loss. . . . . . . . . (1,030,513) (1,030,513)
------------- ------------- ------------- ------------- ------------- -------------
BALANCE,
DECEMBER 31, 1994 . . . . 5,731,073 762,500 112,500 (2,283,490) (1,408,490)
Issuance of common stock 717,369 500,000 500,000
Dividends . . . . . . . . (792,875) (792,875)
Net income. . . . . . . . 402,592 402,592
------------- ------------- ------------- ------------- ------------- -------------
BALANCE,
DECEMBER 31, 1995 . . . . 6,448,442 1,262,500 112,500 (2,673,773) (1,298,773)
Capital contribution
from stockholder
(Note 14) . . . . . . . 1,000,000 1,000,000
Issuance of common
stock in private
placement . . . . . . . 4,324,237 43,242 6,443,115 6,486,357
Stock issuance costs. . . (1,777,835) (1,777,835)
Issuance of common
stock for KRSI merger . 2,041,189 20,412 3,041,372 3,061,784
Exercise of warrant . . . 197,079 1,971 529 2,500
Compensation cost on
warrants. . . . . . . . 621,742 621,742
Dividends . . . . . . . . (2,459,253) (2,459,253)
Net loss. . . . . . . . . (2,211,005) (2,211,005)
Change in par value of
stock . . . . . . . . . (1,198,016) 1,198,016
------------- ------------- ------------- ------------- ------------- -------------
BALANCE,
DECEMBER 31, 1996 . . . . 13,010,947 $ 130,109 $ 10,639,439 $ (7,344,031) $ 3,425,517
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) . . . . . . . . . . . $ (2,211,005) $ 402,592 $ (1,030,513)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . 557,683 429,665 400,775
Loss (gain) on sale of property and
equipment. . . . . . . . . . . . . 1,894 298
Minority interest in (income) loss of
subsidiaries . . . . . . . . . . . (94,172) 243,055 (148,048)
Deferred income taxes . . . . . . . . (1,089,248) 178,716 (81,970)
Loss on disposal of discontinued
operations . . . . . . . . . . . . 345,951
Changes in operating assets and
liabilities, net of business
acquisition and disposition:
Accounts receivable -- trade. . . . . (66,999) 1,127,398 179,180
Inventories . . . . . . . . . . . . . 1,044,819 885,297 (492,874)
Prepaid royalty advances. . . . . . . (91,257) 238,813 (416,345)
Prepaid expenses and other current
assets . . . . . . . . . . . . . . (459,683) 131,704 (122,047)
Due from affiliates . . . . . . . . . 326,907
Accounts payable. . . . . . . . . . . 1,644,990 (798,639) 1,106,388
Accrued expenses. . . . . . . . . . . (700,746) (383,989) (276,834)
Royalties payable . . . . . . . . . . (446,531) (837,271) 395,602
Due to customers. . . . . . . . . . . 1,633 59,841 (29,953)
Income taxes payable. . . . . . . . . 143,190 (212,645) (154,909)
------------ ------------ ------------
Net cash (used in) provided by
operating activities . . . . . . (1,767,327) 1,466,431 1,308
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment. . . (211,769) (621,901) (370,551)
Proceeds from sale of property and
equipment . . . . . . . . . . . . . . 20,973 2,283
Payment of merger costs . . . . . . . . (612,375)
Organization costs. . . . . . . . . . . (10,377)
Goodwill. . . . . . . . . . . . . . . . 6,434
Deposits. . . . . . . . . . . . . . . . 34,535 (8,054) (81,343)
------------ ------------ ------------
Net cash used in investing activities . (799,986) (608,982) (443,177)
------------ ------------ ------------
(CONTINUED)
</TABLE>
F-7
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations . $ (83,438) $ (80,332) $ (119,336)
Borrowings from revolving line of
credit. . . . . . . . . . . . . . . . 996,739 4,332,454
Payments on revolving line of credit. . (1,432,474) (2,516,596)
Borrowings on subordinated
long-term debt. . . . . . . . . . . . 750,000
Payments on subordinated long-term
debt. . . . . . . . . . . . . . . . . (531,460) (15,344) (223,983)
Issuance of note receivable . . . . . . 1,575,000
Capital contribution. . . . . . . . . . 1,000,000
Dividends paid. . . . . . . . . . . . . (2,459,253) (792,875) (1,140,074)
Issuance of common stock. . . . . . . . 6,486,357 500,000
Stock issuance costs. . . . . . . . . . (1,311,713)
Proceeds from exercise of
warrant . . . . . . . . . . . . . . . 2,500
Repayment of note receivable from
stockholder . . . . . . . . . . . . . 125,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities. . . . . . . . . 2,524,733 (1,071,025) 457,465
------------ ------------ ------------
NET (DECREASE) INCREASE IN
CASH. . . . . . . . . . . . . . . . . (42,580) (213,576) 15,596
CASH, BEGINNING OF PERIOD . . . . . . . 74,828 288,404 272,808
------------ ------------ ------------
CASH, END OF PERIOD . . . . . . . . . . $ 32,248 $ 74,828 $ 288,404
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid (received) during the
period for:
Interest . . . . . . . . . . . . . $ 1,378,366 $ 752,172 $ 646,227
Income taxes . . . . . . . . . . . $ (20,858) $ (43,407) $ 67,500
(CONTINUED)
</TABLE>
F-8
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCING
TRANSACTIONS:
Capital lease obligations of $43,504 were incurred when the Company entered
into agreements for the purchase of new equipment in 1995.
