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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 September 30, 2000
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 13,163,124 at September 30, 2000.
This report consists of 22 pages of which this page is number 1.
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MEDIA ARTS GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I: Financial Information
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Income for the Three
and Six Month Periods Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for
the Six Month Periods Ended September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 17
Part II: Other Information
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 896 $ 5,544
Accounts receivable, net 37,209 27,844
Inventories 24,821 22,102
Prepaid expenses and other current assets 5,569 5,001
Deferred income taxes 6,433 6,260
--------- ---------
Total current assets 74,928 66,751
Property and equipment, net 14,205 17,780
Notes receivable 68 341
Cash value of life insurance 2,527 2,569
Other assets 1,662 2,371
--------- ---------
Total assets $ 93,390 $ 89,812
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,975 $ 8,640
Commissions payable 886 945
Accrued royalties 863 726
Accrued compensation costs 1,868 2,710
Accrued expenses 692 868
Income taxes payable 3,803 4,272
Capital lease obligation, current 381 --
--------- ---------
Total current liabilities 16,468 18,161
Capital lease obligation, long term 650 --
Deferred compensation cost 2,956 3,011
Deferred income tax liability 908 1,032
Convertible notes 1,200 1,200
--------- ---------
Total liabilities 22,182 23,404
--------- ---------
Stockholders' equity:
Common Stock 90 90
Additional paid-in capital 38,343 38,301
Retained earnings 36,609 32,126
Treasury stock (3,834) (4,109)
--------- ---------
Total stockholders' equity 71,208 66,408
--------- ---------
Total liabilities and stockholders' equity $ 93,390 $ 89,812
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 35,390 $ 34,624 $ 64,368 $ 60,369
Cost of sales 13,250 13,073 23,653 22,900
--------- --------- --------- ---------
Gross profit 22,140 21,551 40,715 37,469
--------- --------- --------- ---------
Operating expenses
Selling and marketing 6,742 8,874 14,472 17,803
General and administrative 8,274 7,957 16,175 14,319
Write-down of Internet
business assets 2,541 -- 2,541 --
--------- --------- --------- ---------
Total operating expenses 17,557 16,831 33,188 32,122
--------- --------- --------- ---------
Operating income 4,583 4,720 7,527 5,347
Interest income (expense) (52) (3) (6) 7
--------- --------- --------- ---------
Income before income taxes 4,531 4,717 7,521 5,354
Provision for income taxes 1,676 1,864 2,782 2,113
--------- --------- --------- ---------
Net income $ 2,855 $ 2,853 $ 4,739 $ 3,241
========= ========= ========= =========
Net income per share:
Basic $ 0.22 $ 0.22 $ 0.36 $ 0.25
Diluted $ 0.22 $ 0.22 $ 0.36 $ 0.25
Shares used in net income per
share computation:
Basic 13,157 12,926 13,152 12,929
Diluted 13,187 13,067 13,210 13,141
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended September 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,739 $ 3,241
Adjustments to reconcile to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,070 1,920
Loss from write-down of Internet business assets 2,541 --
Loss on disposal of fixed assets 216 --
Deferred income taxes (297) (31)
Provision for returns and allowances (619) (213)
Provision for losses on accounts receivable 963 173
Changes in assets and liabilities:
Accounts receivable (9,642) (5,585)
Inventories (2,719) (2,476)
Prepaid expenses and other current assets (813) 387
Other assets 124 (345)
Accounts payable 426 1,246
Commissions payable (59) 289
Accrued royalties 137 (10)
Accrued compensation costs (842) 16
Accrued expenses (176) (576)
Income taxes payable (469) 1,989
Deferred compensation liability (55) 837
--------- ---------
Net cash provided by (used in) operating activities (3,475) 862
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (1,977) (6,315)
Proceeds from disposals of galleries 385 376
Proceeds from payments on notes receivable 377 256
Increase in cash surrender value of life insurance 42 (678)
--------- ---------
Net cash used in investing activities (1,173) (6,361)
--------- ---------
Cash flows from financing activities:
Repayment of capital lease obligation (60) --
Proceeds from issuance of Common Stock 60 193
Purchases of Common Stock -- (486)
--------- ---------
Net cash used in financing activities -- (293)
--------- ---------
Net decrease in cash and cash equivalents (4,648) (5,792)
Cash and cash equivalents at beginning of period 5,544 6,361
--------- ---------
Cash and cash equivalents at end of period $ 896 $ 569
========= =========
</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 subsidiaries,
Lightpost Publishing, Inc., Thomas Kinkade Stores, Inc. and Exclaim
Technologies, Inc. ("Exclaim"). The Company primarily designs,
manufactures, markets and retails branded art-based home accessories,
collectibles and gift products based on the works of the artist Thomas
Kinkade. The Company's primary products are canvas and paper lithographs
that feature Mr. Kinkade's unique use of light and his peaceful and
inspiring themes.
