FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:June 30, 2002
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.
YesX 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 August 23, 2002:
8,227,389 - Voting Common, 0 - Non - Voting Common
Index
Moto Photo, Inc. and Subsidiaries
Part I. Financial Information
Item 1. Notice Regarding Failure to Obtain Independent Accountant Review
Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001
Consolidated Statements of Operations - Three months ended June 30, 2002 and 2001 and six months ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements - June 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
Part I. Financial Information | |||||
Item 1. Financial Statements | |||||
Moto Photo, Inc. and Subsidiaries | |||||
IMPORTANT NOTE: The Company dismissed its independent accountant, Arthur Andersen LLP, and has not retained an acceptable independent accountant at this time. Accordingly, the Company did not obtain a review of this report or these interim financial statements by an independent accountant using professional standards and procedures, although that review is required by the form. | |||||
Consolidated Balance Sheets | |||||
(Unaudited) | |||||
June 30, | December 31, | ||||
2002 | 2001 | ||||
Assets | |||||
Current assets: | |||||
Cash | $ 993,217 | $ 1,372,657 | |||
Accounts receivable, less allowances of $991,000 | |||||
in 2002 and $858,000 in 2001 | 1,852,383 | 2,541,825 | |||
Notes receivable, less allowances of $34,000 | |||||
in 2002 and $18,000 in 2001 | 16,000 | 73,000 | |||
Inventory | 833,345 | 1,014,729 | |||
Deferred club costs | 80,000 | 111,000 | |||
Prepaid expenses | 72,988 | 25,782 | |||
Total current assets | 3,847,933 | 5,138,993 | |||
Property and equipment, net | 568,611 | 660,237 | |||
Assets held for sale | 640,000 | 1,496,000 | |||
Other assets: | |||||
Notes receivable, less allowances of $1,537,000 | |||||
in 2002 and $1,840,000 in 2001 | 332,706 | 269,960 | |||
Cost of franchises and contract acquired | 37,483 | 53,381 | |||
Other assets | 80,453 | 84,653 | |||
Total assets | $ 5,507,186 | $ 7,703,224 | |||
See accompanying notes. | |||||
Moto Photo, Inc. and Subsidiaries | ||||||
Consolidated Balance Sheets, continued | ||||||
(Unaudited) | ||||||
June 30, | December 31, | |||||
2002 | 2001 | |||||
(Unaudited) | ||||||
Liabilities and stockholders' deficit | ||||||
Current liabilities: | ||||||
Accounts payable | $ 4,225,712 | $ 4,739,305 | ||||
Accrued payroll and benefits | 548,884 | 876,122 | ||||
Accrued expenses | 866,426 | 881,100 | ||||
Accrued restructuring expenses | 752,500 | 727,000 | ||||
Deferred club revenue | 215,132 | 264,536 | ||||
Current portion of long-term obligations | 4,741,247 | 4,808,050 | ||||
Other | 95,625 | 105,450 | ||||
Total current liabilities | 11,445,526 | 12,401,563 | ||||
Long-term debt, less current portion | - | 290,743 | ||||
Capitalized lease obligations, less current portion | 52,470 | 59,929 | ||||
Deferred compensation, less current portion | 529,650 | 645,250 | ||||
Deferred income | 661,666 | 666,671 | ||||
Total liabilities | 12,689,312 | 14,064,156 | ||||
Stockholders' deficit | ||||||
Preferred stock $.01 par value: | ||||||
Authorized shares - 2,000,000: | ||||||
Amended Series G cumulative nonvoting preferred | ||||||
shares, 1,000,000 shares issued and outstanding | ||||||
with preferences aggregating $10,000,000 | 10,000 | 10,000 | ||||
Common shares $.01 par value: | ||||||
Authorized shares - 31,000,000: | ||||||
Issued and outstanding shares - 8,227,389 | ||||||
in 2002 and 7,884,565 shares in 2001 | 82,274 | 78,845 | ||||
Treasury stock, at par (0 shares in 2002 | ||||||
and 1,227 shares in 2001, at par) | - | (12) | ||||
Paid-in capital | 8,131,555 | 7,653,102 | ||||
Accumulated deficit subsequent to June 30, 1991 | (15,405,955) | (14,102,867) | ||||
Total stockholders' deficit | (7,182,126) | (6,360,932) | ||||