Effective August 28, 1996, the Company completed the acquisition of Kelly
Russell Studios, Inc. ("KRSI"). The acquisition was accounted for as a purchase,
applying the provisions of Accounting Principles Board Opinion No. 16. The
purchase cost was allocated to KRSI's assets and liabilities based on their
relative fair values. The purchase cost and the net liabilities assumed have
been allocated to goodwill as follows:
Purchase cost equity $ 3,217,404
Assets acquired 799,563
Liabilities assumed (1,540,780)
-----------
Less net liabilities acquired (741,217)
-----------
Plus OSP's portion of costs associated
with the KRSI Merger 612,375
-----------
Goodwill $ 4,570,996
-----------
Effective December 31, 1996, the Company completed the sale of its 51%
owned subsidiary, Stanley DeSantis, Inc ("SDI"). The sales price was allocated
to the assets and liabilities of SDI based on the percentage owned by OSP as
well to other intercompany accounts as follows:
Total consideration $ 1,575,000
Amounts due from SDI (235,000)
Reimbursement of legal fees 15,000
Net assets of SDI (652,581)
------------
Gain on sale $ 702,419
------------
------------
(CONCLUDED)
F-9
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Global One Distribution & Merchandising Inc. ("Global One")
and subsidiaries (the "Company") design and produce licensed trend merchandise
which is marketed for sale in gift and stationary stores, video stores, music
stores, toy stores, book stores and mass retailers. The Company's products
consist of posters, T-shirts, framed wall decor, buttons, key chains, stickers,
collectible movie scripts and sports related collectible art. These products
incorporate primarily licensed images and characters from motion pictures,
television, comic books, music, sports and popular culture.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Global One, its 100%-owned subsidiaries, OSP Publishing,
Inc. ("OSP") (and its division, Top Banana, which was discontinued in 1994 - see
Note 15); BEx Corp. ("BEx"), which prior to the reorganization in August 1996
(see Note 2) was a 79%-owned subsidiary of OSP and operated under the name
Button Exchange, Ltd.; Kelly Russell Studios, Inc. ("KRSI"), which was acquired
on August 28, 1996; and its 51%-owned subsidiary, Stanley DeSantis, Inc.
("SDI"), which was acquired during 1993 and sold on December 31, 1996 (see Note
3). All material intercompany transactions have been eliminated in
consolidation. See Note 2 for a description of the transactions pursuant to
which, among other things, the Company was reorganized and acquired KRSI on
August 28, 1996.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
consist primarily of accounts receivable and payable, and debt instruments. The
carrying values of all financial instruments, other than debt instruments, are
representative of their fair values due to their short maturities. The carrying
values of the Company's bank debt instruments are considered to approximate
their fair values because the interest rates of these instruments are based on
variable reference rates. Management believes that the fair value of
subordinated debt would not differ significantly from the carrying amount at
December 31, 1996 and 1995.
CONCENTRATION OF CREDIT RISK -- Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. Concentration
of credit risk with respect to accounts receivable is generally diversified due
to the large number of entities composing the Company's customer base and their
geographic dispersion. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses.
SIGNIFICANT LICENSORS AND CUSTOMERS -- Disney Enterprises, Inc. represented
approximately 10%, 22% and 31% of net sales of products in 1996, 1995 and 1994,
respectively, and in 1996, Warner Brothers represented approximately 12% of net
sales of products. Sales to one and two customers each accounted for
approximately 10% of net sales during 1996 and 1995, respectively.
INVENTORIES -- Inventories, consisting primarily of posters, stickers and
trend gift items, are valued at the lower of cost or market, with cost
determined on the first-in, first-out method.