The condensed interim consolidated 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 consolidated 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
condensed consolidated 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 September 30, 2000 are not necessarily indicative of the results
that may be expected for the entire fiscal year which ends March 31, 2001.
NOTE 2 - Net income per share
The following summarizes the effects of the assumed issuance of dilutive
securities on weighted average shares for basic net income per share (in
thousands):
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of
shares - basic 13,157 12,926 13,152 12,929
Incremental shares from assumed
issuance of stock options 30 141 58 212
--------- --------- --------- ---------
Weighted average number of
shares - diluted 13,187 13,067 13,210 13,141
========= ========= ========= =========
</TABLE>
NOTE 3 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
--------- ---------
<S> <C> <C>
Raw materials $ 9,309 $ 7,642
Work-in-process 2,967 1,727
Finished goods 12,545 12,733
--------- ---------
$ 24,821 $ 22,102
========= =========
</TABLE>
NOTE 4 - Sale of Company-owned stores
During the six months ended September 30, 2000, the Company closed one of
its Company-owned stores and sold three to Signature Gallery owners,
bringing the total number of stores sold to 29. Since the Company began
selling Company-owned stores, $1.7 million of inventory and $2.0 million
of fixed assets have been sold. In addition, the Company has received
$4.5 million in notes receivable in connection with these sales. The
terms on the notes are generally five to seven years and bear interest of
8.5% per annum. The Company has not recognized any gains on the sales of
Company-owned stores due to the significant notes receivable that have
been taken. The Company will continue to defer the recognition of gains
on past and future sales until such time that the sales of all Company-
owned stores which the Company intends to sell are substantially complete
and the likelihood of a net gain from store sales is virtually certain.
Deferred gains total $2.9 million as of September 30, 2000. Due to the
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uncertainty of the collectibility of the notes and eventual recognition
of gains, the Company has reported the net of the notes receivable and
deferred gains as other assets at September 30, 2000.
NOTE 5 - Comprehensive Income
To date, the Company has not had any transactions that are required to be
reported in comprehensive income as compared to its reported net income.
NOTE 6 - Operating Segments and Geographic Information
The Company has three operating segments: wholesale, retail and Internet
application service provider ("ASP"). The wholesale segment includes
sales to the Company's branded distribution channel (which includes
Company-owned Thomas Kinkade Stores, and independently owned Thomas
Kinkade Signature Galleries and Showcase dealers), other independent
dealers and strategic partners such as QVC, Avon and Hallmark, as well as
sales generated from the Company's e-commerce web-site, thomaskinkade.com.
Media Arts' retail segment consists of sales by Company-owned Thomas
Kinkade Stores. The ASP segment consists of the operations of Exclaim,
which is developing and supporting a retail operating system, Storefront,
which is used by independently owned Thomas Kinkade Signature Galleries.
During the period ended September 30, 2000, Exclaim was also developing
Marketplace, a vertical business-to-business trade community that would
link buyers and sellers together to create supply chain efficiencies
within the fine art, gift and collectibles, furniture and home decor
industries. During the period ended September 30, 2000 the Company
significantly reduced the funding of Exclaim's operations and stopped
development of the Marketplace product.