Total liabilities and stockholders' deficit | $ 5,507,186 | $ 7,703,224 | ||||
See accompanying notes. | ||||||
Moto Photo, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Six Months Ended | |||||||
June 30, | June 30, | June 30, | June 30, | |||||
2002 | 2001 | 2002 | 2001 | |||||
Revenues | ||||||||
Sales and other revenue | 6,387,139 | $ 8,362,467 | 11,208,641 | $ 14,747,640 | ||||
Interest income | 6,782 | 23,158 | 18,103 | 66,570 | ||||
6,393,921 | 8,385,625 | 11,226,744 | 14,814,210 | |||||
Expenses | ||||||||
Cost of sales and operating expenses | 4,793,095 | 6,370,563 | 8,739,775 | 11,592,220 | ||||
Selling, general, and administrative expenses | 983,952 | 1,232,577 | 1,963,881 | 2,417,575 | ||||
Advertising expense | 161,084 | 213,416 | 266,859 | 389,875 | ||||
Depreciation and amortization | 57,783 | 349,798 | 112,408 | 704,547 | ||||
Interest expense | 51,985 | 108,865 | 104,853 | 222,046 | ||||
Restructuring charge | 894,568 | - | 894,568 | - | ||||
6,942,467 | 8,275,219 | 12,082,344 | 15,326,263 | |||||
Income (loss) before income taxes | (548,546) | 110,406 | (855,600) | (512,053) | ||||
Income taxes | - | - | - | - | ||||
Net income (loss) | (548,546) | 110,406 | (855,600) | (512,053) | ||||
Preferred stock dividend accretion | (226,946) | (202,394) | (447,488) | (399,076) | ||||
Net income (loss) applicable to common shares |
$ (775,492) |
$ (91,988) |
$ (1,303,088) |
$ (911,129) | ||||
Net income (loss) per common share - basic and diluted | $ (.09) | $ (.01) | $ (.16) | $ (.12) | ||||
Weighted average shares outstanding - basic and diluted | 8,227,389 | 7,818,235 | 8,141,851 | 7,806,539 | ||||
See accompanying notes.
Moto Photo, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, | ||||
2002 | 2001 | |||
Operating activities | ||||
Net loss | $ (855,600) | $ (512,053) | ||
Adjustments to reconcile net cash provided by (utilized in) operating activities: | ||||
Depreciation and amortization | 112,408 | 704,547 | ||
Provision for losses on inventory and receivables | 79,496 | 229,110 | ||
Notes receivable increases as a result of franchise activities | (35,000) | (23,115) | ||
Loss on disposition of assets | - | 2,057 | ||
Asset write-down charges | 816,000 | - | ||
Noncash directors fees expense | 34,405 | 8,754 | ||
Increase (decrease) resulting from changes in: | ||||
Income tax receivable | - | 240,784 | ||
Accounts receivable | 454,795 | 560,102 | ||
Inventory, prepaid expenses and deferred club costs | 164,727 | 198,628 | ||
Accounts payable, accrued payroll, benefits and accrued expenses | (830,005) | (822,868) | ||
Deferred revenue and other liabilities | (171,234) | 1,743 | ||
Net cash provided by (utilized in) operating activities | (230,008) | 587,689 | ||
Investing activities | ||||
Purchases of property and equipment | (4,883) | (237,011) | ||
Proceeds from sale of property and equipment | 40,000 | - | ||
Payments received on notes receivable | 184,856 | 146,355 | ||
Other assets | 4,200 | 53 | ||
Net cash provided by (utilized in) investing activities | 224,173 | (90,603) | ||
Financing activities | ||||
Principal payments on long-term debt and capital | ||||
lease obligations | (373,605) | (524,028) | ||
Net cash utilized in financing activities | (373,605) | (524,028) | ||
Decrease in cash | (379,440) | (26,942) | ||
Cash at beginning of period | 1,372,657 | 1,504,233 | ||
Cash at end of period | $ 993,217 | $ 1,477,291 | ||
See accompanying notes | ||||
Moto Photo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2002 and June 30, 2001
"Unaudited"
A. Basis of Presentation
The Company dismissed its independent accountant, Arthur Andersen LLP, and has not retained an acceptable independent accountant at this time. Accordingly, the Company did not obtain a review of this report or the accompanying interim financial statements by an independent accountant using professional standards and procedures, although that review is required by the form.
