SEC 10QSB: Report (Management's Discussion) SEC 10QSB: Report
(Management's Discussion)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Form 10-QSB.
General
The Company markets a wide variety of branded consumer products, including collectibles, costume and fine jewelry, fashion accessories, patented products and consumables. The Company markets these brands through a variety of channels, including television shopping channels, infomercials, print media, direct mail, retail stores and internet marketing campaigns. The Company's core collectible business is developing diverse lines of consumer products, contracting for the manufacture of those products to the Company's specifications, and marketing those products to customers. The Company's strength and history has been its strategy in marketing to the home shopping industry by identifying the industry's key
product segments (i.e. collectibles, environmental systems, jewelry, health and beauty) and building Brand recognition within those product segments. The Company partners with a celebrity or spokesperson to enhance the appeal of the product. Using this strategy, the Company was the first to bring celebrities to the home shopping industry. The Company's celebrity programs include products endorsed by Marie Osmond, Annette Funicello, Bob Mackie, Nolan Miller, Kenneth Jay Lane, and Barbara Mandrell. The Company plans to expand celebrity programs introducing new key product segments.
The Company has expanded from marketing its products through television shopping channels to include direct response marketing channels such as print media advertising, infomercials, direct mail campaigns, and the internet. The Company has also developed product distribution through retail stores and retail catalog accounts.
During 1996, the Company expanded its stable of brand names and increased its distribution of products by making several strategic acquisitions, as follows: Effective June 18, 1996, the Company acquired all of the outstanding capital stock of Krasner Group, Inc., a marketer and manufacturer of celebrity-driven costume jewelry located in New York; effective July 1, 1996, the Company acquired certain assets and assumed certain liabilities of S.L.S Trading Co., Ltd, a jewelry stone sourcing and cutting operation that holds proprietary stone cutting techniques, located in Bangkok, Thailand; effective, July 1, 1996, the Company acquired the remaining 51% interest in Grant King International Co., Ltd, that the Company did not previously own. Grant King International Co., Ltd. is a jewelry design operation, located in Bangkok, Thailand; effective July 1, 1996, the Company acquired all of the common stock of Harlyn International, Ltd., a fine jewelry manufacturing operation, located in Bangkok, Thailand; and, effective October 18, 1996, the Company acquired approximately 82% of the capital stock of Georgetown Collection, Inc., a marketer of collectible dolls, located in Portland, Maine.
As a result of the acquisitions, the Company has substantially changed the size, scope, and nature of its business. Prior to the acquisitions, the Company marketed primarily collectible dolls and bears over television shopping channels. At that time, the Company was characterized by a relatively small revenue base, one major customer, and one primary means of distribution. As a result of the acquisitions, the Company now has a wide distribution base, diverse product lines, and has increased its revenue base five-fold. Management believes that the Company's significantly more diversified product and revenue base increases the overall health of the Company and has reduced its exposure to demand fluctuations in any one product area or distribution channel.
The Company also has a strategy that includes searching for investment opportunities that appear to offer attractive returns on invested capital. The Company made two such investments in 1996. The Company owns a 38.3% interest in the Pure Energy Corporation. Pure Energy Corporation is in the process of developing a proprietary alternative fuel that would produce the lowest possible emissions at the lowest cost to the public. The Company, on September 18, 1996, acquired 25%, on a fully diluted basis, of the common stock of both Ontro, Inc. (formerly Self-Heating Container Corporation ) and Insta-Heat, Inc. a related corporation. In connection with the Ontro, Inc. and Insta-Heat, Inc. investments, the Company will receive distribution rights for a product that self-heats canned liquids and meals on demand by pressing a button.
The Company also has a joint venture with Paxson Communications Corporation and is currently developing infomercials for several new products and services. The Company believes that the joint venture will provide synergistic opportunities for strategic growth. To date, the joint venture has generated only minimal sales and profit.
As a result of the Company's growth in its television shopping business, and the acquisitions, the Company has phased out its marketing consulting services to outside companies.
Results of operations
The following table sets forth, for the periods indicated, the percentage of revenues represented by items included in the Company's Statements of Operations.
Three Months Ended March 31,
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1997 1996
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Revenue 100.0% 100.0%
Cost of revenue 49.4% 44.4%
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Gross profit 50.6% 55.6%
Operating expenses 58.4% 40.0%
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Operating income -7.8% 15.6%
Interest expense 23.0% 0.0%
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Net income -28.6% 10.2%
The following comparisons are for the quarters ended March 31, 1997 and March 31, 1996.
Revenues
First quarter revenues increased 326% from $3,159,000 in 1996 to $13,441,000 in 1997. The increase in revenues was due primarily to an increase in jewelry sales as a result of the acquisitions completed in the second half of 1996 which expanded the consumer product lines and distribution channels of the Company. Revenues in the first quarter of 1997 include revenues from costume jewelry, fine jewelry, fashion accessories and additional doll lines that were not part of the Company's product lines in the first quarter of 1996. Revenues from costume jewelry and fashion accessories were $2,835,000 in 1997 versus zero in 1996. Revenues from fine jewelry were $2,430,000 in 1997 versus $385,000 in 1996. Additional doll lines acquired through acquisitions contributed $5,892,000 to revenues in 1997. Revenues from the Marie Osmond collectible doll line decreased to $579,000 in 1997 from $1,599,000 in 1996. Revenues from the Annette Funicello collectible bear line increased to $1,065,000 in 1997 from $564,000 in 1996.
