SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
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: 0-20510
AMERICAN STUDIOS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1758321
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
11001 Park Charlotte Boulevard, Charlotte, NC 28273
(Address of principal executive office)
(Zip Code)
(704) 588-4351
(Registrant's telephone number, including area code)
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 CORPORATE ISSUES:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 29, 1996
Common Stock, $.001 par value 21,433,160
AMERICAN STUDIOS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Consolidated Balance Sheets -
September 29, 1996 and December 31, 1995 1
Consolidated Statements of Operations -
Thirteen Weeks Ended and Thirty-Nine Weeks Ended
September 29, 1996 and October 1, 1995 2
Consolidated Statements of Shareholders' Equity -
Thirty-Nine Weeks Ended
September 29, 1996 and October 1, 1995 3
Consolidated Statements of Cash Flows -
Thirty-Nine Weeks Ended
September 29, 1996 and October 1, 1995 4
Condensed Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
AMERICAN STUDIOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 29, December 31,
ASSETS 1996 1995
--------------------- ---------------------
CURRENT ASSETS:
Cash $763 $1,681
Accounts receivable:
Trade 655 809
Employees, principally travel advances 69 183
Income tax receivable 0 1,365
Inventories 2,247 3,027
Prepaid expenses and other 749 491
--------------------- ---------------------
Total current assets 4,483 7,556
PROPERTY, PLANT AND EQUIPMENT, NET 25,271 30,010
NON-COMPETE AGREEMENTS AND OTHER INTANGIBLE ASSETS 4,000 4,485
DEFERRED TAX ASSET 1,301 1,301
OTHER ASSETS 548 478
--------------------- ---------------------
TOTAL $35,603 $43,830
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $9,495 $7,240
Trade accounts payable 4,606 4,324
Commissions payable to Wal-Mart Stores, Inc. 924 2,232
Salaries, commissions and bonuses 1,600 1,809
Taxes (other than income) 1,478 1,974
Income Tax payable 1,097 -
Self-insurance reserves 2,883 2,447
Other 938 753
--------------------- ---------------------
Total current liabilities 23,021 20,779
--------------------- ---------------------
LONG TERM DEBT 5,038 10,380
SHAREHOLDERS' EQUITY:
Preferred stock - $1.00 par value (authorized 1,000,000 shares; no
shares issued) - -
Common stock - $.001 par value (authorized 70,000,000 shares;
outstanding 21,433,160 shares) 21 21
Additional paid-in capital 12,794 12,794
Retained deficit (5,348) (223)
Cumulative foreign currency translation adjustments 77 79
--------------------- ---------------------
Total shareholders' equity 7,544 12,671
--------------------- ---------------------
TOTAL $35,603 $43,830
===================== =====================
See condensed notes to consolidated financial statements.
1
AMERICAN STUDIOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS-ENDED
------------------------------------------------------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
-------------- --------------- ----------------- -----------
NET SALES $24,771 $23,312 $68,686 $66,659
COST OF SALES 21,411 24,038 60,716 62,215
-------------- -------------- ----------- ---------
GROSS PROFIT (LOSS) 3,360 (726) 7,970 4,444
GENERAL AND ADMINISTRATIVE EXPENSES 3,388 4,953 11,398 13,920
AMORTIZATION OF NON-COMPETE AGREEMENTS
AND OTHER INTANGIBLE ASSETS 163 169 487 508
FOREIGN EXCHANGE LOSSES (GAINS) 6 21 - 70
-------------- -------------- ----------- ----------
LOSS BEFORE INTEREST (197) (5,869) (3,915) (10,054)
INTEREST 372 233 1,210 265
-------------- -------------- ----------- ----------
LOSS BEFORE INCOME TAXES (569) (6,102) (5,125) (10,319)
INCOME TAX BENEFIT - (2,251) - (4,023)
-------------- -------------- ----------- ----------
NET LOSS ($569) ($3,851) ($5,125) ($6,296)
============== ============== =========== ==========
NET LOSS PER COMMON SHARE ($0.03) ($0.18) ($0.24) ($0.29)
============== ============== =========== ==========
CASH DIVIDEND PER COMMON SHARE - - - -
============== ============== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
AND COMMON STOCK EQUIVALENTS 21,433,160 21,397,885 21,433,160 21,399,674
============== ============== =========== ===========
See condensed notes to consolidated financial statements.