The accompanying unaudited consolidated financial statements have been derived from the unaudited accounting records of Moto Photo, Inc. and its subsidiaries ("the Company") and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X except as provided in the preceding paragraph. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.
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., June 29 vs. June 30 for the second quarter 2002), except for the fourth quarter, which ends on December 31. The differences in ending dates are immaterial.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates that affect amounts reported in the financial statements. Actual results could differ from those estimates.
The Company has a $1.9 million note with Fuji, as well as accounts payable of approximately $2.7 million, subject to other claims. In May 2001, the Company's primary bank declared the Company to be in default of certain financial covenants under an agreement with the bank, although the Company remains current with its bank payment obligations. The bank therefore has the right to accelerate repayments of the bank debt and lease obligations; however, the bank has not given notice of any intent to accelerate these payments. The bank agreement prohibits principal payments on the note payable to Fuji until covenant compliance is achieved. The Company has been in negotiations with Fuji to change the Company's payment schedule on the $1.9 million note, on its accounts payable and on the terms of the Amended Series G Stock, all of which is held by Fuji. The Company has been unable to obtain agreement at this point. On March 21, 2002 the Company advised Fuji that it was substantially reducing its payments on its past due trade payables while negotiations are pending. There can be no assurance negotiations will be successful.
The Company terminated its supply contract with Fuji on September 17, 2001, giving rise to a redemption event ("Redemption Event") that could ultimately result in Fuji's acquiring control of the Company. Please see Item 2. Liquidity and Capital Resources.
On September 17, 2001 the Company signed a three-year contract with Eastman Kodak Company ("Kodak") for the purchase of photo processing paper, film, and batteries. The Company has agreed to purchase 100 million square feet of photo processing paper from Kodak over three years; if the Company does not meet its purchase requirement, the contract will be extended for another year. The Company believes that, at current purchasing levels, it will be able to meet the purchase commitment within the four-year period. In addition, the Company has agreed to purchase at least one million rolls of film and/or one-time-use cameras from Kodak each year during the term of the supply contract; if the Company fails to do so, Kodak has the right to increase film prices. Purchases from Kodak will be made primarily for resale to franchisees.
The ability of the Company to continue as a going concern depends upon, among other things, (i) the Company's obtaining satisfactory repayment terms on the Company's indebtedness to Fuji, (ii) the Company's obtaining an amendment or waiver from the bank concerning its financial covenants or the bank's refraining from accelerating repayment of the Company's indebtedness to the bank, (iii) the Company's generating sufficient cash from operations and/or other sources to meet its obligations, and (iv) success of the Company's restructuring plan, including the sale of the company stores at their estimated sales price.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amount and classification of liabilities, that might be necessary should the Company be unable to continue as a going concern, except for the increased deferred tax valuation allowance and the classification of the primary bank debt and capitalized lease obligations as current.
For further information, see the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K of Moto Photo, Inc. and Subsidiaries for the year ended December 31, 2001.
B. Supplemental Noncash Investing and Financing Cash Flow Information
Noncash items included noncash expense for directors fees totaling $34,405 during the first half of 2002 and $8,754 during the first half of 2001. Noncash items in the first half of 2001 also included $48,607 of capital expenditures from entering into capitalized leases.
C. Restructuring Charges
During the fourth quarter of 2001, the Company announced its plan to exit all its company-owned stores, except for the stores operated in the Dayton, Ohio area, and recorded a restructuring charge of $6.6 million. The balance of the stores will be franchised, sold, or, if unprofitable, closed. Annual revenue in 2001 for the stores that will be exited was approximately $12.3 million.
During the second quarter of 2002, the Company recorded a charge of $895,000 for restructuring, consisting of an additional write-down of $816,000 for company store assets held for sale and an additional net restructuring charge of $79,000, consisting of an additional $309,000 liability for operating lease net termination costs, offset by a $230,000 reduction in liabilities to reflect changes in management's estimates of future obligations related to company stores held for sale. Management believes these adjustments are necessary to reflect the most current information available and current economic and industry realities.
Following is a summary of the accrued restructuring liabilities and related activity through June 30, 2002:
Store Selling | ||||
Severance | And Other | Total | ||
Balance, December 31, 2001 | $ 287,000 | $ 727,000 | $ 1,014,000 | |
Credited to reserves | - | 309,000 | 309,000 | |
Charged to reserves | (188,062) | (283,500) | (198,562) | |
Balance, June 30, 2002 | $ 98,938 | $ 752,500 | $ 851,438 |
The severance accrual is for hourly and salaried employees whose positions will be eliminated due to the franchising, selling or closing of company stores. The store selling and other liabilities relate to estimated store fix-up and closing costs, broker and legal fees, and operating lease net termination costs.
