<PAGE> 1
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:
June 30, 1996 0-13141
---------------------- -----------------------
MARTIN LAWRENCE LIMITED EDITIONS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 95-4103583
---------------------------- ---------------------
(State or other jurisdiction (IRS Employer Identi-
of incorporation or organization) fication Number)
16250 Stagg Street
Van Nuys, California 91406
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(Address and zip code of principal executive offices)
(818) 988-0630
----------------------------------------------------
(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
----- -----
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 August 12, 1996
---------------------------- ----------------------------
Common Stock, $.01 par value 5,893,748
This document consists of 19 pages
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MARTIN LAWRENCE LIMITED EDITIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet for June 30, 1996
and December 31, 1995 (Unaudited) .......................... 3
Consolidated Statement of Operations
for the Three Months Ended June 30, 1996
and June 30, 1995 and for the Six Months
Ended June 30, 1996 and June 30, 1995
(Unaudited) ................................................ 4
Consolidated Statement of Cash Flows
for the Six Months Ended June 30, 1996
and June 30, 1995 (Unaudited) .............................. 5
Notes to Unaudited Consolidated
Financial Statements ....................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 18
Item 2. Changes in Securities ........................................ 18
Item 3. Defaults Upon Senior Securities .............................. 18
Item 4. Submission of Matters to a Vote of
Security Holders ........................................... 18
Item 5. Other Information ............................................ 18
Item 6. Exhibits and Reports on Form 8-K ............................. 18
</TABLE>
Page 2 of 19
<PAGE> 3
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1996 Dec. 31, 1995
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 424,000 $ 769,000
Accounts receivable, net (Note 2) 637,000 1,033,000
Inventories (Note 2) 11,207,000 12,318,000
Prepaid expenses and other current assets 377,000 363,000
Notes receivable, short-term 31,000 31,000
------------ ------------
Total current assets 12,676,000 14,514,000
Equipment and leasehold improvements,
net of accumulated depreciation and
amortization (Note 2) 2,722,000 2,907,000
Other assets 573,000 693,000
Deferred income taxes (Note 3) 652,000 652,000
------------ ------------
Total assets $ 16,623,000 $ 18,766,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses (Notes 2 and 5) $ 3,140,000 $ 3,112,000
Accrued compensation and employee benefits 267,000 512,000
Deferred rents--current 63,000 170,000
Customer deposits 149,000 155,000
Escrowed funds (Note 4) - 150,000
Dividends payable (Note 5) 66,000 58,000
Notes payable (Note 6) 809,000 16,000
Deferred income taxes (Note 3) 1,341,000 1,341,000
------------ ------------
Total current liabilities 5,835,000 5,514,000
Notes payable, long-term 350,000 214,000
Deferred rents 360,000 407,000
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Total liabilities 6,545,000 6,135,000
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Commitments and contingencies - -
Mandatorily redeemable preferred stock--
$.01 par value, 1,000,000 shares
authorized, 260,000 shares issued
and outstanding at June 30, 1996 (Note 4) 2,359,000 2,021,000
------------ ------------
Stockholders' equity:
Preferred stock--$.01 par value, 4,000,000
shares authorized, none issued or outstanding - -
Common stock--$.01 par value, 20,000,000
shares authorized, 8,350,000 shares issued
and 5,893,748 shares outstanding
at June 30, 1996 and December 31, 1995 83,000 83,000
Paid-in capital 27,709,000 27,709,000
Deficit (12,288,000) (9,397,000)
Less cost of shares held in treasury--
2,456,000 shares at June 30, 1996 and
December 31, 1995 (7,785,000) (7,785,000)
------------ ------------
Total stockholders' equity 7,719,000 10,610,000
------------ ------------
Total liabilities and stockholders' equity $ 16,623,000 $ 18,766,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
Page 3 of 19
<PAGE> 4
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 4,227,000 $ 4,281,000 $ 9,609,000 $ 8,451,000
Other income 105,000 99,000 214,000 256,000
----------- ----------- ----------- -----------
4,332,000 4,380,000 9,823,000 8,707,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 1,738,000 1,584,000 3,860,000 3,200,000
Selling expenses 2,650,000 2,551,000 5,663,000 4,988,000
General and administrative
expenses 1,342,000 1,357,000 2,901,000 2,692,000
Interest 63,000 3,000 67,000 6,000
Net loss (gain) on gallery/
Frame Shops closures 73,000 - 73,000 (91,000)
----------- ----------- ----------- -----------
5,866,000 5,495,000 12,564,000 10,795,000
----------- ----------- ----------- -----------
Loss before taxes (1,534,000) (1,115,000) (2,741,000) (2,088,000)
Provision for taxes (benefit) 5,000 (42,000) 8,000 (88,000)
----------- ----------- ----------- -----------
Net loss (1,539,000) (1,073,000) (2,749,000) (2,000,000)
Dividends and accretion on
mandatorily redeemable