The operating segments have management teams that report directly to the
Chief Operating Decision Maker ("CODM"), as defined by Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The CODM evaluates performance and
allocates resources to each operating segment. Information on the
Company's reportable segments for the three and six months ended
September 30, 2000 and 1999 is as follows (in thousands):
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
External wholesale $ 34,781 $ 29,284 $ 62,953 $ 48,673
Intersegment wholesale 363 2,658 568 6,188
Retail 573 5,296 1,378 11,597
ASP 36 44 37 99
Eliminations (363) (2,658) (568) (6,188)
--------- --------- --------- ---------
Total company $ 35,390 $ 34,624 $ 64,368 $ 60,369
========= ========= ========= =========
Operating income (loss):
Wholesale $ 10,535 $ 7,142 $ 17,272 $ 9,611
Retail (676) (1,148) (1,316) (2,132)
ASP (5,174) (922) (8,873) (1,328)
Eliminations (102) (352) 444 (804)
--------- --------- --------- ---------
Total company $ 4,583 $ 4,720 $ 7,527 $ 5,347
========= ========= ========= =========
Assets:
Wholesale $ 90,692 $ 67,982
Retail 1,863 7,931
ASP 1,355 1,815
Eliminations (520) (1,879)
--------- ---------
Total company $ 93,390 $ 75,849
========= =========
Depreciation and amortization:
Wholesale $ 719 $ 642 $ 1,998 $ 1,213
Retail 101 314 277 680
ASP 730 27 795 27
--------- --------- --------- ---------
Total company $ 1,550 $ 983 $ 3,070 $ 1,920
========= ========= ========= =========
Capital expenditures:
Wholesale $ 397 $ 1,764 $ 790 $ 4,766
Retail 81 3 81 72
ASP 199 1,183 1,106 1,477
--------- --------- --------- ---------
Total company $ 677 $ 2,950 $ 1,977 $ 6,315
========= ========= ========= =========
</TABLE>
Media Arts currently does not sell to geographic regions outside the
United States, Canada and the United Kingdom. Currently sales to Canada
and the United Kingdom are immaterial. During the three and six month
periods ended September 30, 2000 and 1999 no customer accounted for
greater than 10% of net sales.
9
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NOTE 7 - Subsequent Events
On October 17, 2000, Thomas Kinkade, a member of the Board of Directors,
co-founder and Art Director of the Company, proposed to make an offer to
acquire all of the outstanding shares of common stock of the Company not
already owned by Mr. Kinkade for $6.25 per share in cash. The closing
price of the Company's common stock on October 17, 2000 was $3.375 per
share. As of October 17, 2000, Mr. Kinkade owned approximately 24% of
the outstanding stock of the Company. There can be no assurance that
this proposal will result in an offer, nor whether any offer may be
accepted by the Company.
On October 19, 2000, the Board of Directors of the Company formed a special
committee of independent Directors, composed of directors who do not have any
business relationship with Thomas Kinkade, to evaluate the proposal made by
Mr. Kinkade. The Board of Directors has delegated to the special committee
the responsibility and authority to review, evaluate and, if appropriate,
negotiate the terms of Mr. Kinkade's proposal or of any alternative
transaction, and to consider alternatives to Mr. Kinkade's proposal,
including the possibility of remaining an independent public company.
A complaint was filed on October 24, 2000 in Santa Clara County Superior
Court by James Boersma, on behalf of himself and all others similarly
situated, against Media Arts and its Board of Directors. Breach of fiduciary
duty is alleged in this purported class action, stemming from the proposal by
Thomas Kinkade to offer to acquire the outstanding shares of the Company not
already owned by him. As of November 14, 2000, no offer has yet been made by
Mr. Kinkade. The Company intends to defend against this lawsuit vigorously.
