<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
--- ---
Commission File No. 0-25804
ZANART ENTERTAINMENT INCORPORATED
----------------------------------------------
(Name of small business issuer in its charter)
Florida 59-2716063
- - ------------------------------- ------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
7641 Burnet Avenue, Van Nuys, CA 91405
- - -------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Issuer's Telephone Number, Including Area Code) (818) 904-9797
---------------------------------------------------------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of May 10, 1996, the Company had outstanding a total of 2,902,983
shares of Common Stock, par value $.0001 per share.
<PAGE> 2
ZANART ENTERTAINMENT INCORPORATED
Form 10-QSB -- for the Quarter Ended March 31, 1996
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
a) Condensed Balance Sheets -- June 30, 1995 and
March 31, 1996 3-4
b) Condensed Statements of Operations -- Nine month period ended
March 31, 1995 and March 31, 1996 and three month
period ended March 31, 1995 and March 31, 1996 5
c) Condensed Statements of Cash Flows -- Nine month period ended
March 31, 1995 and March 31, 1996 6
d) Notes to Condensed Financial Statements, March 31, 1996 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZANART ENTERTAINMENT INCORPORATED
CONDENSED BALANCE SHEETS
AS OF JUNE 30, 1995 AND MARCH 31, 1996 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------------------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,270,570 $2,246,021
Accounts receivable, net of
allowance for doubtful accounts of $54,000 at
June 30, 1995 and March 31, 1996 780,783 622,893
Income tax refund receivable 18,210 8,360
Inventories 405,719 530,478
Prepaid expenses 46,871 34,090
Officer advances 4,149 4,149
-------------------------
Total current assets 4,526,302 3,445,991
-------------------------
FURNITURE AND EQUIPMENT, net 45,008 51,283
LICENSING FEES, net 37,887 154,060
OTHER ASSETS, net 13,888 8,886
=========================
TOTAL ASSETS $4,623,085 $3,660,220
=========================
</TABLE>
The accompanying notes are an integral part of these
condensed balance sheets.
3
<PAGE> 4
ZANART ENTERTAINMENT INCORPORATED
CONDENSED BALANCE SHEETS
JUNE 30, 1995 AND MARCH 31, 1996 (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
----------------------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 364,431 $ 206,567
Trade payable to vendor/shareholder 199,005 135,618
Professional fees payable 45,000 26,000
Accrued payroll 10,784 10,719
Royalties payable 121,815 154,344
----------------------------
Total current liabilities 741,035 533,248
----------------------------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value:
Authorized--1,000,000 shares
None issued and outstanding -- --
Common stock, $.0001 par value:
Authorized--100,000,000 shares
Issued and outstanding, 2,902,983 shares
at June 30, 1995 and March 31, 1996 290 290
Additional paid-in-capital 4,913,743 4,913,743
Deficit (1,031,983) (1,787,061)
----------------------------
Total Shareholders' Equity 3,882,050 3,126,972
----------------------------
Total Liabilities & Shareholders' Equity $ 4,623,085 $ 3,660,220
============================
</TABLE>
The accompanying notes are an integral part of these
condensed balance sheets.
4
<PAGE> 5
ZANART ENTERTAINMENT INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTH PERIOD ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD THREE MONTH PERIOD
ENDED MARCH 31, ENDED MARCH 31,
--------------------------- ---------------------------
1995 1996 1995 1996
--------------------------- ---------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES $ 1,584,310 $ 1,979,576 $ 445,510 $ 508,028
COST OF REVENUES 1,117,985 1,726,035 343,994 454,214
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 551,460 1,113,521 225,958 387,715
--------------------------- ---------------------------
Loss from operations (85,135) (859,980) (124,442) (333,901)
INTEREST INCOME 3,239 107,630 871 31,380
INTEREST EXPENSE (91,163) (1,928) (16,691) (137)
--------------------------- ---------------------------
Loss before provision for income
taxes and extraordinary item (173,059) (754,278) (140,262) (302,658)
PROVISION FOR INCOME TAXES -- 800 -- --
--------------------------- ---------------------------
Loss before extrordinary loss (173,059) (755,078) (140,262) (302,658)
EXTRAORDINARY ITEM-LOSS FROM
EARLY EXTINGUISHMENT OF DEBT (37,281) -- -- --
--------------------------- ---------------------------
NET LOSS $ (210,340) $ (755,078) $ (140,262) $ (302,658)
=========================== ===========================
PRO FORMA EARNINGS PER
SHARE INFORMATION:
Loss per share - before
extradordinary item $ (0.07) $ (0.26) $ (0.07) $ (0.10)
Extraordinary item (0.02) -- -- --
--------------------------- ---------------------------
Loss per common share $ (0.09) $ (0.26) $ (0.07) $ (0.10)
=========================== ===========================
PRO FORMA WEIGHTED AVERAGE
NUMBER OF COMMON SHARES --------------------------- ---------------------------
OUTSTANDING 2,028,275 2,902,983 2,065,034 2,902,983
=========================== ===========================
</TABLE>
The accompanying notes are an integral part of these
condensed statements.
