UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996
Commission File number 0-25754
KELLY RUSSELL STUDIOS, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1735795
(State of incorporation or organization) (I.R.S. Employer Identification No.)
2905 Northwest Boulevard, Suite 220, Plymouth, Minnesota 55441
(Address of principal executive offices)
612-553-9992
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the last 90 days.
Yes X No
On May 6, 1996, the Company had 4,082,373 shares of Common Stock, $.01 par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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This Form 10-QSB/A is being filed to amend Part I, Item 2 of Form 10-QSB for the
quarter ended March 31, 1996, which Item 2 is hereby amended and restated as set
forth below.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion relates to the results of operations of Kelly Russell
Studios, Inc. for the three months ended March 31, 1996 and March 31, 1995 and
its financial position as of March 31, 1996. Due to the seasonal nature of the
Company's business, the results of operations are not indicative of the results
expected for the complete year.
Results of Operations
In the first quarter of 1996, the Company's Board of Directors further revised
its business plan and operations to reduce operating costs. In 1996, the Company
plans to produce and distribute a more limited number of images, primarily just
the top few athletes of any given sport. The product line in 1996 will include
approximately 100 different images, down from the 300 images offered during
1995. Additionally, in 1996 the Company will continue to increase channels of
distribution with existing and new national and regional retail customers. The
Company also changed contractors for its assembly warehousing and shipping
function in January 1996. Management believes that alternate contractors are
available in the event the Company is unable to obtain services from their
current contractor.
In connection with this restructuring, the Company recorded a charge to 1995
operations of approximately $186,000 for the write-down of inventories, prepaid
licensing rights and original art work, all relating to print images which will
not be aggressively sold during 1996. The Company also reduced the number of
employees and accepted the resignation of its Chief Executive Officer in
February 1996. Management believes its new business strategy will result in
improved cash flow and a reduction of losses in 1996.
On March 27, 1996, the Company entered into an Agreement and Plan of
Reorganization ("Merger Agreement") with O.S.P. Publishing, Inc. ("OSP"), a
California corporation, and its shareholders. Pursuant to the Merger Agreement,
the Company will combine its operations with OSP, its subsidiary Stanley
DeSantis, Inc. ("SDI") and The Button Exchange ("BEx"). OSP is a publisher of
licensed posters, SDI develops and markets licensed and nonlicensed T-shirts,
sweatshirts, boxer shorts and mugs, and BEx develops and markets licensed and
nonlicensed buttons, key rings and stickers. To effectuate this reorganization,
a new corporation, Global One Distribution & Merchandising Inc. ("Global One"),
a Delaware corporation has been formed, and Global One will form three
wholly-owned Delaware subsidiaries, KRSI Acquisition Corp. ("KRSI Acquisition"),
OSP Acquisition Corp. ("OSP Acquisition"), and BEx Acquisition Corp. ("BEx
Acquisition"). As part of the reorganization, the Company will be merged with
and into KRSI Acquisition, KRSI Acquisition being the surviving company, and OSP
and BEx will be merged with and into OSP Acquisition and BEx Acquisition,
respectively. As a result, Global One will be the holding company for the
operations formerly conducted by the Company, OSP, SDI and BEx. Following
consummation of the merger, KRSI Acquisition will change its name and conduct
its business under the name "Kelly Russell Studios, Inc."
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The Company's shareholders will receive one share of Global One Common Stock for
every two shares of the Company's Common Stock outstanding at closing. The
closing of the Merger Agreement will be subject to various conditions, including
approval of the merger by the Company's shareholders at a special meeting and
the successful placement of at least 4,000,000 shares of Global One Common Stock
at $1.50 per share. The Company currently anticipates that the special meeting
of shareholders will be held sometime in August 1996. In connection with the
merger, the Company has delivered $100,000 to an escrow account and is obligated
to deposit an additional $150,000 in the escrow account. In the event the Merger
Agreement is terminated by the Company, the escrow agent may be obligated to
deliver the escrowed funds to OSP as liquidated damages for such termination.
OSP is the world's largest publisher and distributor of licensed posters. OSP
also develops, publishes and distributes an extensive product line of novelty
and gift items, including Book Bites(TM), Wallet Cards(TM), buttons, key chains,
stickers, movie scripts and T-shirts, which incorporate images and/or characters
from motion pictures, television, animation, music, sports personalities and
popular performers. In the last five years, OSP sales have increased from $13
million in 1990 to $38 million in 1995.
The Company has explored various alternatives to generate acceptable revenue
growth as a stand-alone company without success. Management of the Company
believes that combining the Company's sports licenses and original art
capability with OSP's strong distribution network will provide OSP with another
large market and potential for further expansion. Management of the Company
believes that the merger will therefore give the Company's shareholders a
significant stake in a company with significantly better growth prospects.
However, if the merger is not approved by the shareholders or not completed for
any other reason, management believes it will be necessary for the Company to
obtain debt or equity financing to finance operations through 1996. If
management is unsuccessful in its financing efforts, the Company may not be able
to continue as a going concern and would be forced to sell off significant
assets, file for protection under federal bankruptcy laws or liquidate the
business.
