SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: JUNE 24, 1995 Commission file No. 0-15338
------------- -------
SEATTLE FILMWORKS, INC.
------------------------
(Exact name of registrant as specified in its charter.)
WASHINGTON 91-0964899
------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1260 16TH AVENUE WEST, SEATTLE, WA 98119
---------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-1390
--------------
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 the
filing requirements for the past 90 days.
Yes X No
----- --
As of August 1, 1995, there were issued and outstanding 7,095,673 shares of
common stock, par value $.01 per share.
Index to Exhibits at Page 13
SEATTLE FILMWORKS, INC.
INDEX
-----
Page No.
--------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-8
Balance Sheets as of June 24, 1995
and September 24, 1994 3-4
Statements of Income for the three months and nine
months ended June 24, 1995 and June 25, 1994 5
Statements of Cash Flows for the nine months ended
June 24, 1995 and June 25, 1994 6
Notes to Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-10
PART II -- OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
INDEX TO EXHIBITS 13
EXHIBITS 14
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
SEATTLE FILMWORKS, INC.
BALANCE SHEETS
(in thousands)
<CAPTION>
(UNAUDITED) (NOTE)
June 24, September 24,
ASSETS 1995 1994
======================================================================================================================
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,486 $ 2,711
Short-term investments 144 1,330
Accounts receivable, net of
allowance for doubtful accounts 1,499 1,369
Inventories 5,180 3,659
Capitalized promotional expenditures 1,148 735
Prepaid expenses and other 655 191
-------- --------
TOTAL CURRENT ASSETS 12,112 9,995
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 3,063 2,986
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 6,840 4,111
DEPOSITS AND OTHER ASSETS 85 95
NON-COMPETE AGREEMENTS,
net of accumulated amortization 1,178 1,332
-------- --------
TOTAL ASSETS $ 23,278 $ 18,519
======== ========
<FN>
Note: The September 24, 1994 balance sheet has been derived from audited financial statements.
See notes to financial statements.
</TABLE>
<TABLE>
SEATTLE FILMWORKS, INC.
BALANCE SHEETS (CONTINUED)
(in thousands, except share information)
<CAPTION>
(UNAUDITED) (NOTE)
June 24, September 24,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
======================================================================================================================
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 5,009 $ 2,958
Accrued expenses 1,981 1,991
Deferred income taxes 1,194 628
Income taxes payable 1,141
-------- --------
TOTAL CURRENT LIABILITIES 8,184 6,718
DEFERRED INCOME TAXES 917 454
-------- --------
TOTAL LIABILITIES 9,101 7,172
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value
authorized 2,000,000 shares, none issued.
Common Stock, $.01 par value - authorized 45,000,000
shares, issued and outstanding 7,085,223 71 70
Additional paid-in capital 375 53
Retained earnings 13,731 11,224
-------- --------
TOTAL SHAREHOLDERS' EQUITY 14,177 11,347
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,278 $ 18,519
======== ========
Note: The September 24, 1994 balance sheet has been derived from audited financial statements.
<FN>
See notes to financial statements.
</TABLE>
<TABLE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share information)
<CAPTION>
Third Quarter Ended Nine Months Ended
June 24, June 25, June 24, June 25,
1995 1994 1995 1994
========================================================================================================================
<S> <C> <C> <C> <C>
Net revenues $ 15,791 $12,872 $ 40,354 $ 34,144
Cost of goods and services 9,655 8,096 25,476 21,597
-------- ------- -------- --------
GROSS PROFIT 6,136 4,776 14,878 12,547
Operating expenses:
Customer acquisition costs 1,788 1,474 5,251 4,722
Other selling expenses 1,337 1,024 3,745 3,002
General and administrative 617 546 1,898 1,755
Research and development 144 80 355 316
-------- ------- -------- --------
Total operating expenses 3,886 3,124 11,249 9,795
-------- ------- -------- --------
INCOME FROM OPERATIONS 2,250 1,652 3,629 2,752
Other income (expense):
Interest expense (1) (1) (3) (5)
Interest income 55 51 172 163
Non operating expense, net (29) (10) (26) (11)
-------- ------- -------- --------
Total other income 25 40 143 147
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 2,275 1,692 3,772 2,899
Provision for income taxes (762) (516) (1,265) (901)
-------- ------- -------- --------
NET INCOME $ 1,513 $ 1,176 $ 2,507 $ 1,998
======== ======= ======== ========
EARNINGS PER SHARE $ .19 $ .14 $ .32 $ .24
======== ======= ======== ========
WEIGHTED AVERAGE SHARES AND
EQUIVALENTS OUTSTANDING 7,791,669 8,366,217 7,775,237 8,337,135
========= ========= ========= =========
<FN>
See notes to financial statements.
