-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R2UsrG6c16X/1OfxAAAbpXcO7XRHNd7XM37+RR2qXIFnbWWtK2OTd0oY7PcLaHWS tnbwrpTc+geXweuDkxvRPA== 0000891618-96-001819.txt : 19960816 0000891618-96-001819.hdr.sgml : 19960816 ACCESSION NUMBER: 0000891618-96-001819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIA ARTS GROUP INC CENTRAL INDEX KEY: 0000924645 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 770354419 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24294 FILM NUMBER: 96613748 BUSINESS ADDRESS: STREET 1: TEN ALMADEN BLVD STREET 2: 9TH FL CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089474680 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30,1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number: 0-24294 MEDIA ARTS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 77-0354419 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 521 Charcot Ave, San Jose, California 95131 (Address of principal executive offices and zip code) Registrant's telephone number: (408) 324-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock, $0.01 par value, was 9,867,032 at July 28, 1996. This report consists of 13 pages of which this page is number 1. 2 MEDIA ARTS GROUP, INC. FORM 10-Q INDEX
Page No. ------------------- Part I: Financial Information Item I: Financial Statements (unaudited) Condensed Consolidated Balance Sheet as of June 30, 1996 and March 31, 1996 3 Condensed Consolidated Statement of Operations for the Three Month Periods Ended June 30, 1996 and 1995 4 Condensed Consolidated Statement of Cash Flows for the Three Month Periods Ended June 30, 1996 and 1995 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item II: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II: Other Information Item 1: Legal Proceedings 11 Item 2: Changes in Securities 11 Item 3: Defaults upon Senior Securities 11 Item 4: Submission of Matters to a Vote of Security Holders 11 Item 5: Other Information 11 Item 6: Exhibits and Reports on Form 8-K 11 (a). Exhibits 12 (b). Reports on Form 8-K 11 Signatures 13
2 3 MEDIA ARTS GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, UNAUDITED)
June 30, March 31, 1996 1996 ----------- ----------- ASSETS Current assets: Cash and cash equivalents......................................... $ 117 $ 419 Accounts receivable, net.......................................... 8,624 10,396 Receivable from related parties................................... 99 120 Inventories....................................................... 10,713 10,712 Prepaid expenses and other current assets......................... 2,558 2,445 Deferred income taxes............................................. 2,181 1,366 ----------- ----------- Total current assets.......................................... 24,292 25,458 Property and equipment, net.......................................... 6,176 6,261 Goodwill ........................................................... 4,745 4,812 Other assets......................................................... 3,720 3,879 ----------- ----------- $ 38,933 $ 40,410 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................. $ 3,346 $ 3,634 Commissions payable............................................... 69 189 Accrued royalties................................................. 703 440 Accrued expenses.................................................. 3,680 3,825 Borrowings under line of credit................................... 5,239 4,932 Current portion of long-term debt................................. 623 682 ----------- ----------- Total current liabilities..................................... 13,660 13,702 Long-term debt, less current portion................................. 8,284 8,333 Convertible notes payable to related parties......................... 2,697 2,682 ----------- ----------- Total liabilities............................................. 24,641 24,717 ----------- ----------- Minority interest.................................................... 114 115 ----------- ----------- Stockholders' equity: Common stock...................................................... 58 58 Additional paid-in capital........................................ 15,725 15,725 Cumulative translation adjustment................................. 120 164 Retained earnings (accumulated deficit)........................... (1,725) (369) ----------- ----------- 14,178 15,578 ----------- ----------- $ 38,933 $ 40,410 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 4 MEDIA ARTS GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
Three Months Ended June 30, -------- 1996 1995 ----------- ----------- Net sales............................................................ $ 10,799 $ 13,602 Cost of sales........................................................ 5,562 5,458 ----------- ----------- Gross profit...................................................... 5,237 8,144 ----------- ----------- Operating expenses................................................... Marketing and selling............................................. 3,590 3,598 General and administrative........................................ 3,136 4,079 ----------- ----------- Total operating expenses....................................... 6,726 7,677 ----------- ----------- Operating income (loss).............................................. (1,489) 467 Interest expense..................................................... (580) (242) Exchange gains (losses).............................................. (77) 32 ----------- ----------- Income (loss) before income taxes.................................... (2,146) 257 Provision (benefit) for income taxes................................. (789) 58 ----------- ----------- Income (loss) before minority interest............................... (1,357) 199 Minority interest in subsidiary loss................................. 1 7 ----------- ----------- Net income (loss).................................................... $ (1,356) $ 206 =========== =========== Net income (loss) per common share................................... $ (0.14) $ 0.02 =========== =========== Weighted average common and common equivalent shares outstanding..................................... 9,867 10,006 =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 5 MEDIA ARTS GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS, UNAUDITED)