2
AMERICAN STUDIOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
FOR THE THIRTY-NINE WEEKS ENDED
-----------------------------------------------------------------------------------------
REETAINED CUMULATIVE TOTAL
COMMON STOCK ADDITIONAL EARNINGS TRANSLATION SHAREHOLDERS'
-------------------------
SHARES AMOUNT PAID-IN CAPITAL (DEFICIT) ADJUSTMENTS EQUITY
-------------- --------- -------------- ------------ ----------- ----------
BALANCE AT DECEMBER 31, 1994 21,426,465 $21 $12,871 $6,626 $7 $19,525
NET LOSS (6,296) (6,296)
ISSUANCE OF COMMON STOCK UNDER THE
THE EMPLOYEE STOCK PURCHASE PLAN 25,420 49 49
CASH DIVIDEND DECLARED ($.04
PER SHARE) (856) (856)
ACQUISITION OF COMPANY STOCK (54,000) (161) (161)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT 39 39
============== ========= ============= ============ =========== ==========
BALANCE AT OCTOBER 1, 1995 21,397,885 $21 $12,759 ($526) $46 $12,300
============== ========= ============= ============ =========== ==========
BALANCE AT DECEMBER 31, 1995 21,433,160 $21 $12,794 ($223) $79 $12,671
NET LOSS (5,125) (5,125)
FOREIGN CURRENCY TRANSALATION
ADJUSTMENT (2) (2)
============== ========= ============= ============ =========== ==========
BALANCE AT SEPTEMBER 29, 1996 21,433,160 $21 $12,794 ($5,348) $77 $7,544
============== ========= ============= ============ =========== ==========
See condensed notes to consolidated financial statements.
3
AMERICAN STUDIOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THIRTY-NINE
WEEKS ENDED
------------------------------
September 29, October 1,
1996 1995
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($5,125) ($6,296)
-------------- -------------
Adjustments to reconcile net loss to net cash used by operating activities
Deferred income tax benefit 0 (656)
Depreciation of property, plant and equipment 4,993 2,475
Amortization of intangible assets 487 508
Foreign exchange losses (gains) (6) 70
Increase in valuation allowance 100 -
Other 230 -
Change in operating assets and liabilities net of effects from purchase of
CVS, Inc.:
Decrease (increase) in accounts receivable 1,633 (2,247)
Decrease (increase) in inventories 780 (432)
Decrease (increase) in prepaid expenses and other assets (328) 70
Increase (decrease) in accounts payable and accrued liabilities (13) 309
-------------- -------------
Total adjustments 7,876 97
-------------- -------------
Net cash provided by (used in) operating activities 2,751 (6,199)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (584) (7,425)
Payment for purchase of CVS, Inc. - (460)
-------------- -------------
Net cash used in investing activities (584) (7,885)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITES:
Net borrowings under revolving credit facility 1,864 6,921
Principal payments under notes payable (4,217) (533)
Principal payments under capital lease obligations (734) (56)
Dividends paid - (856)
Issuance of common stock under the employee stock purchase plan - 49
Acquisition of company stock - (161)
-------------- -------------
Net cash provided by (used in) financing activities (3,087) 5,364
-------------- -------------
EFFECT OF EXCHANGE RATE ON CASH 2 (70)
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (918) (8,790)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,681 9,058
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $763 $268
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $5 $1,239
============== =============
Cash paid during the period for interest $1,236 $173
============== =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations inclurred when the Company entered into
a lease for new property plant and equipment $6,817
=============
Note payable obligations incurred when the Company entered into
a note payable for new property plant and equipment $2,834
=============
4
AMERICAN STUDIOS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
With respect to the significant accounting policies of American Studios, Inc.
(the "Company"), reference is made to Note 1 of the financial statements in the
Company's Form 10-K for the year ended December 31, 1995. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in such Form 10-K.
In the opinion of the Company's management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods presented. Interim results are not necessarily indicative of results for
the entire year.
