FORM 10-Q-A
AMENDMENT 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
{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 Number)
Incorporation or organization)
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
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
This form 10-Q-A, Amendment No. 1, is being filed to incorporate Part II, Item
2. Changes in Securities and Use of Proceeds, additional disclosures related to
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information and the Year 2000.
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.Effective December 31, 1998 the Company will be required to implement the
provision of Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information. The implementation
of this pronouncement is not expected to have a material impact on the
Company's financial statements.
7.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.
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.
YEAR 2000
The year 2000 issue, or Y2K, refers to computer programs or computer embedded
chips which use two digits rather than four digits to define the applicable
year. Any of the Company's computer software, hardware or other equipment
having date sensitive software or embedded chips could recognize a "00" date as
year 1900 rather than year 2000. If this happened, it could result in
miscalculations or system failures which could be disruptive to normal business
activities. The Company has a plan to prepare its systems for the Y2K issue.
This plan includes obtaining reasonable assurance that its critical business
partners are also prepared.
The Company's plan for resolving Y2K issues has the following phases:
assessment, remediation, testing, and implementation. The Company has completed
assessment of its internal software and computer hardware that could be
significantly affected by the year 2000 issue. The Company believes that it is
currently Y2K compliant on all critical internal systems with the exception of
certain computer hardware used in some Company store point of sale systems, as
discussed below.
The Company is still in the process of gathering information about the Y2K
compliance status of key third party suppliers. The Company has received
written notification from most of its key suppliers that they plan to be Y2K
compliant by October 1, 1999. The Company has been informed by its primary bank
that it believes it is Y2K compliant. The Company will be requesting
certification by May 1, 1999 from depository banks. If the review and
evaluation of responses indicate lack of Y2K compliance by September 30, 1999,
the Company will change its depository banking relationships as required.
The Company is in the implementation phase on certain of the older computer
hardware used in its approved point of sale systems in both franchise and
Company stores. A software modification is currently available, at no cost, to
achieve Y2K compliance for this hardware. It will be implemented in Company
stores by June 30, 1999, and will be installed in all franchise stores as they
request it.
There are several versions of the Company sponsored point of sale software in
use in franchise stores, all of which are believed to be Y2K compliant except
for certain operating systems which are no longer supported by their provider.
Accordingly, the provider will not certify as to its Y2K compliance. However,
the Company has tested the software and believes that it will operate without
any critical failures after December 31, 1999. The Company will continue its
testing and will attempt to develop solutions if any disruptions occur during
test. The worst case solution would be for the franchisee to upgrade software
and hardware at a cost of $2,000 to $7,000 per store. Currently 53 franchise
stores use the subject operating system. Seven other stores are using a POS
system that has not been supported by the Company since 1997. These franchisees
are being notified of where to obtain assistance on Y2K compliance for these
systems.
The Company believes that all significant non-information systems are either Y2K
compliant or has received notification that the vendors will make them Y2K
compliant by no later than September 30, 1999. The Company plans to continue
testing its operating equipment and other equipment to ensure that it is
operable in 2000 and beyond.
By April 30, 1999, the Company intends to further notify its franchisees of the
steps they should take to ensure that there are no disruptions to their
operations as a result of the Y2K issue. The Company cannot guarantee that each
franchisee will follow through on the necessary steps, and accordingly, some
short-term interruptions could occur in certain franchise stores. The Company
does not believe that this disruption will have a material impact on the
Company's results of operations, financial condition or cash flows. The Company
will develop contingency plans to assist franchisees if any significant
disruption risks are identified.
The Company has spent no significant incremental funds to date to achieve Y2K
compliance and does not anticipate doing so in the future. All expenses paid to
date as well as in the future will be funded through existing cash resources and
future operating cash flows.
While the Company believes it has an effective plan to resolve the Y2K issue in
a timely manner, lack of historical experience and the forward-looking nature of
the issues involved make it difficult to predict with certainty what will happen
on January 1, 2000 and thereafter. It is possible that there will be disruption
and unexpected business problems during the early months of 2000. The Company
intends to make contingency plans if any critical systems or suppliers are
identified as representing a significant risk of Y2K failure. Unfortunately,
despite the Company's efforts, unanticipated third party failures may occur,
particularly in general public infrastructures. If this were to occur, it could
have a material adverse impact on the Company's results of operations, financial
condition or cash flows. The amount of potential loss cannot be reasonably
estimated at this time.
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 2. Changes in Securities and Use of Proceeds.
During the quarter ended September 30, 1998 and prior quarters through the
quarter ending December 31, 1996, the Company issued unregistered securities, as
follows:
<TABLE>
DATE OF TITLES OF AMOUNT OF TERMS OF CONVERSION
SALE SECURITIES SECURITIES CONSIDERATION EXERCISE
<S> <C> <C> <C> <C>
08/24/98 Voting Common 12,500 Shares $12,500(1) N/A
Stock, par value
$.01 per share
("Common Stock")
05/15/98 Common Stock 6,700 shares (2) N/A
02/13/98 Common Stock 3,000 shares (2) N/A
11/17/97 Common Stock 5,600 shares (2) N/A
09/16/97 Option to Purchase Option to (3) (4)
Common Stock Purchase
50,000 shares
08/15/97 Common Stock 3,800 shares (2) N/A
05/15/97 Common Stock 3,600 shares (2) N/A
02/17/97 Common Stock 4,000 shares (2) N/A
(1) These shares were sold to an officer of the Company, Lloyd F. Noland.
(2) These shares were issued to outside directors of the Company electing to
take their directors' fees in the form of stock. The number of shares issued is
calculated following a formula based on monthly fees and attendance at meetings.
(3) This option was issued to Tangram Corporation as compensation for
professional services.
(4) The option will be exercisable as to 20,000 shares on August 15, 1999, as
to an addition 10,000 shares as of August 15, 2000, and as of August 15, 2001,
as to any shares not previously acquired. The exercise price is $1.9375 per
share. The option expires on September 15, 2002.
All of the foregoing transactions were done in reliance on the exemption
available in Section 4(2) of the Securities Act of 1933, as amended. The shares
or options were issued to a small number of acquirors, each of whom is
sophisticated and all of whom were either an officer or director of the Company
or had a relationship with the Company. Each of the acquirors signed a letter
stating that the acquiror was holding the shares for investment and not with a
view toward distribution.
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: April 2, 1999
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