Three Months Ended June 30, -------- 1996 1995 ----------- ----------- Cash flows from operating activities: Net income (loss).............................................. $ (1,356) $ 206 Adjustments to reconcile net income to net cash used in continuing operating activities: Depreciation................................................ 322 266 Amortization of intangibles................................. 247 191 Deferred income taxes....................................... (806) 49 Minority interest in loss of subsidiary..................... (1) (7) Provision for returns and allowances........................ (167) (71) Provision for losses on accounts receivable................. 142 (86) Changes in assets and liabilities: Accounts receivable ...................................... 1,804 (1,549) Receivables from related parties ......................... 21 (9) Inventories .............................................. 32 (570) Prepaid expenses and other current assets ................ (126) (274) Other assets ............................................. (6) (75) Accounts payable ......................................... (275) (531) Commissions payable ...................................... (120) 4 Income taxes payable ..................................... - 137 Accrued expenses ......................................... 77 91 ----------- ------------ Net cash used in continuing operating activities................. (212) (2,228) ----------- ------------ Cash flows from investing activities: Acquisition of property and equipment.......................... (193) (200) ----------- ----------- Net cash used in investing activities............................ (193) (200) ----------- ------------ Cash flows from financing activities: Proceeds from borrowings under line of credit.................. 298 1,474 Repayment of notes payable..................................... (196) (71) ----------- ----------- Net cash provided by financing activities........................ 102 1,403 ----------- ----------- Effect of exchange rate changes on cash.......................... 1 (18) ----------- ----------- Net decrease in cash and cash equivalents........................ (302) (1,043) Cash and cash equivalents at beginning of period................. 419 1,949 ----------- ----------- Cash and cash equivalents at end of period....................... $ 117 $ 906 =========== ===========
Noncash investing activities: In June 1995 the Company acquired the operations of a gallery in exchange for notes aggregating $1,494,000. See accompanying notes to condensed consolidated financial statements. 5 6 MEDIA ARTS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Basis of Presentation The consolidated financial statements of Media Arts Group, Inc. (the Company) include the accounts of its wholly-owned subsidiary, Thomas Kinkade Stores, Inc. and its majority owned subsidiary John Hine Limited. The Company markets and distributes fine quality gift and collectible art work and other art memorabilia primarily in the United States and the United Kingdom. The condensed interim financial statements of Media Arts Group, Inc. have been prepared by the Company without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. The information included in this report should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited interim financial statements reflect all material adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results of the interim period ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire fiscal year which ends March 31, 1997. NOTE 2 - Net income (loss) per share Net income (loss) per share is computed using the weighted average number of shares of Common Stock and dilutive Common Stock equivalent shares outstanding. Common Stock equivalents include shares from the exercise of stock options and warrants (using the treasury stock method). NOTE 3 - Inventories Inventories consisted of (in thousands):
June 30, March 31, 1996 1996 ------------- ------------- Raw materials................................... $ 3,109 $ 2,027 Work-in-process................................. 1,369 1,699 Finished goods.................................. 6,235 6,986 ------------- ------------- $ 10,713 $ 10,712 ============= =============
NOTE 4 - Debt As of June 30, 1996, the Company had borrowings of $4.8 million under a line of credit with a bank (the Senior Debt and the Senior Lender, respectively) and had issued $8,000,000 in secured notes payable to investors (the Subordinated Debt and the Investors, respectively). At June 30, 1996, the Company was not in compliance with certain financial covenants under the Senior Debt and the Subordinated Debt. The Company anticipates obtaining waivers of the existing defaults from the Senior Lender and the Investors. However there can be no assurance that the existing defaults will be waived or that waivers will be obtained without significant cost to the Company. 6 7 MEDIA ARTS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - Litigation The Company and its subsidiaries are defendants in certain legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company's financial position or results of operations. 