The photo processing and printing equipment, computer equipment, furniture and fixtures, and leasehold improvements in the 24 stores to be sold are classified as assets held for sale. During the six months ended June 30, 2002, three stores were sold.
D. Segment Information
Three Months Ended June 30, 2002
|
Development | Company Stores | Royalties and Advertising | Wholesale | Total |
Sales and other revenue | $ 35,740 | $ 2,250,976 | $ 963,060 | $ 3,137,363 | $ 6,387,139 |
Depreciation and amortization | 257 | 23,418 | 2,714 | 924 | 27,313 |
Operating segment contribution prior |
(43,533) |
(342,423) |
720,942 |
61,527 |
396,513 |
Restructuring charges | - | 894,568 | - | - | 894,568 |
Capital expenditures | - | - | - | - | - |
Three Months Ended June 30, 2001
Development | Company Stores | Royalties and Advertising | Wholesale | Total | |
Sales and other revenue | $ (1,250) | $3,473,226 | $1,141,774 | $3,748,717 | $8,362,467 |
Depreciation and amortization | 353 | 298,196 | 2,878 | (227) | 301,200 |
Operating segment contribution prior |
(92,601) |
(468,580) |
806,769 |
(92,972) |
152,616 |
Capital expenditures | - | 98,539 | - | - | 98,539 |
Six Months Ended June 30, 2002
|
Development | Company Stores | Royalties and Advertising |
Wholesale |
Total |
Sales and other revenue | $ 50,990 | $ 4,085,770 | $ 1,771,504 | $ 5,300,377 | $11,208,641 |
Depreciation and amortization | 686 | 46,094 | 5,196 | 1,718 | 53,694 |
Operating segment contribution prior |
(78,870) |
(984,719) |
1,286,281 |
(97,962) |
124,730 |
Restructuring charges | - | 894,568 | - | - | 894,568 |
Identifiable segment assets | 35,367 | 1,632,156 | 366,990 | 2,161,298 | 4,195,811 |
Capital expenditures | - | - | - | - | - |
D. Segment Information (continued)
Six Months Ended June 30, 2001
Development | Company Stores | Royalties and Advertising |
Wholesale |
Total | |
Sales and other revenue | $18,613 | $6,129,100 | $2,127,325 | $6,472,602 | $14,747,640 |
Depreciation and amortization | 778 | 597,655 | 5,807 | 2,105 | 606,345 |
Operating segment contribution prior to interest income and expense, investment expense, income taxes, restructuring charges and unallocated corporate expenses for segment totals reconciled to income (loss) before taxes |
(186,078) |
(1,370,547) |
1,468,627 |
(277,852) |
(365,850) |
Identifiable segment assets | 43,219 | 9,256,116 | 669,064 | 2,810,230 | 12,778,629 |
Capital expenditures | - | 284,612 | - | - | 284,612 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
REVENUE | 2002 | 2001 | 2002 | 2001 | |||
Total sales and other revenue for reportable segments | $ 6,387,139 | $ 8,362,467 | $ 11,208,641 | $ 14,747,640 | |||
Interest income | 6,782 | 23,158 | 18,103 | 66,570 | |||
Total consolidated revenue | $ 6,393,921 | $ 8,385,625 | $ 11,226,744 | $ 14,814,210 | |||
D. Segment Information (continued)
Other Significant Items | Segment Totals | Corporate | Consolidated Total | |
Three Months Ended June 30, 2002 | ||||
Depreciation and amortization | 27,313 | 30,470 | 57,783 | |
Operating segment contribution prior to | ||||
interest income and expense, investment expense, income taxes, restructuring charges and unallocated corporate expenses for segment totals reconciled to income (loss) |
396,513 |
(50,491) |
346,022 | |
Restructuring charges | 894,568 | - | 894,568 | |
Capital expenditures | - | - | - | |
Three Months Ended June 30, 2001 | ||||
Depreciation and amortization | $301,200 | $48,598 | $349,798 | |
Operating segment contribution prior to | ||||
interest income and expense, investment expense, income taxes, restructuring charges and unallocated corporate expenses for segment totals reconciled to income (loss) |
152,616 |
(42,210) |
110,406 | |
Capital expenditures | 98,539 | 1,006 | 99,545 | |
| ||||
Six Months Ended June 30, 2002 | ||||
Depreciation and amortization | $ 53,694 | $ 58,714 | $ 112,408 | |
Operating segment contribution prior to | ||||
interest income and expense, investment expense, income taxes, restructuring charges and unallocated corporate expenses for segment totals reconciled to income (loss) |
124,730 |
(85,762) |
