SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: COMMISSION FILE NUMBER:
MARCH 31, 1997 000-21049
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Global One Distribution & Merchandising Inc.
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-4578632
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(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
5548 Lindbergh Lane, Bell, California 90201-6410
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(Address and zip code of principal executive offices)
213-980-4300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
the filing requirements for at least the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at May 9, 1997
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Common Stock, $.01 PAR VALUE 13,011,947
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1997
(Unaudited) and December 31, 1996. . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Unaudited Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 17
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 18
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PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS.
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
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CURRENT ASSETS:
Cash................................................................. $ $ 32,248
Accounts receivable -- trade, net of allowance for doubtful
Accounts and returns of $2,593,328 and $2,506,893 at March 31,
1997 and December 31, 1996, respectively........................... 3,670,307 4,667,818
Inventories (Note 2)................................................. 1,764,003 2,560,603
Prepaid royalty advances............................................. 736,486 576,347
Prepaid expenses and other current assets............................ 579,946 643,791
Note receivable...................................................... - 1,575,000
Deferred income taxes................................................ 1,089,248 1,089,248
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Total current assets.............................................. 7,839,990 11,145,055
Property and equipment, net............................................ 1,227,453 1,149,775
GOODWILL, net of accumulated amortization of $353,921 and $222,724
at March 31, 1997 and December 31, 1996, respectively................ 4,419,334 4,550,531
DEPOSITS............................................................... 197,753 189,659
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TOTAL.................................................................. $ 13,684,530 $ 17,035,020
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(CONTINUED)
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1997 1996
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(UNAUDITED)
CURRENT LIABILITIES:
Revolving line of credit................................... $ 2,991,426 -
Accounts payable........................................... 3,924,803 $ 4,826,256
Accrued expenses........................................... 1,709,480 723,016
Royalties payable.......................................... 1,143,861 1,382,549
Due to customers........................................... 148,314 253,536
Income taxes payable....................................... 53,042 53,042
Current maturities of:
Capitalized lease obligations........................... 100,041 95,254
Subordinated long-term debt............................. 300,000 675,000
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Total current liabilities.......................... 10,370,967 8,008,653
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REVOLVING LINE OF CREDIT..................................... 3,813,334
CAPITALIZED LEASE OBLIGATIONS,
less current maturities................................. 75,170 55,612
SUBORDINATED LONG-TERM DEBT,
less current maturities................................. 1,731,904 1,731,904
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 30,000,000
shares, issued and outstanding, 13,011,947 and 13,010,947
shares at March 31, 1997 and December 31, 1996,
respectively............................................ 130,119 130,109
Additional paid-in capital................................. 10,640,929 10,639,439
Accumulated deficit........................................ (9,264,559) (7,344,031)
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Total Stockholders' equity......................... 1,506,489 3,425,517
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TOTAL........................................................ $ 13,684,530 $ 17,035,020
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(CONCLUDED)
See notes to consolidated financial statements.
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
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1997 1996
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NET SALES........................ $5,126,536 $8,940,658
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COST OF SALES:
Cost of goods sold............. 2,048,858 4,347,317
License and royalty expense.... 689,426 922,206
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Total cost of sales.......... 2,738,284 5,269,523
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GROSS PROFIT..................... 2,388,252 3,671,135
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OPERATING EXPENSES:
Warehouse and selling.......... 1,782,927 2,351,868
Warehouse relocation (Note 6).. 1,080,000 -
General and administrative..... 1,249,153 1,452,981
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Total operating expenses..... 4,112,080 3,804,849
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OPERATING LOSS................... (1,723,828) (133,714)
INTEREST EXPENSE................. 196,443 267,659
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LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST.............. (1,920,271) (401,373)
INCOME TAX PROVISION............. 257 67,323
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LOSS BEFORE MINORITY INTEREST.... (1,920,528) (468,696)
MINORITY INTEREST IN INCOME
OF SUBSIDIARIES................ (45,420)
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NET LOSS......................... $ (1,920,528) $ (514,116)
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(CONTINUED)
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1996
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NET LOSS DATA (1996 PRO FORMA):
Loss before income taxes, as reported.. $ (1,920,271) $ (401,373)
Provision (benefit) for income taxes... 257 (85,114)
Minority interest in income of
subsidiaries......................... (45,420)
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Net loss........................... $ (1,920,528) $ (361,679)
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NET LOSS PER SHARE (1996 PRO
FORMA) (Note 5):
Loss from operations................... $ (0.15) $ (0.04)
Minority interest in income of
subsidiaries......................... (0.01)
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Net loss........................... $ (0.15) $ (0.05)
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Weighted average shares outstanding.... 13,011,947 8,036,602
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(CONCLUDED)
See notes to consolidated financial statements.
