FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1998
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: 0-11927
Moto Photo Inc.
(Exact name of registrant as specified in its charter)
Delaware 31-1080650
(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
4444 Lake Center Dr. Dayton, OH 45426
(Address of principal executive offices with Zip Code)
(937) 854-6686
(Registrant's telephone number, including area code)
No Change
(Former name, former address, and former fiscal year,
if changed since last report)
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
APPLICABLE ONLY TO ISSUERS IN BANKRUPTCY
6
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
As of November 11, 1998:
7,826,173 - Voting Common, 0 - Non - Voting Common
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
September 30 December 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,868,170 $ 3,139,252
Accounts receivable, less allowances of
$1,136,000 in 1998 and $1,590,000 in 1997 3,861,996 4,416,899
Notes receivable, less allowances of
$125,000 in 1998 and 1997 434,608 403,669
Inventory 1,649,220 1,388,010
Deferred tax assets 1,025,000 1,025,000
Prepaid expenses 123,829 223,176
Total current assets 8,962,823 10,596,006
Property and equipment 3,578,845 3,095,006
OTHER ASSETS:
Notes receivable, less allowances of
$1,365,000 in 1998 and $893,000 in 1997 1,793,230 2,157,360
Cost of franchises and contracts acquired 170,733 167,741
Goodwill 3,769,612 3,932,883
Deferred tax assets 57,000 57,000
Other assets 1,368,765 1,032,119
Total assets $19,701,008 $ 21,038,115
</TABLE>
<TABLE>
MOTO PHOTO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
September 30 December 31,
1998 1997
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,926,738 $ 3,206,342
Accrued payroll and benefits 571,184 1,060,188
Accrued expenses 1,312,204 1,472,306
Current portion of long-term obligations 1,376,000 1,444,000
Other 205,675 181,286
Total current liabilities 6,391,801 7,364,122
Long-term obligations 9,053,637 9,783,805
Deferred revenue 119,032 119,032
Total liabilities 15,564,470 17,266,959
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value:
Authorized shares - 2,000,000:
Series G cumulative nonvoting preferred
shares, 1,000,000 shares issued and
outstanding with preferences aggregating
$10,000,000 10,000 10,000
Common shares $.01 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 7,825,173
in 1998 and 7,802,973 in 1997 78,252 78,030
Paid-in capital 6,472,232 6,670,981
(Deficit) retained earnings subsequent to
June 30, 1991 (2,423,946) (2,987,855)
Total stockholders' equity 4,136,538 3,771,156
Total liabilities and stockholders' equity $ 19,701,008 $ 21,038,115
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Three Nine Months Nine Months
Months Months Ended Ended
Ended Ended September September
September September 30, 1998 30, 1997
30, 1998 30, 1997
<S> <C> <C> <C> <C>
Revenues
Company store sales $3,557,063 $ 4,535,304 $ 9,741,262 $12,568,206
Merchandise sales 4,487,040 4,632,671 12,067,836 12,884,655
Royalties 1,347,411 1,329,586 3,699,273 3,639,127
Franchise fees 176,417 145,250 235,417 405,455
Investment income 85,552 96,471 278,509 246,285
Telemarketing revenue 108,237 234,657 363,203 683,377
9,761,720 26,385,500 30,427,105 10,973,939
Expenses
Company store cost of sales
and operating expenses 2,819,046 3,572,534 8,260,458 10,482,111
Merchandise cost of sales
and operating expenses 3,925,161 3,954,975 10,669,826 11,185,791
Selling, general, and
administrative costs 1,795,546 1,729,228 4,739,380 5,219,887
Advertising 322,020 369,001 927,093 1,005,653
Depreciation and amortization 268,986 213,843 703,972 616,865
Interest expense 104,079 123,810 314,678 324,093
9,234,838 9,963,391 25,615,407 28,834,400
Income before income taxes 526,882 1,010,548 770,093 1,592,705
Income tax benefit (expense) 49,000 (313,500) - (494,000)
Net income 575,882 697,048 770,093 1,098,705
Preferred stock dividend
requirements (68,381) (70,454) (206,709) (212,888)
Net income applicable to
common stock $ 507,501 $ 626,594 $ 563,384 $ 885,817
Net income per common share $ 0.06 $ 0.08 $ 0.07 $ 0.11
Weighted average shares
outstanding - Basic 7,817,075 7,795,514 7,810,399 7,791,772
Weighted average shares
outstanding - Diluted 7,861,762 7,871,222 7,950,898 7,858,364
</TABLE>
<TABLE>
MOTO PHOTO INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASHFLOWS
(UNAUDITED)
<CAPTION>
Nine Months Nine Months
Ended September Ended September
30, 1998 30, 1997
<S> <C> <C>
Operating Activities
Net income $ 770,093 $ 1,098,705
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for income taxes - 494,000
Depreciation and amortization 703,972 616,865
Provision for losses on inventory and
receivables 298,646 586,724
Notes receivable increase from sale of
franchise (7,133) (19,000)
Loss on disposition of assets 87,204 33,974
Write off of assets due to store closings 32,257 -
Issuance of stock for directors fees 23,413 21,422
Increase (decrease) resulting from changes
in:
Accounts receivable 95,638 (119,454)
Inventory and prepaid expenses (387,642) (95,645)
Other assets (209,163) (26,781)
Accounts payable and accrued expenses (928,710) (3,559,796)