ROYALTIES -- The Company has entered into license agreements with various
companies requiring payment of royalties. At the inception of the license term,
minimum royalty payments are accounted for as prepaid royalty advances. These
prepaid royalties are charged to operations based on the related product sales
or license term.
F-10
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is provided for by the straight-line method over the estimated
useful lives of the related assets, which range from two to ten years.
Leasehold improvements are amortized on a straight-line basis over the term of
the lease or estimated useful life, whichever is shorter.
GOODWILL -- Goodwill from the acquisition of KRSI in August 1996 and from
BEx represents the excess cost over the fair value of net assets acquired and is
being amortized over useful lives ranging from five to ten years using the
straight-line method. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred. The Company determines the
recoverability of the goodwill based on the expected future cash flows, on an
undiscounted basis, of KRSI and BEx. Based on its review, the Company does not
believe that an impairment of its goodwill has occurred.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The adoption of this statement in 1996 did not have
an effect on the Company's consolidated financial statements.
COMMON STOCK - In connection with the organization of Global One as the
parent company of OSP (see Note 2), the stockholders of OSP received 6,448,442
shares of common stock of Global One in exchange for the outstanding common
stock of OSP. All share information in the accompanying financial statements
has been retroactively adjusted to reflect this exchange.
NET SALES -- Revenue is recognized when goods are originally shipped. The
Company allows customers to return purchased goods only in exchange for other
goods. Customer credits for goods returned but not yet exchanged for other
goods are included in the accompanying balance sheet as "Due to customers." The
Company provides for estimated returns when the products are shipped to its
customers.
INCOME TAXES -- Until the transactions in August 1996, OSP had elected to
be treated as an S Corporation for federal and California state income tax
purposes. Pursuant to these elections, the income of OSP was included in the
income tax returns of its stockholders. Consequently, no provision for federal
income taxes was recorded in the accompanying financial statements for OSP prior
to August 1996. However, under California state law, an income tax equal to
1.5% of income before tax is imposed upon an S corporation and is provided for
in the accompanying financial statements.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. A valuation allowance is established, when necessary,
to reduce deferred income tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred income tax assets and liabilities.
2. MERGER AND PRIVATE PLACEMENT
On March 27, 1996, OSP entered into an agreement to acquire 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
Publishing, Inc. ("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
F-11
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"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
SmallCap Market effective August 28, 1996.
3. SALE OF SDI AND PRO FORMA RESULTS OF OPERATION
In 1996, OSP entered into an agreement with the minority shareholder and
President of 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
Company's original investment in SDI in 1993 was $50,000. The purchase price
was allocated to certain intercompany accounts receivable and payable and the
net gain after the reduction in the net assets of SDI consolidated with the
Company totaled $702,719. The purchase price was evidenced by a promissory note
secured by the stock previously held by OSP and was paid in two installments
with the final installment received in February 1997. The consolidated
financial statements of the Company include the statement of operations for SDI
for all periods presented. The consolidated balance sheet at December 31,1996
reflects the sale of SDI.
Summarized financial information for SDI (in thousands) is as follows:
Year Ended December 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Net sales. . . . . . . . . . $17,634 $10,140 $11,096
Net income (loss). . . . . . (192) 556 (327)
Total assets . . . . . . . . 2,911 2,256
Total liabilities. . . . . . 1,646 1,095
As noted in Note 2, 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 1995. 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
gain on sale of SDI in 1996, (3) elimination of the allocation of the profit
(loss) to the minority shareholder of SDI and (4) 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 2 for all
periods presented.
Years Ended December 31,
------------------------
1996 1995
-------- --------
Net sales . . . . . . . . . . . . . . . . . . . . $26,564 $30,902
Cost of sales . . . . . . . . . . . . . . . . . . 16,187 17,398
-------- --------
Gross profit. . . . . . . . . . . . . . . . . . . 10,377 13,504
Operating expenses. . . . . . . . . . . . . . . . 15,232 15,313
-------- --------
Operating income. . . . . . . . . . . . . . . . . (4,855) (1,809)
Interest expense. . . . . . . . . . . . . . . . . 1,071 683
-------- --------
F-12
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss before taxes . . . . . . . . . . . . . . . . (5,926) (2,492)
Provision (benefit) for income taxes. . . . . . . (672) 114
-------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . $ (5,254) $ (2,606)
-------- --------
-------- --------
Net loss per share. . . . . . . . . . . . . . . . $ (0.40) $ (0.20)
-------- --------
-------- --------
Weighted average shares outstanding . . . . . . . 13,011 13,011
-------- --------
-------- --------
4. ACCOUNTS RECEIVABLE
Stanley DeSantis, Inc. sells substantially all of its accounts receivable
to a factor under a continuing contract, cancelable upon written notice. In
most cases, the factor approves the credit and the account is sold without
recourse. In cases in which the factor does not approve the credit, Stanley
DeSantis, Inc. bears the risk. At December 31, 1995, the receivables that were
at the Company's risk were approximately $251,000. At December 31, 1995,
amounts due from factor included in accounts receivable -- trade were $821,730.
