<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 28, 1998 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 April 30, 1998, there were issued and outstanding 16,637,349 shares of
common stock, par value $.01 per share.
Index to Exhibits at Page 14
Page 1 of 15
<PAGE>
SEATTLE FILMWORKS, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Consolidated Balance Sheets as of March 28, 1998
and September 27, 1997 3-4
Consolidated Statements of Income for the second quarter
and six months ended March 28, 1998 and March 29, 1997 5
Consolidated Statements of Cash Flows for the six months
ended March 28, 1998 and March 29, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II -- OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
EXHIBITS 15
</TABLE>
Page 2 of 15
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
March 28, September 27,
ASSETS 1998 1997
=============================================================== =========== ==============
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,477 $10,252
Securities available-for-sale 5,245 5,062
Accounts receivable, net of allowance for doubtful accounts 1,909 3,680
Inventories 11,777 8,998
Capitalized promotional expenditures 116 211
Prepaid expenses and other 519 743
Deferred income taxes 370 313
------- -------
TOTAL CURRENT ASSETS 26,413 29,259
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 8,840 7,564
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 16,404 13,882
DEPOSITS AND OTHER ASSETS 136 285
NON-COMPETE AGREEMENT,
net of accumulated amortization 188 376
------- -------
TOTAL ASSETS $51,981 $51,366
======= =======
</TABLE>
Note: The September 27, 1997 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements.
Page 3 of 15
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
March 28, September 27,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
======================================================== =========== ==============
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 5,604 $ 3,588
Accrued expenses 1,114 1,402
Accrued compensation 1,030 1,931
Income taxes payable 605 2,450
------- -------
TOTAL CURRENT LIABILITIES 8,353 9,371
DEFERRED INCOME TAXES 5,223 4,394
------- -------
TOTAL LIABILITIES 13,576 13,765
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value,
authorized 2,000,000 shares, none issued
Common Stock, $.01 par value, authorized 101,250,000
shares, issued and outstanding 16,599,683 166 164
Additional paid-in capital 526 2,459
Retained earnings 37,713 34,978
------- -------
TOTAL SHAREHOLDERS' EQUITY 38,405 37,601
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $51,981 $51,366
======= =======
</TABLE>
Note: The September 27, 1997 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements.
Page 4 of 15
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
----------------------- -----------------------
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
========== ========== ========== ==========
<S> <C> <C> <C> <C>
Net revenues $21,439 $21,657 $43,910 $42,893
Cost of goods and services 12,408 12,762 25,380 25,744
------- ------- ------- -------
GROSS PROFIT 9,031 8,895 18,530 17,149
Operating expenses:
Customer acquisition costs 4,239 3,762 8,360 7,244
Other selling expenses 1,968 2,100 3,990 3,860
Research and development 153 209 296 382
General and administrative 1,043 1,213 2,099 2,120
------- ------- ------- -------
Total operating expenses 7,403 7,284 14,745 13,606
------- ------- ------- -------
INCOME FROM OPERATIONS 1,628 1,611 3,785 3,543
Other income (expense):
Interest income 175 141 389 287
Non operating income (expense), net (12) 7 (12) 9
------- ------- ------- -------
Total other income 163 148 377 296
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,791 1,759 4,162 3,839
Provision for income taxes (614) (613) (1,427) (1,336)
------- ------- ------- -------
NET INCOME $ 1,177 $ 1,146 $ 2,735 $ 2,503
======= ======= ======= =======
Diluted Earnings per Share $.07 $.06 $.16 $.14
==== ==== ==== ====
Basic Earnings per Share $.07 $.07 $.17 $.15
==== ==== ==== ====
Weighted Average Shares and
Equivalents Outstanding - Diluted 17,479,000 17,760,000 17,561,000 17,795,000
========== ========== ========== ==========
Weighted Average Shares - Basic 16,564,000 16,278,000 16,552,000 16,266,000
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 5 of 15
<PAGE>
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
March 28, March 29,
1998 1997
========== ==========
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 2,735 $ 2,503
Charges to income not affecting cash:
Depreciation and amortization 1,885 1,393
Amortization of capitalized customer
acquisition expenditures 7,772 6,594
Deferred income taxes 772 418
Loss on disposal of equipment 13 0
Net change in receivables, inventories, payables and other (1,818) (630)
Capitalized promotional expenditures, net 95 197
Additions to capitalized customer acquisition expenditures (10,294) (8,399)
-------- -------
NET CASH FROM OPERATING ACTIVITIES 1,160 2,076
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (2,821) (2,172)
Purchases of securities available-for-sale (3,620) (6,257)
Sales of securities available-for-sale 3,437 4,942
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (3,004) (3,487)
FINANCING ACTIVITIES:
- ---------------------
Proceeds from issuance of Common Stock 706 214
Payment on purchase of Common Stock (2,637) (180)
-------- -------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (1,931) 34
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (3,775) (1,377)
Cash and cash equivalents at beginning of period 10,252 6,135
-------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 6,477 $ 4,758
======== =======
</TABLE>
See notes to consolidated financial statements.