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 1996
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................................... $ (1,920,528) $ (514,116)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.................. 237,423 89,393
Provision for warehouse relocation............. 1,080,000 -
Minority interest in income of
subsidiaries................................. 45,402
Changes in operating assets and liabilities:
Accounts receivable ........................... 997,511 (665,578)
Inventories.................................... 796,600 (920,516)
Prepaid royalty advances....................... (160,139) (160,712)
Prepaid expenses and other current
assets....................................... 63,845 (214,386)
Accounts payable............................... (901,453) 1,236,382
Accrued expenses............................... (93,536) 147,904
Royalties payable.............................. (238,688) 140,968
Due to customers............................... (105,222) (47,023)
Income taxes payable........................... 60,140
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Net cash used in operating
activities................................. (244,187) (802,142)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of Property and Equipment............. (125,798) (78,175)
Deposits....................................... (8,094) 69,654
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Net cash used in investing
activities................................. (133,892) (8,521)
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(CONTINUED)
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 1996
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CASH FLOWS FROM FINANCING
ACTIVITIES:
Net (repayment) borrowings on line
of credit............................... $ (821,908) $ 1,204,931
Payments on subordinated debt............. (375,000) (31,460)
Proceeds of note receivable............... 1,575,000
Dividends paid............................ (39,974)
Proceeds from exercise of stock
options................................. 1,500
Payment on capital lease obligations...... (33,761) (19,884)
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Net cash provided by financing
activities............................. 345,831 1,113,613
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NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS................ (32,248) 302,950
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD...................... 32,248 74,828
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CASH AND CASH EQUIVALENTS,
END OF PERIOD............................ - 377,778
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SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................... $ 189,980 $ 158,955
Income taxes........................... - $ 7,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTION
Capital lease obligations of approximately $58,000 were incurred in 1997 when
the Company entered into an agreement for the purchase of new equipment.
(CONCLUDED)
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1997 and the related consolidated
statements of operations and of cash flows for the three months ended March 31,
1997 and 1996 have been prepared by Global One Distribution & Merchandising Inc.
("Global One" or the "Company") without audit. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) have been made
which are necessary to present fairly the financial position, results of
operations and cash flows of the Company at March 31, 1997 and for the three-
month period then ended.
Although the Company believes that the disclosure in the consolidated
financial statements is adequate for a fair presentation thereof, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The December 31, 1996 audited statements
were included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 15, 1997. These consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto contained in that document.
The results of operations for the three-month period ended March 31, 1997 are
not necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
MARCH 31, DECEMBER 31,
1997 1996
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Products in process $ 164,867 $ 252,893
Finished products 1,188,419 1,796,604
Packaging materials 410,717 511,106
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$ 1,764,003 $2,560,603
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3. MERGER AND PRIVATE PLACEMENT
On March 27, 1996, OSP Publishing, Inc. ("OSP") entered into an agreement to
acquire Kelly Russell Studios, Inc. ("KRSI"), a publicly-traded entity. Global
One was formed to serve as a holding company for OSP and its subsidiaries and to
acquire KRSI. On August 28, 1996, the Company acquired KRSI through a merger of
KRSI into a wholly owned subsidiary of the Company (the "KRSI Merger"). In
connection with the KRSI Merger, the Company issued 2,041,189 shares of Common
Stock to the former shareholders of KRSI. Concurrently with the KRSI Merger,
the Company acquired its affiliates, OSP and The Button Exchange, Inc., through
a merger of those companies into wholly owned subsidiaries of the Company (the
"Reorganization"). In connection with the Reorganization, the Company issued
6,448,442 shares to the former shareholders of OSP. Also concurrently with the
KRSI Merger and the Reorganization, the Company issued 4,324,238 shares of
Common Stock to investors in a private placement (the "Private Placement" and,
together with the "KRSI Merger" and the "Reorganization," the "Transactions").