Principles of Consolidation - The accompanying financial statements include the
accounts of the Company, its wholly owned subsidiary, ASI Distribution, Inc.
(presently inactive) and its 99.99% owned subsidiary American Studios de Mexico,
S.A. de C.V. All significant intercompany transactions have been eliminated.
5
NOTE 2 - LONG TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases obligations are summarized as follows (in
000's):
Long-term debt: 1996 1995
-------- ----------
Revolving credit facility due January 31, 1997, bearing interest
at lender's prime rate, which at September 29, 1996 was 8.25% $ 5,560 $ 3,696
Collateralized note payable, 8.00%, due in monthly installments
of $41,438, including interest through 1998 881 1,191
Collateralized note payable, 8.00%, due in monthly installments
of $54,945, including interest through 1998 1,215 1,623
Notes payable, at prime, in one installment, due on
December 31, 1996 500 500
Collateralized note payable, at prime, due in monthly installments
of $500,000 through 1996 670 4,169
Capital lease obligations:
Leases of certain digital imaging technology systems and sales/portrait
order entry stations with lease periods expiring
through 2000, at interest of 7.69% 3,932 4,781
Leases of certain digital imaging technology systems with lease
periods expiring through 1999, at interest of 8.5% 1,701 1,660
Lease of certain copier equipment with lease period expiring in 2001 46
Lease of certain film processing equipment with lease period
expiring in 1998 28 -
------ -------
Total debt 14,533 17,620
Less current portion due within one year 9,495 7,240
------ -------
Long-term debt and capital loan obligation, net of current portion $ 5,038 $ 10,380
====== =======
Aggregate principal payments for the next five years are as follows:
1996 $ 9,495
1997 2,847
1998 2,007
1999 174
2000 10
-------
Total $ 14,533
========
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations.
Results of Operations
Overview
American Studios, Inc.'s net loss for the third quarter, ending September 29,
1996, of $569,000 was a 85.2% improvement over the third quarter of 1995's net
loss of $3.9 million. Sales increased 6.3% to $24.8 million as compared to $23.3
million in 1995. The improvement in operating results is due primarily to
increased gross margin in the Permanent Studio operations, increased efficiency
in portrait processing which reduced costs, along with reduced general and
administrative expenses.
The Company incurred a net loss of $5.1 million for the first three quarters of
1996, a $1.1 million improvement over $6.3 million net loss for the same period
in 1995. Net sales increased 3.0% to $68.7 million as compared to $66.7 million
for the same period in 1995. The reduction in the net loss is due to improved
gross margin in Permanent Studios and Fashion Photography, increased portrait
processing efficiency and reduced general and administrative expenses. The
increase in net sales was due to an increase in Fashion Photography and
Permanent Studio operations being partially offset by lower sales in Traveling
Studio operations.
Permanent Studio Operations
For the third quarter of 1996 in permanent studio operations, gross margin
improved due to improved labor productivity, lower promotion expenses, and
decreased product costs due to the implementation of the Company's digital
imaging system. These improvements were partially offset by a 15.1% decline in
customers per promotion and higher depreciation expense associated with the
digital imaging systems and sales/portrait order systems. Net sales were up 5.6%
due to a 4.1% increase in average sales per customer and a 19.2% increase in the
number of promotions which was partially offset by the decrease in customers per
promotion. Cost of sales per customer decreased 8.6% in the second quarter of
1996 as compared to the third quarter of 1995.
Traveling Studio Operations
For the third quarter of 1996 in traveling studio operations, gross margin
increased 26.8% as compared to the third quarter of 1995 principally due to
improved labor productivity and reduced promotion costs. Net sales decreased
5.2% principally due to 7.8% decline in customers per promotion partially offset
by a 2.9% increase in promotions. The average sales per customer were
approximately the same in the third quarter of 1996 and the third quarter of
1995. Cost of sales per customer decreased 4.1% in the third quarter of 1996
versus the third quarter of 1995. The cost reductions were achieved by lower
promotion expenses, improved labor productivity, and reduced studio costs.