The factor, to the extent of any financing provided, holds a security interest
in all accounts receivable and property of SDI. SDI was sold on December 31,
1996 to the minority stockholder.
5. INVENTORIES
Inventories consist of the following:
December 31,
------------------------
1996 1995
-------- --------
Products in process . . . . . . . . . . . . . $ 252,893 $ 659,657
Finished products . . . . . . . . . . . . . . 1,796,604 3,159,953
Packaging materials . . . . . . . . . . . . . 511,106 246,402
----------- -----------
$ 2,560,603 $ 4,066,012
----------- -----------
----------- -----------
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
------------------------
1996 1995
-------- --------
Computer equipment. . . . . . . . . . . . . . . . $ 773,029 $ 600,138
Machinery and equipment . . . . . . . . . . . . . 252,140 495,887
Furniture and fixtures. . . . . . . . . . . . . . 502,764 359,808
Leasehold improvements. . . . . . . . . . . . . . 468,597 462,597
Vehicles. . . . . . . . . . . . . . . . . . . . . 60,630 81,165
----------- -----------
2,057,160 1,999,595
Less accumulated depreciation and amortization. . 907,385 813,796
----------- -----------
Property and equipment, net . . . . . . . . . . . $ 1,149,775 $ 1,185,799
----------- -----------
----------- -----------
Included in the above is equipment under capitalized leases in the amounts
of approximately $356,000 and $422,000 with accumulated depreciation of
approximately $215,000 and $186,000 at December 31, 1996 and 1995, respectively.
F-13
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTE RECEIVABLE -- STOCKHOLDER
In 1992, OSP sold 1,002,444 shares of common stock to an officer of OSP in
exchange for a $125,000 note receivable. In 1994, this note was repaid with
proceeds received from a dividend declared by OSP.
8. REVOLVING LINE OF CREDIT
In February 1996, the Company refinanced its outstanding line of credit
with a financial institution. The line of credit expires in February 1999 and
provides for maximum borrowings of $7,500,000, subject to a borrowing base of
approximately 75% of eligible accounts receivable and 45% of eligible finished
goods inventory, as defined. The outstanding balance under the line of credit
bears interest at a bank's prime rate (8.5% at December 31, 1996) plus 1.75% and
is payable monthly. The agreement also provides for $500,000 term loan subject
to certain restrictions and a $200,000 for standby letters of credit which may
be drawn upon and reduce the available borrowings under the line of credit. The
borrowings under the line of credit are collateralized by substantially all of
the assets of the Company and a certificate of deposit held by a third party, in
an amount of at least $500,000, to be held at a bank designated by the financial
institution. The line of credit line is personally guaranteed by the principal
stockholders/officers and contains various restrictive covenants including a
current and interest coverage ratio requirement, minimum level of tangible net
worth, and limits the incurrence of additional indebtedness, capital
expenditures and payments of distributions. As of December 31, 1996, the
Company was in compliance with its financial covenants.
9. SUBORDINATED LONG-TERM DEBT
Subordinated long-term debt is payable to the former owner of the Company
and is collateralized by all of the Company's assets. Interest is calculated at
prime plus 2% per annum, unless prime plus 2% shall equal or exceed 10% per
annum, in which case interest shall accrue at the higher of (1) the prime
interest rate, or (2) 10% per annum. The Company is required to pay monthly
principal payments of $25,000 plus accrued interest until October 1, 1998, at
which time the remaining principal balance is due. The note is due on demand if
there is a sale of more than 50% of the Company's outstanding stock. The note
is subordinated to all business debt now or hereinafter incurred by the Company.
In addition, in 1995, the Company obtained subordinated debt financing from
a vendor totaling $750,000, which bears interest at 10% per annum. In connection
with the Transactions, the vendor purchased 250,000 shares of common stock and
the Company repaid $375,000 of the outstanding loan balance. The remaining
balance of the loan was repaid in February 1997 from the proceeds of the sale of
SDI. The borrowings were collateralized by a security interest in all of the
assets of the Company.