Net proceeds (less commissions and expenses and distributions) to the Company
as a result of the Private Placement were $2,824,000. The Company's Common
Stock commenced trading on the NASDAQ
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SmallCap Market effective August 28, 1996.
4. SALE OF SDI AND PRO FORMA RESULTS OF OPERATION
In 1996, OSP entered into an agreement with the minority shareholder and
President of SDI under which the minority shareholder had an option to purchase
the 51% ownership of SDI held by OSP at a determined price. Effective December
31, 1996, the minority shareholder exercised the option and purchased the 51% of
the common stock of SDI held by OSP for total consideration of $1,575,000. The
consolidated financial statements of the Company include the statement of
operations for SDI for only the three months ended March 31, 1996. The
consolidated balance sheet at December 31,1996 reflected the sale of SDI. Net
sales and the net income of SDI for the three months ended March 31, 1996 were
approximately $4.1 million and $93,000, respectively.
As noted in Note 3, the Company merged with a public entity effective August 28,
1996. The following table sets forth (in thousands, except per share data) the
unaudited pro forma results of operations as if the acquisition of KRSI and
disposition of SDI were consummated at the beginning of 1996. The unaudited
results of operations data consists of historical results of the Company as
adjusted to give effect to (1) amortization of the excess of the purchase price
over the net assets acquired for KRSI, (2) elimination of the allocation of the
profit to the minority shareholder of SDI and (3) pro forma effect of income
taxes as if OSP had been taxed as a C Corporation. The unaudited pro forma
results of operations do not include cost reductions from the elimination of
duplicated operating expenses such as personnel, rent and warehouse operations.
The unaudited pro forma weighted average number of common and common equivalent
shares outstanding give effect to the Transactions described in Note 3 for all
periods presented.
Three Months Ended
March 31, 1996
---------------
Net sales.............................. $ 5,637
Cost of sales.......................... 2,947
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Gross profit........................... 2,690
Operating expenses..................... 3,506
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Operating loss......................... (816)
Interest expense....................... 216
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Loss before taxes...................... (1,032)
Provision for income taxes............. 2
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Net loss............................... $ (1,034)
---------------
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Net loss per share..................... $ (0.06)
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Weighted average shares outstanding.... 12,994
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5. PRO FORMA NET LOSS PER SHARE
In connection with the organization of Global One as the parent company of OSP,
the stockholders of OSP received 6,448,442 shares of common stock of Global One
in exchange for the common stock outstanding at December 31, 1995. The pro
forma weighted average shares outstanding for 1996 assumes that this exchange
had occurred throughout the period presented, includes the dilutive common
equivalent shares from stock warrants (using the treasury stock method) and also
gives effect to 1,393,550 shares deemed to be outstanding in 1996. These shares
represent the approximate number of shares deemed to be sold by the Company (at
the net offering proceeds of $1.26 per share) to fund the S corporation
distribution of $2,350,000 that was declared prior to the closing of the KRSI
acquisition and private placement offering and was paid from the proceeds
-10-
of the offering. Common and common equivalent shares issued during the
12-month period prior to the offering have been included in the calculation
using the treasury stock method as if they were outstanding for all periods
presented.