</TABLE>
<TABLE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF CASH FLOW (UNAUDITED)
(in thousands)
<CAPTION>
Nine Months Ended
June 24, June 25,
1995 1994
======================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 2,507 $ 1,998
Charges to income not affecting cash:
Depreciation and amortization 1,213 1,004
Amortization of capitalized customer
acquisition expenditures 3,308 3,099
Deferred income taxes 1,029 207
Loss on disposal of equipment 24 9
Net change in receivables, inventories, payables and other (1,214) (1,670)
Capitalized promotional expenditures, net (413) (259)
Additions to capitalized customer acquisition expenditures (6,037) (3,860)
-------- --------
NET CASH FROM OPERATING ACTIVITIES 417 528
------ -------
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (1,170) (1,217)
Proceeds from sale of short-term investments 1,186 2,005
Proceeds from sale of equipment 19
Purchase of assets from Private Label Film, Inc. (1,637)
------- -------
NET CASH FROM (USED IN) INVESTING ACTIVITIES 35 (849)
------ -------
FINANCING ACTIVITY:
- -------------------
Proceeds from issuance of Common Stock 323 122
------ -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 775 (199)
Cash and cash equivalents at beginning of period 2,711 5,707
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,486 $ 5,508
======== ========
<FN>
See notes to financial statements.
</TABLE>
SEATTLE FILMWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
Seattle FilmWorks, Inc. (the "Company") principally markets 35mm
photographic film, photofinishing services and related photographic products on
a direct-to-consumer mail order basis under the brand name of Seattle FilmWorks.
The Company also markets 35mm photographic film and supplies on a wholesale
basis under the brand name of OptiColor Film and Photo.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for fair presentation have been
included. The Company follows a policy of recording its interim periods and
year-end on a 5 week, 4 week and 4 week basis for comparability of results and
to be consistent with its internal weekly reporting. Operating results for the
third quarter and nine months ended June 24, 1995 are not necessarily indicative
of the results that may be expected for the fiscal year ending September 30,
1995. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
September 24, 1994.
NOTE B -- SEASONALITY OF REVENUES
The Company's revenues are subject to monthly variations due to the
seasonal demand for photofinishing services. Typically, revenues for
photofinishing services are highest during the summer months.
NOTE C -- STOCK SPLIT
On March 15, 1995 the Company effected a three for two stock split by
declaring a stock dividend of one share for every two shares outstanding. All
share information and the related capital accounts in the accompanying financial
statements have been retroactively adjusted for this stock split.
NOTE D -- ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
During 1993, the Financial Accounting Standards Board issued Statement No.
115, `Accounting for Certain Investments in Debt and Equity Securities''. The
Company adopted this new standard in the first quarter of fiscal year 1995. The
adoption of this new standard had no significant impact on operating results
upon adoption as the amortized cost of the Company's investments, which are
considered available for sale, approximate their fair values due to their high
credit ratings and short-term maturities.
NOTE E -- REPORTING ON ADVERTISING COSTS
In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-7, `Reporting on Advertising Costs.'' The
Company adopted this new standard in the first quarter of fiscal year 1995. The
adoption of the new standard does not impact the Company's accounting practices
except that all customer acquisition expenditures have been classified as
noncurrent. Previously, capitalized customer acquisition costs amortizable
within one year were recorded under current assets. This change has the effect
of reducing the Company's current ratio and working capital.
