FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 30, 2000
-----------------
Commission file No. 0-15338
-------
PHOTOWORKS, 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 February 2, 2001, there were issued and outstanding 16,505,659 shares
of common stock, par value $.01 per share.
Index to Exhibits at Page 16
Page 1 of 16
PHOTOWORKS, INC.
INDEX
-----
Page No.
--------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-9
Consolidated Balance Sheets as of December 30, 2000
and September 30, 2000 3-4
Consolidated Statements of Operations for the first quarter
ended December 30, 2000 and December 25, 1999 5
Consolidated Statements of Cash Flows for the first quarter
ended December 30, 2000 and December 25, 1999 6
Notes to Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
INDEX TO EXHIBITS 16
Page 2 of 16
PART I -- FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PHOTOWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED) (NOTE)
December 30, September 30,
ASSETS 2000 2000
- ----------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 1,204 $ 1,629
Securities available-for-sale - 1,022
Accounts receivable, net of allowance for doubtful accounts 898 1,300
Inventories 5,104 5,562
Prepaid promotional expenditures 998 1,412
Prepaid income taxes 970 970
Prepaid expenses and other 299 377
------- -------
TOTAL CURRENT ASSETS 9,473 12,272
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 11,174 12,390
TOTAL ASSETS $20,647 $24,662
======= =======
Note: The September 30, 2000 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements (unaudited).
Page 3 of 16
PHOTOWORKS, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share and share data)
(UNAUDITED) (NOTE)
December 30, September 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2000
- ------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 4,843 $ 5,478
Accrued compensation 1,635 1,854
Accrued expenses 1,723 1,726
Current portion of note payable 1,642 821
Current portion of capital lease obligations 248 250
Income taxes payable 6 6
------- -------
TOTAL CURRENT LIABILITIES 10,097 10,135
Note payable, net of current portion 295 1,231
Capital lease obligations, net of current portion 234 292
------- -------
TOTAL LONG TERM LIABILITIES 529 1,523
TOTAL LIABILITIES 10,626 11,658
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 2,000,000 shares,
issued and outstanding 15,000 shares - -
Common Stock, $.01 par value, authorized 101,250,000
shares, issued and outstanding 16,505,659 165 165
Additional paid-in capital 15,679 15,629
Retained earnings (5,823) (2,790)
------- -------
TOTAL SHAREHOLDERS' EQUITY 10,021 13,004
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,647 $24,662
======= =======
Note: The September 30, 2000 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements (unaudited).
Page 4 of 16
PHOTOWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share and share data)
First Quarter Ended
--------------------------
December 30, December 25,
2000 1999
- ------------------------------------------------------------------
Net revenues $ 14,985 $ 20,491
Cost of goods and services 12,298 13,452
----------- -----------
GROSS PROFIT 2,687 7,039
Operating expenses:
Marketing expenses 2,566 6,307
Research and development 1,175 465
General and administrative 1,849 1,235
----------- -----------
Total operating expenses 5,590 8,007
----------- -----------
LOSS FROM OPERATIONS (2,903) (968)
Other income (expense):
Interest income 27 271
Interest expense (169) (11)
Non-operating income (expense), net 12 (14)
----------- -----------
Total other income (expense) (130) 246
----------- -----------
LOSS BEFORE INCOME TAXES (3,033) (722)
Income tax benefit - 250
----------- -----------
NET LOSS $ (3,033) $ (472)
=========== ===========
Net Loss per Share-Basic $ (.18) $ (.03)
=========== ===========
Weighted Average Shares - Basic 16,506,000 16,327,000
=========== ===========
See notes to consolidated financial statements (unaudited).