The Company also entered into a minimum purchase agreement with the vendor,
whereby it agreed to purchase or procure a minimum of 75% of its total printing
from the vendor, and the minimum amount payable to the vendor for printing shall
not be less than $2,500,000 per year.
Future minimum payments of subordinated long-term debt are summarized as
follows:
YEAR ENDING
DECEMBER 31,
- ------------
1997 . . . . . . . . . . . . . . . . . . . . . . . $ 675,000
1998 . . . . . . . . . . . . . . . . . . . . . . . 1,731,904
-----------
Total. . . . . . . . . . . . . . . . . . . . $ 2,406,904
-----------
-----------
F-14
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. CAPITALIZED LEASE OBLIGATIONS
The Company has various capitalized lease obligations payable in monthly
installments of $9,438, including interest at rates ranging from 7.5% to 17.3%
per annum. The capitalized lease obligations are due at various dates through
September 1999 and are collateralized by property and equipment. Future minimum
lease payments are as follows:
DECEMBER 31,
- ------------
1997 . . . . . . . . . . . . . . . . . . . . $ 109,409
1998 . . . . . . . . . . . . . . . . . . . . 57,200
1999 . . . . . . . . . . . . . . . . . . . . 3,939
---------
170,548
Less amount representing interest. . . . . . 19,682
---------
Net minimum lease payments . . . . . . . . . 150,866
Less amount due in one year. . . . . . . . . 95,254
---------
Long-term obligations under capital leases . $ 55,612
---------
---------
11. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company leases facilities and equipment from nonaffiliated
and affiliated parties under noncancelable operating leases expiring through
June 2005. Amounts paid to affiliated parties during 1996, 1995 and 1994 were
approximately $60,000, $66,000 and $194,000, respectively.
Future minimum rental commitments (excluding taxes, insurance and other
occupancy expenses) under noncancelable leases are as follows:
YEAR ENDING
DECEMBER 31,
- ------------
1997 . . . . . . . . . . . . . . . . . . . . $ 466,026
1998 . . . . . . . . . . . . . . . . . . . . 489,099
1999 . . . . . . . . . . . . . . . . . . . . 480,720
2000 . . . . . . . . . . . . . . . . . . . . 479,119
2001 . . . . . . . . . . . . . . . . . . . . 478,525
Thereafter . . . . . . . . . . . . . . . . . 1,796,986
-----------
Total . . . . . . . . . . . . . . . . . $ 4,190,475
-----------
-----------
Rent expense was approximately $597,000, $525,000 and $367,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
OTHER -- The Company is involved in litigation arising in the normal course
of business. It is the opinion of management that the disposition of such
actions will not materially affect the financial position or results of
operations of the Company.
F-15
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES AND PRO FORMA INCOME TAXES
The components of income tax expense are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Current:
Federal. . . . $ 37,470 $ (250,359) $ 125,174
State. . . . . (39,520) (5,693) 72,413
----------- ----------- -----------
(2,050) (256,052) 197,587
----------- ----------- -----------
Deferred:
Federal. . . . (817,744) 151,314 (69,904)
State. . . . . (233,312) 27,402 (12,066)
----------- ----------- -----------
(1,051,056) 178,716 (81,970)
----------- ----------- -----------
Total . . $(1,053,106) $ (77,336) $ 115,617
----------- ----------- -----------
----------- ----------- -----------
Deferred income taxes consist of the following:
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
Allowance for doubtful accounts and returns $1,077,658 $ 63,749
Inventory reserve . . . . . . . . . . . . . 362,659 83,175
Inventory cost capitalization . . . . . . . 128,570 35,018
Net operating loss carryforwards. . . . . . 579,498 -
Other . . . . . . . . . . . . . . . . . . . 20,640 4,562
---------- ----------
Deferred tax assets . . . . . . . 2,169,025 186,504
---------- ----------
Management fee income . . . . . . . . . . . (333,250) -
Accrued vacation liability. . . . . . . . . (65,643) -
Depreciation. . . . . . . . . . . . . . . . (21,500) (49,588)
---------- ----------
Deferred tax liabilities. . . . . (420,393) (49,588)
Valuation allowance . . . . . . . (659,385) (98,725)
---------- ----------
Net deferred tax assets . . . . . 1,089,247 38,191
---------- ----------
---------- ----------
The change in the valuation allowance of $560,660 in 1996 was a result of
the composition of the deferred tax components.