NOTE F -- PROPERTY
The Company has been evaluating the feasibility of consolidating all of
its operations into a single location within the Seattle, Washington
metropolitan area. The Company is still considering alternative properties
available in the area. The Company has extended its lease on a warehouse
storage facility for six months to February 29, 1996. This building, located in
Seattle, Washington, is used as a storage facility for excess inventory and
photofinishing supplies. This lease had been scheduled to expire in August
1995.
NOTE G -- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1995
financial statements, primarily related to the reclassification of all
capitalized customer acquisition expenditures to long term and the presentation
of research and development expenses.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The principal operation of Seattle FilmWorks, Inc. (the "Company") is the
marketing of 35mm film, photofinishing services, and related products on a
direct-to-consumer mail order basis under the brand name Seattle FilmWorks and
several other lesser known brand names. The Company also provides these
services and products on a wholesale basis to a variety of retailers who offer
these services and products to their customers at their own retail locations
under their own brand names. The Company also provides a variety of reprint and
enlargement services to its mail order and wholesale photofinishing customers.
In addition, the Company offers conversion of photographs to digital images on
personal computer floppy diskettes under the Pictures On Disk brand name. To
permit viewing of digital images on personal computers, the Company provides
various versions of software under the titles PhotoWorks and PhotoWorks Plus.
The Company also provides various film products and other photofinishing
supplies to other companies on a wholesale basis. To support its direct-to-
consumer business, the Company has developed comprehensive computerized models
and support systems for designing and implementing direct response marketing
programs.
Demand for the Company's photofinishing services, which represents the
largest portion of the Company's business, is highly seasonal with the highest
volume of photofinishing activity occurring during the summer months. This,
coupled with relatively higher expenditures on marketing programs prior to the
summer months, causes considerable seasonal variation in both revenues, earnings
and cash flows.
RESULTS OF OPERATIONS
The Company's net revenues for the third quarter of fiscal 1995 increased
22.7%, to $15,791,000 compared to net revenues of $12,872,000 in the third
quarter of fiscal 1994. For the nine months ended June 24, 1995, net revenues
increased 18.2% to $40,354,000 compared to $34,144,000 for the same period of
fiscal 1994. The increased revenues in the 1995 periods are primarily a result
of higher photofinishing roll volume and increased shipments of various film and
photo-related products through the Company's wholesale business. The Company
believes these increases primarily resulted from expanded and more efficient
customer acquisition and other selling activities during the first three
quarters of fiscal 1995.
Gross profit in the third quarter of fiscal 1995 increased to 38.9% of net
revenue compared to 37.1% in the third quarter of fiscal 1994. For the first
nine months of fiscal 1995, gross profit increased to 36.9% compared to 36.7%
for the same period of fiscal 1994. For the third quarter of fiscal 1995, gross
profit increased as a percentage of net revenue due to a product sales mix
containing a higher proportion of photofinishing revenues. For the first nine
months of fiscal 1995, the gross margin percentage reflects lower gross margin
percentages in the first two quarters, due to a higher proportion of revenue
from film and photo-related products which carry significantly lower gross
profit margins compared to photofinishing services. Fluctuations in gross
profit may occur in future periods due to the seasonal nature of revenues,
intensity of promotional activities, mix of product sales and for other reasons.
Total operating expenses in the third quarter of fiscal 1995 increased to
24.6% of net revenues compared to 24.3% in the third quarter of fiscal 1994.
