<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended March 31, 1996
Commission file number: 0-19503
MEGACARDS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1325291
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1353 North Warson Road
St. Louis, Missouri 63132
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (314) 993-3686
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 / /.
On May 21, 1996, the registrant had 3,375,741 outstanding shares of Common
Stock, $.03 par value.
<PAGE> 2
MEGACARDS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets - March 31, 1996 and December 31, 1995
Statements of Operations - Three Months Ended
March 31, 1996 and 1995
Statements of Cash Flows - Three Months Ended March 31, 1996
and 1995
Notes to Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MEGACARDS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 143,594 $ 245,911
Accounts receivable (net of allowance for
returns and doubtful accounts of $924,000
and $846,000 as of March 31, 1996 and
December 31, 1995, respectively) 3,436,184 3,945,951
Inventories 4,329,937 5,157,435
Other current assets 348,139 173,206
----------- -----------
Total current assets 8,257,854 9,522,503
PROPERTY AND EQUIPMENT
At cost less accumulated depreciation and amortization 876,167 875,801
PROPERTY HELD FOR SALE-net (Note 3) 1,811,811 1,811,811
OTHER LONG-TERM ASSETS 121,952 117,931
----------- -----------
TOTAL ASSETS $11,067,784 $12,328,046
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $3,147,184 $2,996,112
Lines of credit-banks 3,068,378 3,732,040
Current portion of long-term debt 132,938 167,766
----------- -----------
Total current liabilities 6,348,500 6,895,918
EXCESS ACQUIRED ASSETS OVER COST 867,281 948,588
CAPITAL LEASE OBLIGATION-related party (Note 3) 1,889,007 1,889,007
LONG-TERM DEBT 60,715 66,735
NOTES PAYABLE-SHAREHOLDERS-net current 1,540,000 1,350,000
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none issued or outstanding 0 0
Common stock, $0.03 par value; 10,000,000 shares
authorized; issued and outstanding, 3,375,741 shares 101,272 101,272
Additional paid-in capital 1,905,297 1,905,297
Accumulated deficit (1,644,288) (828,771)
----------- -----------
Total shareholders' equity 362,281 1,177,798
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,067,784 $12,328,046
=========== ===========
See notes to financial statements.
</TABLE>
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<PAGE> 4
MEGACARDS, INC.
STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales $ 5,471,781 $ 4,350,757
Cost of sales 4,569,712 2,995,461
-------------- --------------
Gross margin 902,069 1,355,296
Selling, general and administrative expenses 1,545,770 937,584
-------------- --------------
Income (loss) from operations (643,701) 417,712
Interest expense 174,821 79,787
Other expense (income) (3,005) 0
-------------- --------------
Net income (loss) $ (815,517) $ 337,925
============== ==============
Net income (loss) per common share $ (0.24) $ 0.13
-------------- --------------
Weighted average number of
common shares outstanding 3,375,741 2,541,000
See notes to financial statements.
</TABLE>
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<PAGE> 5
<TABLE>
MEGACARDS, INC.
STATEMENTS OF CASH FLOWS (unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (815,517) $ 337,925
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 124,403 19,212
Amortization of excess of acquired
assets over cost (81,307) (81,307)
Net changes in assets and liabilities:
Accounts receivable 509,767 (350,675)
Inventories 827,498 146,604
Other assets (180,333) 11,430
Accounts payable and other liabilities 151,073 (445,904)
------------ -----------
Net cash provided by (used in) operating activities 535,584 (362,716)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (123,390) (18,656)
------------ -----------
Net cash used in investing activities (123,390) (18,656)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on bank debt (704,511) 915,000
Net proceeds (repayments) from notes payable to shareholders 190,000 (650,000)
------------ -----------
Net cash provided by (used in) financing activities (514,511) 265,000
------------ -----------
NET DECREASE IN CASH (102,317) (116,372)
CASH, BEGINNING OF PERIOD 245,911 20,471
------------ -----------
CASH, END OF PERIOD $ 143,594 $ (95,901)
============ ===========
Cash paid during the period for interest $ 121,303 $ 87,687
See notes to financial statements.