preferred stock 72,000 55,000 142,000 88,000
----------- ----------- ----------- -----------
Net loss applicable to
common stock $(1,611,000) $(1,128,000) $(2,891,000) $(2,088,000)
=========== =========== =========== ===========
Net loss per common share $ (.27) $ (.19) $ (.49) $ (.35)
=========== =========== =========== ===========
Weighted average common
shares outstanding 5,894,000 5,894,000 5,894,000 5,894,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Page 4 of 19
<PAGE> 5
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,749,000) $(2,000,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 455,000 440,000
Write-off of Frame Shops leaseholds upon closure 41,000 -
Changes in assets and liabilities:
Accounts receivable, net 396,000 (30,000)
Inventories 1,111,000 115,000
Prepaid expenses and other current assets (14,000) (48,000)
Other assets 120,000 (15,000)
Accounts payable and accrued expenses (Note 5) 28,000 (40,000)
Accrued compensation and employee benefits (245,000) (28,000)
Escrowed Funds (150,000) -
Deferred rents (154,000) (146,000)
Customer deposits (6,000) (1,000)
Deferred income taxes - (101,000)
----------- -----------
Net cash provided by (used in) operating activities (1,167,000) (1,854,000)
----------- -----------
Cash flows from investing activities:
Additions to equipment and leasehold improvements (312,000) (109,000)
----------- -----------
Net cash used in investing activities (312,000) (109,000)
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Cash flows from financing activities:
Net proceeds from issuance of mandatorily
redeemable preferred stock (Note 4) 326,000 1,787,000
Dividends paid on preferred stock (121,000) -
Notes payable 929,000 82,000
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Net cash provided by financing activities 1,134,000 1,869,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (345,000) (94,000)
Cash and cash equivalents at beginning of period 769,000 575,000
----------- -----------
Cash and cash equivalents at end of period $ 424,000 $ 481,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Page 5 of 19
<PAGE> 6
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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Note 1. Basis of Presentation
The unaudited consolidated financial statements presented herein
include the accounts of Martin Lawrence Limited Editions, Inc., a Delaware
corporation, and its wholly owned subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated from the
consolidated financial statements.
These financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not contain certain information required by
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1995. The accompanying
financial statements reflect all adjustments of a normal recurring nature which
are, in the opinion of management, necessary for a fair presentation.
Reclassification: Beginning in 1996, certain expenses, such as store
rents and other occupancy costs, which were previously classified as general and
administrative expenses have been reclassified as selling expenses. Such
expenses for the first six months amounted to $1,709,000 in 1996 and $1,623,000
in 1995 and for the second quarter, $920,000 in 1996 and $810,000 in 1995.
All prior year financial information has been restated to conform with
this year's presentation.
Note 2. Details of Certain Financial Statement Components
Accounts Receivable
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
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<S> <C> <C>
Amounts due from
trade customers $657,000 $1,054,000
Accounts receivable -
other 5,000 4,000
Less: Allowance for
doubtful accounts (25,000) (25,000)
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$637,000 $1,033,000
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Inventories
<CAPTION>
June 30, 1996 December 31, 1995
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<S> <C> <C>
Raw materials -
framing $ 267,000 $ 277,000
Finished goods:
Limited editions,
frames and other 9,584,000 10,304,000
Original works of art 1,356,000 1,737,000
----------- -----------
$11,207,000 $12,318,000
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</TABLE>
Page 6 of 19
<PAGE> 7
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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Note 2. Details of Certain Financial Statement Components
(Contd.)
Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
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<S> <C> <C>
Equipment $ 4,144,000 $ 4,113,000
Leasehold improvements 7,088,000 6,858,000
----------- -----------
11,232,000 10,971,000
Less: Accumulated
depreciation and
amortization (8,510,000) (8,064,000)
----------- -----------
$ 2,722,000 $ 2,907,000
=========== ===========
</TABLE>
Accounts Payable and Accrued Expenses
At June 30, 1996 and December 31, 1995, the Company had rent payable of
$423,000 and $436,000, respectively, included in accounts payable and accrued
expenses.
Note 3. Income Taxes
The income tax benefit for the three months and six months ended June
30, 1995 reflects adjustments to the deferred income tax liability. The
provision of $5,000 and $8,000 in the three months and six months ended June 30,
1996 relates to state income or franchise taxes.