For the first nine months of fiscal 1995 total operating expenses decreased to
27.9% of net revenue compared to 28.7% for the same period of fiscal 1994. The
Company increased its customer acquisition expenditures during the first nine
months of 1995 to $5,251,000 compared to $4,722,000 for the same period in
fiscal 1994. However, these expenditures decreased as a percentage of net
revenue for the first nine months of fiscal 1995 to 13.0% as compared to 13.8%
for the same period of fiscal 1994. The Company expanded its customer
acquisition programs during the third quarter and nine months of fiscal year
1995 as compared to fiscal year 1994 and believes this planned expansion is the
primary reason for the increase in photofinishing revenues. A significant
portion of the cost of obtaining new customers is capitalized (exclusive of
promotional expenditures) and amortized over succeeding periods on an
accelerated basis. Primarily as a result of significant customer acquisition
programs during the third quarter of fiscal 1995, the capitalized customer
acquisition costs for the period ending June 24, 1995, increased to $6,840,000
as compared to $4,111,000 for the period ending September 24, 1994. Each year
the Company prepares detailed plans for its various marketing activities
including the mix between customer acquisition expenditures and other selling
expenses. However, the Company occasionally changes both the mix and total
marketing expenditures between periods in order to take advantage of marketing
opportunities as they become available. Future periods may reflect increased
acquisition costs compared to the first three quarters of fiscal 1995 if
productive marketing programs can be developed. Other selling expenses in the
third quarter of fiscal 1995 increased to 8.5% of net revenues compared to 8.0%
for the same period in fiscal 1994. For the first nine months, other selling
expenses increased as a percent of net revenue to 9.3% compared to 8.8% for the
same period in fiscal 1994. These increases were primarily due to increased
marketing to existing customers compared to the same promotional activities for
the first nine months of fiscal 1994. General and administrative expenses for
the third quarter of fiscal 1995 increased to $617,000 compared to $546,000 for
the same period in fiscal 1994. For the first nine months of fiscal 1995,
general and administrative expenses increased to $1,898,000 from $1,755,000 in
fiscal 1994. General and administrative expenses include additional costs
incurred in the 1995 periods related to recruitment, consulting and some
additional labor costs due to increased volumes. Research and development
expenses for the third quarter of fiscal 1995 increased to $144,000 compared to
$80,000 for the same period in fiscal 1994. For the first nine months of fiscal
1995 research and development expenses increased to $355,000 compared to
$316,000 in fiscal 1994. The increases resulted primarily from additional
staffing costs.
Total net other income for the third quarter of fiscal 1995 was $25,000
compared to net other income of $40,000 for the same period in fiscal 1994. The
decrease is primarily a result of a $24,000 loss on equipment disposals during
the third quarter of 1995 as compared to the 1994 period. For the first nine
months of fiscal 1995, net other income was $143,000 compared to $147,000 for
the same period of fiscal 1994.
Net income in the third quarter of fiscal 1995 was $1,513,000, or $.19 per
share, compared to $1,176,000, or $.14 per share, in the third quarter of fiscal
1994. For the first nine months of fiscal 1995, net income was $2,507,000 or
$.32 per share compared to $1,998,000 or $.24 per share for the same period in
fiscal 1994. The increase in net income compared to the same periods for 1994
is primarily attributable to the increase in net revenues and an increase in
gross profit as a percentage of net revenue. Earnings per share for the third
quarter and nine months ended June 24, 1995 also was favorably affected by the
repurchase of 500,000 shares of Common Stock by the Company during the fourth
quarter of fiscal 1994.
The federal income tax rate for the third quarter of fiscal 1995 was 33.5%
compared to 30.5% for the same period in fiscal 1994. For the first nine months
of fiscal 1995 the federal income tax rate was 33.5% compared to 31.1% for the
first nine months of fiscal 1994. The increase in the effective tax rate is
primarily due to a decrease in tax free interest income and a decrease in the
meals and entertainment deduction. The tax rate for fiscal 1994 was also
favorably affected by initial research and development tax credits which are not
anticipated to be as significant for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of July 21, 1995, the Company's principal sources of liquidity included
cash and short term investments of $4,263,305 and unutilized revolving lines of
credit of $5,000,000. The ratio of current assets to current liabilities for
the Company was 1.5 to 1 at the end of the third quarter of fiscal 1995, which
was unchanged from the end of the 1994 fiscal year. During the first three
quarters of fiscal 1995 the Company increased inventory levels by $1,500,000 to
accomodate new and expanded marketing plans, achieve faster turnaround of
customer orders, and support increased photofinishing volume. This planned
increase in inventory was also the principal reason for the increase in accounts
payable. Federal income taxes payable were favorably affected due to the
increase in capitalized customer acquisition expenditures. For tax purposes
these customer acquisition expenditures are expensed as incurred, thereby having
the effect of substantially reducing current federal income tax liabilities.