Fashion Photography Operations
For the third quarter of 1996, fashion photography operations gross margin
improved 558.9% as compared to the third quarter of 1995 due to a 26.9% increase
in promotions and a 23.7%
7
increase in sales average per customer being partially
offset by a 1.4% decline in customers per promotion. Cost of sales per customer
increased 12% due to reduced labor efficiency, higher promotion costs, and
increased studio costs related to conversion of our fashion operations to
digital imaging technology.
General Operations - During the third quarter, Wal*Mart began a test with
another portrait photography company in 15 of ASI's existing permanent studio
locations in the western United States. The Company's traveling children's and
fashion photography operations in this region are not involved in the test.
These locations were obtained by ASI in October 1995 from Associated Family
Photographers. In October 1996, the Company was notified by Wal*Mart that its
seven portrait studios in Puerto Rico would be given to another vendor while ASI
was awarded four new studio locations in Mexico. These decisions are consistent
with Wal*Mart's corporate policy of having two suppliers for all vendor
services.
General and Administrative Expenses - General and administrative expenses were
$3.4 million, or 13.7% of net sales for the third quarter of 1996 as compared to
$5.0 million, or 21.2% of net sales for the third quarter of 1995. The decrease
in general and administrative expenses is principally due to (i) the Company's
restructuring of field and corporate management, (ii) reduced communications
costs, and (iii) lower insurance costs.
Interest Expense - Interest expense was $372,000 for the third quarter of 1996,
as compared to $233,000 for the same period in 1995. The increase in interest
expense for the third quarter of 1996 is primarily due to borrowings on the
Company's revolving credit facility to support working capital needs, and
long-term capital lease and note obligations to finance the Company's digital
imaging and electronic order entry systems.
Income Tax Benefit - During the third quarter of 1995, the Company recognized
income tax benefits totaling approximately $2.2 million relating principally to
operating losses incurred during the period. Historically, during quarters in
which the Company experiences a loss, the Company has recognized income tax
benefits at an effective tax rate of 40%; however, during the third quarter of
1996, there was no income tax benefit due to the Company's utilization of net
operating loss carrybacks as a result of the 1995 net loss.
Seasonality
Like the business of many retailers, the Company's business is seasonal, with
its highest sales historically occurring in the fourth quarter and its lowest
sales historically occurring in the first quarter. The fourth quarter accounted
for approximately 35% of the Company's net sales in 1995 and the first quarter
accounted for approximately 18% of the Company's net sales in 1995.
Liquidity and Capital Resources
Net working capital at September 29, 1996 was a negative $18.5 million; cash was
$763,000. During the third quarter of 1996, net working capital increased
$368,000 over the second quarter of 1996 due to an increase in cash, an increase
in prepaid expenses, a decrease in the current portion of long term debt, and a
reduction in commissions payable to Wal*Mart. These increases were partially
offset by an increase in trade accounts payable, a reduction in inventories, an
increase in accrued taxes (other than income), and larger self-insurance
reserves.
8
The Company believes that cash flow from operations and borrowings under its
existing revolving credit facility will be adequate to fund the Company's
operating requirements for 1996. The Company plans to continue to examine
appropriate cost cutting measures, its method of operating in certain Wal*Mart
stores, non-profitable areas of its operations and ways to continue to improve
its operating and portrait processing efficiency. However, the Company's ability
to meet its liquidity needs for 1996 will depend principally on the success of
management's efforts to increase sales and reduce cost.
On November 1, 1995, the Company obtained a new secured revolving credit
facility that expires on January 31, 1997 from its commercial bank lender. The
Company and the commercial bank amended this facility on March 26, 1996 to,
among other things, modify certain financial covenants to facilitate the
Company's compliance therewith and to reduce the maximum amount available
thereunder. The maximum amount available under this facility, as amended,
including amounts available for letters of credit issued in connection with the
Company's worker's compensation insurance arrangements, is $14.5 million through
March 31, 1996, $13.5 million from April 1, 1996 through May 31, 1996, $13.0
million from June 1, 1996 through July 31, 1996, $11.5 million from August 1,
1996 through October 31, 1996, $9.5 million from November 1, 1996 through
November 30, 1996 and $8.5 million from December 1, 1996 until maturity. As of
September 29, 1996, the Company had obligations of approximately $5.6 million
under this facility and the bank had issued letters of credit under this
facility in the aggregate amount of approximately $2.3 million in connection
with the Company's worker's compensation insurance arrangements. The Company's
obligations under the facility are secured by a first priority security interest
in all of the Company's assets (other than certain equipment used in the
Company's digital imaging systems with regard to which the Company had granted a
first security interest to a vendor prior to obtaining the facility), including
any federal and state tax refunds.