Page 5 of 16
PHOTOWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
First Quarter Ended
---------------------------
December 30, December 25,
2000 1999
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
- ---------------------
Net loss $(3,033) $ (472)
Charges to income not affecting cash:
Depreciation and amortization 1,747 1,033
Deferred income taxes - (67)
Net change in receivables, inventories, payables and other 13 695
Capitalized promotion expenditures, net - -
------- -------
NET CASH FROM (USED IN) OPERATING ACTIVITIES (1,273) 1,189
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (114) (357)
Purchases of securities available-for-sale - (1,965)
Proceeds from sales of securities available-for-sale 1,022 2,521
------- -------
NET CASH FROM INVESTING ACTIVITIES 908 199
FINANCING ACTIVITIES:
- ---------------------
Proceeds from issuance of Common Stock - 65
Payments on capital lease obligations (60) (46)
------- -------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (60) 19
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (425) 1,407
Cash and cash equivalents at beginning of period 1,629 15,001
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,204 $16,408
======= =======
See notes to consolidated financial statements (unaudited).
Page 6 of 16
PHOTOWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
PhotoWorks, Inc. ("PhotoWorks" or the "Company") is a leading photo
services company dedicated to providing its customers with innovative ways to
enjoy and use their photos. The Company, formerly Seattle FilmWorks, Inc.,
changed its corporate name to PhotoWorks, Inc. on February 1, 2000. The
PhotoWorks service provides film and image processing and online image storage
and management services to both traditional and digital camera users, providing
customers with the easiest way to store and organize photos online, share them
with friends and family, and order reprints, photo albums, and photo related
products. The Company also offers an array of complementary products and
services, primarily under the brand names PhotoWorks(R) and Seattle
FilmWorks(R). To a lesser extent, the Company provides photo-related products on
a wholesale basis.
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. Fiscal year 2001 will include 52 weeks compared to fiscal 2000 that
included 53 reporting weeks, with the additional week reported in the fourth
quarter of fiscal 2000. Operating results for the first quarter ended December
30, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 29, 2001. For further information, refer to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 2 below and under Item 7 of Part II of the Company's
Annual Report on Form 10-K for the year ended September 30, 2000 and the
Company's consolidated financial statements and footnotes thereto also included
in the Company's Annual Report
NOTE B -- ADVERTISING AND PROMOTIONAL EXPENDITURES
Prepaid promotional expenditures consist of deposits made for direct
advertising to be mailed in future periods and prepaid amounts for Internet
advertising. Direct mail promotional costs are recorded as expenses during the
period in which the promotional materials are mailed. Internet advertising is
expensed on a straight-line basis over the periods in which the advertising
takes place. Under the Internet advertising program, the Company has commitments
of approximately $1,000,000 pursuant to terms and conditions of the agreements.
NOTE C -- INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market. Inventories consist primarily of preloaded cameras, film and
photofinishing supplies.
NOTE D -- RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year's presentation.
NOTE E -- SEGMENT REPORTING
The Company currently operates in one principal business segment.
Page 7 of 16
PHOTOWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE F -- INCOME TAXES
In the second quarter of fiscal 2000, it was determined that due to the
Company's continued focus on promotional activities related to its digital
imaging and online services and the effects of such costs on its ongoing
profitability, it was appropriate to provide a valuation allowance equal to the
amount of deferred tax assets not recoverable through operating loss carrybacks.
For the three months ended December 30, 2000 the income tax benefit was $0, as
opposed to a benefit of approximately $1,031,000 (assuming a normal statutory
rate of 34%). Utilization of the remaining deferred tax assets of approximately
$13,681,000 is dependent on future profits that are not assured.
NOTE G -- EARNINGS PER SHARE
The Company calculates earnings per share in accordance with the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Net loss per share is based on the weighted average number
of common shares outstanding. Convertible preferred shares, outstanding warrants
and stock options to purchase shares of common stock were excluded from the
computation of earnings per share because their effect was antidilutive.
