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, 1998
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-11927
Moto Photo Inc.
(Exact name of registrant as specified in its charter)
Delaware 31-1080650
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
4444 Lake Center Dr. Dayton, OH 45426
(Address of principal executive offices with Zip Code)
(937) 854-6686
(Registrant's telephone number, including area code)
No Change
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
As of July 31, 1998:
7,812,673 - Voting Common, 0 - Non - Voting Common
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December
31,
1998 1997
ASSETS
CURRENT ASSETS:
Cash $ 901,438 $ 3,139,252
Accounts receivable, less allowances of $1,420,000
in 1998 and $1,590,000 in 1997 3,667,324 4,416,899
Notes receivable, less allowances of $125,000 in 403,669
1998 and 1997 437,669
Inventory 1,774,462 1,388,010
Deferred tax assets 1,025,000 1,025,000
Prepaid expenses 356,786 223,176
Total current assets 8,162,679 10,596,006
Property and equipment 3,012,093 3,095,006
OTHER ASSETS:
Notes receivable, less allowances of $1,251,000 in
1998 and $893,000 in 1997 1,867,093 2,157,360
Cost of franchises and contracts acquired 172,047 167,741
Goodwill 3,810,815 3,932,883
Deferred tax assets 57,000 57,000
Other assets 1,444,167 1,032,119
Total assets $18,525,894 $21,038,115
MOTO PHOTO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,827,593 $ 3,206,342
Accrued payroll and benefits 557,064 1,060,188
Accrued expenses 1,199,029 1,472,306
Current portion of long-term obligations 1,391,000 1,444,000
Other 296,381 181,286
Total current liabilities 5,271,067 7,364,122
Long-term obligations 9,447,014 9,783,805
Deferred revenue 119,032 119,032
Total liabilities 14,837,113 17,266,959
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value:
Authorized shares - 2,000,000:
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 - 30,000,000
Issued and outstanding shares - 7,812,673 in 1998
and 7,793,573 in 1997 78,127 78,030
Paid-in capital 6,532,101 6,670,981
(Deficit) retained earnings subsequent to
June 30, 1991 (2,931,447) (2,987,855)
Total stockholders' equity 3,688,781 3,771,156
Total liabilities and stockholders' equity $18,525,894 $21,038,115
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
REVENUES
Company store sales $3,448,618 $ 4,491,315 $ 6,184,199 $ 8,032,902
Merchandise sales 4,487,113 4,751,845 7,580,796 8,251,984
Royalties 1,318,605 1,239,749 2,351,862 2,309,541
Franchise fees 36,750 214,435 59,000 260,205
Investment income 98,490 60,228 192,957 149,814
Telemarketing revenue 142,763 233,846 254,966 448,720
9,532,339 10,991,418 16,623,780 19,453,166
EXPENSES
Company store cost of sales
and operating expenses 2,824,261 3,614,868 5,441,412 6,909,577
Merchandise cost of sales
and operating expenses 3,917,788 4,144,429 6,744,665 7,230,816
Selling, general, and
administrative costs 1,593,967 1,790,432 2,943,834 3,490,659
Advertising 347,389 351,710 605,073 636,652
Depreciation and amortization 224,227 203,827 434,987 403,022
Interest expense 112,859 120,062 210,599 200,283
9,020,491 10,225,328 16,380,570 18,871,009
Income before income taxes 511,848 766,090 243,210 582,157
Income tax expense (116,000) (237,500) (49,000) (180,500)
Net income 395,848 528,590 194,210 401,657
Preferred stock dividend
requirements (68,904) (70,964) (138,328) (142,434)
Net income applicable to
common stock $ 326,944 $ 457,626 $ 55,882 $ 259,223
Net income per common share $ 0.04 $ 0.06 $ 0.01 $ 0.03
Weighted average shares
outstanding - Basic 7,809,581 7,791,832 7,807,074 7,789,869
Weighted average shares
outstanding - Diluted 7,932,520 7,856,275 7,995,479 7,851,904
MOTO PHOTO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASHFLOWS
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
OPERATING ACTIVITIES
Net income $ 194,210 $ 401,657
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 434,987 403,022
Provision for losses on inventory and
receivables 249,680 397,178
Write off of assets due to store closings 32,257 -
Loss on disposition of assets 65,672 43,432
Issuance of stock for directors fees 23,413 14,060
Increase (decrease) resulting from changes in:
Accounts receivable 466,247 (61,214)
Inventory and prepaid expenses (544,062) (170,206)
Other assets (462,563) 3,735
Accounts payable and accrued expenses (2,131,737) (3,292,084)
