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