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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 June 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 13,144,370 at June 30, 2000.
This report consists of 21 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
June 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Income for the
Three Month Periods Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for
the Three Month Periods Ended June 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 11
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 19
Signatures 20
</TABLE>
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,123 $ 5,544
Accounts receivable, net 27,996 27,844
Inventories 22,824 22,102
Prepaid expenses and other current assets 5,993 5,001
Deferred income taxes 6,363 6,260
--------- ---------
Total current assets 65,299 66,751
Property and equipment, net 17,397 17,780
Notes receivable 205 341
Cash value of life insurance 2,763 2,569
Other assets 2,362 2,371
--------- ---------
Total assets $ 88,026 $ 89,812
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,230 $ 8,640
Commissions payable 691 945
Accrued royalties 594 726
Accrued compensation costs 2,183 2,710
Accrued expenses 726 868
Income taxes payable 3,993 4,272
Capital lease obligation, current 320 --
--------- ---------
Total current liabilities 13,737 18,161
Capital lease obligation, long term 525 --
Deferred compensation cost 3,210 3,011
Deferred income tax liability 1,032 1,032
Convertible notes 1,200 1,200
--------- ---------
Total liabilities 19,704 23,404
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Stockholders' equity:
Common Stock 90 90
Additional paid-in capital 38,311 38,301
Retained earnings 33,755 32,126
Treasury stock (3,834) (4,109)
--------- ---------
Total stockholders' equity 68,322 66,408
--------- ---------
Total liabilities and stockholders' equity $ 88,026 $ 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
June 30,
2000 1999
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<S> <C> <C>
Net sales $ 28,978 $ 25,745
Cost of sales 10,403 9,827
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Gross profit 18,575 15,918
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Operating expenses:
Selling and marketing 7,730 8,929
General and administrative 7,901 6,362
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Total operating expenses 15,631 15,291
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Operating income 2,944 627
Interest income 46 10
--------- ---------
Income before income taxes 2,990 637
Provision for income taxes 1,106 249
--------- ---------
Net income $ 1,884 $ 388
========= =========
Net income per share:
Basic $ 0.14 $ 0.03
Diluted $ 0.14 $ 0.03
Shares used in net income per share computation:
Basic 13,147 12,932
Diluted 13,233 13,214
</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>
Three Months Ended
June 30,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,884 $ 388
Adjustments to reconcile to net cash
provided by (used in) operating activities:
Depreciation 1,520 937
Deferred income taxes (103) (31)
Provision for returns and allowances (259) (125)
Provision for losses on accounts receivable 229 (88)
Changes in assets and liabilities:
Accounts receivable (1,133) 2,961
Inventories (722) (2,156)
Prepaid expenses and other assets 425 22
Accounts payable (2,925) 1,671
Commissions payable (254) (308)
Accrued compensation costs (527) (1,228)
Income taxes payable (279) 157
Accrued expenses (142) (487)
Accrued royalties (132) (147)
Deferred compensation liability 199 545
--------- ---------
Net cash provided by (used in) operating activities (2,219) 2,111
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (1,300) (3,365)
Proceeds from disposals of galleries 104 191
Proceeds from payments of notes receivable 159 --
Increase in cash surrender value of life insurance (194) (435)
--------- ---------
Net cash used in investing activities (1,231) (3,609)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 29 84
Purchases of Common Stock -- (517)
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Net cash provided by (used in) financing activities 29 (433)
--------- ---------
Net decrease in cash and cash equivalents (3,421) (1,931)
Cash and cash equivalents at beginning of period 5,544 6,361
--------- ---------
Cash and cash equivalents at end of period $ 2,123 $ 4,430
========= =========
</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. and Thomas Kinkade Stores, Inc., and Exclaim
Technologies, Inc. ("Exclaim"), a majority owned subsidiary. 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. Exclaim is an Internet based
applications service provider, developing products for the business-to-
business market for the art, gift and home decor industries.
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 June 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
June 30,
2000 1999
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<S> <C> <C>
Weighted average number of shares - basic 13,147 12,932
Incremental shares from assumed issuance
of stock options 86 282
--------- ---------
Weighted average number of shares - diluted 13,233 13,214
========= =========
</TABLE>
NOTE 3 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------- ---------
<S> <C> <C>
Raw materials $ 8,139 $ 7,642
Work-in-process 2,750 1,727
Finished goods 11,935 12,733
--------- ---------
$ 22,824 $ 22,102
========= =========
</TABLE>
NOTE 4 - Sale of Company-owned stores
During the three months ended June 30, 2000, the Company sold three of its
Company-owned stores 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 $2.6 million as of June 30, 2000.