38,968 | |
Restructuring charges | 894,568 | - | 894,568 | |
Identifiable segment assets | 4,195,811 | 1,311,375 | 5,507,186 | |
Capital expenditures | - | 4,883 | 4,883 | |
Six Months Ended June 30, 2001 | ||||
Depreciation and amortization | $ 606,345 | $ 98,202 | $ 704,547 | |
Operating segment contribution prior to | ||||
interest income and expense, investment expense, income taxes, restructuring charges and unallocated corporate expenses for segment totals reconciled to income (loss) |
(365,850) |
(146,203) |
(512,053) | |
Identifiable segment assets | 12,778,629 | 2,837,412 | 15,616,041 | |
Capital expenditures | 284,612 | 1,006 | 285,618 | |
E. Income (Loss) Per Share Data
The following table sets forth the calculation of basic and diluted loss per share for the periods indicated.
Three Months EndedSix Months Ended
June 30, 2002 | June 30, 2001 | June 30, 2002 | June 30, 2001 | ||||
Net loss applicable to common shares | $ (775,492) | $ (91,988) | $ (1,303,088) | $ (911,129) | |||
Reconciliation of shares: | |||||||
Weighted average common shares Outstanding | 8,227,389 | 7,818,235 | 8,141,851 | 7,806,539 | |||
Effect of dilutive stock options and other common stock equivalents | - | - | - | - | |||
Weighted average common shares assuming dilution | 8,227,389 | 7,818,235 | 8,141,851 | 7,806,539 | |||
Loss per common share - basic and diluted |
$ (.09) |
$ (.01) |
$ (.16) |
$ (.12) | |||
Item 2.
Management's Discussion and Analysis
of Financial Condition
and Results of Operations
See Note A to the financial statements for information concerning the Company's ability to continue as a going concern.
Results of Operations Second Quarter 2002 vs. Second Quarter 2001
The Company reported a net loss of $548,546, or loss per common share, basic and diluted, of $.09 for the second quarter 2002, compared to net income of $110,406, or a loss per common share, basic and diluted, of $.01 for the second quarter 2001. Per share calculations are made after provision for preferred dividend requirements. The dividend requirement is an imputed amount, and no cash payments are required. Because the Company's common share price is approximately $0.05, certain securities could become dilutive and have a significant impact on diluted earnings per share in subsequent periods.
Development segment revenue increased by $37,000 in 2002 compared to 2001. During the second quarter of 2002, one new franchise was opened and three existing franchises were transferred, as compared to one transfer during the second quarter of 2001. Development segment operating contribution improved by $49,000 as compared to the same period in 2001, primarily attributable to decreased controllable costs and advertising costs and increased margins.
Company store revenue decreased $1,222,000, or 35%, in 2002 compared to 2001, primarily due to $943,000 in decreased revenue from the closure or sale of sixteen company stores in 2001 and year-to-date in 2002 and a 12% comparable store sales decline primarily attributable to a reduction in rolls processed.
Company store segment operating contribution improved by $126,000 in 2002 compared to 2001. Gross margin decreased approximately $885,000, primarily due to decreased revenue. Offsetting the margin reduction were decreased operating expenses of approximately $755,000, primarily attributable to the closure of company stores. An additional improvement of $155,000 in 2002 was from the elimination of depreciation/amortization expense on assets of the 24 remaining company stores that are being offered for franchise or sale, in addition to a reduction in allocated corporate overhead of $101,000.
Royalty and advertising revenue decreased $179,000, or 16%, in 2002 compared to 2001, due to approximately 11% less franchise stores during the second quarter 2002 as compared to the same period in the previous year, and a decline of approximately 8% in comparable store franchise sales. Segment operating profit contribution decreased by $86,000 in 2002 compared to 2001, primarily due to the reduced revenue which was partially offset by improved operating expenses.