5
<PAGE> 6
ZANART ENTERTAINMENT INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED MARCH 31,
------------------------
1995 1996
------------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(210,340) $ (755,078)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 61,831 81,305
Amortization of deferred financing costs 56,081 --
Loss from early extinguishment of debt 37,281 --
Changes in assets and liabilities:
Accounts receivable 123,118 157,890
Income tax refund receivable -- 9,850
Inventories (122,434) (124,759)
Prepaid expenses (24,857) 12,781
Other assets (20,000) --
Accounts payable and accrued liabilities 308,527 (157,864)
Trade payable to vendor/shareholder (71,050) (63,387)
Professional fees payable (68,792) (19,000)
Accrued payroll (22,266) (65)
Royalties payable (62,696) 32,529
------------------------
Net cash used in operating activities (15,597) (825,798)
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (29,189) (23,751)
Advances on licensing fees (75,000) (175,000)
Officer advances, net 551 --
------------------------
Net cash used in investing activities (103,638) (198,751)
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 100,000 --
Deferred offering costs (201,251) --
------------------------
Net cash provided by financing activities (101,251) --
------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (220,486) (1,024,549)
CASH AND CASH EQUIVALENTS, beginning of period 339,982 3,270,570
========================
CASH AND CASH EQUIVALENTS, end of period $ 119,496 $ 2,246,021
========================
</TABLE>
The accompanying notes are an integral part of these
condensed statements.
6
<PAGE> 7
ZANART ENTERTAINMENT INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management and subject to year-end audit, the accompanying
unaudited condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do no include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. These condensed financial statements should be read in conjunction
with the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1995.
Certain reclassifications have been made to the accompanying condensed financial
statements to conform them with the current period presentation.
LOSS PER COMMON SHARE
Loss per common share for the three and nine month period ended March 31, 1995
is based upon the pro forma weighted average number of common shares outstanding
assuming the public offering of shares of the Company's common stock in May 1995
had been completed as of July 1, 1994. Pro forma income adjustments relate to
increases in officers salaries and reduction in interest expense. For the three
and nine month period ended March 31, 1996, loss per common share is based on
the historical weighted average number of shares outstanding. Common stock
equivalents have not been included as they would be anti-dilutive for the
periods presented.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
Nine months Ended March 31, 1996 vs. Nine months Ended March 31, 1995
Revenues increased 25% to $1,979,576 from $1,584,310 for the nine month
period ended March 31, 1996 compared with the nine month period ended March 31,
1995. This increase was due primarily to an increase in the sale of licensed
products, especially framed art and the Company's Chromart line. Warner Bros.,
the Company's largest customer, represented approximately $1,078,874 compared
with approximately $866,950 during the nine months ended March 31, 1995 or
approximately 55% of sales for the nine months ended March 31, 1996 and 1995.
The Musicland Group represented approximately $268,484 or 14% of total revenues
and $157,010 or 10% of total revenues for the comparative periods.
Cost of revenues (principally raw material, production costs and
licensing royalties) for the nine months ended March 31, 1996 increased $608,050
to $1,726,035 from $1,117,985 for the nine months ended March 31, 1995. The
Company's gross margin decreased to $253,541 or 13% of revenues for the nine
months ended March 31, 1996 from $466,325 or 29% for the nine months ended March
31, 1995. The decrease in comparative periods was due primarily to an increase
in royalties as a percentage of sales, an increase in certain new product
development costs, an increase in the costs of certain raw materials, an
unfavorable shift in the sales mix to lower margin products, and the sale of
certain excess inventories at lower than normal wholesale margins.
