<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, 1997
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 11,031,527 at July 31, 1997.
This report consists of 12 pages of which this page is number 1.
1
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MEDIA ARTS GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
---------
Part I: Financial Information
<S> <C>
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheet as
of June 30, 1997 and March 31, 1997 3
Condensed Consolidated Statement of Operations for the
Three Month Periods Ended June 30, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows for the
Three Month Periods Ended June 30, 1997 and 1996 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item II: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II: Other Information
Item 1: Legal Proceedings 10
Item 2: Changes in Securities 10
Item 3: Defaults upon Senior Securities 10
Item 4: Submission of Matters to a Vote of Security Holders 10
Item 5: Other Information 10
Item 6: Exhibits and Reports on Form 8-K 10
(a). Exhibits 10
(b). Reports on Form 8-k 10
Signatures 11
</TABLE>
2
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalent $ 1,919 $ 374
Accounts receivable, net 6,067 7,394
Receivable from related parties 114 114
Inventories 5,630 5,415
Net assets of discontinued operations 300 890
Prepaid expenses and other current assets 1,643 1,464
Deferred income taxes 853 1,581
Income taxes refundable 698 2,002
-------- ---------
Total current assets 17,224 19,234
Property and equipment, net 3,491 3,562
Other assets 265 265
-------- ---------
$ 20,980 $ 23,061
======== =========
Current liabilities:
Accounts payable $ 1,709 $ 2,065
Commissions payable 576 403
Accrued royalties 1,260 1,213
Accrued expenses 3,472 2,964
Borrowings under line of credit -- 2,655
Current portion long-term debt 2,123 2,062
-------- ---------
Total current liabilities 9,140 11,362
Long-term debt, less current portion 3,406 4,609
Convertible notes 1,200 1,200
-------- ---------
Total liabilities 13,746 17,171
-------- ---------
Stockholders' equity:
Common stock 69 69
Additional paid-in capital 17,189 17,176
Retained earnings (accumulated deficit) (10,024) (11,355)
-------- ---------
Total shareholder's equity 7,234 5,890
-------- ---------
$ 20,980 $ 23,061
======== =========
</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,
1997 1996
--------- ---------
<S> <C> <C>
Net sales $ 13,189 $ 8,723
Cost of sales 4,208 3,698
--------- ---------
Gross profit 8,981 5,025
--------- ---------
Operating expenses
Marketing and selling 3,342 3,103
General and Administrative 2,794 2,272
--------- ---------
Total operating expenses 6,136 5,375
--------- ---------
Operating income (loss) 2,845 (350)
Interest expense (688) (515)
Exchange losses (61) (64)
--------- ---------
Income (loss) before income taxes 2,096 (929)
Provision (benefit) for income taxes 765 (364)
--------- ---------
Income (loss) from continuing operations 1,331 (565)
Loss from discontinued operations -- (791)
--------- ---------
Net income (loss) $ 1,331 $ (1,356)
========= =========
Income (loss) from continuing operations per
common share $ 0.12 $ (0.06)
Loss from discounted operations -- (0.08)
--------- ---------
Net shares (loss) per common share $ 0.12 $ (0.14)
========= =========
Weighted average common and common
equivalent shares outstanding 11,294 9,867
========= =========
</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 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,331 $ (1,356)
Adjustments to reconcile to net cash provided by
(used in) continuing operating activities:
Losses from discontinued operations -- 791
Depreciation 252 230
Amortization of intangibles 268 56
Deferred income taxes 728 (531)
Provision for returns and allowances (259) (167)
Provision for losses on accounts receivable 24 142
Changes in assets and liabilities:
Accounts receivable 1,562 1,717
Receivables from related parties -- 21
Inventories (215) (348)
Prepaid expenses and other current assets (179) (151)
Other assets -- (6)
Accounts payable (356) (205)
Commissions payable 173 (120)
Income taxes refundable 1,304 --
Accrued expenses 555 (186)
--------- ---------
Net cash provided by (used in)
continuing operating activities 5,188 (113)
Net cash provided by discontinued operations 590 84
--------- ---------
Net cash provided by (used in) operations 5,778 (29)
--------- ---------
Net cash used in investing activities for
acquisitions of property and equipment: (181) (159)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayment of )borrowings
under line of credit (2,655) 89
Repayment of notes payable (1,410) (171)
Proceeds from issuance of common stock 13 --
--------- ---------
Net cash used in financing activities (4,052) (82)
--------- ---------
Net increase (decrease) in cash and cash
equivalents 1,545 (270)
Cash and cash equivalents at beginning of period 374 382
--------- ---------
Cash and cash equivalents at end of period $ 1,919 $ 112
========= =========
</TABLE>
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. The Company markets and distributes fine quality gift and collectible
art work and other home decor products primarily in the United States.