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, 2000 which
contains the audited financial statements and notes thereto for the years
ended March 31, 2000, 1999 and 1998 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,
2000, 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, other risks
detailed from time to time in the Company's periodic reports and other
information filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended September 30, 2000 were $35.4 million, a
2.2% increase compared to the $34.6 million reported for the quarter
ended September 30, 1999. The growth in net sales was primarily
attributable to increased sales to Thomas Kinkade Signature Galleries due
to an increase in the number of Signature Galleries to 337 as of
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September 30, 2000 from 228 in the prior year. This increase was offset
by a $4.7 million decrease in retail sales due to the sales of sixteen
and closure of one of the 20 company stores we owned in the prior year.
Net sales for the six months ended September 30, 2000 were $64.4 million,
up 6.6% from $60.4 million during the six months ended September 30, 1999
primarily attributable to the increased number of Signature Galleries as
well as other branded and non-branded retail distribution.
Gross Profit
Gross profit increased by $589,000, or 2.7%, to $22.1 million for
the three months ended September 30, 2000 compared to $21.6 million for
the three months ended September 30, 1999. Gross profit was $40.7
million for the six months ended September 30, 2000 compared to $37.5
million in the prior year. Consolidated gross margin remained relatively
unchanged at 62.6% for the three months ended September 30, 2000 compared
to 62.2% for the same period in the prior year. For the six months ended
September 30, 2000 consolidated gross margin was 63.3% compared to 62.1%
for the same period in the prior year due primarily to the prior year's
margin being reduced due to under absorbed manufacturing capacity
resulting from lower than expected sales.
Selling and Marketing Expenses
Selling and marketing expenses were $6.7 million and $14.5 million for
the three and six month periods ended September 30, 2000 compared to $8.9
million and $17.8 million for the same periods in the prior year. As a
percentage of net sales, selling and marketing expenses were 19.1% and
22.5% for the three and six month periods ended September 30, 2000
compared to 25.6% and 29.5% for the same periods in the prior year.
Selling and marketing expenses decreased in absolute terms and as a
percentage of sales for the three and six months ended September 30, 2000
due to reduced compensation costs as well as advertising and promotional
expenses resulting from the transfer of company-owned Thomas Kinkade
Stores to Signature Gallery owners.
General and Administrative Expenses
General and administrative expenses were $8.3 million and $16.2 million
for the three and six month periods ended September 30, 2000 compared to
$8.0 million and $14.3 million for the same periods in the prior year.
Expressed as a percentage of net sales, general and administrative
expenses were 23.4% and 25.1% for the three and six month periods ended
September 30, 2000 compared to 23.0% and 23.7% for the same periods in
the prior year. The increase in general and administrative expenses in
absolute terms and as a percentage of sales for the three and six months
ended September 30, 2000 was primarily due to increased general and
administrative costs related to Exclaim of $1.3 million and $2.3 million
for the three and six month periods, offset by lower compensation costs
due to a non-recurring charge in the prior year of $1.3 million for
severance payments relating to cost reductions and certain settlement
payments under key management contracts.
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Write-down of Internet Business Assets
During the period ended September 30, 2000, we significantly reduced the
funding of Exclaim due to the significant cash requirements related to
its software development activities and the inability to obtain outside
sources of capital. We determined that by stopping development of the
more costly Marketplace product and by focussing development efforts on
the Storefront retail operating system, we could significantly reduce
Exclaim's operating expenses and continue supporting our Signature
Gallery dealers who were utilizing the Storefront product for their
gallery operations. Accordingly, we incurred a $2.5 million charge in
connection with the write-down of assets related to the Marketplace
product.
Wholesale Segment
Net sales to wholesale accounts include sales to our branded distribution
channel, including independently owned Signature Galleries and Showcase
dealers, our company-owned Thomas Kinkade Stores, other independent
dealers and strategic partners and revenue generated from licensing
arrangements, as well as revenue generated from our e-commerce web-site,
thomaskinkade.com. Net sales to wholesale customers before intersegment
eliminations increased 10.0% to $35.1 million for the three months ended
September 30, 2000 compared to $31.9 million for the same period in the
prior year. The increase in net sales for this segment was primarily due
to the increase in the number of Signature Galleries, as well as
increased distribution in non-branded retail outlets. Net sales to
wholesale customers before intersegment eliminations for the six months
ended September 30, 2000 were $63.5 million, up 15.8% from $54.9 million
during the same period in the prior year. Sales to Signature Galleries
increased 15.0% to $18.9 million for the three months ended September 30,
2000 from $16.4 million for the same period in the prior year due to an
increase in the number of Signature Galleries to 337 as of September 30,
2000 from 228 as of September 30, 1999.