Selling, general and administrative expenses (SG&A) increased $562,061
to $1,113,521 in the nine months ended March 31, 1996 from $551,460 during the
same period in the previous year. This increase was primarily due to
expenditures incurred by the Company in an effort to expand its overall
marketing efforts and to enhance market recognition as well as its channels of
distribution. The increase also resulted from the hiring of key personnel and
related expenses in an effort to position the Company for further expansion.
8
<PAGE> 9
A comparison of significant SG&A expenses is as follows for the nine month
periods ended March 31:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Payroll/Payroll Related Cost $ 255,748 $ 505,538
Advert./Selling Materials/Commissions 39,467 82,670
Public & Investor Relations 1,100 30,339
Filing Fees/Financial Printing 750 16,906
Accounting/Legal Fees 41,510 46,330
Rent/Storage 16,467 33,143
Insurance 6,225 53,390
Samples/Prototypes 1,350 28,091
Freight/Postage 39,101 61,044
Depreciation & Amortization 11,769 22,479
Trade Shows 24,212 39,786
Provision for Doubtful Accounts 6,643 20,493
Utilities/Bus. Taxes/Fees 3,301 11,136
Other 103,817 162,176
---------- ----------
$ 551,460 $1,113,521
========== ==========
</TABLE>
Interest expense decreased $89,235 to $1,928 for the nine months ended
March 31, 1996 compared to $91,163 for the nine months ended March 31, 1995.
This decrease was due to the Company's repayment of short-term debt in the
principal amount of $400,000 (the "Note") concurrent with the closing of the
Company's public offering of securities which generated approximately $4.4
million in net proceeds in May 1995 (the "May Public Offering"). Prior to the
repayment of the Note in May 1995, the Company extinguished 20% of the Note by
issuing common stock. The extinguishment resulted in a loss of $37,281 in the
second quarter of fiscal year 1995. Interest expense for the nine months ended
March 31, 1996 relates to a capital lease transaction and credit arrangements
with certain vendors.
Interest income of $107,630 compared to interest income for the same
period in the prior year of $3,239 was earned primarily on the proceeds of the
May Public Offering.
The Company's net loss for the nine months ended March 31, 1996 was
$755,078 compared to $210,340 for the same period in the prior year. The
increase in the loss was primarily due to an increase in SG&A expenses and a
decrease in the gross margin offset by an increase in interest income.
9
<PAGE> 10
Three Months Ended March 31, 1996 vs. Three Months Ended March 31, 1995
Revenues increased 14% to $508,028 from $445,510 for the three month
period ended March 31, 1996 (third quarter of fiscal 1996) compared with the
three month period ended March 31, 1995 (third quarter of fiscal 1995). This
increase was due primarily to an increase in sales to Warner Bros., the
Company's largest customer. Sales to Warner Bros. represented approximately
$328,744 during the third quarter of 1996 compared with approximately $187,345
during the third quarter of 1995, or approximately 65 % of sales for the third
quarter of 1996 versus approximately 42% of sales for third quarter of 1995. The
Musicland Group represented approximately $39,397 and $52,096 for the third
quarter of 1996 and 1995, respectively, which represented approximately 8% and
12% of sales for the comparable periods.
Cost of revenues (principally raw material, production costs and
licensing royalties) for the third quarter of 1996 increased $110,220 to
$454,214 from $343,994 in the third quarter of 1995. The Company's gross margin
decreased to $53,814 or 11% of sales for the third quarter of 1996 from $101,516
or 23% of sales for the third quarter of 1995. The decrease in comparative
quarters was due primarily to an increase in certain new product development
costs, an increase in the costs of certain raw materials and an unfavorable
shift in the sales mix to lower margin products.
Selling, general and administrative expenses (SG&A) increased $161,757
to $387,715 in the third quarter of 1996 from $225,958 during the same period in
the previous year. This increase was primarily due to expenditures incurred by
the Company in an effort to expand its overall marketing efforts and to enhance
market recognition as well as its channels of distribution. The increase also
resulted from the hiring of key personnel and related expenses in an effort to
position the Company for further expansion.