</TABLE>
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<PAGE> 6
MEGACARDS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pursuant to an agreement dated July 17, 1995, Megacards, Inc.
("Megacards") acquired all of the outstanding common stock of Windsor Art,
Inc. ("Windsor") in exchange for 2,541,000 shares of Megacards' Common Stock
and acquired all of the outstanding Common Stock of Janco Designs, Inc.
("Janco") for a nominal amount of cash (the acquisition by Megacards of all
of the outstanding capital stock of Windsor and Janco is referred to as the
"Business Combination"). (As used herein the term "Company" refers to Janco
and Windsor for periods prior to the Business Combination and to Megacards,
Janco and Windsor for periods subsequent to the Business Combination.)
The Business Combination is accounted for as a reverse acquisition
under the purchase method of accounting. Under this approach, the
accounting for the transaction differs from the legal form of the
transaction as described above. Therefore, Megacards is not assumed to be
the acquiror in the Business Combination but rather Windsor and Janco are.
Accordingly, the historical financial statements of the Company reflect the
financial position and the results of operations of Windsor and Janco. The
historical financial statements have been restated for all periods prior to
the Business Combination to include the combined results of operations and
financial position of both Windsor and Janco due to the common ownership of
Windsor and Janco prior to the Business Combination. Adjustments have been
made to eliminate the impact of intercompany transactions. The components
of shareholders' equity are stated in terms of Windsor's and Janco's
shareholders' equity on a combined basis prior to the Business Combination
with an adjustment to reflect the effects of the Business Combination on the
equity components. The number of shares outstanding for purposes of
presenting shareholders' equity on a comparative basis have been
retroactively restated to the earliest period presented in order to reflect
the effect of the recapitalization that occurred in the Business
Combination.
The Company's financial statements for the year ended December 31,
1995 included disclosures regarding factors indicating that the Company may
have been unable to continue as a going concern for a reasonable period of
time. Included in these factors were significant operating losses and
noncompliance with certain of the Company's loan covenant requirements
related to its lines of credit.
The Company has implemented various initiatives to reduce its costs
and to improve its liquidity position including: (i) disposing of its
retail store; (ii) reducing staffing levels at its Iowa facility; (iii)
selling its interest in the Erie, Pennsylvania facility and terminating the
sublease thereof and eliminating the staff associated with the operation of
this facility; and (iv) consolidating the operations of Megacards with those
of Janco in St. Louis. As a result of inefficiencies and costs associated
with the consolidation of Megacards' operations with those of Janco in
St. Louis, the Company did not recognize a reduction in its operating costs
from the foregoing actions for the quarter ended March 31, 1996. Losses of
$815,517 in the three months ended March 31, 1996, as well as a lack of
resolution regarding the Company's bank loans, substantially all of which
mature on or before July 1996, continue to indicate that the Company may
be unable to continue as a going concern. Management believes, however, that
its previous and continuing efforts to reduce costs will significantly reduce
the
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<PAGE> 7
Company's break-even point and should help the Company return to
profitability. The Company's management is actively attempting to obtain
waivers with respect to non-compliance with certain restrictive covenants
related to its credit facilities and renegotiate its existing credit
facilities as they mature. See Note 2. Management believes that it will be
able to continue to obtain financing to fund the operating activities of
Windsor and Megacards under their existing credit facilities. Moreover, the
Company may attempt to obtain additional capital by issuing debt and/or equity
in a private placement.
The accompanying unaudited financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations. Reference is made to the Company's
audited financial statements included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1995.
In the opinion of the management of the Company, the unaudited
financial statements contain all adjustments (which include only normally
recurring adjustments) necessary for a fair statement of the results of
operations for the three-month periods ended March 31, 1996 and 1995,
respectively. The results of operations for the three months ended March
31, 1996 are not necessarily indicative of the results for the full year.
2. DEBT
The Company's third-party debt consists of various line of credit,
term loan and letter of credit agreements with several financial
institutions. Borrowing availability is determined based on certain
requirements in each agreement including the level of eligible accounts
receivable and inventory. At March 31, 1996, the Company had $570,000
available borrowing capability under its debt agreements. The agreements
include certain covenants which require the Company and its subsidiaries to
meet certain ratios and levels of tangible net worth and restrict the
declaration and payment of dividends.