Note 4. Mandatorily Redeemable Preferred Stock
On February 6, 1995, the Company issued 200,000 shares of its 10%
Cumulative Convertible Preferred Stock, $.01 par value per share (the "Preferred
Stock"), pursuant to a private placement commenced in October 1994. The shares
of Preferred Stock were sold at $10.00 per share. The Company received net
proceeds of $1,786,000 from the initial closing of the offering. In three
additional closings of the private placement on September 18, 1995, January 3,
1996 and February 8, 1996, the Company received additional net proceeds of
$232,500, $139,500 and $186,000, respectively, and issued an aggregate of 60,000
shares of Preferred Stock. The $150,000 of gross proceeds from the January 3,
1996 closing was included as a liability (Escrowed Funds) at December 31, 1995
since the amounts were held in escrow subject to the escrow holder's clearing of
the funds prior to distribution to the Company. The private placement terminated
on February 5, 1996.
Dividends on the Preferred Stock are payable semi-annually at the rate
of 10% per annum on April 1 and October 1 of each year. Each share of Preferred
Stock will automatically convert into 10 shares of the Company's common stock,
subject to adjustment in certain events, when the trading price of the common
stock equals or
Page 7 of 19
<PAGE> 8
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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Note 4. Mandatorily Redeemable Preferred Stock (Contd.)
exceeds $2.25 per share for 20 consecutive trading days. In addition, holders of
the Preferred Stock may, under certain circumstances, elect to convert the
Preferred Stock into common stock.
The Preferred Stock is redeemable by the Company on or after January 1,
1997 at $10.80 per share, with redemption rates decreasing by $0.20 per year
until the rate is $10.00 per share on or after January 1, 2001. The Company must
redeem all of the shares of Preferred Stock no later than January 1, 2005.
Holders of Preferred Stock will be entitled to elect 20% (not less than
two) of the Board of Directors when dividends on the Preferred Stock have been
in arrears in an amount equal to at least two semi-annual dividends. The holders
of Preferred Stock will be entitled to elect an additional 10% (not less than
one) of the directors upon each additional dividend arrearage until either they
can elect a majority of the Board of Directors or the dividends in arrears have
been paid in full.
Thomas Green, the principal of one of the placement co-agents for the
private placement, acquired 77,500 shares of the Preferred Stock in the initial
closing of the offering. Thomas Green subsequently acquired 5,000 additional
shares from one of the Preferred Stockholders.
The proceeds from the offering were used principally for acquiring new
inventory, marketing and sales expansion, opening new galleries, the payment of
certain lease deferrals and for working capital and general corporate purposes.
In connection with its private placement of Preferred Stock, the
Company issued warrants to purchase an aggregate of 162,500 shares of common
stock to the placement co-agents for the offering (the "Warrants"). The Warrants
are exercisable at $1.20 per share of common stock for an 18-month period
commencing at such time that the common stock equals or exceeds $2.25 per share
for 20 consecutive trading days. The exercise price of the Warrants (other than
$.10 per share) may be paid with a promissory note secured by the shares of
common stock issuable upon exercise of the Warrants and maturing 18 months from
the date of issuance. The Warrants expire as follows: 125,000 on February 6,
2000, 15,625 on September 18, 2000, 9,500 on January 3, 2001 and 12,500 on
February 8, 2001.
Note 5. Additional Cash Flow Information
For the six months ended June 30, 1996 and the year ended December 31,
1995, non-cash financing activities consisted of $66,000 and $58,000 for
dividends payable on the Preferred Stock. At December 31, 1995, the $58,000
dividend payable was included in accounts payable and accrued expenses. There
was an additional non-cash financing activity of $13,000 for accretion on the
Preferred Stock.
Page 8 of 19
<PAGE> 9
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Notes Payable
In April 1996, the Company entered into a Loan and Security Agreement
with four individuals (the "Lenders") and borrowed an aggregate of $500,000 (the
"Short-Term Loan"). The Short-Term Loan has a maturity of six months (due
October 1, 1996) and bears interest at the rate of 24% per annum (with a default
rate of 36% per annum). The Short-Term Loan is secured by the Company's
inventory with a cost of approximately $5,500,000. In connection with the
Short-Term Loan, the Company issued to the Lenders five-year warrants to
purchase an aggregate of 50,000 shares at $1.00 per share. Thomas Green
Securities, Inc. ("TGI") arranged the Short-Term Loan on behalf of the Company
and, for those services, the Company paid TGI a fee of $20,000.