Page 6 of 15
<PAGE>
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer
marketer and provider of high-quality amateur photofinishing services and
products. The Company offers an array of complementary services and products,
primarily on a mail-order basis, under the brand name Seattle FilmWorks(R). To
a lesser extent, the Company provides services, products and photofinishing
supplies on a wholesale basis to a variety of commercial customers.
The accompanying unaudited consolidated 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
of normal recurring adjustments) considered necessary for fair presentation of
interim results 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 second quarter and six months ended March
28, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 26, 1998. For further information, refer to
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended September 27,
1997.
NOTE B -- STOCK SPLIT
On March 17, 1997 the Company effected a three-for-two stock split by
declaring a stock dividend of one share for every two shares outstanding. All
share data, per share data and related accounts in the accompanying consolidated
financial statements have been retroactively adjusted for this stock split.
NOTE C -- EARNINGS PER SHARE
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options. Diluted
earnings per share is similar to the previously reported primary earnings per
share. All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------------- ---------------------------------
March 28, 1998 March 29, 1997 March 28, 1998 March 29, 1997
============== ============== ================ ==============
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income $ 1,177,000 $ 1,146,000 $ 2,735,000 $ 2,503,000
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 16,564,000 16,278,000 16,552,000 16,266,000
Effect of dilutive securities:
Stock options 915,000 1,482,000 1,009,000 1,529,000
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 17,479,000 17,760,000 17,561,000 17,795,000
=========== =========== =========== ===========
Basic Earnings per Share $ .07 $ .07 $ .17 $ .15
=========== =========== =========== ===========
Diluted Earnings per Share $ .07 $ .06 $ .16 $ .14
=========== =========== =========== ===========
</TABLE>
Page 7 of 15
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information
- ---------------------------
Statements in this report concerning development and introduction of new
services, generation of additional revenue, expected future expenses and any
other statement which may be construed as a prediction of future performance or
events are forward-looking statements, the occurrence of which are subject to a
number of known and unknown risks and uncertainties which might cause actual
results, achievements or occurrences to differ materially from those expressed
or implied by such statements. These risks and uncertainties include the
Company's ability to create and implement effective customer acquisition
techniques; timely development, delivery and market acceptance of products and
services which differentiate the Company from other photofinishers;
technological changes; service and product development; production difficulties
or delays due to technical difficulties, equipment failures, supply constraints
or other factors; changing economic conditions; the impact of competitive
products and pricing; and other risks including those described in the Company's
Annual Report on Form 10-K and those described from time to time in the
Company's other filings with the Securities and Exchange Commission, press
releases and other communications.
General
- -------
Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer
marketer and provider of high-quality amateur photofinishing services and
products. The Company offers an array of complementary services and products
primarily on a mail-order basis under the brand name Seattle FilmWorks(R). The
Company has experienced an increase in net revenues in each year since 1990.