The Company's effective income tax rate differs from the federal statutory
income tax rate due primarily to OSP's being taxed as an S corporation prior to
the Transactions as discussed in Note 1 and the valuation allowance on certain
deferred tax assets.
At December 31, 1996, the Company has net operating loss carryforwards for
Federal and State income tax purposes of approximately $1,500,000 and $750,000
which expire in 2011 and 2001, respectively.
F-16
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following information reflects the pro forma effect on income taxes as
if OSP's earnings from continuing operations had been subject to federal and
state income taxes as a C Corporation for all periods presented:
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Current:
Federal. . . . - $ 264,417 $ 13,511
State. . . . . $ 3,200 117,117 32,705
---------- ---------- ----------
3,200 381,534 42,216
Deferred:
Federal. . . . (495,065) (196,484) (69,263)
State. . . . . (179,792) (71,214) (20,226)
---------- ---------- ----------
(674,857) (267,698) (89,489)
---------- ---------- ----------
Total . . $ (671,657) $ 113,836 $ (43,273)
---------- ---------- ----------
---------- ---------- ----------
The pro forma income tax (benefit) provision on earnings from continuing
operations subject to income taxes differs from the statutory federal income tax
rate due to the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes at the statutory rate . . . . . $(1,141,816) $ 193,226 $ (99,681)
State income taxes, net of federal benefit . . . . . 25,265 11,119
Permanent differences. . . . . . . . . . 15,094 36,254 45,289
Losses for which no benefit was recognized . . . . . 455,065
Prior year under accrual . . . . . . . . . . . . . . (140,909)
----------- ----------- -----------
$ (671,657) $ 113,836 $ (43,273)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
OSP's S Corporation election was terminated at the closing of the
Transactions and the Company recognized a current deferred tax asset
representing the cumulative temporary differences as of the termination date.
This occurred on August 28, 1996, and the Company recorded a net deferred tax
asset of approximately $1,089,000. Had the termination of the S Corporation
election occurred on December 31, 1995, the Company would have recorded a net
deferred tax asset as follows:
DECEMBER 31,
1995
------------
Deferred tax assets:
Allowance for sales returns . . . . . . . . . . . . . . $ 464,328
Allowance for doubtful accounts . . . . . . . . . . . . 170,797
Inventory reserve . . . . . . . . . . . . . . . . . . . 228,215
Inventory capitalization. . . . . . . . . . . . . . . . 112,201
Other . . . . . . . . . . . . . . . . . . . . . . . . . 10,796
----------
986,337
----------
Deferred tax liabilities -- State deferrals . . . . . . . . (59,271)
----------
Net deferred tax asset. . . . . . . . . . . . . . . . . . . $ 927,066
----------
----------
F-17
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTIONS AND WARRANTS
The Company adopted the 1996 Stock Option Plan which provides that options
to purchase up to 2,000,000 shares of common stock may be issued to employees,
directors and consultants. Options may be granted under the plan at prices which
are equal to or greater than the fair market value of the shares at the date of
grant. The options become exercisable over a period of time as determined by
the Board of Directors and generally expire ten years from the date of grant or
earlier upon termination of employment or directorship.
In connection with the merger with KRSI, the Company also assumed 403,675
outstanding stock options under KRSI's stock option plan in connection with the
two-for-one stock exchange as described in Note 2.
The following summarizes activity in the 1996 Stock option Plan and the
KRSI Stock Option Plan since August 28, 1996:
AGGREGATE EXERCISE
NUMBER EXERCISE PRICE PRICE PER SHARE
------ -------------- ---------------
Assumed. . . . . . . . . 403,675 $ 1,159,038 $1.50 - $5.00
Granted. . . . . . . . . 1,821,000 2,731,500 1.50
Forfeited. . . . . . . . (155,000) (232,500) 1.50
----------- ----------- -------------
Balance December 31,
1996 . . . . . . . . . 2,069,675 $ 3,658,038 $1.50 - $5.00
----------- ----------- -------------
----------- ----------- -------------
As of December 31, 1996, options to purchase 589,900 shares were
exercisable under the 1996 Stock Option Plan.
The Company issued warrants to purchase 1,098,672 shares of common stock at
an exercise price of $1.50 per share to various consultants in connection with
the Transactions. In addition, the Company assumed 175,667 outstanding warrants
of KRSI in the two-for-one stock exchange. The warrants have exercise prices
ranging from $1.98 to $8.40 per share, are all exercisable and expire between
1997 and 2005.
In August 1996, 197,079 warrants issued in 1989 were exercised for total
proceeds of $2,500.