As of March 31, 1996, the Company was not in compliance with certain
of the restrictive covenants of its credit facilities. Its lenders have not
issued waivers related to the noncompliance and can now call the debt at any
time. Management is actively attempting to renegotiate those credit
agreements. On May 1, 1996, approximately $1 million under Windsor's
existing credit facility became due. At present, management believes that
no demand for payment will be made and that Windsor will be able to
negotiate an extension of its credit facility. There can be no assurance
that demand will not be made in the future or that Windsor will be able to
extend its credit facility. In the event that demand is made for payment of
any or all of the outstanding debt under the credit facility, Windsor may
not be able to meet such demand with its existing capital resources.
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<PAGE> 8
The following represents a summary of the outstanding bank debt for
the periods presented:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Borrowings under lines of credit,
$950,000 of which is due on
May 1, 1996 with the remaining
amount due in July 1996 or on demand $ 3,068,378 $ 3,732,040
----------- -----------
Note payable - bank due in monthly
installments of $2,520 including
interest at 9.5% per annum
through June 1999 $ 83,947 $ 89,398
Note payable - bank due in monthly
installments of $11,799 plus
interest at prime plus 1.25%
(9.75% at December 31, 1995),
remaining balance due in July 1996 109,706 145,103
----------- -----------
193,656 234,501
Less current portion 132,938 167,766
----------- -----------
Long-term debt $ 60,715 $ 66,735
=========== ===========
</TABLE>
Total bank borrowings are collateralized by substantially all of the
Company's personal property. Certain of the Company's shareholders have
personally guaranteed $2,975,000 of the Company's obligations.
3. RELATED PARTY TRANSACTIONS
As of March 31, 1996, the net carrying cost of the assets under
capital lease obligations with an affiliated entity was $1,811,811 which is
reflected as property held for sale in the accompanying consolidated balance
sheet. On April 29, 1996, the Company acquired the affiliated entity for
$85,000 and sold the Erie, Pennsylvania facility to a third party buyer for
cash and the assumption of underlying debt. The third party buyer assumed
all outstanding debt of the affiliated entity, and all previous guarantees
by the Company and certain shareholders of the underlying debt of the
affiliate entity terminated. The affiliated entity had no material assets
or liabilities other than those related to the Erie, Pennsylvania facility.
The transaction will result in an ultimate gain of $133,000 in the Company's
financial statements for the second quarter of 1996.
- 8 -
<PAGE> 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The Company and its subsidiaries manufacture and distribute decorative
mirrors and framed prints and design, repackage and market sports picture
cards and sports picture card accessories and sports memorabilia products.
Megacards completed its initial public offering of Common Stock in
October 1991. For 1991, Megacards reported net sales of $18.3 million and
net income on a pro forma basis (to adjust for Megacards's status as an S
Corporation for a portion of the year) of $1.2 million. For the year ended
December 31, 1992, Megacards reported net sales of $19.6 million and net
income of $69,000. The decrease in net income for 1992 was attributable to
oversupply of product and a sharp contraction in the speculative demand for
sports picture cards which resulted in a slowing of the rate of sales for
Megacards and declines in inventory valuations and margins. Since 1992, the
sports picture card market has experienced negative industry-wide trends.
For the years ended December 31, 1993 and 1994, Megacards reported net sales
of $13.7 million and $14.2 million, respectively. Megacards reported net
income of $106,000 in 1993 and a net loss of $2.2 million in 1994. The
adverse trend in operating results continued in 1995. For the six months
ended June 30, 1995, net sales were $4.7 million, and Megacards reported a
net loss of $469,000. Inasmuch as the Business Combination was accounted
for as a reverse acquisition of Megacards by Windsor and Janco, the results
of operations of Megacards are not included in the Company's financial
statements included herein for periods prior to the Business Combination.