Operating income for the wholesale segment before intersegment
eliminations increased 47.5% to $10.5 million for the three months ended
September 2000 compared to $7.1 million for the same period in the prior
year. Operating margin for the wholesale segment before intersegment
eliminations increased to 30.0% for the three months ended September 2000
from 22.4% for the same period in the prior year. The increase was
primarily due to an improved gross margin resulting from higher sales
volumes and lower compensation costs due to a non-recurring charge in the
prior year of $1.3 million for severance payments relating to cost
reductions and certain settlement payments under key management
contracts. Operating income before intersegment eliminations increased
79.7% to $17.3 million during the six months ended September 30, 2000
compared to $9.6 million for the same period in the prior year.
Operating margin for the wholesale segment before intersegment
eliminations for the six months ended September 30, 2000 increased to
27.2% from 17.5% for the same period in the prior year. The increase was
due primarily to an improved gross margin resulting from higher sales
volumes and the $1.3 million non-recurring charge in the prior year.
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Retail Segment
Net sales for the retail segment consist of sales by company-owned
Thomas Kinkade Stores. Our retail segment purchases products from our
wholesale segment at the same price as external wholesale customers. Net
sales for the retail segment decreased 89.2% to $573,000 for the three
months ended September 30, 2000 compared to $5.3 million for the same
period in the prior year. Net sales for the retail segment for the six
months ended September 30, 2000 decreased 88.1% to $1.4 million from
$11.6 million for the same period in the prior year. The decrease in net
sales was due to the transfer of sixteen, and closure of one, Thomas
Kinkade Stores since September 30, 1999. There were three company-owned
stores as of September 30, 2000 compared to 20 as of September 30, 1999.
We have not recognized any gains on the sales of company-owned stores due
to the significant notes receivable that have been taken. We will
continue to defer the recognition of gains on past and future sales until
such time that the sales of all company-owned stores which we intend to
sell are substantially complete and the likelihood of a net gain from
store sales is virtually certain. Due to the uncertainty of the
collectibility of the notes receivable taken in connection with these
sales and the eventual recognition of gains, we have reported the net of
the notes receivable and deferred gains as other assets at September 30,
2000.
Operating losses for the retail segment decreased 41.1% to $676,000
for the three months ended September 30, 2000 compared to $1.1 million
for the same period in the prior year. Operating losses for the six
months ended September 30, 2000 decreased 38.3% to $1.3 million from $2.1
million for the same period in the prior year. The decrease in operating
losses is primarily due to the significant reduction in the number of
company-owned stores.
Internet Application Service Provider Segment
Our Internet application service provider ("ASP") segment consists solely
of the operations of Exclaim, which is developing and supporting a retail
operating system, Storefront, which is used by independently owned Thomas
Kinkade Signature Galleries. During the period ended September 30, 2000,
Exclaim was also developing Marketplace, a vertical business-to-business
trade community that would link buyers and sellers together to create
supply chain efficiencies within the fine art, gift and collectibles,
furniture and home decor industries. During the period ended September
30, 2000 we significantly reduced the funding of Exclaim's operations and
stopped development of the Marketplace product. Accordingly, we incurred
a $2.5 million charge in connection with the write-down of assets related
to the Marketplace product.
Net sales in the ASP segment for the three months ended September 30, 2000
were $36,000, down 18.2% from $44,000 for the same period in the prior year.
Net sales for the six months ended September 30, 2000 were $37,000, down
62.6% from $99,000 for the same period in the prior year. The decrease in
the three and six month periods was due primarily to Storefront license
pricing changes. Net sales for the ASP segment
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consist of subscription fees paid by retailers for access to a web-based
gift store and gallery management system, named Storefront. Storefront
is designed to assist gallery owners with inventory management, customer
contact management and automated purchasing and point of sale
processing. As of September 30, 2000, net sales of Storefront have been
made solely to Signature Galleries.