6. WAREHOUSE RELOCATION
Effective March 31, 1997, the Company agreed to a plan to outsource its
warehouse facility including the inventory, distribution and shipping functions
as well as certain accounting functions. The accrual recorded in the financial
statements as of March 31, 1997 includes the estimated costs of employee
severance arrangements and accrued but unpaid vacation time for employees to be
terminated. It also includes the estimated physical moving and relocation costs
as well as the write-off of leasehold improvements at the Company's current
warehouse location.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
RESULTS OF OPERATIONS
The business of the Company is conducted through the Company's
subsidiaries, OSP Publishing, Inc. ("OSP"), BEx Corp. ("BEx") and, since
August 28, 1996, Kelly Russell Studios, Inc. ("KRSI"), each of which conducts
a distinct business. OSP develops and markets posters incorporating
primarily licensed images and characters from motion pictures, television,
animation, music, sports and popular culture. BEx develops and markets
licensed and non-licensed buttons, key rings and stickers. KRSI creates,
markets and distributes sports related art for the collectible market. Prior
to 1997, the Company owned 51% of Stanley DeSantis, Inc. ("SDI"). SDI was
sold on December 31, 1996 to the minority stockholder. SDI developed and
marketed licensed and non-licensed T-shirts, sweatshirts, hats, boxer shorts
and mugs.
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The following tables set forth the net sales, total cost of sales and gross
profit of OSP, SDI, KRSI, BEx and the Company for the three months ended
March 31, 1996 and 1997.
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------
1996 1997
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% of % of
AMOUNT SALES AMOUNT SALES
-------- -------- --------- --------
(DOLLARS IN MILLIONS)
NET SALES
OSP............................. $ 4.6 100.0% $ 4.8 100.0%
SDI (1)......................... 4.1 100.0 0.0 100.0
KRSI (2)........................ 0.0 0.0 0.2 0.0
BEx............................. 0.2 100.0 0.1 100.0
-------- ---------
Company......................... $ 8.9 100.0 $ 5.1 100.0
-------- ---------
-------- ---------
COST OF GOODS SOLD
OSP............................. $ 1.8 39.1 $ 1.8 37.5
SDI (1)......................... 2.4 58.5 0.0 0.0
KRSI (2)........................ 0.0 0.0 0.1 50.0
BEx............................. 0.1 50.0 0.1 100.0
-------- ---------
Company......................... $ 4.3 48.3 $ 2.0 39.2
-------- ---------
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LICENSE AND ROYALTY EXPENSE
OSP............................. $ 0.6 13.0 $ 0.7 14.6
SDI (1)......................... 0.3 7.3 0.0 0.0
KRSI (2)........................ 0.0 0.0 0.0 0.0
BEx............................. 0.0 0.0 0.0 0.0
-------- ---------
Company......................... $ 0.9 10.1 $ 0.7 13.7
-------- ---------
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TOTAL COST OF SALES
OSP............................. $ 2.4 52.2 $ 2.5 52.1
SDI (1)......................... 2.7 65.9 0.0 0.0
KRSI (2)........................ 0.0 0.0 0.1 50.0
BEx............................. 0.1 50.0 0.1 100.0
-------- ---------
Company......................... $ 5.2 58.4 $ 2.7 52.9
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GROSS PROFIT
OSP............................. $ 2.2 47.8 $ 2.3 47.9
SDI (1)......................... 1.4 34.1 0.0 0.0
KRSI (2)........................ 0.0 0.0 0.1 50.0
BEx............................. 0.1 50.0 0.0 0.0
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Company......................... 3.7 41.6 $ 2.4 47.1
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(1) Sold effective December 31,1996
(2) Acquired on August 28, 1996
The following tables set forth the percentage of net sales of certain income and
expense items for the three months ended March 31, 1996 and 1997.
PERCENTAGE OF
NET SALES
THREE MONTHS ENDED PERIOD TO PERIOD
MARCH 31, PERCENTAGE CHANGE
----------------------- ---------------------
1996 1997 1996 VS. 1997
----------------------- ---------------------
Net sales.................................... 100.0% 100.0% (42.7)
Cost of goods sold........................... 48.3 39.2 (53.5)
License and royalty expense.................. 10.1 13.7 (22.2)
Gross profit................................. 41.6 47.1 (35.1)
Warehouse and selling expenses............... 26.3 35.3 (25.0)
Warehouse relocation......................... - 19.6 -
General and administrative................... 16.3 23.5 (20.0)
Operating loss............................... (1.5) (80.4) (1,600.0)
Interest expense............................. 3.0 3.9 (33.3)
Minority interest in income of subsidiaries.. (0.5) - (100.0)
Net loss..................................... (5.8) (37.3) (280.0)
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THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH
31,1996
The Company's net sales decreased $3.8 million, or 42.7%, for the three
months ended March 31, 1997 compared to the three months ended March 31, 1996.