In light of substantial losses for the year ended December 31, 1994
and the six months ended June 30, 1995, Megacards' Board of Directors
carefully considered its strategic alternatives for maximizing share value
and providing for a return to profitability. Ultimately, the board
determined that a business combination with Windsor and Janco offered the
best available transaction among limited strategic alternatives and
substantial uncertainties. Accordingly, in July 1995, the Company acquired
all of the outstanding Common Stock of Windsor and Janco.
Windsor and Janco manufacture and distribute decorative mirrors and
framed prints to furniture stores, mass merchants, hotels and designers
throughout the United States. During 1995, Windsor entered into agreements
that permit it to distribute and sell the Dolbi-Cashier line of table-top
accessories. The Company's management anticipates that Windsor will
continue to expand its include new table-top accessories and other products
that complement its existing product lines.
Subsequent to the consummation of the Business Combination, the
Company's management has continuously evaluated the prospects of the
combined businesses. In light of the Company's recent losses, the Company
has sought to eliminate certain non-performing assets, reduce staffing
levels and close certain of the Company's facilities. As a result, the
Company has implemented a plan to restructure its businesses, which is
designed to achieve substantial reductions in the Company's operating costs
and attain
- 9 -
<PAGE> 10
profitability. These efforts continued throughout the first
quarter of 1996 and are in progress to date.
The Company has concentrated on rationalizing the operations of its
sports picture card segment by reducing its inventories to a level more
commensurate with the needs presented by its current operations. Similarly,
the Company has greatly reduced the debt associated with the sports picture
card operation. In addition, the Company has relocated its sports picture
card operations to Janco's St. Louis facility. Effective April 29, 1996,
the Company sold its interest in the Erie facility and terminated its lease
thereof.
RESULTS OF OPERATIONS
The following table presents the results of operations for the three
months ended March 31, 1996 for each of the Company's two business segments,
sports picture cards (Megacards) and decorative mirrors and framed art
(Windsor/Janco) and the results of operations for Windsor/Janco for the
three months ended March 31, 1995:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------------------
1996 1995
--------------------------------------------------- ----
Windsor/Janco Megacards Total Windsor/Janco
------------- --------- ----- -------------
<S> <C> <C> <C> <C>
Net sales $ 3,884,929 $ 1,586,852 $ 5,471,781 $ 4,350,757
Cost of sales 3,341,144 1,228,568 4,569,712 2,995,461
Selling, general and
administrative
expense 1,042,114 503,656 1,545,770 937,584
Income (loss) from
operations (497,330) (145,374) (643,701) 417,712
Interest expense 82,999 91,822 174,821 79,787
Other income (3,005) (3,005) --
Net income (loss) (581,329) (234,189) (815,517) 337,925
</TABLE>
For the three months ended March 31, 1996, Windsor's and Janco's net
sales decreased by $466,000, or 11%, compared to the three months ended
March 31, 1995. The decrease was attributable to decreases in Janco's net
sales. Janco experienced lower levels of sales during the first quarter of
1996 compared to the corresponding period of 1995 as a result of the
relocation of its production facility, which interrupted production and
shipment of products. The new production facility became fully operational
in March 1996. Moreover, Janco experienced substantial reductions in sales
to a significant customer. Windsor's sales of $2.7 million for the first
quarter of 1996 remained relatively constant compared to the corresponding
period of 1995.
Cost of sales for the combined Windsor/Janco operations increased
approximately $346,000, or 12%, from the first quarter in 1995. Janco's
cost of sales increased 27% in the three months ended March 31, 1996
compared to corresponding period of 1995, due
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<PAGE> 11
primarily to sales of slow moving inventory at reduced margins to reduce
inventory levels. Windsor's cost of sales during the first quarter of 1996
which decreased $17,000 was generally consistent with the level reported for
the corresponding period of 1995.
Windsor's and Janco's selling, general and administrative ("SG&A")
expenses for the first quarter of 1996 increased $105,000, or 11%, compared
to the first quarter of 1995. This increase reflected increased Windsor
commissions related to its new Dolbi-Cashier line of products and a
non-recurring expense incurred by Janco in connection with conversion of
its computer system to provide additional support to its largest customer.
Interest expense for Windsor and Janco remained relatively constant
for the comparable periods.