Although the Company does not currently have any material fixed commitments
with regard to capital expenditures, it currently expects to spend approximately
$1,100,000 during the remainder of fiscal 1995, principally for the acquisition
of additional photofinishing equipment.
The Company currently anticipates that existing funds together with
anticipated cash flow from operations and the Company's available line of credit
of $5,000,000 will be sufficient to finance its operations, including planned
capital expenditures, and to service its indebtedness for the foreseeable
future. However, if the Company does not generate sufficient cash from
operations to satisfy its ongoing expenses, the Company will be required to seek
external sources of financing or to refinance its obligations. Possible sources
of financing include the sale of equity securities or additional bank
borrowings. There can be no assurance that the Company will be able to obtain
adequate financing in the future.
PART II -- OTHER INFORMATION
----------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
---------
11 Computation of Per Share Earnings
(B) REPORTS ON FORM 8-K.
--------------------
None.
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.
SEATTLE FILMWORKS, INC.
DATED: August 1, 1995 //s// CASE H. KUEHN
------------------------------------
Case H. Kuehn
Vice President-Finance/Treasurer
(Principal Financial and Accounting
Officer)
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 24, 1995
Exhibit Description Page No.
- ------- ---------------------------------------------- --------
11 Computation of Earnings Per Share 14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Seattle
FilmWorks, Inc. third quarter 1995 10-Q and is qualified in its entirety by
reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-24-1995
<CASH> 3,630
<SECURITIES> 0
<RECEIVABLES> 1,499<F1>
<ALLOWANCES> 0
<INVENTORY> 5,180
<CURRENT-ASSETS> 12,112
<PP&E> 3,063<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,278
<CURRENT-LIABILITIES> 8,184
<BONDS> 0
<COMMON> 71
0
0
<OTHER-SE> 14,106
<TOTAL-LIABILITY-AND-EQUITY> 23,278
<SALES> 0
<TOTAL-REVENUES> 40,354
<CGS> 25,476
<TOTAL-COSTS> 11,249
<OTHER-EXPENSES> (146)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 3,772
<INCOME-TAX> 1,265
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,507
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<FN>
<F1>Asset values represent net amounts.
</FN>
</TABLE>
<TABLE>
EXHIBIT 11
SEATTLE FILMWORKS, INC.
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Third Quarter Ended Nine Months Ended
June 24, June 25, June 24, June 25,
1995 1994 1995 1994
===========================================================================================================================
<S> <C> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE
- -----------------------------------------
Weighted average shares outstanding 7,082,125 7,739,730 7,052,445 7,714,830
Net effect of dilutive stock options based on the
treasury stock method using average market price 688,433 626,487 666,522 598,464
----------- ----------- ----------- -----------
Total shares and equivalents 7,770,558 8,366,217 7,718,967 8,313,294
=========== =========== =========== =========
Net income $ 1,512,619 $ 1,176,097 $ 2,506,801 $1,998,190
=========== =========== =========== ==========
PRIMARY EARNINGS PER SHARE $ .19 $ .14 $ .32 $ .24
=========== =========== =========== ===========
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
- ------------------------------------------------
Weighted average shares outstanding 7,082,125 7,739,730 7,052,445 7,714,830
Net effect of dilutive stock options based on the
treasury stock method using the higher of quarter-end
market price or average market price 709,544 626,487 722,792 622,305
----------- ----------- ----------- -----------
Total shares and equivalents 7,791,669 8,366,217 7,775,237 8,337,135
=========== =========== =========== ===========
Net income $ 1,512,619 $ 1,176,097 $ 2,506,801 $1,998,190
=========== =========== =========== ==========
FULLY DILUTED EARNINGS PER SHARE $ .19 $ .14 $ .32 $ .24
=========== =========== =========== ===========
<FN>
Note - All share data has been retroactively restated to reflect a three-for-two stock split effected in the form of a stock
dividend on March 15, 1995.
</TABLE>