This decrease was primarily a result of the sale of SDI on December 31, 1996,
which contributed sales of $4.1 million in the three months ended March 31,
1996. OSP experienced increased sales of $200,000 or 4.3% for the three months
ended March 31, 1997 compared with 1996. This increase can be attributed to
sales of products acquired from Zanart Entertainment in late 1996, which
consisted primarily of STAR WARS framed prints associated with the re-release of
the trilogy of movies produced by Lucasfilms. BEx's sales decreased $100,000,
or 50%, for the quarter compared with the comparable period in 1996 as a result
of the redirection of marketing and sales efforts which focuses on sales of
products produced for major movie promotions. KRSI was merged into the Company
effective August 28, 1996 and contributed sales of $200,000 for the quarter
ended March 31, 1997.
Cost of goods sold decreased $2.3 million, or 53.5%, for the three months
ended March 31, 1997 to $2.0 million compared with $4.3 million for the same
period in 1996. As a percentage of net sales, cost of goods sold decreased to
39.2% for the three months ended March 31, 1997 from 48.3% for the three months
ended March 31, 1996. The Company's cost of goods sold decreased primarily
because SDI, which historically has had a higher cost of goods sold percentage,
had costs of $2.4 million for the three months ended March 31, 1996.
OSP's cost of goods sold remained unchanged in dollar amounts. For the
first quarter of 1997, OSP's costs of goods sold sales as a percentage of net
sales was 37.5% compared with 39.1% in the first quarter of 1996. This is
primarily due to the sales of STAR WARS products which were purchased at a
discount from Zanart Entertainment's historical costs and therefore carried
higher margins for OSP.
BEx's cost of goods sold for the first quarter of 1997 was 100% of net
sales compared with 50% of net sales for the first quarter of 1996. The
deteriorated margin can be attributed to the fixed components of cost of goods
sold spread over the lower net sales, as well as sales during the quarter of
merchandise which is being discontinued and therefore sold at discounted prices.
KRSI's cost of goods sold as a percentage of net sales for first quarter
was 50.0%.
License and royalty expense as a percentage of net sales increased to 13.7%
for the three months ended March 31, 1997 from 10.1% for the three months ended
March 31, 1996. OSP's royalty rate increased to 14.6% for the three months
ended March 31, 1997 from 13.0% for the same period in 1996 due primarily to the
increased sales under Disney licenses which have higher royalty rates.
Additionally, SDI, which has historically had the lowest royalty rate, had a
royalty rate of 7.3% in the first quarter of 1996, which lowered the Company's
combined royalty rate. Since SDI was sold on December 31, 1996, this effect was
not present in the first quarter of 1997.
Warehouse and selling expenses decreased $600,000, or 25.0%, to $1.8
million for the three months ended March 31, 1997 from $2.4 million for the
same period in 1996. SDI had costs of approximately $450,000 which represented
approximately 11% of net sales. The remaining decreases after removing the
effect of SDI were primarily the result of lower salaries and wages as well as
efficiencies with the cost reductions of BEx, which more than offset the
increase associated with the addition of KRSI. Warehouse and selling expenses
as a percentage of net sales increased to 35.3% for the three months ended March
31, 1997 from 26.3% for the same period in 1996 due to the sale of SDI which had
lower warehouse and selling expenses as a percentage of net sales than OSP.
Warehouse relocation expense represents an estimated $1.0 million accrual
for the costs associated with the relocation of the Company's current warehouse.
The Company has signed a letter of intent with a fulfillment company located in
New Jersey which will be responsible for the entire order fulfillment and
inventory handling and distribution functions.