As a result of the foregoing, Windsor and Janco reported a net loss
of $581,000 for the first quarter of 1996 compared to net income of
$338,000 reported in the first quarter of 1995.
Megacards reported a net loss of $184,000 for the three months ended
March 31, 1996. This net loss is a result of continued depression of the
sports picture card market and inefficiencies associated with relocating
its processing facility from Erie to St, Louis, which was offset in part by
reductions of certain operating costs.
As a result of the foregoing, the Company reported a net loss of
$816,000 ($0.24 per share) for the first quarter of 1996 compared to net
income of $338,000 ($0.13 per share) reported in the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1996, the Company's operating, investing
and financing activities utilized $102,000 of cash. Reductions of
inventory for both the sports picture card and framed art work businesses
provided $381,000 and $446,000, respectively, which was utilized to help
fund the Company's $816,000 operating loss.
Bank debt was reduced by $705,000 during the first quarter of 1996,
in part a result of reducing customer receivables by $510,000. As of March
31, 1996, Megacards had borrowing capability under its credit facility of
approximately $495,000 and Windsor had borrowing capability of $75,000
under its credit facility. As of March 31, 1996, Janco had no unused
borrowing capability.
As of March 31, 1996, the Company was not in compliance with certain
of the restrictive covenants of its credit facilities. Its lenders have not
issued waivers related to the noncompliance and can now call the debt at any
time. Management is actively attempting to renegotiate those credit
agreements. On May 1, 1996, approximately $1 million under Windsor's existing
credit facility became due. At present, management believes that no demand
for payment will be made and that Windsor will be able to negotiate an
extension of its credit facility. There can be no assurance that demand will
not be made in the future or that Windsor will be able to extend its credit
facility. In the event that demand is made for payment of any or all of the
outstanding debt under the credit facility, Windsor may not be able to meet
such demand with its existing capital resources.
The Company's management continues to pursue courses of action to
improve the Company's liquidity. As of April 29, 1996, the Company
acquired all of an affiliated entity's interest in the Company's Erie
Pennsylvania facility, sold all of the Company's and the affiliated
entity's interest in such facility and terminated the Company's lease
obligations related thereto. The Company continues to decrease its sports
card inventory and related indebtedness in an effort to reach a level which
is more commensurate with needs of its
- 11 -
<PAGE> 12
current operations. The Company will seek to renegotiate its credit
facilities as they come due to provide for additional financing.
The Company believes that its available credit facilities will be
sufficient to fund current operations of Megacards and Windsor. In
addition to drawing on its available credit facilities, the Company may
attempt to raise additional operating capital through the private placement
of debt and/or equity. Moreover, to enhance the Company's capital and
surplus certain of the Company's principal shareholders may convert
existing debt obligations of the Company to such shareholders into equity.
Additional financing would be required if the Company pursues
identified acquisition opportunities. There can be no assurance that such
financing will be available to the Company on favorable terms or at all.
As a result of Janco's operational difficulties, it has experienced a
severe liquidity shortage and its accounts payable have increased
substantially. Management is actively pursuing alternatives to preserve,
and enhance Janco's business, including negotiating deferred payment terms
with suppliers and other unsecured creditors. There can be no assurance
that Janco will succeed in attaining such arrangements and Janco could be
forced to pursue other alternatives.
- 12 -
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K: None
- 13 -
<PAGE> 14
SIGNATURE
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.
MEGACARDS, INC.
(Registrant)
May 28, 1996 By: /s/Lloyd R. Abrams
------------------------------
Lloyd R. Abrams, President
Chief Executive Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 144
<SECURITIES> 0
<RECEIVABLES> 3,436
<ALLOWANCES> 0
<INVENTORY> 4,330
<CURRENT-ASSETS> 8,258
<PP&E> 876
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,068
<CURRENT-LIABILITIES> 6,349
<BONDS> 0
<COMMON> 101
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,068
<SALES> 5,472
<TOTAL-REVENUES> 5,472
<CGS> 4,570
<TOTAL-COSTS> 6,115
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 644
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> (816)
<INCOME-TAX> 0
<INCOME-CONTINUING> (816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (816)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