Deferred revenues and other liabilities 115,095 381,396
Net cash used in operating activities (1,556,801) (1,879,024)
INVESTING ACTIVITIES
Purchases of equipment and leaseholds (247,491) (96,292)
Payments received on notes receivable 256,269 233,666
Net cash provided by investing activities 8,778 137,374
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
borrowings - 8,824,274
Principal payments on revolving line of credit,
long-term debt and capital lease obligation (389,791) (6,925,845)
Payment of preferred dividends (300,000) (300,000)
Net cash (used in) provided by financing
activities (689,791) 1,598,429
Decrease in cash and cash equivalents (2,237,814) (143,221)
Cash and cash equivalents at beginning of period 3,139,252 1,398,944
Cash and cash equivalents at end of period $ 901,438 $1,255,723
MOTO PHOTO, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
``UNAUDITED''
1.In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial position
and results of operations for the period covered in this report. These
statements should be read in conjunction with the Notes to the
Consolidated Financial Statements for the year ended December 31,1997.
The internal accounting for the Company is on a fiscal calendar quarter
basis. The fiscal quarter dates may vary from the calendar quarter dates,
(i.e. June 27 vs. June 30 for the second quarter 1998), except for the
fourth quarter which ends on December 31. The differences in interim
periods are immaterial.
2.The first six months of the year are seasonally slower and do not
represent 50% of the year.
3.In the first six months of 1998 $300,000 of dividends were paid on the
Series G preferred shares. Of this amount $161,672 was for previously
reported and accreted dividends.
4.In the first six months of 1997, the Company incurred capital lease
obligations totaling $452,000 in connection with equipment purchases.
5.Certain amounts from prior periods have been restated to conform to the
current period presentation.
6.The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect amounts reported in the financial statements. Actual results could
differ from those estimates.
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS SECOND QUARTER AND SIX MONTHS 1998 VS SECOND QUARTER
AND SIX MONTHS 1997
The Company reported net income of $395,848 and basic and diluted income per
common share of $.04 for the second quarter 1998, compared to net income of
$528,590 and basic and diluted income per common share of $.06 for the second
quarter 1997. For the six months ended June 30, 1998, the Company recorded
net income of $194,210 and basic and diluted earnings per common share of
$.01, compared to net income of $401,657 and basic and diluted earnings per
common share of $.03 for the same period a year ago. Per share calculations
are made after provision for Series G preferred dividend requirements.
Sales from Company stores were down $1,043,000, or 23% for the second quarter
1998, and down $1,848,000, or 23% on a year-to-date basis, compared to the
same period a year ago primarily due to fewer Company stores in operation.
The decrease was anticipated due to the sale of certain stores as franchises
and the planned closing of other Company stores.
Fewer Company stores also accounted for reduced Company store cost of sales
and operating expenses which fell $791,000, or 22% for the second quarter,
and $1,468,000, or 21% for the six months ended June 30, 1998.
Merchandise sales decreased $265,000, or 6% for the second quarter of 1998,
and $670,000, or 8% on a year-to-date basis, as a result of fewer system
stores and lower pricing in 1998 as compared to 1997. Accordingly,
merchandise cost of sales and expenses decreased $227,000 or 5% for the
second quarter, and $486,000, or 7% through June 1998.
Royalty revenues increased $79,000, or 6% for the second quarter, and
$42,000, or 2% for the six months ended June 30, 1998, compared to the same
period a year ago primarily due to increased franchisee store sales.
Franchise fees were down $178,000, or 83% for the quarter, and $201,000, or
77% for the six months ended June 30, 1998, compared to the same period a
year ago due to fewer franchise store openings in 1998.
Investment income increased $38,000, or 64% for the quarter, and $43,000, or
29% on a year-to-date basis, compared to the same period a year ago primarily
due to more notes receivable outstanding.