Wholesale revenue decreased by $611,000, or 16%, in 2002 compared to 2001. Approximately 50% of the decrease resulted from the 8% decline in comparable franchised store sales for the period. The balance of the decline is primarily attributable to fewer franchisees purchasing their supply requirements through the Company and lower selling prices. Wholesale segment operating contribution improved by $154,000 due to lower operating expenses and allocated corporate overhead. A gross margin reduction of approximately $13,000 was due to the reduced revenue and was partially offset by a gross margin rate improvement.
In 2002, selling, general and administrative expense decreased $249,000, or 20%, from the same period in the prior year, primarily due to reductions in corporate expenses.
Advertising expense decreased by $52,000 in 2002 as compared to 2001, primarily due to decreased store revenues and lower franchise development advertising. Company store advertising as a percentage of sales remained at a comparable level with the second quarter of 2001.
Depreciation and amortization expense decreased from $350,000 in 2001 to $58,000 in 2002, primarily due to the December 31, 2001 asset write-down of substantially all company stores to net realizable value and the related write-off of all goodwill (see Note C).
Interest expense decreased $57,000, or 52%, in 2002 compared to 2001, primarily due to reduced average bank borrowings of approximately 40% and reduced interest rates on variable-rate debt. Interest income, which is primarily interest income from notes receivable and temporary investments of cash, decreased $16,000 in 2002 due to lower notes receivable and cash balances.
Results of Operations - First Six Months of 2002 vs. First Six Months of 2001
The Company reported a net loss of $855,600, or loss per common share, basic and diluted, of $.16 for the first six months ended June 30, 2002, compared to net loss of $512,053, or a loss per common share, basic and diluted, of $.12 for the comparable prior year period. Per share calculations are made after provision for preferred dividend requirements. The dividend requirement is an imputed amount, and no cash payments are required. Because the Company's common share price is approximately $0.05, certain securities could become dilutive and have a significant impact on diluted earnings per share in subsequent periods.
Development segment revenue increased by $32,000 in 2002 compared to 2001. During the first six months of 2002, one new franchise was opened and four existing franchises were transferred, as compared to six transfers and renewals in the prior period. Development segment operating contribution improved by $107,000 as compared to the same period in 2001, primarily attributable to decreased controllable costs and advertising costs and increased margins.
Company store revenue decreased $2,043,000, or 33%, in 2002 compared to 2001, primarily due to $1,612,000 in decreased revenue from the closure or sale of sixteen company stores in 2001 and year-to date in 2002 and a 10% comparable store sales decline primarily attributable to a reduction in rolls processed.
Company store segment operating contribution improved by $386,000 in 2002 compared to 2001. Gross margin decreased approximately $1,370,000, primarily due to decreased revenue. Offsetting the margin reduction were decreased operating expenses of approximately $1,301,000, primarily attributable to the closure of company stores. An additional improvement of $321,000 in 2002 was from the elimination of depreciation/amortization expense on assets of the 24 remaining company stores that are being offered for franchise or sale, in addition to a reduction in allocated corporate overhead of $134,000.
Royalty and advertising revenue decreased $356,000, or 17%, in 2002 compared to 2001, due to approximately 11% fewer franchise stores during the first six months of 2002 as compared to the same period in the previous year, and a decline of approximately 7% in comparable store franchise sales. Segment operating profit contribution decreased by $182,000 in 2002 compared to 2001, primarily due to the reduced revenue which was partially offset by improved operating expenses.
Wholesale revenue decreased by $1,172,000, or 18%, in 2002 compared to 2001. Approximately 50% of the decrease resulted from the 7% decline in comparable franchised store sales for the period. The balance of the decline is primarily attributable to fewer franchisees purchasing their supply requirements through the Company and lower selling prices. Wholesale segment operating contribution improved by $180,000 due to lower operating expenses and allocated corporate overhead. A gross margin reduction of approximately $45,000 was due to the reduced revenue, and was partially offset by a gross margin rate improvement.
In 2002, selling, general and administrative expense decreased $454,000, or 19%, from the same period in the prior year, primarily due to reductions in corporate expenses.
Advertising expense decreased by $123,000 in 2002 as compared to 2001, primarily due to decreased store revenues and lower franchise development advertising. Company store advertising as a percentage of sales remained at a comparable level with the first six months of 2001.