10
<PAGE> 11
A comparison of significant SG&A expenses is as follows for the three month
periods ended March 31:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Payroll\Payroll Related Costs $113,572 $165,142
Advert.\Sales Materials\Commissions 24,400 44,531
Public\Investor Relations 1,100 7,991
Filing Fees\Financial Printing 750 7,161
Accounting\Legal Expense 3,212 19,586
Rent\Storage 7,387 10,820
Insurance 3,113 11,419
Samples\Prototypes 1,350 6,589
Freight\Postage 10,999 17,857
Depreciation & Amortization 5,157 7,631
Trade Shows 16,261 15,251
Provision for Doubtful Accounts 6,225 6,855
Utilities\Business Taxes\Fees 1,083 2,684
Other 31,349 64,198
-------- --------
$225,958 $387,715
======== ========
</TABLE>
Interest expense decreased $16,554 to $137 for the third quarter of
1996 compared to $16,691 for the third quarter of 1995. This decrease was due to
the Company's repayment of short-term debt in the principal amount of $400,000
(the "Note") concurrent with the closing of the Company's public offering of
securities which generated approximately $4.4 million in net proceeds in May
1995 (the "May Public Offering"). Interest expense for the third quarter of 1996
relates to a capital lease transaction and credit arrangements with certain
vendors.
Interest income of $31,380 compared to interest income for the same
period in the prior year of $871, was earned primarily on the proceeds of the
May Public Offering.
The Company's net loss for the third quarter of 1996 was $302,658
compared to $140,262 for the same period in the prior year. The increase in the
loss was primarily due to an increase in SG&A expense and a decrease in the
gross margin offset by an increase in interest income.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES:
During the nine months ended March 31, 1996 the Company produced
negative cash flows of $1,024,549 which included negative cash flows from
operations of $825,798. At March 31, 1996, the Company had accounts receivable
of $622,893 compared to accounts receivable of $780,783 at June 30, 1995. The
Company's decline in accounts receivable was accompanied by a decrease in total
trade payables from $563,436 to $342,185 at June 30, 1995 and March 31, 1996,
respectively. The decrease in accounts receivable was due primarily to an
improved collection effort and an increase in COD and credit card sales. The
decrease in accounts payable was due to accelerated payments by the Company to
vendors due to the Company's improved cash position resulting from the proceeds
of the May Pubic Offering.
As of March 31, 1996, available cash was $2,246,021 and the Company's
total liabilities were $533,248. Working capital decreased by $872,524 to
$2,912,743 at March 31, 1996 from $3,785,267 at June 30, 1995. There can be no
assurance that the Company will be able to generate enough revenues to satisfy
its obligations on a timely basis or raise additional funds sufficient to
continue its planned operations on a long-term basis. The Company expects to use
significant funds to obtain new licenses and develop new products. The Company
also expects that its operating expenses will increase due to additional
overhead required for license acquisition, product development and marketing.
The Company believes its cash resources are sufficient to meet all financing
requirements for at least the next twelve months.
12
<PAGE> 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings NONE
Item 2. Changes in Securities NONE
Item 3. Defaults Upon Senior Securities NONE
Item 4. Submission of Matters to a Vote of Security Holders NONE
Item 5. Other Information NONE
Item 6. Exhibits and Reports on Form 8-K NONE
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Zanart Entertainment Incorporated
(Registrant)
Dated: May 11, 1996 By: /s/ Thomas Zotos
--------------- ----------------
Thomas Zotos
Chief Executive Officer
Dated: May 11, 1996 By: /s/ Todd B. Slayton
--------------- -------------------
Todd B. Slayton
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS, THE CONDENSED STATEMENTS OF OPERATIONS AND THE
CONDENSED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MARCH 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,246,021
<SECURITIES> 676,893
<RECEIVABLES> 622,893
<ALLOWANCES> 54,000
<INVENTORY> 530,478
<CURRENT-ASSETS> 3,445,991
<PP&E> 88,796
<DEPRECIATION> 37,513
<TOTAL-ASSETS> 3,660,220
<CURRENT-LIABILITIES> 533,248
<BONDS> 0
0
0
<COMMON> 290
<OTHER-SE> 3,126,682
<TOTAL-LIABILITY-AND-EQUITY> 3,660,220
<SALES> 1,979,576
<TOTAL-REVENUES> 1,979,576
<CGS> 1,726,035
<TOTAL-COSTS> 1,726,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 20,493
<INTEREST-EXPENSE> 1,928
<INCOME-PRETAX> (754,278)
<INCOME-TAX> 800
<INCOME-CONTINUING> (755,078)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (755,078)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