7 8 MEDIA ARTS GROUP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth below should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I - - Item 1 of this Quarterly Report and the Company's Annual Report on Form 10-K for the year ended March 31, 1996 which contains the audited financial statements and notes thereto for the years ended March 31, 1996 and 1995 and December 31, 1993 and for the three month period ended March 31, 1994 and Management's Discussion and Analysis of Financial Condition and Results of Operations for those respective periods. RESULTS OF OPERATIONS Net Sales Net sales for the quarter ended June 30, 1996 were $10.8 million, or 21% below the $13.6 million reported for the quarter ended June 30, 1995. Net sales of John Hine products declined by $2.3 million or 51% compared to the prior year, while sales by Thomas Kinkade Stores increased by approximately $0.6 million or 24% compared to the prior year. Wholesale sales of lithographs were $1.1 million or 18% lower than the prior year, due primarily to fewer releases during the current quarter as compared to the prior year. The significant decline in net sales of John Hine is attributable to a significant softening of the collectible cottage market in the US as well as restructuring of UK manufacturing practices implemented in March 1996, which adversely affected production volumes. Gross Profit Gross profit decreased by $2.9 million for the quarter ended June 30, 1996, or 36%, to $5.2 million in comparison to the $8.1 million reported for the quarter ended June 30, 1995. The decrease was due to a reduction in sales as well as a reduction in gross margins. The Company's consolidated gross margin was 48% for the quarter ended June 30, 1996, compared to 59% for the same quarter in the prior year. John Hine's gross margin for the current quarter was 15% compared to 50% for the same period in the prior year. The decrease in John Hine gross margin was due primarily to production delays arising from the restructuring of manufacturing practices which caused production volumes to decline at a greater rate than the reductions in fixed manufacturing costs. The Company's consolidated gross margin also declined due to a change in the product mix of lithograph products. Selling Expenses Selling expenses were $3.6 million during the quarters ended June 30, 1996 and 1995. As a percentage of net sales, selling expenses increased to 33% for the current quarter from 26% for the quarter ended June 30, 1995, due to net sales declining while selling expenses remained relatively fixed. The Company's change from independent sales representatives to a primarily salaried sales force in June 1995 increased the proportion of fixed selling expenses in the current quarter as compared to the prior year. The Company plans to pursue further expansion of its markets and distribution channels through low cost programs such as the licensing of independent Thomas Kinkade Signature Galleries. General and Administrative Expenses General and administrative expenses decreased $1.0 million, or 23%, to $3.1 million during the quarter ended June 30, 1996, compared to $4.1 million for the same period in the prior year. Expressed as a percentage of net sales, general and administrative expenses were 29% compared to 30% for the quarter ended June 1995. The decrease in general and administrative expenses was primarily due to cost cutting during the year which focused principally on headcount and facility lease reductions. The Company implemented further efficiencies in August 1996 by consolidating the Company's San Jose operations into one facility, which is expected to further reduce headcount and facility costs. Management plans to continue to seek efficiencies and cost cutting opportunities, however general and administrative expenses 8 9 MEDIA ARTS GROUP, INC. may increase in the future as a result of the Company's commitment to provide support for the continued expansion of business. Interest Expense Interest expense was $580,000 for the quarter ended June 30, 1996, compared to $242,000 for the same period in the prior year. The increase was due to the issuance of $8 million in notes payable in July 1996, which increased the aggregate amount and interest rate of the Company's long term debt. Foreign Currency Exchange Gains and Losses The Company recorded foreign currency exchange losses of $77,000 during the quarter ended June 30, 1996, compared to foreign exchange gains of $32,000 for the quarter ended June 30, 1995. The Company uses a foreign currency bank line of credit facility to minimize the effects of currency exchange rate fluctuations on the Company's income statement. However, currency exchange rate fluctuations are unpredictable and no assurance can be given that foreign exchange losses will not be incurred by the Company in the future. Provision for Income Tax Income tax benefit was $789,000 for the quarter ended June 1996, compared to income tax expense of $58,000 for the same quarter in the prior year. The Company's effective income tax rate for the quarter ended June 30, 1996 was 37% compared to 44% in the prior year. Minority Interest Minority shareholders owned a 49% interest in John Hine until August 31, 1994, at which time the Company acquired an additional 46% interest in John Hine, leaving a 3% minority interest outstanding. Seasonality The Company's business has experienced, and is expected to continue to experience, significant seasonality. The Company's net revenues are generally highest in the September and December quarters. Management believes that the seasonal effect is due primarily to customer buying patterns and is typical of the fine art, gift and collectible industry. The Company expects the seasonal trends to continue in the foreseeable future. In addition, although the backlog of orders increased in the June 1996 quarter due to production delays in John Hine, sales in future quarters are expected to continue to be substantially dependent on orders booked in those quarters. Fluctuations in operating results may also result in volatility in the Company's earnings and the price of the Company's Common Stock. Liquidity and Capital Resources The Company's working capital position decreased by $1.2 million during the quarter ended June 30, 1996, from $11.8 million at March 31, 1996 to $10.6 million at June 30, 1996. The decrease was primarily attributable to the loss in the June 1996 quarter of $1.4 million and was reflected in a $1.8 million decrease in accounts receivable, partly offset by an increase in deferred tax assets of $0.8 million. The Company made capital expenditures of $193,000 for property and equipment during the quarter ended June 30, 1996. The Company anticipates that total capital expenditure in fiscal 1997 will be approximately $750,000, and will relate to continued manufacturing and infrastructure investments. 