Depreciation and amortization expense decreased from $705,000 in 2001 to $112,000 in 2002, primarily due to the December 31, 2001 asset write-down of substantially all company stores to net realizable value and the related write-off of all goodwill (see Note C).
Interest expense decreased $117,000, or 53%, in 2002 compared to 2001, primarily due to reduced average bank borrowings of approximately 41% and reduced interest rates on variable-rate debt. Interest income, which is primarily interest income from notes receivable and temporary investments of cash, decreased $48,000 in 2002 due to lower notes receivable and cash balances.
Liquidity and Capital Resources
Net cash utilized in operating activities increased by approximately $0.8 million in 2002 compared to 2001, due to the receipt of an income tax refund in 2001, payments made in 2002 related to severance and other restructuring-related costs that total approximately $241,000, reduced operating profit of approximately $246,000 before depreciation, amortization and material non-cash provisions, and payments of $107,000 made in 2002 under deferred compensation agreements.
In 2002, net cash provided by investing activities was $224,000, as compared to net cash utilized in investing activities of $91,000 in 2001. Decreases in capital expenditures, arising from the Company's decision in November 2001 to franchise, sell or close most of its company stores, an increase in proceeds from the sale of stores during the first half of 2002, and increased collections on notes receivables were primarily responsible for the difference.
Net cash utilized in financing activities was $374,000 in 2002 as compared to $524,000 in 2001. During 2002, payments of $303,000 were made to the Company's primary bank for scheduled principal payments and a payoff of a capitalized lease obligation, with the balance of payments made to various other lenders. During 2001, payments of approximately $430,000 were made to Fuji on a note and a revolving credit arrangement, with the balance of payments made to various other lenders. In 2000, the Company prepaid to its primary bank any principal payments that were due during the first half of 2001.
The working capital deficit as of June 30, 2002 increased over December 31, 2001 by approximately $335,000. Reductions in accounts payable and accrued payroll and benefits were more than offset by reductions in receivables, cash and inventory, and can be primarily attributable to seasonality in the photoprocessing and retail industry.
The Company has a $1.9 million note with Fuji, as well as accounts payable of approximately $2.7 million, subject to other claims. In May 2001, the Company's primary bank declared the Company to be in default of certain financial covenants under an agreement with the bank, although the Company remains current with its bank payment obligations. The bank therefore has the right to accelerate repayments of the bank debt and lease obligations; however, the bank has not given notice of any intent to accelerate these payments. The bank agreement prohibits principal payments on the note payable to Fuji until covenant compliance is achieved. The Company has been in negotiations with Fuji to change the Company's payment schedule on the $1.9 million note, on its accounts payable and on the terms of the Amended Series G Stock, all of which is held by Fuji. The Company has been unable to obtain agreement at this point. On March 21, 2002 the Company advised Fuji that it was substantially reducing its payments on its past due trade payables while negotiations are pending. There can be no assurance negotiations will be successful.
The current portion of long-term obligations included approximately $1.9 million for June 30, 2002 and $2.9 million for June 30, 2001, due to the classification of all primary bank long-term debt and capitalized lease obligations as current because of the Company's non-compliance with certain financial covenants with its primary bank.
The Company's material capital commitments consist primarily of long-term debt and lease obligations. Funds for repaying these commitments need to be generated primarily from operations, working capital and other sources in future years. If the Company could not generate sufficient funds to repay these commitments as they become due, the Company would need to raise additional capital. There is no assurance the Company could do so, and even if the Company were successful, existing shareholders could suffer significant dilution.
The Company has $10,000,000 of Amended Series G Stock outstanding that Fuji may require the Company to redeem at any time subsequent to March 17, 2002, due to the occurrence of a redemption event ("Redemption Event"). If Fuji requests redemption, the Company may redeem by offering the requisite cash or common stock at its option. If redemption were to occur in shares of common stock, depending upon the market price of the common stock and the number of shares of common stock outstanding at the time of redemption, Fuji could acquire control of the Company. Based on current market prices of the common stock, full redemption of the Amended Series G Stock in shares of common stock would result in Fuji having the right to receive shares representing approximately 95% of the Company's outstanding common stock following such redemption. If the Company fails to give notice of redemption of all of the Amended Series G Stock upon request by Fuji, Fuji would have the right, until all the shares o f the Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority of the Board of Directors. The Company is uncertain at this time how and when the Amended Series G Stock will be retired. The Company continues to explore various possibilities to negotiate a satisfactory resolution of the Fuji relationship.