The Company accounts for stock option and warrant grants in accordance with
Accounting Principles Board opinion No. 25. Had compensation cost for stock
option grants been calculated using the fair market value provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS 123), the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated in the following table:
1996
------------
Pro forma net loss - as reported. . . . . . . . $(2,592,454)
Pro forma net loss - pro forma for FAS 123. . . $(2,772,427)
Primary EPS - as reported . . . . . . . . . . . $ (0.26)
Primary EPS - pro forma for FAS 123 . . . . . . $ (0.28)
The pro forma effect on net income for 1996 is not necessarily
representative of the pro forma effect on net income for future years since the
pro forma compensation costs relate only to stock options granted during 1996.
The fair value of the stock options and warrants granted and issued during
1996 was determined using the Black-Scholes option pricing model and the
following weighted average assumptions: risk-free interest rate of 6.7%;
expected option life of 5 years; volatility of 62.9%; and no dividend yield.
F-18
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option and warrant groups outstanding at December 31, 1996 and related
option and warrant information follows:
<TABLE>
<CAPTION>
Wtd. Avg. Options/
Number Remaining Wtd. Avg. Warrants Wtd. Avg
Outstanding at Contractual Exercise Exercisable at Exercise
Range of Exercise Prices: 12/31/96 Life Price 12/31/96 Price
-------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$1.50 1,666,000 10 Years $1.50 385,000 $1.50
$1.50 to $8.40 579,342 8 Years $3.31 424,567 $3.34
</TABLE>
In connection with the Transactions, certain consultants and the investment
banker received an aggregate of 1,098,672 warrants to purchase the Company's
Common Stock at $1.50 per share. The fair value of these warrants was computed
as described above and $155,623 of fair value was recorded as additional
goodwill and $466,119 was recorded as stock issuance costs. The total of
$621,742 has been recorded as additional paid-in capital as an addition to
stockholders' equity in the accompanying financial statements.
14. RELATED PARTY TRANSACTIONS
Effective December 1996, OSP's principal stockholder agreed to rescind
$1,000,000 in dividends that had been previously declared which has been
reflected as an addition to paid-in capital in the accompanying financial
statements.
The Company's principal stockholder has a 26% equity interest in Press One,
a printing company majority owned by the former owner of the Company. The
Company purchased approximately $654,000, $997,000 and $1,355,000 of printing
services from Press One in 1996, 1995 and 1994, respectively. At December 31,
1996 and 1995, the Company owed approximately $264,000 and $278,000,
respectively, to Press One.
The Company's principal stockholder is also a shareholder in Pyramid
Licensing which represents licensors of properties, some of whom may license
such properties to OSP. OSP has guaranteed Pyramid Licensing's performance
under a lease agreement for which the annual commitment is $46,000. OSP has
also paid certain expenses on behalf of Pyramid Licensing, mainly consulting
fees, totaling approximately $147,000.
The former owner of the Company owned the main facilities from which the
Company conducted its operations. These facilities were under operating leases
that expired December 31, 1994. The Company moved its main facilities in April
1995 to their present location whose lease is with an unaffiliated entity.
The Company pays commissions to an outside agency of sales representatives.
The outside agency pays to Joseph C. Angard and Michael A. Malm, Global One's
Chairman of the Board and Chief Executive Officer and Chief Operating Officer,
respectively, a consulting fee on the basis of commissions received from the
Company. The Company paid approximately $368,000, $640,000 and $751,000 of
commissions to the outside agency in 1996, 1995 and 1994, respectively.
During January 1994, in exchange for the release from certain guarantees,
OSP received 2,900 additional shares of Button Exchange, Ltd. (the predecessor
of BEx Corp.) common stock from a minority stockholder, increasing its ownership
to 79%. In connection with the reorganization (Note 2), in 1996, Global One
acquired the remaining 21% of The Button Exchange, Ltd.
In addition, the Company has advanced funds to its majority stockholders,
who in turn advanced the funds to certain affiliated companies. During 1994,
the balance of these advances, $324,998, was repaid with proceeds received in
the form of a dividend from the Company.
F-19
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. DISCONTINUED OPERATIONS
During fiscal 1994, the Company committed to a formal plan to phase out and
dispose of its division, Top Banana, a distributor of licensed battery operated
electronic products. The phase-out and ultimate sale of the remaining assets
have been substantially completed.
The loss on disposition of the division has been accounted for as
discontinued operations. Revenues of the division for 1996, 1995 and 1994 were
$5,000, $1,174,000 and $3,532,000, respectively.