Telemarketing revenues were down $91,000, or 39% for the second quarter, and
$194,000, or 43% as of June 30, 1998, primarily due to emphasis on other
marketing programs and planned reliance on less sales to non-franchisees.
Advertising costs were down $4,000, or 1% for the quarter, and $32,000, or 5%
year-to-date due to planned reduced levels of Company store advertising.
Interest expense decreased $7,000, or 6% for the quarter, but increased
$10,000, or 5% year-to-date due to a change in the levels of interest bearing
debt.
YEAR 2000
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's
programs that recognize a date using ``00' as the year 1900 rather than the
year 2000 could result in errors or system failures. The Company utilizes a
number of computer programs across its entire operation. The Company has not
completed its assessment, but currently believes that costs of addressing
this issue will not have a material adverse impact on the Company's financial
position.
LIQUIDITY AND CAPITAL RESOURCES
The reduction in accounts receivable can be attributed to tighter credit
policies and fewer Company stores in 1997 as compared to 1998. The Company
anticipates opening additional stores during the remainder of 1998, which
would change this trend but should lead to increased operating earnings.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Canadian Industrial Services Limited v. Hidome Investments Ltd. and Herbert Lam
(Ontario [Canada] Court (General Division, Case No. 97-CU-118907). Canadian
Industrial Services (`CIS''), the Company's Canadian master franchisor, filed
this lawsuit February 14, 1997, against one of its former franchisees, Hidome
Investments Ltd. (`Hidome'') and its owner, Herbert Lam. Hidome had abandoned
the franchise which it had purchased from Northvale Industrial Co. Ltd.
(`Northvale''). CIS sought damages of $418,740.33. On April 3, 1997, Hidome
filed a counterclaim against CIS, Northvale, and the Company, alleging
fraudulent and negligent misrepresentation and breach of contract and seeking,
among other things, damages of $600,000. On July 15, 1998, the parties signed a
settlement agreement, pursuant to which Hidome paid CIS $60,000 and the parties
released all claims against each other. The lawsuit was dismissed with
prejudice on July 16, 1998.
The Company has pending against it a small number of claims which it believes
are routine and incidental to the business. These actions are being contested
and defended. Management of the Company is of the opinion that such actions are
not likely to result in any liability which would have a material adverse effect
on the consolidated financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) On June 18, 1998, the Company held its annual meeting of
shareholders.
(c) At the meeting the shareholders voted on the election of
directors and on an amendment to the 1992 Performance and Equity
Incentive Plan (`the Plan'') to increase by 750,000 the number of
shares available for distribution under the Plan and to add outside
directors as eligible participants under the Plan.
The shareholders voted on the election of the following directors. The voting
tabulation for each director is set next to his name.
Votes For Votes Withheld
Michael F. Adler 7,172,220 84,372
Frank W. Benson 7,002,965 253,627
D. Lee Carpenter 7,186,220 70,372
Leslie Charm 7,003,165 253,427
Dexter B. Dawes 7,002,865 253,727
Harry D. Loyle 7,186,120 70,274
David A. Mason 7,153,520 103,072
James. F. Robeson 7,185,920 70,672
The shareholders approved the amendment to the Plan, voting as follows:
Shares Voting For - 4,264,681
Shares Abstaining - 263,926
Shares Voting Against - 597,385
Broker Non-Votes - 2,130,699
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See Exhibit Index immediately preceding exhibits.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K
during the quarter ended June 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
MOTO PHOTO, INC.
By /s/ David A. Mason
David A. Mason
Executive Vice President,
Treasurer, and Chief
Financial Officer
Date: August 13, 1998
EXHIBITS TO
FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 1998
Copies of the following documents are filed as exhibits to this report:
No. Description
*10.1 1992 Moto Photo Performance and Equity Incentive Plan and Amendment
No. 1 to the Plan, as amended through April 11, 1995 (Incorporated by
Reference to Exhibit 4.1 to Registration Statement Number 033-59673 on
Form S-8 dated May 30, 1995)
*10.2 Amendment No. 2 to the 1992 Moto Photo Performance and Equity
Incentive Plan
10.3 First Amendment to Loan and Security Agreement, dated as of May 1,
1998, by and between Moto Photo, Inc. and The Provident Bank
11.0 Computation of Per Share Earnings
27.0 Financial Data Schedule