On June 7, 1996, the Company entered into an agreement (the "Supplier
Agreement") with a major supplier of artwork to the Company. The Supplier
Agreement provides for (i) the Company's deferral of approximately $500,000 owed
to the supplier pursuant to a non-interest bearing note (the "Supplier Note")
and (ii) certain payment terms relating to the Company's continuing purchases of
artwork from the supplier (the "Continuing Obligations"). Both the Continuing
Obligations and the Company's obligations under the Supplier Note are secured by
approximately $4,500,000 of the Company's inventory valued at cost. In lieu of
interest on the Supplier Note, the Company is obligated to convey to the
supplier certain of the Company's artwork with a cost of $30,400. The Company
reduced the principal amount of the Supplier Note through (i) the conveyance to
the supplier of artwork with a cost to the Company of $95,600 for a credit of
$69,500 and (ii) the payment to the supplier of $37,000 from the sale at auction
of certain of the Company's inventory. The balance of the Supplier Note which
was unpaid as of June 25, 1996, is payable over an 18-month period commencing
July 1, 1996 and continuing through December 1, 1997. The Company has made each
payment of $21,864 when due. During the three months and six months ended June
30, 1996, the Company's sales of inventory provided by such supplier accounted
for approximately 26% and 28% of revenues, respectively.
Page 9 of 19
<PAGE> 10
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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1. Liquidity and Capital Resources
Several key components affect the Company's ability to meet its
financial needs, including funds generated from operations, levels of accounts
receivable and inventories, capital expenditures, short-term borrowing capacity
and the ability to obtain long-term capital on satisfactory terms. For the six
months ended June 30, 1996, the Company experienced negative cash flow from
operating activities of $1,167,000, compared with a negative cash flow from
operating activities of $1,854,000 during the same period last year. This change
is due primarily to the reduction of accounts receivable and Company owned
inventory in the first six months of 1996, partially offset by the increased
losses over the prior year period.
Overall, cash decreased $345,000 in the first six months of 1996,
compared with a decrease of $94,000 for the comparable period last year. The
principal reason for this difference is the Company's receipt of net proceeds of
$1,787,000 in 1995 from the private placement of preferred stock compared to net
cash provided by financing activities of $1,134,000 in the first six months of
1996 resulting from two loans discussed below and additional net proceeds from
the private placement of preferred stock (net of dividends paid).
Due to the Company's net losses, the Company's cash flow has been
severely restricted. In order to alleviate some of the constraints on the
Company's cash flow commencing in March 1996 and continuing through the second
quarter, the Company has taken a series of measures to reduce its overhead
costs. From March 1996 through June 30, 1996, the Company has reduced its staff
at corporate headquarters by approximately 19% through layoffs and attrition.
The Company has also terminated its full-time security staff at its corporate
headquarters and instituted alternative internal safeguards. In addition, on May
1, 1996, the Company began reducing certain selling costs within its control,
including sales commissions.
In April 1996, the Company signed a lease for a new distribution
facility to replace its present facility. The new location is 12,000 square feet
smaller and will be occupied on September 1, 1996. This relocation is expected
to reduce corporate rent by approximately $11,000 per month. In addition, the
Company continues to evaluate its other leases.
Between October 1995 and January 1996, the Company opened four Martin
Lawrence Frame Shops which offered retail custom framing services. These stores
did not perform to the Company's expectations and due to disappointing results
were closed in June 1996. However, the Company continues to offer custom framing
through several of its galleries.
In December 1995, the Company received an aggregate refund of $618,000
(after deducting $22,000 for taxes owed) from the Internal Revenue Service. The
refund was pursuant to the filing of a Form 1139, and was based on Internal
Revenue Code provisions allowing the
Page 10 of 19
<PAGE> 11
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
1. Liquidity and Capital Resources (Contd.)
Company a 10-year carryback period for losses meeting certain statutory
requirements. The filing is subject to audit by the I.R.S. for three years from
the date of the filing of the Company's 1994 federal income tax return. In the
event the I.R.S. determines that any portion of the refund was improperly made,
the Company would be required to return such portion of the refund to the I.R.S.
plus interest and penalties, if any.
In April 1996, the Company entered into a Loan and Security Agreement
with four individuals (the "Lenders") and borrowed an aggregate of $500,000 (the
"Short-Term Loan"). The Short-Term Loan has a maturity of six months (due
October 1, 1996) and bears interest at the rate of 24% per annum (with a default
rate of 36% per annum). The Short-Term Loan is secured by the Company's
inventory with a cost of approximately $5,500,000. In connection with the
Short-Term Loan, the Company issued to the Lenders five-year warrants to
purchase an aggregate of 50,000 shares at $1.00 per share. Thomas Green
Securities, Inc. ("TGI") arranged the Short-Term Loan on behalf of the Company
and, for those services, the Company paid TGI a fee of $20,000.