Management believes this growth is attributable principally to its direct-
marketing programs, including the customer acquisition technique of offering two
rolls of film for $2.00 or less (the "Introductory Offer"). The Introductory
Offer has been nationally advertised in package inserts, newspaper supplements
and magazines and through various other direct-response media.
Beginning in fiscal 1995, the Company shifted the focus of, and substantially
expanded, its customer acquisition programs. Management believes that these
steps are the primary reasons for the growth of net revenues and net income
during fiscal 1997, 1996 and the first six months of fiscal 1998. In addition,
management believes its core photofinishing business has benefited from the
introduction of new products, such as the January 1994 introduction of Pictures
On Disk(TM) and PhotoWorks(R).
Customer acquisition costs are comprised of the costs of generating a lead and
the amortization of direct costs associated with the Company's promotional
offers sent to prospective and existing customers. The costs of generating a
lead include all direct-response media, advertising and other costs associated
with developing target customer lists. These costs per lead have declined
during each of the last three fiscal years. The direct costs of customer
acquisition include film, postage and printed material costs associated with
mailings to prospective and existing customers.
The direct costs of customer acquisition are capitalized as an asset on the
Company's consolidated balance sheet as "capitalized customer acquisition
expenditures." Capitalized customer acquisition expenditures relating to
prospective customers are amortized over three years, and capitalized customer
acquisition expenditures relating to certain marketing activities to groups of
existing customers are amortized over six months. These amortization rates are
based on estimates of the timing of future roll processing volumes per customer.
The proportion of capitalized customer acquisition expenditures to be amortized
over three years relative to those to be amortized over six months will vary
from period to period based on the timing and mix of promotional activities.
Rates of amortization are compared from time to time with the actual timing of
roll processing volumes in order to assess whether the amortization rates
appropriately match the direct costs of customer acquisition with the related
revenues. If the Company were to experience a material change in the timing of
roll processing volumes, it could be required to accelerate the rate of
amortization of capitalized customer acquisition expenditures, which could have
a material adverse effect on the Company's business, financial condition and
operating results.
Page 8 of 15
<PAGE>
Customer acquisition costs as a percentage of net revenues have increased
to 19.0% in the first six months of fiscal 1998 as compared to 16.9% in the
first six months of fiscal 1997. Management believes the increase in customer
acquisition costs as a percentage of net revenues was due primarily to expansion
of the Company's customer acquisition programs. Future periods may reflect
increased customer acquisition costs due to timing of 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.
Net income as a percentage of net revenues increased to 6.2% for the first six
months of fiscal 1998 as compared to 5.8% for the same period of fiscal 1997
primarily due to the relationship between changes in costs of goods sold,
customer acquisition costs and other selling expenses which in turn are
primarily driven by changes in sales mix and the Company's customer acquisition
strategy. Operating results will fluctuate in the future due to changes in the
mix of sales, intensity and effectiveness of promotional activities, price
increases by suppliers, introductions of new products, research and development
requirements, actions by competitors, foreign currency exchange rates,
conditions in the direct-to-consumer market and the photofinishing industry in
general, national and global economic conditions and other factors.
Demand for the Company's photo-related services and products is highly
seasonal, with the highest volume of photofinishing activity occurring during
the summer months. However, seasonality of demand may be offset by the
introduction of new services and products, changes in the level of effectiveness
of customer acquisition programs and other factors. This seasonality, when
combined with the general growth of the Company's photofinishing business, has
produced greater photofinishing net revenues during the last half of the
Company's fiscal year (April through September), with a peak occurring in the
fourth fiscal quarter. Net income is affected by the seasonality of the
Company's net revenues due to the fixed nature of a portion of the Company's
operating expenses, seasonal variation in sales mix and the Company's practice
of relatively higher expenditures on marketing programs prior to the summer
months.
RESULTS OF OPERATIONS
The following table presents information from the Company's consolidated
statements of income, expressed as a percentage of net revenues for the periods
indicated.