The interest rate under the facility is the bank's prime rate. The Company has
agreed to deposit all of its funds into an account with the bank. The facility
contains certain financial covenants of the Company relating to minimum tangible
net worth and debt to tangible net worth and interest coverage ratios. In
addition, the facility contains covenants of the Company that, among other
things, prohibit capital expenditures or acquisitions without the bank's
consent, limit operating lease expense, restrict the Company's ability to incur
additional debt or liens and require the Company to maintain a majority of its
senior management. At September 29, 1996, the Company was in compliance with the
covenants under the facility.
The Company obtained several long-term leases and secured long-term notes
totaling $9.7 million from several vendors to finance certain equipment
associated with the Company's digital imaging systems and sales/portrait order
entry stations during 1995. At September 29, 1996, the Company had obligations
of approximately $7.7 million under such arrangements discussed above.
In November 1995, the Company entered into a short-term note financing
arrangement with its primary supplier evidenced by a promissory note in the
principal amount of $4.1 million and a security agreement pursuant to which the
Company's obligations under such note are secured by a security interest in all
inventories of supplies sold by such supplier to the Company. The principal
amount of the note is payable in monthly payments of $500,000 beginning March
1996 until paid, together with monthly payments of interest at Citibank's prime
rate on the outstanding principal balance. At September 29, 1996, the Company
had obligations of approximately $670,000 under the short-term financing
arrangement.
At the end of the third quarter of 1996, total net capital expenditures to date
were approximately $584,000. The Company's present expectation is that these and
other capital expenditures will be
9
approximately $775,000 for 1996. This estimate does not include any
expenditures by the Company for any additional digital imaging systems.
The Company's 1991 and 1992 federal income tax returns are presently being
examined by the Internal Revenue Service. Although the results of such
examination cannot be predicted with certainty, management believes that
additional assessments, if any, arising from this examination will not have a
material effect on the Company's financial position or future results of
operations.
The statements herein as to the Company's beliefs concerning, and plans for, the
future are forward-looking statements that are subject to a number of risks and
uncertainties. In addition to the other factors, any uncertainties specifically
identified in the text related to such statements, among other factors that
could cause actual results to differ materially from those contemplated in such
forward-looking statements are the following (i) the Company's inability to
increase net sales, (ii) the Company's inability to attract customers in a
sufficient number and/or achieve a sufficient sales average to enable the
Company to offset the costs associated with its operations, (iii) the Company's
inability to control the variable costs of its operations, (iv) the Company's
inability to maintain satisfactory portrait processing operations in terms of
costs and quality, (v) the adverse impact on the Company of strategies pursued
by its competitors, (vi) the unsatisfactory resolution of the claims,
investigations and lawsuits and the examination discussed herein, and (vii) any
decision by Wal*Mart to authorize another portrait photography company to
provide services in a material number of Wal*Mart stores presently serviced by
the Company. Other factors that could cause actual results to differ materially
from those set forth in such forward-looking statements include the risks and
uncertainties detailed in the Company's most recent Form 10-K and other filings
with the Securities and Exchange Commission. All such factors could have an
adverse effect on the Company's results of operations and liquidity needs for
1996.
10
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.
AMERICAN STUDIOS, INC.
Date: November 13, 1996 By: /s/ J. Robert Wren, Jr.
----------------------------------
J. Robert Wren, Jr.
Chief Executive Officer
Date: November 13, 1996 By: /s/ Shawn W. Poole
-------------------------------------
Shawn W. Poole
Executive Vice President/Chief
Financial Officer (Principal Financial
Officer and Accounting Officer)
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10(a) Second Amendment to Employment and Non-compete
Agreement with J. Robert Wren, Jr. dated September 14, 1996.
Exhibit 10(b) First Amendment to Employment and Non-compete
Agreement by and between the Company and James O. Mattox
dated September 14, 1996.
(b) None
12