Operating losses for the ASP segment were $5.2 million during the three
months ended September 30, 2000, up 461.2% from $922,000 for the same
period in the prior year. For the six months ended September 30, 2000
operating losses were $8.9 million, up 568.1% from $1.3 million for the
same period in the prior year. The increase in operating losses were
primarily due to the $2.5 million write-down of Marketplace related
assets as well as a significant ramping up of product development
operations of Exclaim since the prior year. Operating expenses of the
ASP segment consist primarily of salaries and consulting expenses related
to the development of Exclaim's products.
Interest Income (Expense)
Interest expense was $52,000 for the three months ended September 30,
2000 compared to $3,000 for the same period in the prior year. Interest
expense was $6,000 for the six months ended September 30, 2000 compared
to interest income of $7,000 for the same period in the prior year. The
increase in net interest expense was due to decreased cash balances
throughout the current period.
Provision for Income Tax
The provision for income taxes was $1.7 million and $2.8 million for the
three and six months ended September 2000, compared to $1.9 million and
$2.1 million for the same periods in the prior year. The effective
income tax rate for the three and six months ended September 30, 2000 was
37.0%, compared to 39.5% for the same periods in the prior year.
Comparable Store Sales
Comparable store sales for the three months ended September 30, 2000
decreased 13.4% from the same period in the prior year based on
voluntarily reported sales figures from 209 comparable independent
Signature Gallery dealers and company-owned stores. The decline in
comparable store sales is due primarily to the continued retail
development of Signature districts, which involves Signature Gallery
dealers adding additional Signature Galleries within their existing
district, thereby leveraging off the existing infrastructure of the
initial store. While we are seeing increased sales in each Signature
Gallery district, the increase in the number of stores in a particular
district will likely reduce sales from the first, or original, store in
that district. In order to enhance comparable store sales, we intend to
slow the addition of stores within existing districts and to focus our
future retail expansion in new geographical markets where there is no
existing Signature Gallery presence. We believe comparable Signature
district sales are another meaningful indicator of the condition of our
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retail market. Comparable district sales for the three months ended
September 30, 2000 increased 39.6% from the same period in the prior year
for the 123 reporting comparable districts.
Recent Developments
On October 17, 2000, Thomas Kinkade, a member of the Board of Directors,
co-founder and Art Director, proposed to make an offer to acquire all of the
outstanding shares of common stock not already owned by him for $6.25 per
share in cash. The closing price of our common stock on October 17, 2000 was
$3.375 per share. As of October 17, 2000, Mr. Kinkade owned approximately
24% of the outstanding stock. Currently, there is uncertainty as to whether
this proposal will result in an offer, or whether any offer may be accepted
by the Company.
On October 19, 2000, the Board of Directors formed a special committee of
independent Directors, composed of directors who do not have any business
relationship with Thomas Kinkade, to evaluate the proposal made by Mr.
Kinkade. The Board of Directors has delegated to the special committee the
responsibility and authority to review, evaluate and, if appropriate,
negotiate the terms of Mr. Kinkade's proposal or of any alternative
transaction, and to consider alternatives to Mr. Kinkade's proposal,
including the possibility of remaining an independent public company.
A complaint was filed on October 24, 2000 in Santa Clara County Superior
Court by James Boersma, on behalf of himself and all others similarly
situated, against Media Arts and its Board of Directors. Breach of fiduciary
duty is alleged in this purported class action, stemming from the proposal by
Thomas Kinkade to offer to acquire the outstanding shares of the company not
already owned by him. As of November 14, 2000, no offer has yet been made by
Mr. Kinkade. We intend to defend against this lawsuit vigorously.
Seasonality; Fluctuations in Quarterly Results
Our business has experienced, and is expected to continue to experience,
significant seasonal fluctuations in net sales and income. Our net sales
historically have been highest in the December quarter and lower in the
subsequent March and June quarters. We believe that the seasonal effect
is due to customer buying patterns, particularly with respect to holiday
purchases, and is typical of the home decorative accessories,
collectibles and gift product industries. We expect these seasonal
trends to continue in the foreseeable future.