Due to the uncertainty of
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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 June 30, 2000.
NOTE 5 - Capital Lease Obligation
During the period ended June 30, 2000, Exclaim entered into a 36 month
capital lease, bearing interest at 8.9% per annum, for the purchase of
$914,000 of computer equipment and software. Future capital lease
payments under the capital lease as of June 30, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
2001 $ 250
2002 346
2003 197
2004 52
---------
$ 845
=========
</TABLE>
NOTE 6 - 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 7 - Operating Segments and Geographic Information
The Company has three operating segments: wholesale, retail and business-
to-business ("B2B") Internet. 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
B2B Internet segment consists of the operations of Exclaim, which is
developing vertical B2B trade communities that link buyers and sellers
together to create supply chain efficiencies. The first industry
applications are in the fine art, gift and collectibles, furniture and
home decor industries. The Company believes that these B2B Internet
products may be scalable and may leverage Exclaim into other highly
fragmented industries. Exclaim is currently seeking alternative sources
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of financing and if successful, the Company will discontinue funding
Exclaim's operations. While the Company continues to fund Exclaim, the
Company intends to evaluate its options, including future investments in, or
reorganization of, Exclaim. There can be no assurance that Exclaim's search
for alternative sources of financing will be successful and the Company may
not have the necessary resources to continue funding Exclaim in the event
that alternative sources of financing are not obtained. In addition, if
alternative sources of financing are not available, there may be doubt as to
the eventual realization of the Company's investment in Exclaim. 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 months ended June 30, 2000 and 1999 is as follows (in
thousands):
9
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<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
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<S> <C> <C>
Revenues:
External wholesale $ 28,172 $ 19,389
Intersegment wholesale 205 3,530
Retail 805 6,301
B2B Internet 1 55
Eliminations (205) (3,530)
--------- ---------
Total company $ 28,978 $ 25,745
========= =========
Operating income (loss):
Wholesale $ 6,737 $ 2,469
Retail (640) (984)
B2B Internet (3,699) (406)
Eliminations 546 (452)
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Total company $ 2,944 $ 627
========= =========
Assets:
Wholesale $ 81,520 $ 60,370
Retail 2,213 10,691
B2B Internet 4,710 1,937
Eliminations (417) (4,365)
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Total company $ 88,026 $ 68,633
========= =========
Depreciation and amortization:
Wholesale $ 1,279 $ 571
Retail 176 366
B2B Internet 65 --
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Total company $ 1,520 $ 937
========= =========
Capital expenditures:
Wholesale $ 393 $ 3,002
Retail -- 69
B2B Internet 907 294
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Total company $ 1,300 $ 3,365
========= =========
</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 months ended
June 30, 2000 and 1999 no customer accounted for greater than 10% of net
sales.
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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 three months ended June 30, 2000 were $29.0 million, a
12.6% increase from $25.7 million for the same period in the prior year.
The increase in net sales was primarily attributable to the increase in
the number of Signature Galleries to 322 as of June 30, 2000 from 195 as
of June 30, 1999, as well as increased distribution in non-branded retail
outlets.
Gross Profit
Gross profit increased by $2.7 million, or 16.7%, to $18.6 million for
the three months ended June 30, 2000 from $15.9 million for the same
period in the prior year. Consolidated gross margin was 64.1% for the
three months ended June 30, 2000, compared to 61.8% for the same period
in the prior year. The increase in gross profit in absolute terms was
due primarily to increased sales levels. The increase in gross margin
was due 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 $7.7 million for the three months
ended June 30, 2000 compared to $8.9 million for the same period in the
prior year. As a percentage of net sales, selling and marketing expenses
were 26.7% for the three months ended June 30, 2000 compared to 34.7% for
the same period in the prior year. Selling and marketing expenses
decreased due to reduced salaries resulting from the transfer of company-
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owned Thomas Kinkade Stores to Signature Gallery owners as well as
reduced commissions resulting from a more challenging field sales
compensation plan than in the prior period.