9 10 MEDIA ARTS GROUP, INC. As of July 31, 1996, the Company had borrowings of $4.7 million under a line of credit with a bank (the Senior Debt and the Senior Lender, respectively). Borrowing capacity under the Senior Debt facility is based upon eligible accounts receivable and aggregated $5.1 million as of July 31, 1996. As of July 31, 1996, the Company had also issued $8,000,000 in secured notes payable to investors (the Subordinated Debt and the Investors, respectively). At June 30, 1996, the Company was not in compliance with certain financial covenants under the Senior Debt and the Subordinated Debt. Under the terms of the Senior Debt facility, the Senior Lender is not required to make additional advances to the Company. The Company anticipates obtaining waivers of the existing defaults from the Senior Lender and the Investors. However, there can be no assurance that the existing defaults will be waived or that the waivers will be obtained without significant cost to the Company. The Company's principal sources of cash to fund its working capital, debt service and capital expenditure requirements are cash from operations and the Senior Debt facility. For the quarter ended June 30, 1996, the Company used $400,000 in operating and financing activities. If the Company does not generate positive cash flow from operating activities in the quarter ended September 30, 1996 and for the year ended March 31, 1997, additional financing may be required to meet working capital, debt service and capital expenditure requirements. There can be no assurance that such additional financing can be obtained by the Company, or obtained on terms acceptable to the Company. The Company's working capital requirements in the foreseeable future will change depending on various factors. The primary variables include product development efforts, consumer acceptance of the company's products, expansion of distribution channels for the Company's products, successful third party manufacturing relationships, and any other adjustments in its operating plan needed in response to competition, acquisition opportunities or unexpected events. 10 11 MEDIA ARTS GROUP, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES As of July 31, 1996, the Company had borrowings of $4.7 million under a line of credit with a bank (the Senior Debt and the Senior Lender, respectively). Borrowing capacity under the Senior Debt facility is based upon eligible accounts receivable and aggregated $5.1 million as of July 31, 1996. As of July 31, 1996, the Company had also issued $8,000,000 in secured notes payable to investors (the Subordinated Debt and the Investors, respectively). At June 30, 1996, the Company was not in compliance with certain financial covenants under the Senior Debt and the Subordinated Debt. Under the terms of the Senior Debt facility, the Senior Lender is not required to make additional advances to the Company. The Company anticipates obtaining waivers of the existing defaults from the Senior Lender and the Investors. However, there can be no assurance that the existing defaults will be waived or that the waivers will be obtained without significant cost to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11.01 - Computation of Income From Continuing Operations and Net Income Per Share (b) Reports on Form 8-K - none 11 12 MEDIA ARTS GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDIA ARTS GROUP, INC. (Registrant) By ______________________________ Kenneth E. Raasch Chairman of the Board of Directors President & Chief Executive Officer By ______________________________ Raymond A. Peterson Senior Vice President of Finance & Chief Financial Officer Date: August 12, 1996 13 EX-11.01 2 COMPUTATION OF NET INCOME (LOSS) PER SHARE 1 MEDIA ARTS GROUP, INC. EXHIBIT 11.01 ITEM 6(a): EXHIBITS AND REPORTS ON FORM 8-K COMPUTATION OF NET INCOME (LOSS) PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1)
Three Months Ended June 30, --------------------------- 1996 1995 ------------- ------------- Net income........................................... $ (1,356) $ 206 ============= ============= Weighted average common shares outstanding........... 9,867 9,720 Common shares issuable on exercise of options and warrants (2)....................................... - 286 ------------- ------------- Weighted average common and common equivalent shares outstanding................................. 9,867 10,006 ============= ============= Net income (loss) per common share................... $ (0.14) $ 0.02 ============= =============
(1) This Exhibit should be read with Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements. (2) The computation of common and common stock equivalents utilizes the treasury stock method and the average market price of $6.54 per share for the quarter ended June 30, 1995. 12 EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 3-MOS MAR-31-1996 JUN-30-1996 117 0 10262 1638 10713 24292 8310 2134 38933 13660 0 0 0 58 14120 38933 10799 10799 5562 6726 0 229 580 (2146) (789) (1356) 0 0 0 (1356) (.14) (.14)
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