Our quarterly operating results have fluctuated significantly in the past
and may continue to fluctuate as a result of numerous factors including:
- The demand for the art of Thomas Kinkade and our Thomas Kinkade
products (including new product categories and series),
- Consumer acceptance of the art and related products of new artists and
other visual content owners (specifically the art and related products
of Howard Behrens and Simon Bull),
- Our ability to achieve our expansion plans,
- The timing, mix and number of new product releases,
- The continued successful implementation of the Signature Gallery
program and expansion of distribution generally,
- The successful entrance into new distribution channels and new retail
concepts,
- Our ability to implement strategic business alliances,
- Our ability to hire and train new manufacturing, sales and
administrative personnel,
- Continued implementation of manufacturing efficiencies,
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- Timing of product deliveries, and
- The ability to absorb other operating costs.
In addition, since a significant portion of our net sales are generated
from orders received in the quarter, net sales in any quarter are
substantially dependent on orders booked in that quarter. Our results of
operations may also fluctuate based on extraordinary events.
Accordingly, the results of operations in any quarter will not
necessarily be indicative of the results that may be achieved for a full
fiscal year or any future quarter. Fluctuations in operating results may
also result in volatility in the price of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds during the first six months of fiscal
2001 has been from operating income. Our working capital as of
September 30, 2000 was $58.5 million, compared to $48.6 million as of
March 31, 2000.
Net cash used in operations for the first six months of fiscal 2001
was $3.5 million consisting primarily of net income of $4.7 million,
depreciation of $3.1 million and a loss from the write-down of Exclaim
assets of $2.5 million, offset by a $9.6 million increase in accounts
receivable and a $2.7 million increase in inventory. Accounts receivable
increased primarily as a result of seasonal factors as well as a slower
than expected retail economic environment. Inventory increased due
primarily to seasonal increases in anticipation of the approaching peak
retail period. Net cash provided by operations for the first six
months of fiscal 2000 was $862,000 consisting primarily of income from
operations adjusted by increases in accounts receivable and inventory and
decreases in income taxes payable and accounts payable.
Net cash used in investing activities was $1.2 million for the first six
months of fiscal 2001 and primarily related to investment in Internet
related technologies and capital expenditures for property and
equipment. Net cash used in investing activities was $6.4 million in the
first six months of fiscal 2000 primarily related to investment in
Internet related technologies and capital expenditures for property and
equipment. We anticipate that total capital expenditures in fiscal 2001
will be approximately $12 million, and will relate to continued
manufacturing, infrastructure and management information systems upgrades
and to building design and engineering costs in connection with the
development of our leased property in Morgan Hill, California.
There was no net change in cash from financing activities in the first
six months of fiscal 2001. During the first six months of fiscal 2000
net cash used for financing activities was $293,000 due primarily to
purchasing shares of our common stock under our stock repurchase program.
We have a $20 million secured bank line-of-credit facility that may be
increased to $30 million if our rolling four quarter consolidated
earnings before interest, taxes, depreciation and amortization exceeds
$30 million for two consecutive quarters. The line-of-credit bears
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interest at either the bank's current reference rate or the effective
LIBOR rate plus 1.5%, at our discretion. There were no outstanding
borrowings under this credit facility as of September 30, 2000.
We have significantly reduced the funding of Exclaim due to the reduction
of Exclaim's operations to focus solely on the Storefront retail
operating system product. Accordingly, we foresee future funding of
Exclaim to be immaterial to our operations or financial position.
We intend to relocate our offices and manufacturing facilities to a
leased campus facility currently under development in Morgan Hill,
California, during early fiscal 2002. While this move may cause a
disruption to our operations, we anticipate the timing to correspond with
the seasonality of our business. In connection with the move, we will
incur certain one-time costs, including significant management time and
attention. At this time, we do not foresee these costs to be significant
to our operations or financial position. We believe that this move will
be beneficial in the long term by 1) reducing our future monthly rent and
reducing exposure to future rent increases in the competitive commercial
real estate market in the Silicon Valley, 2) consolidating our operations
into a single campus versus our current operations that are spread out in
several areas of a commercial office park and 3) providing capacity for
future growth in our operations.