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
----------------------- -----------------------
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
========== ========== ========== ==========
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods and services 57.9 58.9 57.8 60.0
----- ----- ----- -----
GROSS PROFIT 42.1 41.1 42.2 40.0
Operating expenses:
Customer acquisition costs 19.8 17.4 19.0 16.9
Other selling expenses 9.2 9.7 9.1 9.0
Research and development 0.7 1.0 0.7 0.9
General and administrative 4.8 5.6 4.8 4.9
----- ----- ----- -----
Total operating expenses 34.5 33.7 33.6 31.7
----- ----- ----- -----
INCOME FROM OPERATIONS 7.6 7.4 8.6 8.3
Total other income 0.8 0.7 0.8 0.6
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 8.4 8.1 9.4 8.9
Provision for income taxes 2.9 2.8 3.2 3.1
----- ----- ----- -----
NET INCOME 5.5% 5.3% 6.2% 5.8%
===== ===== ===== =====
</TABLE>
Page 9 of 15
<PAGE>
Net revenues for the second quarter of fiscal 1998 were $21,439,000 compared
to net revenues of $21,657,000 in the second quarter of fiscal 1997. For the
six months ended March 28, 1998, net revenues were $43,910,000 compared to
$42,893,000 for the same period of fiscal 1997. Net revenues were affected by a
lower-than-expected rate of photofinishing growth and a decline in net revenues
from ancillary businesses, primarily wholesale film sales. Management
attributes the reduced photofinishing growth to increased competition and a
continuing impact of extended delivery times experienced by customers during the
summer of fiscal year 1997. Wholesale film sales declined primarily because of
weaker demand and price competition.
Cost of goods and services consist of labor, postage and supplies related
to the Company's services and products. Gross profit in the second quarter of
fiscal 1998 increased to 42.1% of net revenues compared to 41.1% in the second
quarter of fiscal 1997. For the first six months of fiscal 1998, gross profit
increased to 42.2% compared to 40.0% for the same period of fiscal 1997. The
increases in fiscal 1998 periods were due primarily to lower material costs,
photofinishing productivity improvements and to a lesser extent, a product mix
containing a higher percentage of the Company's Seattle FilmWorks(R) branded
products which carry a higher gross profit margin than the Company's other
services and products. Fluctuations in gross profit may occur in future periods
due to the seasonal nature of revenues, mix of product sales, intensity of
promotional activities and other factors.
Total operating expenses in the second quarter of fiscal 1998 increased to
34.5% of net revenues compared to 33.7% in the second quarter of fiscal 1997.
For the first six months of fiscal 1998 total operating expenses increased to
33.6% of net revenues compared to 31.7% for the same period of fiscal 1997. The
increases were due primarily to an increase in customer acquisition and other
selling expenses which affect revenues in current and future periods. The
Company's principal technique for acquiring new customers is its Introductory
Offer of two rolls of 35 mm film for $2.00 or less. The Company capitalized
$10,294,000 of customer acquisition expenditures in the first two quarters of
fiscal 1998 compared to $8,399,000 for the first two quarters of fiscal 1997
while amortization of these costs was $7,772,000 and $6,594,000 during these two
same periods, respectively. Capitalized customer acquisition expenditures as of
March 28, 1998, increased to $16,404,000 compared to $13,882,000 as of September
27, 1997. The increases reflect higher levels of customer acquisition activity
undertaken to expand the customer base and to replace customers management
believes were lost in fiscal 1997 due to summer processing delays. Management
believes this increased investment in customer acquisition combined with new
service and product introductions are the primary reasons for the year-to-date
increase in photofinishing-related revenues. 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 customer acquisition costs due
to the timing of the amortization of capitalized expenditures or the development
and initiation of additional marketing programs.
Other selling expenses include marketing costs associated with building
brand awareness, testing of new marketing strategies and marketing to existing
customers, as well as certain costs associated with acquiring new customers.