On April 17, 1996, Woodfield Associates filed a lawsuit against the
Company in the Circuit Court for the Sixth Judicial Circuit for the State of
Michigan alleging, among other things, the Company's failure to satisfy its
lease obligations, including the payment of rent. On August 15, 1995, after
receiving a notice of forcible detainer action from the landlord for failure to
pay several months' rent, the Company vacated its premises in the Woodfield Mall
prior to the expiration of the lease. The term of the lease as set forth in the
lease agreement extended until January 31, 2001. The lawsuit demands payment of
$1,943,602.90 in damages for rent and other charges through the end of the lease
term. The Company believes that the damages sought by Woodfield Associates are
far in excess of any damages the landlord may have suffered. The Company
believes that it will be able to reach a settlement of the action with Woodfield
Associates which may involve leasing a new, smaller space in the Woodfield Mall.
On June 7, 1996, the Company entered into an agreement (the "Supplier
Agreement") with a major supplier of artwork to the Company. The Supplier
Agreement provides for (i) the Company's deferral of approximately $500,000 owed
to the supplier pursuant to a non-interest bearing note (the "Supplier Note")
and (ii) certain payment terms relating to the Company's continuing purchases of
artwork from the supplier (the "Continuing Obligations"). Both the Continuing
Obligations and the Company's obligations under the Supplier Note are secured by
approximately $4,500,000 of the Company's inventory valued at cost. In lieu of
interest on the Supplier Note, the Company is obligated to convey to the
supplier certain of the Company's artwork with a cost of $30,400. The Company
reduced the principal amount of the Supplier Note through (i) the conveyance to
the supplier of artwork with a cost to the Company of $95,600 for a credit of
$69,500 and (ii) the payment to the supplier
Page 11 of 19
<PAGE> 12
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
1. Liquidity and Capital Resources (Contd.)
of $37,000 from the sale at auction of certain of the Company's inventory. The
balance of the Supplier Note which was unpaid as of June 25, 1996, is payable
over an 18-month period commencing July 1, 1996 and continuing through December
1, 1997. The Company has made each payment of $21,864 when due. During the three
months and six months ended June 30, 1996, the Company's sales of inventory
provided by such supplier accounted for approximately 26% and 28% of revenues,
respectively.
On July 31, 1996, the Company entered into a Note Agreement with an
investor (the "Investor") pursuant to which the Investor loaned $500,000 to the
Company for the acquisition of graphics of certain selected artists (the
"Artwork"). The Company's obligations under the Note Agreement are secured by
the Artwork and the proceeds thereof. Upon the sale of a piece of Artwork, the
Investor is entitled to receive 25% of the net profits. During the initial six
month term of the investment program, the principal amount of the loan must be
reinvested in Artwork on a revolving basis. Thereafter, at the election of the
Investor, the investment program may continue on an ongoing basis for additional
six month terms, provided that the Investor may request at the end of any such
six-month period that the loan be repaid within six months. For services
rendered in connection with arranging this financing, the Company paid TGI a fee
of $35,000.
The Company believes that, based on its current projections, its cash
and capital resources may be insufficient to meet its financing requirements
throughout the balance of 1996. In order to meet its obligation to pay the
$500,000 Short-Term Loan due on October 1, 1996, the Company plans to file for a
tax refund related to carry-back losses. However, the Company is unable to
ascertain at this time whether the amount of such refund will be sufficient to
repay the Short-Term Loan or whether the refund will be received in time. In
addition, the Company will seek to negotiate an extension of time to pay the
Short-Term Loan. The Company will continue its efforts to increase sales,
improve margins, reduce inventory levels and minimize operational costs. The
Company is exploring alternative sources of liquidity, including other sources
of financing. In the event that the Company does not obtain the anticipated tax
refund or additional financing, the Company may elect to undertake such other
actions as may be appropriate in light of the circumstances at the time,
including seeking protection under reorganization or other debtor protection
laws.
Page 12 of 19
<PAGE> 13
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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2. Results of Operations
a. Six Months Ended June 30, 1996
Net sales for the six months ended June 30, 1996 were $9,609,000, an
increase of 13.7%, compared with the same period in 1995. The Company believes
that this increase was due to its promotional activities coupled with sales of
artwork published by the Company's newest artist, and the opening of two new
gallery locations and five Frame Shops.
