UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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 August 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]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Kelly Russell Studios, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(Unaudited) 1995
<S> <C> <C>
Assets
Current assets
Cash $ 73,472 $ 257,618
Trade receivables, less allowances of $61,877
and $161,000, respectively 336,907 709,988
Inventories 305,471 372,370
Prepaid and other expenses 13,923 26,430
Prepaid licensing rights 95,514 175,945
Escrow deposit 125,000 --
---------- ----------
Total current assets 950,287 1,542,351
---------- ----------
Property & equipment
Property and equipment, net of accumulated
depreciation of $169,719 and $114,060,
respectively 229,668 314,934
---------- ----------
Total assets $1,179,955 $1,857,285
========= =========
Liabilities and shareholders' equity
Current liabilities
Accounts payable 709,557 597,649
Accrued expenses 463,494 179,130
License fees payable 93,768 57,061
---------- ----------
Total current liabilities 1,266,819 833,840
---------- ----------
Shareholders' equity (deficit)
Common stock, par value $.01; authorized
10,000,000 shares; 4,082,373 and 4,082,373
shares issued and outstanding at
June 30, 1996 and December 31, 1995,
respectively 40,824 40,824
Additional paid in capital 8,133,560 8,133,560
Accumulated deficit (8,261,248) (7,150,939)
--------- ---------
Total shareholders' equity (deficit) ( 86,864) 1,023,445
--------- ---------
Total liabilities and shareholders' equity (deficit) $1,179,955 $1,857,285
========= =========
</TABLE>
See notes to condensed financial statements (unaudited).
- 2 -
<PAGE>
Kelly Russell Studios, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------ ------ ------ -----
<S> <C> <C> <C> <C>
Net sales $829,182 $575,150 $1,607,796 $1,088,015
Cost of sales:
Cost of goods sold 296,375 281,246 634,878 502,131
Licensing fees 204,266 74,099 318,501 130,619
---------- ---------- ---------- ----------
Total cost of sales 500,641 355,345 953,379 632,750
---------- ---------- ---------- ----------
Gross profit 328,541 219,805 654,417 455,265
Operating expenses 1,026,561 474,859 1,734,962 926,810
--------- ---------- --------- ----------
Operating loss (698,020) (255,054) (1,080,545) (471,545)
Net interest income (expense) ( 27,740) 3,938 ( 29,764) 3,938
--------- --------- --------- ----------
Net loss before income taxes and (725,760) (251,116) (1,110,309) (467,607)
extraordinary item
Federal and state income taxes -- -- -- --
--------- --------- --------- ----------
Net loss before extraordinary item (725,760) (251,116) (1,110,309) (467,607)
Extraordinary item -- 41,591 -- 288,288
--------- --------- --------- ----------
Net income (loss) ( 725,760) ( 209,525) (1,110,309) ( 179,319)
========= ========= ========= ==========
Net income (loss) per common and common equivalent shares:
Net loss before extraordinary item ($0.18) ($0.07) ($0.27) ($0.15)
====== ====== ====== ======
Extraordinary item -- 0.01 -- 0.09
======= ====== ======= ======
Net income (loss) ($0.18) ($0.06) ($0.27) ($0.06)
====== ====== ====== ======
Weighted average number of common and
common equivalent shares outstanding 4,082,373 3,359,450 4,082,373 3,085,189
========= ========= ========= =========
</TABLE>
See notes to condensed financial statements (unaudited).
- 3 -
<PAGE>
Kelly Russell Studios, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,110,309) $(179,319)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation 67,313 41,226
Amortization -- 164
Provision for trade receivable allowances (98,665) (403,234)
Provision for inventories (141,661) (844,927)
Noncash compensation expense, net -- 3,082
Gain (loss) on disposal of assets 17,952 29,277
Changes in assets and liabilities:
Trade receivables 471,746 547,081
Inventories 208,560 844,776
Prepaid and other expenses 52,507 (33,213)
Prepaid licensing rights 40,431 (101,864)
Accounts payable 111,910 (789,565)
Accrued expenses 284,363 (77,445)
License fee payable 36,707 (205,257)
------------ ------------
Net cash used in operating activities (59,146) (1,169,218)
------------ ------------
Cash flows from investing activities:
Purchase of equipment -- (26,581)
Escrow deposit (125,000) --
------------ -----------
Net amount used in investing activities (125,000) (26,581)
Cash flows from financing activities:
Proceeds from sale of common stock, net of expenses -- 1,626,959
------------ -----------
Net cash provided by financing activities -- 1,626,959
------------ -----------
Net increase (decrease) in cash (184,146) 431,160
Cash:
Beginning 257,618 403,840
------------ -----------
Ending $ 73,472 $ 835,000
============ ===========
</TABLE>
See notes to condensed financial statements (unaudited).