Other selling expenses in the second quarter of fiscal 1998 decreased to 9.2% of
net revenues compared to 9.7% of net revenues for the second quarter of fiscal
1997. For the first six months of fiscal 1998, other selling expenses were 9.1%
of net revenues compared to 9.0% of net revenues for the first six months of
fiscal 1997.
Research and development expenses decreased to $153,000 in the second
quarter of fiscal 1998 as compared to $209,000 for the second quarter of fiscal
1997. Research and development expenses for the first six months of fiscal 1998
decreased to $296,000 as compared to $382,000 for the first six months of fiscal
1997. The decreases resulted primarily from lower contract service and
equipment costs for the first and second quarters of fiscal 1998. Research and
development expenses consist primarily of costs incurred in researching new
computerized digital imaging concepts, developing computer software products and
creating equipment necessary to provide customers with new computer-related
photographic services and products.
General and administrative expenses decreased to $1,043,000 for the second
quarter of fiscal 1998 as compared to $1,213,000 for the second quarter of
fiscal 1997. General and administrative costs decreased to $2,099,000 for the
first six months of fiscal 1998 as compared to $2,120,000 for the first six
months of fiscal 1997. The decreases were due primarily to expense controls as
a result of lower than anticipated revenues, although general and administrative
expenses contain higher
Page 10 of 15
<PAGE>
information systems costs related to enhancements and support of both marketing
and production systems. The Company anticipates higher expenses in upcoming
quarters related to the defense of an action filed by Fuji Photo Film Co., Ltd.
with the International Trade Organization against a number of parties, including
the Company's OptiColor, Inc. subsidiary, regarding the import and sale of
recycled cameras. General and administrative expenses consist of costs related
to computer operations, human resource functions, finance, accounting, legal,
investor relations and general corporate activities.
Total other income for the second quarter of fiscal 1998 increased to
$163,000 as compared to $148,000 for the second quarter of fiscal 1997. For the
first six months of fiscal 1998, total other income was $377,000 as compared to
$296,000 for the same period of fiscal 1997. The increases in the fiscal 1998
periods resulted from higher interest income due to increased cash available for
investments.
The federal income tax rate for the first six months of fiscal 1998 as
compared to the first six months of fiscal 1997 decreased to 34.3% from 34.8%.
The decrease was due primarily to a higher balance of tax exempt investments.
Net income in the second quarter of fiscal 1998 was $1,177,000, or $.07
diluted earnings per share, compared to $1,146,000 or $.06 diluted earnings per
share for the second quarter of fiscal 1997. Net income for the first six
months of fiscal 1998 was $2,735,000 or $.16 diluted earnings per share as
compared to $2,503,000 or $.14 diluted earnings per share for the same period of
fiscal 1997. The increases in net income were primarily attributable to the
increase in gross profit partially offset by increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of May 1, 1998, the Company's principal sources of liquidity included cash
and short-term investments of $12,182,000 and an unused revolving line of credit
of $6,000,000. The ratio of current assets to current liabilities for the
Company was 3.2 to 1 at the end of the second quarter of fiscal 1998, compared
to 3.1 to 1 at September 27, 1997. During the first six months of fiscal 1998,
the Company increased inventory levels by $2,779,000 to accommodate expanded
marketing plans and support photofinishing volumes. Accounts payable increased
by $2,016,000 primarily due to inventory purchases. Accounts receivable
decreased by $1,771,000 primarily due to payments received for wholesale film
orders shipped in the fourth quarter of fiscal 1997. Federal income taxes
payable decreased $1,845,000 primarily due to payments made during the first
quarter of fiscal 1998 and increased capitalized customer acquisition
expenditures which are expensed as incurred for federal income tax purposes,
thereby having the effect of reducing current federal income tax liabilities and
increasing deferred federal income tax liabilities.
On January 22, 1997, the Company announced that it may repurchase shares of
its Common Stock, either through open market purchases at prevailing market
prices, through block purchases or in privately negotiated transactions.