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, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year
which ends March 31, 1998.
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).
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 128,"Earnings per Share." SFAS 128
specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. This statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application of this statement is not permitted. SFAS 128 requires restatement
of all prior-period earnings per share data previously presented. Reported
earnings per share would not change materially if the provisions of this
statement were applied.
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NOTE 3 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
--------- ---------
<S> <C> <C>
Raw materials $ 941 $ 843
Work-in-process 13 12
Finished goods 4,676 4,560
--------- ---------
$ 5,630 $ 5,415
========= =========
</TABLE>
NOTE 4 - Debt
On June 30, 1997, the Company repaid $1.3 million of a $7.4 million Senior
Subordinated Note, and on July 7, 1997 repaid a further $700,000 of that note.
The payments were made using the proceeds of a federal income tax refund. The
remaining principal balance of $5.4 million is due between December 28, 1998
and December 31, 2001.
NOTE 5 - Subsequent Events
In July 1997, the Company exercised an option to purchase it's San Jose
leasehold facility. The Company subsequently sold the facility to an investor
and entered into a four year lease agreement with that investor. The gain on
sale and leaseback of the facility, after transaction costs of $110,000 and
deferral of $650,000 to offset future rent increases as compared to the
previous lease, aggregated $990,000 and will be reflected in the quarter ended
September 30, 1997.
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, 1997 which contains the
audited financial statements and notes thereto for the years ended March 31,
1997, 1996 and 1995 and Management's Discussion and Analysis of Financial
Condition and Results of Operations for those respective periods.
Forward looking statements in this Quarterly Report on Form 10-Q as well as
the Company's Annual Report on Form 10-K for the year ended March 31, 1997,
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Stockholders are cautioned that all forward-
looking statements pertaining to the Company involve risks and uncertainties,
including, without limitation, risks detailed from time to time in the
Company's periodic reports and other information filed with the Securities and
Exchange Commission.
7
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RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended June 30, 1997 were $13.2 million, a 51%
increase compared to the $8.7 million from continuing operations reported for
the quarter ended June 30, 1996. The significant increase in net sales was due
primarily to an increase in the number of wholesale customers as well as an
increase in same store retail sales. The number of wholesale accounts
increased due to the successful efforts of the Company's in-house sales force,
as well as the continued implementation of the Company's Signature Gallery
program which licenses independently owned and dedicated Thomas Kinkade stores
throughout the US. Wholesale sales increased by 42% and retail sales increased
by 35% for the June 1997 quarter as compared to the prior year. Retail sales
increased due to the continuing recognition by the public of the work of Thomas
Kinkade as well as a change in the product mix of retail sales towards higher
priced editions.
Gross Profit
Gross profit increased by $4.0 million, or 79%, to $9.0 million for the quarter
ended June 30, 1997, in comparison to the $5.0 million from continuing
operations reported for the quarter ended June 30, 1996. The increase was due
to increased sales as well as an increase in gross margins. The Company's
consolidated gross margin was 68% for the quarter ended June 30, 1997, compared
to 58% for the same quarter in the prior year. The gross margin increase
related principally to an improvement in wholesale gross margins due to higher
sales volumes, a change in product mix to higher margin products and improved
manufacturing efficiencies.
Selling and Marketing Expenses
Selling and marketing expenses were $3.3 million during the quarter ended June
30, 1997 compared to $3.1 million for the June 1996 quarter. As a percentage of
net sales, selling and marketing expenses decreased to 25% for the current
quarter from 36% for the quarter ended June 30, 1996, due to net sales
increasing while selling expenses remained relatively fixed. The Company plans
to pursue further expansion of its markets and distribution channels through
programs such as the licensing of independent Thomas Kinkade Signature
Galleries.
General and Administrative Expenses
General and administrative expenses were $2.8 million and $2.3 million for the
June 1997 and 1996 quarters respectively. Expressed as a percentage of net
sales, general and administrative expenses were 21% compared to 26% for the
quarter ended June 1996. The increase in general and administrative expenses
was primarily due to increased compensation costs. Management plans to continue
to seek efficiencies and cost cutting opportunities, however general and
administrative expenses may increase in the future as a result of the Company's
commitment to provide support for the continued expansion of business.
8
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Interest Expense
Interest expense was $688,000 for the quarter ended June 30, 1997, compared to
$515,000 for the same period in the prior year. The increase was due to an
increase in non-cash amortization of debt issuance costs resulting from
refinancing of the Company's long-term debt in February 1997, partly offset by
a reduction in the Company's borrowings under lines of credit.