Retail sales were $6,965,000, an increase of 15.8%, compared with the
same period last year. Retail operations provided 72.5% of total net sales
through the full-period operation of 20 galleries and the partial-period
operation of four galleries, four Frame Shops and four Masterpieces of the World
locations. During the same period last year, retail operations provided 71.2% of
the total net sales through the full-period operation of 19 galleries and the
partial-period operation of one gallery and two Masterpieces of the World
locations.
Retail sales on a same-store basis (17 stores) increased 6.3%, compared
with the same period last year. The Company believes that this increase is due,
in part, to sales of artwork published by the Company's newest artist and
promotional activities.
Between October 1995 and January 1996, the Company opened four Martin
Lawrence Frame Shops which offered retail custom framing services. These stores
did not perform to the Company's expectations and due to disappointing results
were closed in June 1996. However, the Company continues to offer custom framing
through several of its galleries.
The Company opened five Masterpieces of the World retail stores between
May and July 1995 in regional shopping malls in California. All of these
locations were taken on a temporary basis in order to test a new concept in art
retailing. Masterpieces of the World sold framed oil paintings at affordable
prices, primarily under $500. The results of operations of Masterpieces of the
World did not meet the Company's expectations and, accordingly, the Company
began closing the stores in January 1996 and completed the closings in March.
Although the Company has ceased operating Masterpieces of the World retail
stores, management believes that the concept may be viable in other venues. The
Company currently offers Masterpieces of the World inventory in its gallery
outlet store.
Page 13 of 19
<PAGE> 14
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2. Results of Operations (Contd.)
a. Six Months Ended June 30, 1996 (Contd.)
Wholesale sales provided 13.1% of net sales, compared with 13.7% of net
sales for the six months ended June 30, 1995. Wholesale sales for the first six
months of 1996 were $1,255,000, an increase of 8.5%, compared with the same
period last year. The Company believes that this increase is primarily due to
the sale of the Company's newest published artist's works.
Auction sales provided 14.4% of net sales, compared with 15.1% of net
sales for the six months ended June 30, 1995. Auction sales for the first six
months of 1996 were $1,388,000, an increase of 8.5% compared with the same
period last year. The Company believes that this increase is primarily due to
greater average sales achieved plus one additional auction during the period.
Auctions which are conducted in geographical areas where the Company
has retail galleries tend to reduce the retail sales per square foot in those
galleries. However, the Company believes that the combination of its retail
galleries and auctions have increased its overall sales in those areas.
Historically, a majority of the Company's net sales have been generated
by the works of only a few of the Company's published artists. The Company
expects the mix of these artists to change over time, due to factors such as
changing customer preference and the expiration or termination of publishing
agreements with artists. As a result of these factors, the Company maintains an
extensive inventory of the works of popular artists and constantly seeks to
attract new promising artists and to promote their works. The works of two of
the Company's published artists accounted for approximately 14.3% and 5.7% of
the Company's net sales during the first six months of 1996. Two of the
Company's non-published artists accounted for approximately 11.8% and 10.4%,
respectively, of the Company's net sales during the first six months of 1996.
Cost of sales as a percentage of net sales was 40.2% and 37.9% for the
six months ended June 30, 1996 and 1995, respectively. The increase in the cost
of sales percentage from 1995 to 1996 was primarily the result of lower margins
on selected works of art.
Selling expenses as a percentage of net sales were 58.9% and 59.0% for
the six months ended June 30, 1996 and 1995, respectively. Selling expenses
include such items as retail sales location occupancy costs, advertising, sales
commissions, brochures and other promotional material costs, freight and certain
salary expenses. The percentage decrease is primarily due to the increase in
sales.
Page 14 of 19
<PAGE> 15
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2. Results of Operations (Contd.)
a. Six Months Ended June 30, 1996 (Contd.)
Selling expenses increased $675,000 in the first six months of 1996,
compared with the first six months of 1995. The increase is primarily due to
increased fixed and variable compensation in the amount of $414,000 associated
with the increase in sales and new gallery and Frame Shops locations. Sales
location occupancy costs increased $160,000 over the same period last year. This
increase is due to the opening of new gallery and Frame Shops locations and
increased percentage rent under certain leases. Depreciation expense increased
$23,000 over the same period last year. All other selling expenses increased
$78,000 compared with the comparable period last year.
General and administrative expenses as a percentage of net sales were
30.2% and 31.9% for the six months ended June 30, 1996 and 1995, respectively.
General and administrative expenses include all corporate overhead costs.