Sales for the three months ended March 31, 1996 were $778,614 compared to
$512,863 for the three months ended March 31, 1995, representing an increase of
52%. Management attributes the increase in sales primarily to orders obtained
from national mass merchant accounts.
Cost of goods sold totaled $338,503 for the three months ended March 31, 1996,
representing 43% of net sales, compared to $220,884 or 43% of net sales for the
three months ended March 31, 1995. Management currently anticipates that cost of
goods sold will be in the range of 43% to 47% of net sales in 1996, based on
currently estimated levels of payments for original artwork and photographic
resources.
License and royalty expenses paid to third parties totaled $114,235 or 15% of
net sales for the three months ended March 31, 1996, compared to $56,520 or 11%
of net sales for the three months ended March 31, 1995. License and royalty
expenses for the three months ended March 31, 1995 were reduced due to credits
received as a result of items returned to the
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Company that were recorded as sold in 1994. Management currently anticipates
that license and royalty expenses will be in the range of 15% to 18% of net
sales in the future.
Operating expenses increased to $708,401 for the three months ended March 31,
1996 from $451,950 for three months ended March 31, 1995, representing an
increase of $256,451 or 57%. This increase is primarily due to (i) a $118,025
increase in advertising, promotions and services to increase salability of the
Company's products, (ii) a $55,283 increase in wages and payroll taxes, (iii) a
$24,935 increase in commissions paid to outside sales representatives as a
result of the increase in sales, (iv) an $11,728 increase in depreciation
relating to purchase of displays in 1995, and (v) a $43,643 increase in
accounting and legal expenses relating to the pending OSP transaction, which
expenses are expected to increase during the Company's second quarter.
The Company has incurred $2,024 of interest expense in the first quarter of 1996
which relates to finance charges paid to vendors who have extended payments
terms to the Company. The Company did not utilize any interest-bearing debt in
the first quarter of 1995.
The Company incurred a loss of $384,549 for the three months ended March 31,
1996 despite the increase in sales and reduction in cost of goods sold as a
percentage of net sales. While the Company's sales are anticipated to increase
in 1996 compared to 1995, the Company does not expect that sales will be
sufficient for the Company to be profitable in the next three quarters of 1996
or for the year.
Liquidity and Capital Resources
The Company had cash of $37,962 and working capital of $360,570 at March 31,
1996, as compared to cash of $257,618 and working capital of $708,511 at
December 31, 1995. Cash flow used in operating activities totaled $119,656 for
the three months ended March 31, 1996, primarily due to the operating loss as
offset partially by the normal first quarter reduction in trade receivables as
customers made payments on their fourth quarter holiday shipments and a
reduction in the amount of inventory purchases. The Company's first quarter
sales are typically less than its fourth quarter sales.
In anticipation of future costs the Company may incur as a result of
consummating the transaction contemplated by the Merger Agreement and working
capital needs, the Company entered into a Combined Account Factoring and
Security Agreement on April 8, 1996 (the "Factoring Agreement") with Principal
Resources, LLC, an affiliate of one of the Company's principal shareholders.
Pursuant to this Factoring Agreement, the Company agreed to assign its accounts
receivable for cash. As of May 20, 1996, the Company has assigned $191,000 worth
of accounts receivable for approximately $130,000 and may assign an additional
$470,000 worth of accounts receivable for $330,000. The Company believes that
the Factoring Agreement is on terms no less favorable than could have been
obtained from unaffiliated third parties.
In February 1996, the Company restructured its business in an effort to improve
income and cash flows from operations and in March 1996 executed the Merger
Agreement to combine its operations with OSP and its subsidiaries. Pursuant to
the Merger Agreement, the Company has delivered $100,000 to an escrow account
and is obligated to deposit an additional $150,000 in such account. In the event
the Merger Agreement is terminated by the Company, the escrow
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agent may be obligated to deliver to OSP the escrowed funds as liquidated
damages for such termination. If the planned merger is not consummated,
management believes it will be necessary for the Company to obtain substantial
debt or equity financing to finance operations through 1996. If management is
unsuccessful in its financing efforts, and there is no assurance it would be
successful, the Company may not be able to continue as a going concern and would
be forced to sell off significant assets, file for protection under federal
bankruptcy laws or liquidate the business.
Even if the Company obtains sufficient financing, its success will nevertheless
be dependent upon the effectiveness of the recent restructuring in increasing
sales and managing costs. The restructuring changes in management, production,
product distribution and operations undertaken in the recent restructuring have
not been in effect sufficiently long to demonstrate their long-term efficacy in
correcting the Company's financial condition. The Company can, therefore,
provide no assurance that its new business plan will be effective in
significantly improving the Company's financial results in 1996.
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Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant)
KELLY RUSSELL STUDIOS, INC.
Dated: May 23, 1996 By /s/ George J. Vrabeck
George J. Vrabeck
President and Chief Executive Officer
(principal executive officer)
By /s/ William J. Righeimer, III
William J. Righeimer, III
Chief Financial Officer (principal
financial and accounting officer)
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