- 4 -
<PAGE>
Kelly Russell Studios, Inc.
Notes to Condensed Financial Statements
Note 1. Unaudited Interim Results
The accompanying condensed balance sheet as of June 30, 1996, and the condensed
statements of operations and cash flows for the three and six month periods
ended June 30, 1996 and 1995, respectively, are unaudited and reflect all
adjustments, consisting of only normal recurring adjustments which, in the
opinion of management, are necessary for a fair statement of financial position,
results of operations and cash flows for the periods presented. These financial
statements are condensed and do not include all information required by
generally accepted accounting principles. These condensed financial statements
should be read in conjunction with the Company's year ended December 31, 1995
audited financial statements and notes thereto. The operating results for the
interim periods are not necessarily indicative of the operating results to be
expected for a full fiscal year.
Note 2. Inventories
The components of inventory as of June 30, 1996 and December 31, 1995, are as
follows:
June 30, 1996 December 31, 1995
------------- -----------------
Raw materials $426,390 $565,716
Finished goods 77,221 146,825
Less inventory allowance (198,140) (340,171)
-------- --------
$ 305,471 $ 372,370
======== ========
Note 3. Net Income (Loss) Per Share
Net income (loss) per share is computed based upon the weighted average number
of common shares and dilutive common equivalent shares outstanding.
Note 4. Business Transactions
On March 27, 1996, the Company entered into an Agreement and Plan of
Reorganization with O.S.P. Publishing, Inc. ("OSP"), a California corporation,
and its shareholders. On May 28, 1996, the Company entered into a Final Amended
and Restated Agreement and Plan of Reorganization effective as of March 27, 1996
(the "Merger Agreement"). 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 domestic publisher of 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
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<PAGE>
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."
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 of
shareholders to be held on August 26, 1996. The Company anticipates that the
merger will become effective following the special meeting of shareholders. In
connection with the merger, the Company has delivered $125,000 to an escrow
account and is obligated to deposit an additional $125,000. 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.
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 and six month periods ended June 30, 1996 and June
30, 1995 and its financial position as of June 30, 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 two quarters of 1996, the Company's Board of Directors has been
implementing its revised business plan and operations to reduce operating costs.
The Company has been producing and distributing a limited number of images,
primarily just the top few athletes of any given sport. The product line in 1996
includes approximately 100 different images, down from the 300 images offered
during 1995. Additionally, the Company has continued 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, pre-paid
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 during 1996.
On March 27, 1996, the Company entered into an Agreement and Plan of
Reorganization with O.S.P. Publishing, Inc. ("OSP"), a California corporation,
and its shareholders. On May 28, 1996, the Company entered into a Final Amended
and Restated Agreement and Plan of Reorganization effective as of March 27, 1996
(the "Merger Agreement"). 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 domestic publisher of posters, SDI
develops and markets licensed and nonlicensed T-shirts, sweatshirts, boxer
-8-
<PAGE>
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."
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 of
shareholders to be held on August 26, 1996. The Company currently anticipates
that the merger will become effective following the special meeting of
shareholders. In connection with the merger, the Company has delivered $125,000
to an escrow account and is obligated to deposit an additional $125,000. 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's management believes OSP is the largest domestic publisher and distributor
of licensed posters. OSP and its subsidiaries (SDI and BEx) also develop,
publish and distribute 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 exciting growth prospects.
However, if the merger is not approved by the shareholders or not completed for
any other reason, it will be necessary for the Company to obtain debt or equity
financing to finance operations through 1996. Management of the Company have not
been able to secure a source for additional financing and management believes
that there is a risk that the Company will not be able to obtain financing from
any source as a result of the Company's historical performance. If management is
unsuccessful in its financing efforts, the Company will not be able to continue
as a going concern and will be forced to sell off significant assets, file for
protection under federal bankruptcy laws or liquidate the business.
Sales for the three and six month periods ended June 30, 1996 were $829,182 and
$1,607,796 compared to $575,150 and $1,088,015 for the three and six month
periods ended June 30, 1995, representing an increase of 44% and 48%. Management
attributes the increase in sales primarily to orders obtained from national mass
merchant accounts, some of which are new customers; however, there is no
assurance that the increased sales will continue.
- 9 -
<PAGE>
Cost of goods sold totaled $296,375 and $634,878 for the three and six month
periods ended June 30, 1996, representing 36% and 39% of net sales, compared to
$281,246 and $502,131 or 49% and 46% of net sales for the three and six month
periods ended June 30, 1995. The decrease in the cost of goods sold is a result
of effectively managing original art costs and decreasing the number of images
for sale. Management currently anticipates that cost of goods sold will be
approximately 40% to 45% of the net sales in the future.