General and administrative expenses increased $209,000, compared with the same
period in 1995. Depreciation and amortization expense decreased $8,000, compared
with the same period last year. All other general and administrative expenses
increased $217,000, compared with the same period last year, due in part to
additional operational and support personnel required for the sales volume
increase and finance charges from increased levels of credit card sales.
The Company had a net loss applicable to common stock of $2,891,000 for
the six months ended June 30, 1996, compared with a net loss applicable to
common stock of $2,088,000 in the same period last year. The increase in the net
loss is due to higher cost of sales and higher selling and general and
administrative expenses associated with increased sales volume and additional
retail locations. In addition, there was a loss of approximately $370,000 from
the Company's Masterpieces of the World and Frame Shops stores which were closed
during the first six months of 1996. Additionally, in the first quarter of 1995,
the Company realized a $91,000 gain on gallery closings and $88,000 tax benefit,
whereas in the first six months of 1996 the Company realized a $73,000 loss on
the closing of the Frame Shops.
Page 15 of 19
<PAGE> 16
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2. Results of Operations (Contd.)
b. Three Months Ended June 30, 1996
Net sales for the three months ended June 30, 1996 were $4,227,000, a
decrease of $54,000, or 1.3%, compared with the same period in 1995.
Overall, retail sales were $2,922,000, a decrease of 7.0% compared with
the same period last year. Retail operations provided 69.1% of total net sales
during the three months ended June 30, 1996 through the full period operation of
22 galleries and the partial-period operation of four Frame Shops and one
gallery. During the same period last year, retail operations provided 73.4% of
total net sales through the full-period operation of 19 galleries and the
partial-period operation of one gallery.
Retail sales on a same-store basis (17 stores) decreased 15.5% compared
with the same period last year. The Company believes that this decrease is due,
in part, to a general industry-wide weakness in sales, certain personnel changes
occurring at several of the Company's galleries as well as a decreased diversity
of inventory available for sale in the Company's Museum Shops.
Wholesale sales provided 16.0% of net sales, compared with 9.6% of net
sales for the three months ended June 30, 1995. Wholesale sales for the quarter
were $675,000, an increase of 63.8% compared with the same period last year.
This increase is due to additional sales of Company published art as well as the
sale of original works of art.
Auction sales provided 14.9% of net sales, compared with 17.0% of net
sales for the three months ended June 30, 1995. Auction sales for the three
months ended June 30, 1996 were $630,000, a decrease of 13.2% compared with the
same period last year. The Company believes that this decrease is due to one
less auction during the period as well as lower average sales.
Auctions which are conducted in geographical areas where the Company
has retail galleries tend to reduce the retail sales per square foot in those
galleries. However, the Company believes that the combination of its retail
galleries and auctions have increased its overall sales in those areas.
Historically, a majority of the Company's net sales have been generated
by the works of only a few of the Company's published artists. However, the
Company expects the mix of these artists to change over time due to factors such
as changing customer preference and the expiration or termination of publishing
agreements with artists. As a result of these factors, the Company maintains an
extensive inventory of the works of popular artists and constantly seeks to
attract new promising popular artists and to promote their works. The works of
two of the Company's published artists accounted for approximately 15.4% and
5.1% of the Company's net sales during the second quarter of 1996. The works of
two of the Company's non- published artists accounted for approximately 12.3%
and 9.6%, respectively, of the Company's net sales during the second quarter of
1996.
Page 16 of 19
<PAGE> 17
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2. Results of Operations (Contd.)
b. Three Months Ended June 30, 1996 (Contd.)
Cost of sales, as a percentage of net sales, was 41.1% and 37.0% for
the three months ended June 30, 1996 and 1995, respectively. The increase in the
cost of sales from 1995 to 1996 was primarily due to lower margins on certain
original works of art.
Selling expenses, as a percentage of net sales, were 62.7% and 59.6%
for the three months ended June 30, 1996 and 1995, respectively. Selling
expenses include such items as advertising, sales commissions, brochures and
other promotional material costs, freight, certain salary expenses and retail
location occupancy costs. The percentage increase is primarily due to occupancy
and compensation costs for Frame Shops locations.
General and administrative expenses, as a percentage of net sales, were
31.7% for the three months ended June 30, 1996 and 1995. General and
administrative expenses include all corporate overhead. General and
administrative expenses decreased by $15,000 compared with the same period in
1995. For the three months ended June 30, 1996, occupancy costs decreased $5,000
compared with the same period last year. Depreciation and amortization expense
increased $2,000 compared with the same period last year. All other general and
administrative expenses decreased $12,000, compared with the same period last
year, due to a lower number of employees and their related costs.
