<PAGE>
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: DECEMBER 30, 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
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(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 January 30, 1996, there were issued and outstanding 7,164,669 shares
of common stock, par value $.01 per share.
Index to Exhibits at Page 12
Page 1 of 13
<PAGE>
SEATTLE FILMWORKS, INC.
INDEX
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<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Balance Sheets as of December 30, 1995
and September 30, 1995 3-4
Statements of Income for the first quarter
ended December 30, 1995 and December 24, 1994 5
Statements of Cash Flows for the first quarter ended
December 30, 1995 and December 24, 1994 6
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART II -- OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 10
SIGNATURES 11
INDEX TO EXHIBITS 12
EXHIBITS 13
</TABLE>
Page 2 of 13
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
December 30, September 30,
ASSETS 1995 1995
===============================================================================
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,904 $ 8,560
Securities available for sale 3,195 1,345
Accounts receivable, net of
allowance for doubtful accounts 1,362 1,242
Inventories 5,388 4,626
Capitalized promotional expenditures 102 158
Prepaid expenses and other 695 164
Deferred income taxes 449 398
------- -------
TOTAL CURRENT ASSETS 15,095 16,493
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 3,442 3,200
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 9,608 7,356
DEPOSITS AND OTHER ASSETS 126 68
NONCOMPETE AGREEMENTS,
net of accumulated amortization 1,076 1,127
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TOTAL ASSETS $29,347 $28,244
======= =======
</TABLE>
Note: The September 30, 1995 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 3 of 13
<PAGE>
SEATTLE FILMWORKS, INC.
BALANCE SHEETS (CONTINUED)
(in thousands, except share information)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
December 30, September 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1995
===================================================================================================
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 5,447 $ 4,782
Accrued expenses 1,890 2,364
Income taxes payable 856
------- -------
TOTAL CURRENT LIABILITIES 7,337 8,002
DEFERRED INCOME TAXES 3,105 2,310
------- -------
TOTAL LIABILITIES 10,442 10,312
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 7,154,316 72 71
Additional paid-in capital 976 955
Retained earnings 17,857 16,906
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TOTAL SHAREHOLDERS' EQUITY 18,905 17,932
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,347 $28,244
======= =======
</TABLE>
Note: The September 30, 1995 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 4 of 13
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share information)
<TABLE>
<CAPTION>
First Quarter Ended
December 30, December 24,
1995 1994
============================================================================
<S> <C> <C>
Net revenues $16,689 $12,270
Cost of goods and services 10,397 7,680
------- -------
GROSS PROFIT 6,292 4,590
Operating expenses:
Customer acquisition costs 2,538 2,039
Other selling expenses 1,332 884
Research and development 247 117
General and administrative 768 620
------- -------
Total operating expenses 4,885 3,660
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INCOME FROM OPERATIONS 1,407 930
Other income (expense):
Interest expense (1)
Interest income 142 60
Nonoperating income (expense), net (93) 4
------- -------
Total other income 49 63
------- -------
INCOME BEFORE INCOME TAXES 1,456 993
Provision for income taxes (505) (338)
------- -------
NET INCOME $ 951 $ 655
======= =======
EARNINGS PER SHARE $.12 $.09
==== ====
WEIGHTED AVERAGE SHARES AND
EQUIVALENTS OUTSTANDING 7,847,802 7,688,145
========= =========
</TABLE>
See notes to financial statements.
Page 5 of 13
<PAGE>
SEATTLE FILMWORKS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
First Quarter Ended
December 30, December 24,
1995 1994
=====================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 951 $ 655
Charges to income not affecting cash:
Depreciation and amortization 537 395
Amortization of capitalized customer
acquisition expenditures 2,165 1,279
Deferred income taxes 744 (15)
Loss or (gain) on disposal of equipment 90 (4)
Net change in receivables, inventories, payables and other (2,077) (927)
Capitalized promotional expenditures, net 56 162
Additions to capitalized customer acquisition expenditures (4,417) (1,688)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,951) (143)
------- -------
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (877) (281)
Purchases of securities available for sale (1,850)
Sales of securities available for sale 740
Proceeds from sale of equipment 14
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NET CASH FROM (USED IN) INVESTING ACTIVITIES (2,727) 473
------- -------
FINANCING ACTIVITY: Proceeds from issuance of Common Stock 22 176
- ------------------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,656) 506
Cash and cash equivalents at beginning of period 8,560 2,711
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,904 $ 3,217
======= =======
</TABLE>
See notes to financial statements.
Page 6 of 13
<PAGE>
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(R). The Company also markets 35mm photographic film and supplies on a
wholesale basis to mini photofinishing labs under the brand name of OptiColor
Film and Photo(TM).
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
first quarter ended December 30, 1995 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 28, 1996. 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 30, 1995.