The Company currently has 21,772,611 authorized but unissued shares of voting common stock, which would be insufficient at current share prices to redeem all shares of the Amended Series G Stock should Fuji request redemption. In such case, the Company would have to seek shareholder authorization of additional shares of common stock.
This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words as "anticipates", "believes", "assumes", "expects", "intends", "estimates", "planned", "scheduled", "may", "will", "would", "could" or similar expressions. Such forward-looking statements, which reflect the Company's current views of future events and financial performance, involve known and unknown risks and uncertainties that may cause the Company's actual results to differ materially from planned or expected results. Those risks and uncertainties include, but are not limited to: those risk factors described in the Company's Form 10-K for the year ended December 31, 2001, uncertainty relating to new store development and expansion, decline in consumer or franchisee demand for the products and services offered, consumer acceptance of new programs and services, stability in market prices of key supply it ems, continuity of management, liquidity of the Company and franchise system, lender and supply relationships, economic conditions, the ability of the Company to locate and obtain favorable store sites at acceptable lease terms, management's ability to manage its franchisees, the effect of severe weather or natural disasters, and the availability of capital and financing on acceptable terms. For all of the foregoing reasons, actual results may vary materially from the forward-looking statements. The Company assumes no obligation to update any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in market risk since December 31, 2001.
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
(a) On May 3, 2001, the Company's primary bank declared the Company to be in default of certain financial covenants under a Loan and Security Agreement between the Company and the bank. This default continues. The Company is current on all of its obligations to the bank; loans and leases from the bank total approximately $4.7 million. The bank therefore has the right to accelerate repayments of the bank debt and lease obligations; however, the bank has not given notice of any intent to accelerate these payments.
The Company has a $1.9 million note payable to Fuji Photo Film U.S.A., Inc. ("Fuji"), as well as accounts payable of approximately $2.7 million, subject to other claims. While there is a default under the Company's agreement with its primary bank, an agreement between the bank agreement and Fuji prohibits principal payments on the note payable to Fuji until covenant compliance is achieved. The Company has been in negotiations with Fuji to change the Company's payment schedule on the $1.9 million note, on its accounts payable to Fuji and on the terms of the Amended Series G Stock, all of which is held by Fuji. The Company has been unable to obtain agreement at this point. On March 21, 2002 the Company advised Fuji that it was substantially reducing its payments on its past due trade payables while negotiations are pending. There can be no assurance negotiations will be successful.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) On June 28, 2002, the Company held its annual meeting of shareholders.
(c) At the meeting the shareholders voted on the election of directors. The voting tabulation for each director is set next to his or her name.
Votes ForVotes Withheld
Michael Adler 7,148,481 254,275
Jane Aggers 7,218,281 184,475
Leslie Charm 7,184,881 217,875
Dexter Dawes 7,183,881 218,875
Lawrence Destro 7,056,771 345,985
Harry Loyle 7,211,081 191,675
David Mason 7,175,681 227,075
James Robeson 7,191,481 211,275
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See Exhibit Index immediately preceding exhibits.
(b) Reports on Form 8-K. During the quarter ended June 30, 2002, the Company filed a report on Form 8-K dated June 11, 2002, to report the dismissal of Arthur Andersen LLP as the Company's independent public accountant and the engagement of Deloitte & Touche LLP ("Deloitte") as the Company's independent auditor for the year ending December 31, 2002, subject to Deloitte's customary client acceptance procedures. At the same time, the Company filed a similar report on Form 8-K on behalf of the Moto Photo, Inc. Salary Savings Plan.
In addition, on July 15, 2002, the Company filed a report on Form 8-K, dated July 10, 2002, to report that Deloitte had informed the Company that Deloitte was not accepting the engagement.
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/ Alfred E. Lefeld
Alfred E. Lefeld,
Vice President, Treasurer, and Chief
Financial Officer
Date: August 27, 2002
EXHIBITS TO
FORM 10-Q
for the quarter ended
June 30, 2002
Copies of the following documents are filed as exhibits to this report:
No.Description
10.1* Line of Credit Promissory Note dated as of April 1, 2002 by Lawrence P. Destro
99.2 Chief Financial Officer Certification
__________________________
*Indicates management contract or compensatory plan.