Repurchases may be commenced or discontinued by the Company at any time.
Although the number of shares to be repurchased is uncertain, any repurchased
shares will to some degree offset the dilutive effect on earnings per share of
shares of Common Stock issued under the Company's stock option and stock
purchase plans. During the first quarter of fiscal 1998 the Company repurchased
267,300 shares of its common stock for a total of $2,637,000.
The Company currently expects to spend approximately $3,500,000 for capital
expenditures during the remainder of fiscal 1998, principally for photofinishing
equipment, data processing equipment to support its digital and Internet-related
imaging services and for leasehold improvements. Approximately $1,000,000 will
be financed through a capital leasing transaction consisting of sixty monthly
payments of $19,000 commencing in April 1998.
The Company is currently evaluating its computer systems to identify
potential problems relating to the Year 2000 date change but has not yet
determined whether it has material Year 2000 issues. The Company does not
expect the cost to modify its computer systems to address Year 2000 issues will
be material to its financial condition or results of operations, and does not
anticipate any material disruption in its operations as a result of Year 2000
issues. However, the Company does not have information concerning the potential
impact of Year 2000 issues on any if its suppliers or customers. In the event
that the Company or any of the Company's significant suppliers or customers does
not successfully and timely address Year 2000 issues, the Company's business or
operations could be adversely affected.
Page 11 of 15
<PAGE>
The Company currently anticipates that existing funds together with
anticipated cash flow from operations and the Company's available line of credit
of $6,000,000 will be sufficient to finance its operations and 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On February 11, 1998, the Company held its annual meeting of shareholders.
The shareholders acted on the following matter at the annual meeting.
The following individual was elected to the Company's Board of Directors,
to hold office for a three-year term and until his successor is duly elected and
qualified. The number of votes cast, the number of votes withheld, and the
number of broker non-votes are listed below.
For Withheld Non-votes
--- -------- ---------
Douglas A. Swerland 15,344,779 111,298 N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
---------
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
--------------------
None
Page 12 of 15
<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: May 8, 1998 /s/ Gary R. Christophersen
---------------------------------
Gary R. Christophersen
President/Chief Executive Officer
(Principal Executive Officer)
/s/ Case H. Kuehn
---------------------------------
Case H. Kuehn
Vice President-Finance/Treasurer
(Principal Financial and
Chief Accounting Officer)
Page 13 of 15
<PAGE>
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 28, 1998
Exhibit Description Page No.
- ------- ----------- --------
27 Financial Data Schedule 15
Page 14 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM SEATTLE FILMWORKS
SECOND QUARTER 1998 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> MAR-28-1998
<CASH> 11,722
<SECURITIES> 0
<RECEIVABLES> 1,909<F1>
<ALLOWANCES> 0
<INVENTORY> 11,777
<CURRENT-ASSETS> 26,413
<PP&E> 8,840<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,981
<CURRENT-LIABILITIES> 8,353
<BONDS> 0
0
0
<COMMON> 166
<OTHER-SE> 38,239
<TOTAL-LIABILITY-AND-EQUITY> 51,981
<SALES> 0
<TOTAL-REVENUES> 43,910
<CGS> 25,380
<TOTAL-COSTS> 14,745
<OTHER-EXPENSES> (377)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,162
<INCOME-TAX> 1,427
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,735
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE
FILMWORKS INC SECOND QUARTER 1997 10Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 10,632
<SECURITIES> 0
<RECEIVABLES> 1,650<F1>
<ALLOWANCES> 0
<INVENTORY> 8,494
<CURRENT-ASSETS> 21,739
<PP&E> 6,183<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,998
<CURRENT-LIABILITIES> 8,638
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 29,049
<TOTAL-LIABILITY-AND-EQUITY> 41,998
<SALES> 0
<TOTAL-REVENUES> 42,893
<CGS> 25,744
<TOTAL-COSTS> 13,606
<OTHER-EXPENSES> (296)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,839
<INCOME-TAX> 1,336
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,503
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