Gross profit
Gross profit increased 287% from $1,755,000 in 1996 to $6,797,000 in 1997 due primarily to the increase in revenues from the acquisitions completed in 1996. In the Company's core celebrity driven collectibles business, the decrease in gross profit generated from the Marie Osmond collectible doll line was more than offset by the increase in gross profit generated from the growth in the Annette Funicello collectible bear line. As a percentage of revenues, gross profit decreased to 50.6% in the first quarter of 1997 from 55.6% in the first quarter of 1996. Gross profit, as a percentage, is impacted by the amount of revenues generated from the Company's direct response doll business, which consists of retail sales to consumers, thereby generating higher gross margins. Alternatively, gross profit will be lower if the percentage of the Company's wholesale jewelry and collectible doll business surpasses the direct response business.
Advertising expense
Advertising expense increased from $108,000 in 1996 to $1,577,000 in 1997 due primarily to the Company's expansion of its direct response business and through its acquisition of Georgetown Collection, Inc., which markets its products primarily through direct response channels. Included in advertising expense are advertisement printing costs, catalog printing costs, media space in magazines, infomercial costs, and advertisement development costs.
Selling, general and administrative expenses
Total selling, general and administrative expenses increased from $1,156,000 in 1996 to $6,269,000 in 1997. The percentage of revenues represented by these expenses increased from 36.6% in 1996 to 46.6% in 1997. The primary reason for the increase is due to the jewelry manufacturing operations purchased in 1996 which, due to the nature of manufacturing, typically carry higher overhead than the Company's core collectible doll business. Additionally, the Company has added professionals in the areas of management, development, and marketing which increase the overall overhead of the Company. Additionally, the Company's overall selling, general, and administrative expenses have increased due to the Company's focus on expanding its infrastructure to accommodate anticipated future growth by adding office space and systems support. Remaining expenses in this category were in proportion to the corresponding revenues between 1997 and 1996.
Other income (expense)
Other income (expense) decreased $157,000 to $(113,000) in 1997 from $44,000 in 1996 primarily as a result of the acquisitions completed in 1996.
Interest income (expense)
Interest expense increased in 1997 primarily as a result of charges associated with the convertible debenture financing which occurred in September of 1996. The noncash 15% conversion discount on conversions into common stock is charged as interest expense. The total conversion discount in the first quarter of 1997 totaled $591,000. Additionally, the Company has taken a charge of $1,899,000 representing the accretion of the principal balance which resulted from the restructuring in February of 1997 of the convertible debentures. Also, cash interest expense increased to due to the acquisitions completed in 1996 which employ bank lines of credit.
Net Income
As a result of the foregoing factors, net income decreased from $323,000 in 1996 to a net loss of $3,839,000 in 1997.
Liquidity and Capital Resources
As of March 31, 1997 the Company had working capital of $15,883,000. Working capital has increased substantially by both the issuance of convertible debentures of $15,500,000, which resulted in $14,880,000 in net proceeds to the Company and the acquisitions completed in 1996.
Through the first quarter of 1997, the Company has continued to invest most of the funds generated from operations and raised in the convertible debenture financing by capitalizing subsidiaries and paying down high interest bearing debt.
In February 1997, the Company restructured its convertible debentures which had an unconverted balance of $10,850,000 prior to restructuring. The Company reached an agreement with the Debenture holders to tender all of the outstanding Debentures to the Company in exchange for new convertible Debentures (the "New Debentures"). Under the terms of the agreement, the New Debentures were issued with a face value of 117.5% of the unconverted balance of the tendered debentures. The New Debentures are convertible into common stock at the option of the holder at a fixed price of $8.00 per share. The New Debentures must be converted by January 1999. As a result of the 17.5% premium given as an inducement to the
Debenture holders to tender the original debentures into New Debentures, the Company recorded a noncash charge of $1,899,000 in the first quarter of 1997.
The Company is currently negotiating a line of credit to replace a $4.1 million line of credit acquired through its acquisition of Georgetown Collection, Inc. and is technically in default under the terms of the line of credit with the financial institution. Management believes it will be successful in its negotiations on the replacement line.
Cash flow used in operations was $4,569,000 due to the increase in inventory and other current assets associated with the acquisitions of Krasner Group, Inc, Harlyn International, Ltd., and L.L. Knickerbocker (Thai) Company, Ltd. The Company's cash flow also decreased due to the payments made to decrease accounts payable. The combination of the above factors resulted in an overall increase in working capital from $15,702,000 at December 31, 1996 to $15,833,000 at March 31, 1997. The current ratio for the Company increased from 1.74 at December 31, 1996 to 1.89 at March 31, 1997.
In the first quarter of 1997, the Company received $220,000 as the final proceeds from warrants that were issued in connection with the Company's 1995 initial public offering which, under their terms, were to expire in January of 1997.
Additional sources of information
Company Profile - From E*TRADE: |KNIC
Stock Charts - From Quote.Com: |KNIC
SEC Filings - From EDGAR Online: |KNIC
Company Capsule - From Hoover's Online: |KNIC |