General and Administrative Expenses
General and administrative expenses were $7.9 million for the three
months ended June 30, 2000 compared to $6.4 million for the same period
in the prior year. Expressed as a percentage of net sales, general and
administrative expenses for the three months ended June 30, 2000 were
27.3% compared to 24.7% for the same period in the prior year. The
increase in general and administrative expenses was primarily due to a
$2.3 million increase in general and administrative costs related to
Exclaim, offset by effective cost control measures and a reduction in
costs associated with the operations of our company-owned Thomas Kinkade
Stores as a result of the transfers of stores to Signature Gallery owners.
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 inter-segment
eliminations increased 23.8% to $28.4 million in the three months ended
June 30, 2000 compared to $22.9 million in 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. Sales to Signature Galleries
increased 36.4% to $13.9 million in the three months ended June 30, 2000
from $10.2 million in the same period in the prior year due to an increase in
the number of Signature Galleries to 322 as of June 30, 2000 from 195 as
of June 30, 1999.
Operating income for the wholesale segment before inter-segment
eliminations increased 111.9% to $6.2 million in the three months ended
June 30, 2000 compared to $2.9 million in the same period in the prior
year. Operating margin for the wholesale segment before inter-segment
eliminations increased to 21.8% in the three months ended June 30, 2000
from 12.7% in the same period. The increase was primarily due to
increased sales during the period as well as reduced selling and
marketing expenses due to reduced commissions resulting from a more
challenging field sales compensation plan than in the prior period.
Retail Segment
Net sales for the retail segment consists 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 87.2% to $805,000 in the three
months ended June 30, 2000 compared to $6.3 million in the same period in
the prior year. The decrease in net sales was primarily due to the
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transfer of 27 company-owned Thomas Kinkade Stores to Signature Gallery
owners since June 30, 1999. There were four company-owned stores as of
June 30, 2000 compared to 31 as of June 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 June 30, 2000.
Operating losses for the retail segment decreased 35.0% to $640,000 in
the three months ended June 30, 2000 compared to $984,000 in the same
period in the prior year primarily due to the transfer of stores to
Signature Gallery owners.
Business-to-Business Internet Segment.
Our B2B Internet segment consists solely of the operations of Exclaim, which
is developing vertical B2B trade communities that link buyers and sellers
together to create supply chain efficiencies. The first industry
applications are the fine art, gift and collectibles, furniture and home
decor industries. We believe that these B2B Internet products may be
scalable and may leverage Exclaim into other highly fragmented industries.
Exclaim is currently seeking alternative sources of financing and if
successful, we will discontinue funding Exclaim's operations. While we
continue to fund Exclaim, we intend to evaluate our options, including future
investments in, or reorganization of, Exclaim. We cannot be sure that
Exclaim's search for alternative sources of financing will be successful and
we may not have the necessary resources to continue funding Exclaim in the
event that alternative sources of financing are not obtained. In addition,
if alternative sources of financing are not available, there may be doubt as
to the eventual realization of our investment in Exclaim.
Net sales in the B2B Internet segment for the three months ended June 30,
2000 were $1,000, down 98.2% from $55,000 for the same period in the
prior year. The decrease was due to the prior period amount representing
license fees and the current period amount representing primarily
transaction fees. Net sales for the B2B Internet segment 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
June 30, 2000, net sales of Storefront have been made solely to Signature
Galleries. We believe that there will be opportunities to sell
Storefront to other galleries and gift stores outside of the existing
Thomas Kinkade branded distribution network. In addition, we believe
that Storefront may be marketed to other industries outside of fine art,
gift and collectibles. Exclaim has developed a B2B Internet-based
trading hub, Marketplace, that links buyers and sellers together within
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the art, gift, collectibles, furniture and home decor industries. As of
June 30, 2000, over ten manufacturers were offering their products on
Marketplace.
Operating losses for the B2B Internet segment were $3.7 million during
the three months ended June 30, 2000, up 811.1% from $406,000 for the
same period in the prior year due to the ramping up of Exclaim's
operations. Operating expenses of the B2B Internet segment consist
primarily of salaries and consulting expenses related to the development
of Exclaim's existing and future products.
Interest Income
Interest income was $46,000 for the three months ended June 30, 2000
compared to $10,000 for the same period in the prior year. The increase
in interest income was due to increased notes receivable.
Provision for Income Tax
The provision for income taxes was $1.1 million for the three months
ended June 30, 2000, compared to $249,000 for the same period in the
prior year. Our effective income tax rate for the three months ended
June 30, 2000 was 37.0% compared to 39.1% for the same period in the
prior year.