16. PRO FORMA NET INCOME 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 assumes that this exchange had
occurred throughout the periods presented, includes the dilutive common
equivalent shares from stock warrants (using the treasury stock method) and also
gives effect to 1,963,799 and 1,393,550 shares in 1996 and 1995, respectively,
deemed to be outstanding. These shares represent the approximate number of
shares deemed to be sold by the Company (at the net offering proceeds of $1.20
and $1.26 per share in 1996 and 1995, respectively) to fund the S corporation
distribution of $2,350,000 and $1,750,000 in 1996 and 1995, respectively 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.
F-20
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(Charge)/
Balance at Credited to Charged to Balance
Beginning Costs and Other at End of
Classification of Period Expenses Accounts Deductions Period
- -------------- --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
and returns:
Year ended December 31, 1994 $ (728,085) $ (234,581) $ - $ - $ (962,666)
Year ended December 31, 1995 (962,666) (682,031) (1,644,697)
Year ended December 31, 1996 (1,644,697) (862,196) (2,506,893)
Reserve for inventory:
Year ended December 31, 1994 (369,000) 12,441 (356,559)
Year ended December 31, 1995 (356,559) (220,496) (577,055)
Year ended December 31, 1996 (577,055) (823,504) 557,167 (843,392)
</TABLE>
(CONCLUDED)
F-21
<PAGE>
COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995
------------ ----------
Common Stock outstanding at beginning
of year 6,448,442 6,448,442
Exercise of warrant 197,079
Issuance of Common Stock from Merger with
Kelly Russell Studios, Inc. 2,041,189
Issuance of Common Stock from Private
Placement 4,324,237
------------ ----------
Common Stock outstanding at end of year 13,010,947 6,448,442
------------ ----------
------------ ----------
Weighted average shares outstanding during the
year assuming exercise of warrants 8,695,876 6,645,157
Shares assumed outstanding approximating the
number of shares sold (at the net offering
proceeds per share of $1.20 and $1.26 per
share) to fund the S Corporation distribution 1,291,265 1,393,550
Shares assumed to be repurchased under the
treasury stock method at a fair market value
per share of $1.00 for the year ended
December 31, 1995 (2,105)
------------ ----------
Total 9,987,141 8,036,602
------------ ----------
------------ ----------
Pro forma net income (loss) data:
Income (loss) before income taxes ($3,358,283) $ 568,311
Pro forma (benefit) provision for income taxes (671,657) 113,836
Minority interest in (income) loss of subsidiary 94,172 (243,055)
------------ ----------
Pro forma net income (loss) ($2,592,454) $211,420
------------ ----------
------------ ----------
Pro forma net income (loss) per share:
Income (loss) from operations ($0.27) $0.06
Minority interest in (income) loss of
subsidiaries 0.01 (0.03)
----------- ----------
Pro forma net income (loss) ($0.26) $0.03
------------ ----------
------------ ----------
Exhibit 11.1
<PAGE>
SUBSIDIARIES
OSP Publishing, Inc., a Delaware corporations
BEx Corp., a Delaware corporation
Kelly Russell Studios, Inc., a Delaware corporation
*Stanley DeSantis, Inc., a California corporation
-----------------------------
* Sold on December 31, 1996
Exhibit 21.1
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Global One Distribution & Merchandising Inc. on Form S-8, No. 333-17249 of
our report dated March 31, 1997, appearing in the Annual Report on Form 10-K of
Global One Distribution & Merchandising Inc. for the year ended December 31,
1996.
DELOITTE & TOUCHE LLP
Los Angeles , California
April 9, 1997
Exhibit 23.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 32,248
<SECURITIES> 0
<RECEIVABLES> 4,667,818
<ALLOWANCES> 2,506,893
<INVENTORY> 2,560,603
<CURRENT-ASSETS> 11,145,055
<PP&E> 1,149,775
<DEPRECIATION> 907,385
<TOTAL-ASSETS> 17,035,020
<CURRENT-LIABILITIES> 8,008,653
<BONDS> 0
0
0
<COMMON> 130,108
<OTHER-SE> 3,295,408
<TOTAL-LIABILITY-AND-EQUITY> 17,035,020
<SALES> 42,370,400
<TOTAL-REVENUES> 42,370,400
<CGS> 27,383,857
<TOTAL-COSTS> 45,103,003
<OTHER-EXPENSES> (702,414)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,328,044
<INCOME-PRETAX> (3,358,283)
<INCOME-TAX> (1,053,106)
<INCOME-CONTINUING> (2,305,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,211,005)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> 0
</TABLE>