General and administrative expenses decreased by $300,000, or 13.3%, to
$1.2 million for the three months ended March 31, 1997 from $1.5 million for the
same period in 1996 due primarily to the sale of SDI. SDI contributed
approximately $500,000 in general and administrative costs in the first quarter
of 1996. Offsetting that
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decrease were increases in general and administrative costs primarily as a
result of higher amortization due to the goodwill from the KRSI acquisition,
which totaled $117,000 for the three months ended 1997. Other increased
costs were insurance and professional fees as a result of being a public
entity.
Interest expense decreased $100,000, or 33.3%, to $200,000 for the three
months ended March 31, 1997 from $300,000 for the same period in 1996. The
decrease in interest expense is due primarily to the sale of SDI.
The Company recorded income tax expense of approximately $67,000 in the
first quarter of 1996 as a result of the profits of the Company's 51% owned
subsidiary, SDI, which was sold on December 31, 1996. There was no provision
in the first quarter of 1997 as a result of operating losses and no income tax
benefit was recognized for the losses since the additional deferred tax asset
from the net operating loss carryforwards was offset by an increased valuation
allowance.
In the first quarter of 1996, 49% of the income of SDI was allocated to the
minority stockholder and totaled $45,000. Since SDI was sold on December 31,
1996, there was no allocation of profit or loss in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, working capital was a deficit of approximately $ 1.5
million primarily as a result of the Company's line of credit being classified
as a current liability for the reasons set forth below.
Net cash used in operating activities during the three months ended March
31, 1997 was approximately $244,000 due primarily to the net loss, reduction in
accounts payable and royalties payable, which were offset by reductions in
accounts receivable and inventory. Net cash used in investing activities was
$134,000 primarily as a result of the purchase of property and equipment. Net
cash provided by financing activities during the three months ended March 31,
1997 was approximately $346,000 due primarily to proceeds from the collection of
the note receivable from the sale of SDI offset by repayment of a portion of the
revolving line of credit as well as payment of subordinated debt to a vendor.
The Company has a line of credit with a financial institution which
provides for maximum borrowing of $7,500,000 subject to certain conditions. The
outstanding balance at March 31, 1997 was approximately $3.0 million. The
outstanding balance under the line of credit bore interest at the bank's prime
rate plus 1.75% through the first quarter and is payable monthly. Under its
line of credit, the Company is required to maintain certain financial ratios. On
April 17, 1997, the Company was notified it was in default under its credit
agreement as a result of borrowings in excess of the defined collateral base.
The Company cured the default within the permitted ten-day period.
Additionally, as a result of the operating losses in the first quarter of 1997,
the Company was not in compliance with its financial covenants as of March 31,
1997. The Company is currently negotiating a third amendment to its credit
agreement which provides for (1) a waiver of the financial covenants as of March
31, 1997 and the resetting of the financial covenants upon the Company's filing
of this Form 10-Q and supplying new financial projections to the lender, (2) a
temporary over advance agreement of $250,000 to be repaid on or before May 31,
1997, (3) revised maximum level of borrowings under the credit agreement of
$3,200,000, (4) an increase in the interest rate from prime plus 1.75% to prime
plus 4.75% and (5) the removal of the $300,000 limit on the use of a factor on
the assets of KRSI which indebtedness would be senior to the position of the
lender. Since the Company is in default under its credit agreement, new
covenants have not yet been negotiated and future compliance with financial
covenants have not been waived, the balance of the revolving line of credit has
been classified as a current liability as of March 31, 1997.
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
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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.
The Company has experienced operating losses for the first three months of
1997. However, the Company's sales typically fluctuate based on seasonal
releases of major films, which correspond to sales of promotional products
related to such releases. 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 and
discontinued many non-performing poster titles, and plans to reduce the number
of new licenses signed in 1997. This will reduce the initial cash outlays of
pre-production, art and design costs and effort. Additionally, the Company has
signed a letter of intent with a fulfillment company which involves the
outsourcing of the Company's warehouse, distribution, inventory and shipping
functions. The fulfillment company will charge a monthly fee based on sales
volume which will change many of the Company's fixed costs to variable costs as
well as reduce the shipping costs of products. The Company believes that its
credit facility, together with the continued cost reduction plans and ability to
expand the use of financing of the KRSI business upon negotiation of an amended
credit agreement, will be sufficient to fund its working capital requirements
throughout 1997. Additionally, financing will be required to provide for any
business or product line acquisitions and significant expansion of the Company's
international business.