The Company had a net loss applicable to common stock of $1,611,000 for
the three months ended June 30, 1996, compared with a net loss applicable to
common stock of $1,128,000 in the same period last year. The increase in the net
loss is primarily due to higher cost of sales, a loss of approximately $140,000
from Frame Shops operations (Frame Shops commenced operations during the fourth
quarter of 1995) and interest. In addition, the prior year's quarter had a tax
benefit of $42,000 compared to a tax provision of $5,000 for the current
quarter.
The Company's strategy in this cost-conscious environment is to
continue to conduct art auctions and sales and other promotions at its retail
galleries. The Company also intends to continue to test the viability of factory
outlet stores. In addition, with respect to new artists published by the
Company, the Company intends to provide the collector with tremendous value at
moderate prices. The Company plans to increase its publishing activities in
order to improve its gross margins and improve its wholesale and retail sales.
To that end, the Company has recently signed Brent Benger to a publishing
agreement and expects to release limited edition serigraphs of the artist's
works in the fourth quarter. Significant improvement in the Company's operating
results is, to a large extent, dependent upon increased consumer spending of
discretionary income and the Company's ability to publish artists that are
appealing to consumers. The success of the Company in implementing its strategy
is substantially dependent upon its ability to obtain sufficient working capital
in the immediate future. See discussion regarding Liquidity and Capital
Resources.
Page 17 of 19
<PAGE> 18
Martin Lawrence Limited Editions, Inc.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS.
On April 17, 1996, Woodfield Associates filed a lawsuit
against the Company in the Circuit Court for the Sixth
Judicial Circuit for the State of Michigan alleging, among
other things, the Company's failure to satisfy its lease
obligations, including the payment of rent. On August 15,
1995, after receiving a notice of forcible detainer action
from the landlord for failure to pay several months' rent, the
Company vacated its premises in the Woodfield Mall prior to
the expiration of the lease. The term of the lease as set
forth in the lease agreement extended until January 31, 2001.
The lawsuit demands payment of $1,943,602.90 in damages for
rent and other charges through the end of the lease term. The
Company believes that the damages sought by Woodfield
Associates are far in excess of any damages the landlord may
have suffered. The Company believes that it will be able to
reach a settlement of the action with Woodfield Associates
which may involve leasing a new, smaller space in the
Woodfield Mall.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On July 26, 1996, the Company announced that the New York
Stock Exchange had advised the Company that trading in the
common stock of the Company would be suspended before the
opening of trading on Monday, August 12. The NYSE's action was
based on the fact that the Company had fallen below the NYSE's
continued listing criteria related to: aggregate market value
of publicly held shares; net tangible assets available to
common stock together with three-year average net income; and
aggregate market value of all outstanding common shares
together with three-year average net income. On August 9,
1996, the Company announced that the Company had been cleared
to trade its common stock on the OTC Bulletin Board Service of
the National Association of Securities Dealers under the
symbol "MLLE". The Company ceased trading on the NYSE at the
close of the market on Friday, August 9, 1996 and commenced
trading on the OTC Bulletin Board on Monday, August 12, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Not applicable.
Page 18 of 19
<PAGE> 19
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTIN LAWRENCE LIMITED EDITIONS, INC.
(Registrant)
DATED: August 12, 1996 BY: /s/ Allen A. Baron
----------------------------------------------
ALLEN A. BARON
Chief Financial Officer and Treasurer
(Duly Authorized Officer)
Page 19 of 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, STATEMENT OF OPERATIONS, AND STATEMENT OF CASH FLOW
FOR THE 6 MONTH PERIOD AND ENDING JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 424,000
<SECURITIES> 0
<RECEIVABLES> 662,000
<ALLOWANCES> (25,000)
<INVENTORY> 11,207,000
<CURRENT-ASSETS> 12,676,000
<PP&E> 11,232,000
<DEPRECIATION> (8,510,000)
<TOTAL-ASSETS> 16,623,000
<CURRENT-LIABILITIES> 5,835,000
<BONDS> 0
2,359,000
0
<COMMON> 83,000
<OTHER-SE> 7,636,000
<TOTAL-LIABILITY-AND-EQUITY> 16,623,000
<SALES> 9,609,000
<TOTAL-REVENUES> 9,823,000
<CGS> 3,860,000
<TOTAL-COSTS> 12,564,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,000
<INCOME-PRETAX> (2,741,000)
<INCOME-TAX> 8,000
<INCOME-CONTINUING> (2,749,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,749,000
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
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