Provision for Income Tax
Income tax expense was $765,000 for the quarter ended June 1997, compared to
income tax benefit of $364,000 for the same quarter in the prior year. The
Company's effective income tax rate for the quarter ended June 30, 1997 was 37%
compared to 39% in the prior year.
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 quarter. 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, the Company generally ships its products within 3 months after
receipt of an order and accordingly sales in any quarter are substantially
dependent on orders booked in that quarter. Future revenue growth is dependent
on the continued demand for the artwork of Thomas Kinkade and the expansion of
distribution through additional dealers, such as Signature Galleries.
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 was $8.1 million at June 30, 1997,
compared to $7.9 million at March 31, 1997. The change in working capital was
primarily attributable to net income in the June 1997 quarter of $1.3 million
plus non-cash expenses partly offset by a $1.3 million repayment of long-term
debt.
The Company incurred $181,000 in capital expenditures for property and
equipment during the quarter ended June 30, 1997. The Company anticipates that
total capital expenditures in fiscal 1998 will be approximately $2,000,000,
and will relate primarily to continued manufacturing and infrastructure
investments, as well as to the opening of new retail locations.
The Company has a $10 million line of credit with a bank (the Senior Debt).
Borrowing capacity under the Senior Debt facility is based upon eligible
accounts receivable and inventory and aggregated $6.9 million as of June 30,
1997. During the June 1997 quarter the Company fully repaid the Senior Debt.
In February 1997 the Company renegotiated and issued $7.4 million in secured
notes payable to investors (the Subordinated Debt). As of July 31, 1997, the
Company had repaid $2.0 million of the Subordinated Debt using the proceeds of
a federal income tax refund.
9
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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 Thomas Kinkade's artwork and of the
Company's products based upon his work, expansion of distribution channels for
the Company's products and, in particular, the successful implementation of the
Signature Galleries concept, successful third party manufacturing relationships
and any other adjustments in its operating plan as needed in response to
competition, acquisition opportunities or unexpected events. In addition, the
Company is in the final stages of negotiating the repayment terms of $1.6
million of notes which are currently payable to a former shareholder of John
Hine Limited. Management believes the settlement will not have a material
impact on the Company's financial position or results of operations. The
Company believes that existing borrowing capacity under lines of credit,
together with revenues from operations, will be sufficient to meet these
commitments plus satisfy minimum working capital requirements through fiscal
1998, however the Company may seek additional capital in the future to pursue
additional business opportunities, to retire indebtedness or to provide for
other operational purposes.
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS - Not Applicable
ITEM 2. CHANGES IN SECURITIES - Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
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
Exhibit 27 - Financial Data Schedules (EDGAR version only)
(b) Reports on Form 8-K - none
10
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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 /s/ Kenneth E. Raasch
---------------------------------
Kenneth E. Raasch
Chairman of the Board of Directors
& Chief Executive Officer
By /s/ Raymond A. Peterson
---------------------------------
Raymond A. Peterson
Senior Vice President &
& Chief Financial Officer
Date: August 11, 1997
11
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EXHIBIT INDEX
Exhibit Number
11.01 Computation of net income (loss) per share
27 Financial Data Schedule
12
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MEDIA ARTS GROUP, INC.
EXHIBIT 11.01
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net income (loss) $ 1,331 $ (1,356)
========= ========
Weighted average common shares outstanding 11,032 9,867
Common shares issuable on exercise of options and
warrants (2) 262 -
--------- --------
Weighted average common and common equivalent
shares outstanding 11,294 9,867
========= ========
Net income (loss) per common share $ 0.12 $ (0.14)
========= ========
</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 prices of $4.54 and $6.54
per share for the quarters ended June 30, 1997 and 1996, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,919
<SECURITIES> 0
<RECEIVABLES> 8,657
<ALLOWANCES> 2,590
<INVENTORY> 5,630
<CURRENT-ASSETS> 17,224
<PP&E> 6,052
<DEPRECIATION> 2,561
<TOTAL-ASSETS> 20,980
<CURRENT-LIABILITIES> 9,140
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 7,165
<TOTAL-LIABILITY-AND-EQUITY> 20,980
<SALES> 13,189
<TOTAL-REVENUES> 13,189
<CGS> 4,208
<TOTAL-COSTS> 6,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 103
<INTEREST-EXPENSE> 688
<INCOME-PRETAX> 2,096
<INCOME-TAX> 765
<INCOME-CONTINUING> 1,331
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,331
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