Deferred revenues and other liabilities 24,389 234,569
Net cash provided by (used in) operating
activities 502,964 (734,417)
Investing Activities
Purchases of equipment and leaseholds (1,054,579) (213,270)
Proceeds from sale of assets 22,000 -
Payments received on notes receivable 484,826 321,592
Net cash (used in) provided by investing
activities (547,753) 108,322
Financing Activities
Proceeds from revolving line of credit and
borrowings - 8,824,274
Principal payments on revolving line of
credit, long-term debt and capital lease
obligations (798,168) (7,227,814)
Payments of preferred dividends (450,000) (450,000)
Common shares issued 21,875 -
Net cash (used in) provided by financing
activities (1,226,293) 1,146,460
(Decrease) increase in cash and equivalents (1,271,082) 520,365
Cash and cash equivalents at beginning of
period 3,139,252 1,398,944
Cash and cash equivalents at end of period $ 1,868,170 $ 1,919,309
</TABLE>
MOTO PHOTO, INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
``UNAUDITED''
1.In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial position
and results of operations for the period covered in this report. These
statements should be read in conjunction with the Notes to the
Consolidated Financial Statements for the year ended
December 31,1997.
The internal accounting for the Company is on a fiscal calendar quarter
basis. The fiscal quarter dates may vary from the calendar quarter dates,
(i.e. September 26 vs. September 30 for the third quarter 1998), except
for the fourth quarter which ends on December 31. The differences in
interim periods are immaterial.
2.The first nine months of the year are seasonally slower and do not
represent 75% of the year.
3.In the first nine months of 1998 $450,000 of dividends were paid on the
Series G preferred shares. Of this amount $243,291 was for previously
reported and accreted dividends.
4.In the first nine months of 1997, the Company incurred capital lease
obligations totaling $452,000 in connection with equipment purchases.
5.Certain amounts prior period have been restated to conform to the current
period.
6.The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect amounts reported in the financial statements. Actual results could
differ from those estimates
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS THIRD QUARTER 1998 AND NINE MONTHS VS THIRD QUARTER AND
NINE MONTHS 1997
The Company reported net income of $575,882 and basic and diluted income per
common share of $.06 for the third quarter 1998, compared to net income of
$697,048 and basic and diluted income per common share of $.08 for the third
quarter 1997. For the nine months ended September 30, 1998, the Company
recorded net income of $770,093 and basic and diluted earnings per common
share of $.07, compared to net income of $1,098,705 and basic and diluted
income per common share of $.11 for the same period a year ago. Per share
calculations are made after provision for Series G preferred dividend
requirements.
Sales from Company stores were down $978,000, or 22% for the third quarter
1998, and down $2,826,000, or 22% on a year-to-date basis, due to fewer
Company stores in operation. Included in revenue at September 30, 1997 is
$2.6 million related to Company stores that were not in operation at September
30, 1998, due to closure or sale as franchises. Comparable stores sales were
down 2.3% or $230,000 for the nine months ended September 30, 1998 due to an
overall 1% percent decrease in total U.S. film processing and more competitive
outlets offering on site processing.
Cost of sales and operating expenses as a percentage of company store sales
for the third quarter 1998 were approximately 79% for the quarter ended
September 30, 1998 and 1997. On a year-to-date basis cost of sales
represented approximately 85% and 83% of Company store sales for 1998 and
1997, respectively, primarily because of a different store mix.
During the first half of the year market prices for the Company's primary
merchandise products were moving lower. The Company has responded, mostly in
the third quarter, by lowering certain prices to remain competitive. As a
result of these pricing changes merchandise sales have decreased 3% or
$146,000 for the quarter ended September 30, 1998. This also accounted for
most of the increase in cost of sales and operating expenses as a percentage
of sales. For the nine months ended September 30, 1998 the Company estimates
that approximately 3.5% of its revenue was lost due to franchisees purchasing
merchandise from alternative suppliers. The Company believes that its new
pricing and cost programs have corrected this weakness and does not expect the
trend to continue.
Royalty revenues increased $18,000, or 1% for the third quarter, and $60,000,
or 2% for the nine months ended September 30, 1998, compared to the same
period a year ago primarily due to a 3% increase in comparable franchisee
store sales offset by fewer stores.
Franchise fees increased $31,000, or 21% for the quarter, and decreased
$170,000, or 42% for the nine months ended September 30, 1998, compared to the
same period a year ago due to seven fewer franchise store openings in 1998.