Our working capital requirements in the foreseeable future will change
depending on operating results, rate of expansion or any other changes to
our operating plan needed to response to competition, acquisition
opportunities or unexpected events. We believe that our current cash and
cash equivalent balance together with net income from operations and
existing borrowing capacity under our line-of-credit will be sufficient
to meet our working capital requirements through fiscal 2001. We may
consider alternative financing, such as issuance of addition equity or
convertible debt securities or obtaining further credit facilities, if
market conditions make such alternatives financially attractive for
funding expansion.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and borrowings. We do not use
derivative financial instruments in our investment portfolio and our
investment portfolio only includes highly liquid instruments purchased
with an original maturity of 90 days or less and are considered to be
cash equivalents. We did not have short-term investments as of September
30, 2000 and March 31, 2000. We are subject to fluctuating interest
rates that may impact, adversely or otherwise, our results from
operations or cash flows for our variable rate cash and cash equivalents
and borrowings. We do not expect any material loss with respect to our
investment portfolio. The table below presents principal (or notational)
amounts and related weighted average interest rates for our investment
portfolio and debt obligations (in thousands):
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<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
--------- ---------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 896 $ 5,544
Average interest rate 2.8% 3.6%
Liabilities:
Bank line-of-credit $ -- $ --
Interest rate (bank reference rate) 9.5% 9.0%
Capital lease obligation $ 1,031 $ --
Fixed interest rate 8.9% --
Convertible note payable to related party $ 1,200 $ 1,200
Fixed interest rate 8.0% 8.0%
</TABLE>
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PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS
A complaint was filed on October 24, 2000 in Santa Clara County Superior
Court by James Boersma, on behalf of himself and all others similarly
situated, against Media Arts and its Board of Directors. Breach of fiduciary
duty is alleged in this purported class action, stemming from the proposal by
Thomas Kinkade to offer to acquire the outstanding shares of the Company not
already owned by him. As of November 14, 2000, no offer has yet been made by
Mr. Kinkade. The Company intends to defend against this lawsuit vigorously.
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
(a) The Annual Meeting of Media Arts Group, Inc. was convened on
September 7, 2000.
(b) The following directors were elected to hold office until the next
annual meeting:
Votes
Nominee Votes Withheld
Craig A. Fleming 12,139,209 682,516
Michael L. Kiley 12,220,438 601,287
Thomas Kinkade 12,234,678 587,047
Herbert D. Montgomery 12,229,963 591,762
Norman A. Nason 12,138,813 682,912
Raymond A. Peterson 12,227,824 593,901
Kenneth E. Raasch 12,226,104 595,621
Anthony D. Thomopoulos 12,230,113 591,612
W. Michael West 12,240,113 581,612
(c) The following matters were voted upon at the meeting:
The approval of an amendment to the Company's 1998 Stock Incentive
Plan which increases the number of shares reserved for issuance
under the 1998 Stock Incentive Plan to 2,800,000 shares.
Votes for - 7,544,873, against - 1,193,374, abstain - 34,923
Broker nonvote - 4,048,555
The selection and ratification of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the fiscal year ending
March 31, 2001.
Votes for - 12,700,552, against - 109,670, abstain - 11,503
Broker nonvote - 0
ITEM 5. OTHER INFORMATION - Not Applicable
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K - none
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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/ Craig Fleming
--------------------------------------
Craig Fleming
Chairman, President & Chief Executive
Officer
(Principal Executive Officer)
By /s/ Michael J. Catelani
--------------------------------------
Michael J. Catelani
Vice President of Finance
(Principal Financial Officer &
Principal Accounting Officer)
Date: November 14, 2000
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EXHIBIT INDEX
Exhibit Number
27 Financial Data Schedule
22