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other
historical information, the statements made in this filing, including in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward looking statements that involve risks and uncertainties
that could affect future results. Such risks and uncertainties include, but are
not limited to: timing and size of orders from large customers, general economic
conditions, inventory management, the health of the retail environment, supply
constraints, supplier performance and other risks indicated in the Company's
filings with the Securities and Exchange Commission.
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GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On April 17, 1997, the Company was notified it was in default
under its credit agreement as a result of borrowings in excess
of the defined collateral base. The Company cured the
default within the permitted ten-day period. As a result of
the operating losses in the first quarter of 1997, the Company
was not in compliance with its financial covenants as of March
31, 1997. The Company is currently negotiating a third
amendment to its credit agreement which provides for (1) a
waiver of the financial covenants as of March 31, 1997 and the
resetting of the financial covenants upon the Company's filing
of this Form 10-Q and supplying new financial projections to
the lender, (2) a temporary over advance agreement of $250,000
to be repaid on or before May 31, 1997, (3) revised maximum
level of borrowings under the credit agreement of $3,200,000,
(4) an increase in the interest rate from prime plus 1.75% to
prime plus 4.75% and (5) the removal of the $300,000 limit on
the use of a factor on the assets of KRSI which indebtedness
would be senior to the position of the lender. Since the
Company is in default under its credit agreement, new
covenants have not yet been negotiated and future compliance
with financial covenants have not been waived, the balance of
the revolving line of credit has been classified as a current
liability as of March 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On May 9, 1997, Michael A. Malm, a director of the Company, was
terminated from his position as the Chief Operating Officer of
Global One and the Chief Executive Officer and President of OSP.
The following business risks as disclosed in the S-4 Registration
Statement No. 333-4655 filed with the Securities and Exchange
Commission on May 29, 1996, are hereby incorporated by reference as
those set forth fully herein:
Reliance on license agreements
Market acceptance of licensed properties
Seasonality and fluctuations in operating results
Risk and fluctuations in operating results
Concentrated customer base
Dependence on key personnel
Control by existing shareholders
Possible insufficiency of working capital
Anti-takeover effect of undesignated preferred stock
Material returns of unsold products
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description
---------- -----------
2.1 Final Amended and Restated Agreement
and Plan of Merger incorporated by
reference to Exhibit 2.1 of the
Company's Registration Statement on
Form S-4 (No. 333-4655)
3(i).1 Certificate of Incorporation of the
Company incorporated by reference to
Exhibit 3(i).1 of the Company's
Registration Statement on
Form S-4 (No. 333-4655)
3(ii).1 Bylaws of the Company incorporated by
reference to Exhibit 3(ii).1 of the Company's
Registration Statement on Form S-4
(No. 333-4655)
11.1 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K. On January 15, 1997, the Company filed a
Form 8-K with the Securities and Exchange Commission to report the sale of
SDI. The Form 8-K included unaudited pro forma condensed combined financial
statements which give effect to the sale.
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SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
DATED: May 14, 1997 By: /S/ Joseph C. Angard
---------------------------------------
Joseph C. Angard
Chairman of the Board and
Chief Executive Officer
DATED: May 14, 1997 By: /S/ Walter M. Lacher
--------------------------------------
Walter M. Lacher
Chief Financial Officer and Secretary
(Duly Authorized Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
---------- -----------
2.1 Final Amended and Restated Agreement and
Plan of Merger incorporated by reference
to Exhibit 2.1 of the Company's Registration
Statement on Form S-4 (No. 333-4655
3(i).1 Certificate of Incorporation of the Company
incorporated by reference to Exhibit 3(i).1
of the Company's Registration Statement on
Form S-4 (No. 333-4655)
3(ii).1 Bylaws of the Company incorporated by reference
to Exhibit 3(ii).1 of the Company's Registration
Statement on Form S-4 (No. 333-4655)
11.1 Statement re: computation of per share earnings
27 Financial Data Schedule
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