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 -- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1996 financial statements, primarily related to the reclassification of customer
acquisition costs and deferred income taxes.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The principal business 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(R)
and several other brand names. The Company offers its customers the options of
having their photographs delivered as slides or prints or as digital images
delivered either over the Internet using the Company's PhotoMail(TM) software,
or on floppy diskettes under the Pictures On Disk(TM) brand name. To permit
viewing of digital images on personal computers, the Company provides various
versions of software under the titles PhotoWorks(TM) and PhotoWorks Plus(TM).
The Company also provides these services, products and photofinishing supplies
on a wholesale basis to a variety of retailers who offer these services or
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 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 support systems
for designing, implementing and analyzing 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 revenues, earnings and
cash flows.
Page 7 of 13
<PAGE>
RESULTS OF OPERATIONS
The following table presents information from the Company's statements
of income, expressed as a percentage of net revenues for the periods indicated.
<TABLE>
<CAPTION>
First Quarter Ended
December 30, December 24,
1995 1994
=============================================================================
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of goods and services 62.3 62.6
----- -----
GROSS PROFIT 37.7 37.4
Operating expenses:
Customer acquisition costs 15.2 16.6
Other selling expenses 8.0 7.2
Research and development 1.5 1.0
General and administrative 4.6 5.0
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Total operating expenses 29.3 29.8
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INCOME FROM OPERATIONS 8.4 7.6
Total other income .3 .5
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INCOME BEFORE INCOME TAXES 8.7 8.1
Provision for income taxes 3.0 2.8
----- -----
NET INCOME 5.7% 5.3%
===== =====
</TABLE>
The Company's net revenue for the first quarter of fiscal 1996
increased 36% to $16,689,000 compared to net revenues of $12,270,000 in the
first quarter of fiscal 1995. The increase was primarily due to expanded
investment in customer acquisition and other selling activities during the first
quarter of fiscal 1996 and during fiscal year 1995 which increased the number of
new customers and photofinishing orders processed in the first quarter of fiscal
1996. In addition, increased distribution of rolled film and photo related
products on a wholesale basis during the first quarter of fiscal 1996 as
compared to the first quarter of fiscal 1995 favorably affected net revenues.
The Company also believes that its core photofinishing business has benefited
from the Company's entry into the home computer market with its PhotoWorks(TM)
and Pictures On Disk(TM) products, which were first introduced in January 1994.
Gross profit in the first quarter of fiscal 1996 was 37.7% of net
revenue compared to 37.4% in the first quarter of fiscal 1995. The increase was
due primarily to a product mix containing a higher percentage of the Company's
core photofinishing business, which carries a higher gross profit margin than
the Company's other lines of business. Fluctuations in gross profit will occur
in future periods due to the seasonal nature of revenues, intensity of
promotional activities, mix of product sales and other factors.
Total operating expenses in the first quarter of fiscal 1996 decreased
to 29.3% of net revenues compared to 29.8% in the prior year quarter. Although
operating expenses increased to $4,885,000 in the first quarter of fiscal 1996
as compared to $3,660,000 for the same quarter of fiscal 1995, operating
expenses decreased as a percent of net revenues. The decrease is primarily due
to the increase in net revenues and a decrease in customer acquisition costs as
a percentage of net revenues to 15.2% in the first quarter of fiscal 1996 as
compared to 16.6% in the first quarter of fiscal 1995. The Company expanded its
Page 8 of 13
<PAGE>
customer acquisition programs during the first quarter of fiscal 1996 as
compared to fiscal 1995 and believes this planned expansion is the primary
reason for the increase in photofinishing revenues. Customer acquisition costs
consist primarily of advertising expenditures and amortization of deferred
customer acquisition costs. A significant portion of the direct costs of
customer acquisition, including cost of film and printed materials, but
excluding advertising costs, are deferred and amortized over a period of up to
three years as part of customer acquisition costs. These expenditures are
capitalized as assets on the Company's balance sheet. Capitalized customer
acquisition costs for the period ending December 30, 1995, increased to
$9,608,000 as compared to $7,356,000 for the period ending September 30, 1995.
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 to take advantage of marketing
opportunities as they become available. Future periods may reflect increased
acquisition costs due to the amortization of capitalized expenditures or the
development and initiation of additional marketing programs. For tax purposes,
customer acquisition expenditures are expensed as incurred, thereby reducing
current federal income tax liabilities and increasing deferred federal income
tax liabilities.