Comparable Store Sales
Comparable store sales for the three months ended June 30, 2000 decreased
13.9% from the same period in the prior year based on voluntarily
reported sales figures from 163 comparable independent Signature Gallery
dealers. With the inclusion of 29 comparable company-owned stores
transferred to Signature Gallery dealers and four remaining comparable
company-owned stores, comparable store sales for the three months ended
June 30, 2000 declined 14.6% from the same period in the prior year. 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. In addition, the decline in
comparable store sales is also due to the announced and ongoing sales
of company-owned stores and the resulting significant employee turnover.
We believe comparable Signature district sales are another meaningful
indicator of the condition of our retail market. Comparable district
sales for the three months ended June 30, 2000 increased 19.7% from the
same period in the prior year for the 114 reporting comparable districts.
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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,
- 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,
- The operating expenses of Exclaim as it pursues expansion of its B2B
Internet initiatives,
- The reduction in our ownership of Exclaim in the event of obtaining
alternative financing,
- Exclaim's ability to obtain alternative sources of financing,
- Customer acceptance of Exclaim's products generally,
- Our ability to implement strategic business alliances,
- Our ability to hire and train new manufacturing, sales and
administrative personnel,
- Continued implementation of manufacturing efficiencies,
- 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 three months ended June 30, 2000
has been from operating income. Our working capital as of June 30, 2000
was $51.6 million, compared to $48.6 million as of March 31, 2000.
Net cash used by operations during the three months ended June 30, 2000
was $2.2 million consisting primarily of net income of $1.9 million and
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depreciation of $1.5 million, offset by a decrease in accounts accounts
payable of $2.9 million and an increase in accounts receivable of $1.1
million. Accounts payable decreased due to the timing and amounts of
vendor payments during the quarter. Accounts receivable increased due to
the majority of the increase in net sales occurring in the last month of
the quarter. Net cash provided by operations during the three months
ended June 30, 1999 was $2.1 million consisting primarily of a decrease
in accounts receivable and an increase in accounts payable, offset by an
increase in inventory and a decrease in accrued compensation costs.
Net cash used in investing activities was $1.2 million during the three
months ended June 30, 2000 and primarily related to investment in
Internet related technologies and capital expenditures for property and
equipment. Net cash used in investing activities was $3.6 million during
the three months ended June 30, 1999 primarily related to investment in
our e-commerce web-site, thomaskinkade.com, 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, and relocation to, our leased
property in Morgan Hill, California.
Net cash provided by financing activities was $29,000 during the three
months ended June 30, 2000 compared to $433,000 used in financing
activities in the same period in the prior year. Cash provided by
financing activities during the three months ended June 30, 2000 was
from the issuance of common stock through our Employee Stock Purchase
Plan and the exercise of options for our common stock. Cash used in
financing activities during the three months ended June 30, 1999 was
primarily for 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
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 June 30, 2000.
Exclaim is currently seeking alternative sources of financing and if
successful, we will discontinue funding Exclaim's operations. While we
continue to fund Exclaim, we intend to evaluate our options, including future
investments in, or reorganization of, Exclaim. We cannot be sure that
Exclaim's search for alternative sources of financing will be successful and
we may not have the necessary resources to continue funding Exclaim in the
event that alternative sources of financing are not obtained. In addition,
if alternative sources of financing are not available, there may be doubt as
to the eventual realization of our investment in Exclaim.
We intend to relocate our offices and manufacturing facilities to a
leased campus facility currently under development in Morgan Hill,
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California, during 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 respond 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 working capital requirements throughout fiscal 2001. We may
consider alternative financing, such as issuance of additional 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 June 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>
June 30, March 31,
2000 2000
--------- ---------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,123 $ 5,544
Average interest rate 1.9% 3.6%
Liabilities:
Bank line-of-credit $ -- $ --
Interest rate (bank reference rate) 9.5% 9.0%
Capital lease obligation $ 845 $ --
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 - 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 10.42 Consulting Agreement entered into between the
Company and Mike Kiley dated April 1, 2000.
(b) Exhibit 27.1 Financial Data Schedule (EDGAR version only).
(c) 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
President and Chief Executive Officer
By /s/ Michael J. Catelani
--------------------------------------
Michael J. Catelani
Vice President of Finance
(Principal Accounting Officer)
Date: August 14, 2000
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EXHIBIT INDEX
Exhibit Number
10.42 Consulting Agreement entered into between the Company and
Mike Kiley dated April 1, 2000.
27.1 Financial Data Schedule
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