License and royalty expenses paid to third parties totaled $204,266 and $318,501
or 25% and 20% of net sales for the three and six month periods ended June 30,
1996, compared to $74,099 and $130,619 or 13% and 12% of net sales for the three
and six month periods ended June 30, 1995. The increase is due to unmet minimums
on some licenses and the write-down of several licenses to net realizable value.
Total write-downs of $22,500 are mid-year adjustments based on 1996 year to date
performance and anticipated sales for the remainder of 1996. Management
currently anticipates that license and royalty expenses will be approximately
15% to 20% of net sales in the future.
Operating expenses increased to $1,026,561 and $1,734,962 for the three and six
month periods ended June 30, 1996, representing an increase of $551,702 and
$808,152 or 116% and 87%, respectively, over the same periods in 1995. This
increase is primarily due to (i) a $101,356 and $144,999 increase in accounting
and legal expenses relating to the OSP transaction for the three and six month
periods ended June 30, 1996 compared to the same periods in 1995, (ii) a
$394,632 and $428,126 increase in services relating to the OSP transaction
including the fairness opinion for the three and six month periods ended June
30, 1996 compared to the same periods in 1995, (iii) a $80,260 and $105,195
increase in commissions paid to outside sales representatives as a result of the
increase in sales for the three and six month periods ended June 30, 1996
compared to the same periods in 1995, (iv) a $58,914 increase in the six month
period ended June 30, 1996 (there was a $2,934 decrease in the three month
period ended June 30, 1996) in advertising and promotions to increase salability
of the Company's products compared to the same periods in 1995, and (v) a
$14,359 and $26,087 increase in depreciation relating to purchase of displays in
1995 for the three and six month periods ended June 30, 1996 compared to the
same periods in 1995.
The Company has incurred $29,764 of interest expense in the first two quarters
of 1996 which relates to finance charges paid to vendors who have extended
payments terms to the Company and factoring of receivables. The Company did not
utilize any interest-bearing debt in the first two quarters of 1995.
Liquidity and Capital Resources
The Company had cash of $73,472 and working capital of ($316,532) at June 30,
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 $59,146 for
the six months ended June 30, 1996; primarily due to the large operating loss as
offset by a further reduction in trade receivables due to the factoring of those
receivables, combined with a substantial increase in accrued expenses and a
reduction in the amount of inventory purchases due to the tight cash flow. The
Company's first quarter sales are typically substantially less than its fourth
quarter sales.
-10-
<PAGE>
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 July 31, 1996, the Company has assigned $191,000
worth of accounts receivable for approximately $130,000 and may assign an
additional $100,000 worth of accounts receivable for $80,000. The Company
believes that the Factoring Agreement is on terms no less favorable than could
have been obtained from unaffiliated third parties.
Pursuant to the Merger Agreement, the Company has delivered $125,000 to an
escrow account and is obligated to deposit an additional $125,000. In the event
the Merger Agreement is terminated by the Company, the escrow agent may be
obligated to deliver to OSP the escrowed funds as liquidated damages for such
termination. However, if the merger is not approved by the shareholders or not
completed for any other reason, it will be necessary for the Company to obtain
debt or equity financing to finance operations through 1996. Management of the
Company have not been able to secure a source for additional financing and
management believes that there is a risk that the Company will not be able to
obtain financing from any source as a result of the Company's historical
performance. If management is unsuccessful in its financing efforts, the Company
will not be able to continue as a going concern and will 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 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibit is included with the Form 10-QSB:
Exhibit 27 Financial Data Schedule (included in electronic
version only)
(b) Reports on Form 8-K. The Company filed a Form 8-K dated June 5,
1996, disclosing the Company's execution of the Final Amended and
Restated Agreement and Plan of Reorganization dated May 28, 1996.
- 11 -
<PAGE>
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: August 14, 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)
- 12 -
<PAGE>
Kelly Russell Studios, Inc.
Form 10-QSB Quarterly Report
For the Quarter Ended June 30, 1996
EXHIBIT INDEX
Exhibit
Number Item
27 Financial Data Schedule (included in electronic version only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 73,472
<SECURITIES> 0
<RECEIVABLES> 398,784
<ALLOWANCES> 61,877
<INVENTORY> 305,471
<CURRENT-ASSETS> 950,287
<PP&E> 399,387
<DEPRECIATION> 169,719
<TOTAL-ASSETS> 1,179,955
<CURRENT-LIABILITIES> 1,266,819
<BONDS> 0
0
0
<COMMON> 40,824
<OTHER-SE> 8,133,560
<TOTAL-LIABILITY-AND-EQUITY> 1,179,955
<SALES> 1,607,796
<TOTAL-REVENUES> 1,607,796
<CGS> 634,878
<TOTAL-COSTS> 953,379
<OTHER-EXPENSES> 1,734,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,764
<INCOME-PRETAX> (1,110,309)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,110,309)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