Other selling expenses in the first quarter of fiscal 1996 increased
to 8.0% as compared to 7.2% for the same period in fiscal 1995. The increase was
primarily due to increased marketing to existing customers compared to the same
promotional activities for the first quarter of fiscal 1995. Research and
development expenses increased to $247,000 for the first quarter of fiscal 1996
as compared to $117,000 for the first quarter of fiscal 1995. The increase is
due primarily to increased staffing costs and contract services relating to the
development of new computer related photographic products and services. General
and administrative expenses increased to $768,000 for the first quarter of
fiscal 1996 from $620,000 in the first quarter of fiscal 1995 but decreased as a
percent of net revenues to 4.6% for the fiscal 1996 first quarter as compared to
5.0% for the first quarter in the prior year.
Total net other income for the first quarter of fiscal 1996 was
$49,000 compared to net other income of $63,000 for the same period in fiscal
1995. The decrease is a result of a $90,000 loss on equipment disposals during
the first quarter of fiscal 1996. Interest income increased to $142,000 for the
first quarter of fiscal 1996 as compared to $60,000 for the 1995 period. The
increase was primarily due to interest income from short-term investments due to
the availability of cash reserves generated from operations.
The federal income tax rate for the first quarter of fiscal 1996 was
34.7% compared to 34.0% for the same period in fiscal 1995. The increase in the
effective tax rate is due primarily to an increase in the applicable federal
corporate tax rate due to expected income levels.
Net income in the first quarter of fiscal 1996 was $951,000, or $.12
per share, compared to $655,000, or $.09 per share in the first quarter of
fiscal 1995. The increase in net income compared to the same period for fiscal
1995 is primarily attributable to the increase in net revenues, increase in
gross profit as a percentage of net revenues, and the decrease in operating
expenses as a percentage of net revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of January 26, 1996, the Company's principal sources of liquidity
included cash and short-term investments of $7,176,387 and an unused revolving
line of credit of $5,000,000. The ratio of current assets to current liabilities
for the Company was 2.0 to 1 at the end of the first quarter of fiscal 1996,
which was unchanged from the current ratio of 2.0 to 1 at the end of the 1995
fiscal year. During the first quarter of fiscal 1996 the Company increased
inventory levels by $762,000 to accomodate 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
which are expensed as incurred for federal income tax purposes, thereby having
the effect of substantially reducing current federal income tax liabilities.
The Company has a commitment to purchase equipment related to its
Pictures On Disk(TM) product in the amount of $470,000 by January 1, 1997. In
addition, the Company plans to expend approximately $2,600,000 during the
remainder of fiscal 1996, principally for photofinishing and data processing
equipment, and for leasehold improvements, although at this time it has no
binding commitments to do so.
Page 9 of 13
<PAGE>
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
Page 10 of 13
<PAGE>
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: February 7, 1996 //s// GARY R. CHRISTOPHERSEN
-------------------------------------------
Gary R. Christophersen
President, Chief Executive Officer
//s// CASE H. KUEHN
-------------------------------------------
Case H. Kuehn
Vice President-Finance/Treasurer
(Principal Financial and Accounting Officer)
Page 11 0f 13
<PAGE>
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 30, 1995
<TABLE>
<CAPTION>
Exhibit Description Page No.
- ------- ------------------- --------
<S> <C> <C>
11 Computation of Earnings Per Share 13
</TABLE>
Page 12 of 13
<PAGE>
EXHIBIT 11
SEATTLE FILMWORKS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
First Quarter Ended
December 30, December 24,
1995 1994
===============================================================================================
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
- ------------------------------------------
<S> <C> <C>
Weighted average shares outstanding 7,151,349 7,028,632
Net effect of dilutive stock options based on the
treasury stock method using average market price 696,453 641,324
--------- ---------
Total shares and equivalents 7,847,802 7,669,956
========= =========
Net income $950,711 $655,220
======== ========
PRIMARY EARNINGS PER SHARE $.12 $.09
==== ====
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
- ------------------------------------------------
Weighted average shares outstanding 7,151,349 7,028,632
Net effect of dilutive stock options based on the
treasury stock method using the higher of quarter-end
market price or average market price 696,453 659,513
--------- ---------
Total shares and equivalents 7,847,802 7,688,145
========= =========
Net income $950,711 $655,220
======== ========
FULLY DILUTED EARNINGS PER SHARE $.12 $.09
==== ====
</TABLE>
Page 13 0f 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE
FILMWORKS INC. FIRST QUARTER 1996 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-30-1995
<CASH> 7,099
<SECURITIES> 0
<RECEIVABLES> 1,362<F1>
<ALLOWANCES> 0
<INVENTORY> 5,388
<CURRENT-ASSETS> 15,095
<PP&E> 3,442<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,347
<CURRENT-LIABILITIES> 7,337
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 18,833
<TOTAL-LIABILITY-AND-EQUITY> 29,347
<SALES> 0
<TOTAL-REVENUES> 16,689
<CGS> 10,397
<TOTAL-COSTS> 4,885
<OTHER-EXPENSES> (49)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,456
<INCOME-TAX> 505
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 951
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