The marketing of the Moto QuickStart SM franchise finance program was not able
to begin when management anticipated. This has resulted in a delay of sales
of franchises and store openings in 1998. Therefore, expansion in 1998 will
be behind plan. Nineteen franchises were sold from May to October 1998
compared to nine in the same period of 1997. However, franchise fee revenue
is not recognized until the store opens. The Company expects to open several
more franchises during the fourth quarter of 1998 as compared to the fourth
quarter last year.
Investment income decreased $11,000, or 11% for the quarter, and increased
$32,000, or 13% on a year-to-date basis, compared to the same period a year
ago primarily due to more notes receivable outstanding.
Telemarketing revenues decreased $126,000, or 54% for the third quarter, and
$320,000, or 47% as of September 30, 1998, compared to the same period a year
ago primarily due to emphasis on other marketing programs and on less sales to
non-franchisees.
Advertising costs decreased $47,000, or 13% for the quarter, and $79,000 or 8%
year-to-date due to planned reduced levels of Company store advertising.
Interest expense decreased $20,000, or 16% for the quarter, and $90,000, or 3%
year-to-date due to lower levels of interest bearing debt.
The allowance for long term notes receivable increased $472,000 for the nine
months ended September 30, 1998 as compared to December 31, 1997. There was a
corresponding $454,000 decrease in the allowance for accounts receivable.
During 1998 the Company obtained notes from certain franchisees whose accounts
were severely delinquent, and accordingly reclassified the balances and
related allowances from accounts receivable to notes receivable. These
transactions are responsible for the majority of the changes in the
allowances for accounts and notes receivable.
YEAR 2000
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using ``00' as the year 1900 rather than the year 200
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has not completed
its assessment, but currently believes that costs of addressing this issue
will not have a material adverse impact on the Company's financial position.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $1.2 million primarily due
to a decrease of payments on accounts payable and accrued liabilities as
compared to the amount paid in 1997.
Net cash used by financing activities increased $2.3 million due to a decrease
in bank borrowings and the repayment of $798,000 in existing debt.
The foregoing paragraphs may contain ``forward looking statements' within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
based on management's current expectations and are subject to a number of
uncertainties and risks that could cause actual results to differ materially
from the forward looking statements. A description of such risks and
uncertainties, as well as other factors which could affect the Company's
business, are set forth in the Management's Discussion and Analysis portion of
the Company's Form 10-K dated March 30, 1998. The Company assumes no
obligation to update any forward looking statements.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See Exhibit Index immediately preceding exhibits.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during
the quarter ended September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
MOTO PHOTO, INC.
By /s/David A. Mason
David A. Mason
Executive Vice President,
Treasurer, and Chief
Financial Officer
Date: November 12, 1998
EXHIBITS TO
FORM 10-Q
for the quarter ended
September 30, 1998
Copies of the following documents are filed as exhibits to this report:
No. Description
11.0 Computation of Per Share Earnings
27.0 Financial Data Schedule
EXHIBIT 11.0
MOTO PHOTO INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
30-June-98 30-June-97 30-June-98 30-June-97
<S> <C> <C> <C> <C>
Numerator:
Net income $ 575,882 $ 697,084 $ 770,093 $1,098,705
Preferred stock dividend
requirement (68,381) (70,454) (206,709) (212,888)
Numerator for basic earnings
per share--income available
to common shareholders 507,501 626,630 563,384 885,817
Effect of dilutive securities:
Numerator for diluted earnings
per share--income available to
common stockholders after
assumed conversions $ 507,501 $ 626,630 $ 563,384 $ 885,817
Denominator:
Denominator for basic earnings
per share--weighted average
shares outstanding 7,817,075 7,795,514 7,810,399 7,791,772
Effect of dilutive securities:
Employee stock options
Dilutive potential common
shares 44,687 75,708 140,499 66,592
Denominator for diluted
earnings per share--adjusted
weighted average shares and
assumed conversions 7,861,762 7,871,222 7,950,898 7,858,364
Basic earnings per share $0.06 $0.08 $0.07 $0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from Moto Photo
Inc's 1998 Third Quarter 10-Q and is qualified in its entirety by
reference to such 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,868,170
<SECURITIES> 0
<RECEIVABLES> 6,089,834
<ALLOWANCES> 2,626,000
<INVENTORY> 1,649,220
<CURRENT-ASSETS> 8,962,823
<PP&E> 3,578,845
<DEPRECIATION> 8,246,588
<TOTAL-ASSETS> 19,701,008
<CURRENT-LIABILITIES> 6,391,801
<BONDS> 0
0
10,000
<COMMON> 78,252
<OTHER-SE> 4,048,286
<TOTAL-LIABILITY-AND-EQUITY> 19,701,008
<SALES> 21,809,098
<TOTAL-REVENUES> 26,385,500
<CGS> 11,868,244
<TOTAL-COSTS> 18,930,284
<OTHER-EXPENSES> 1,631,065
<LOSS-PROVISION> 298,646
<INTEREST-EXPENSE> 314,678
<INCOME-PRETAX> 770,093
<INCOME-TAX> 0
<INCOME-CONTINUING> 770,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 770,093
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