The following table sets forth the computation of loss per share:
First Quarter Ended
-------------------------------------
December 30, 2000 December 25, 1999
- -------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net loss $(3,033,000) $ (472,000)
=========== ===========
Denominator:
Denominator for basic earnings per share - weighted-average shares 16,506,000 16,327,000
Effect of dilutive securities:
Stock options, warrants, convertible preferred shares - -
----------- -----------
Denominator for diluted earnings per share 16,506,000 16,327,000
=========== ===========
NET LOSS PER SHARE $ (.18) $ (.03)
=========== ===========
NOTE H -- CONTINGENCIES
The Company is a defendant in a legal proceeding that was filed by Fuji
Photo Film Co., Ltd. with the International Trade Commission on February 13,
1998. The action was filed against a number of importers, including the
Company's OptiColor, Inc. subsidiary, alleging patent infringement of U.S.
patents held by Fuji on single use cameras through the importation and resale of
recycled cameras. Fuji was seeking an order prohibiting importation of
infringing cameras into the U.S. and prohibiting further sales of such products
which had been imported. Sales of recycled cameras accounted for 4.3%, 4.1%, and
3.8% of the Company's net revenues during fiscal 2000, 1999 and 1998,
respectively. After an evidentiary hearing before an ITC Administrative Law
Judge in November 1998, the ITC Commissioners issued a final order in June 1999
prohibiting the Company and its subsidiaries from importing and selling imported
recycled single use cameras. The Company has appealed the ITC Commissioners'
order to the Federal Circuit Court of Appeals. In the appeal, as in the ITC
proceeding, the issues have been and are vigorously contested.
A complaint has been filed against the Company, since twice amended, by six
individual plaintiffs who are suing on their own behalf and purportedly on
behalf of a class of all private citizens and non-governmental entities who have
received from the Company, and had the Company process, "C-41" 35mm color film
from the Company or who have received replacement rolls of film from the Company
after film processing. This complaint alleges that the Company has engaged in
unfair and deceptive practices by allegedly misrepresenting that film received
from the Company must be processed only by
Page 8 of 16
PHOTOWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the Company and that replacement film is "free". This complaint requests
injunctive and declaratory relief and restitution and damages in unspecified
amounts, and also requests trebling of damages and recovery of litigation
expenses pursuant to the Washington Consumer Protection Act. The suit is in its
early stages, and the court has not yet determined whether the individual
plaintiffs will be permitted to prosecute the suit as a class action. The
Company filed a motion for summary judgment dismissing the claims of four of the
plaintiffs (two of the plaintiffs were added to the action by an amendment to
the Complaint a few days before filing of the summary judgment motion). This
motion was denied. Management of the Company intends to contest the suit
vigorously, both as to the complaint's substantive allegations and as to whether
the suit may properly be prosecuted as a class action.
Although the Company believes these claims are without merit, it is not
possible to predict an outcome at this time or the potential affect on its
business or financial condition. The Company's defense of these claims will
cause it to incur substantial legal expenses. The Company does not expect the
litigation to have a significantly harmful impact on its financial condition,
results of operations or liquidity.
The Company is also involved in various routine legal proceedings in the
ordinary course of its business.
NOTE I -- ADOPTION OF ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," in
the first quarter of fiscal year 2001. The Standard requires the Company to
recognize all derivatives on the balance sheet at fair value. The adoption of
SFAS 133 is not expected to have a material effect on the Company's financial
position or overall trends in the results of operations.
Page 9 of 16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:
This report contains forward-looking statements that relate to future
events, product or service offerings or the future financial performance of the
Company. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms and other comparable terminology. These statements only reflect
the Company's management's expectations and estimates. Actual events or results
may differ materially from those expressed or implied by such forward-looking
statements due to a number of known and unknown risks and uncertainties. These
risks and uncertainties include the inability to obtain additional funding,
possibility of delays in the expansion of image storage capacity due to delays
in deliveries from suppliers or technical problems; system performance problems
due to technical difficulties, system malfunctions, Internet interruptions or
other factors; marketing activities, pricing and other activities by
competitors; 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. Any forward-looking statements in this report reflect the
Company's expectations at the time of this report only, and the Company
disclaims any responsibility to revise or update any such forward-looking
statements except as may be required by law.
General
PhotoWorks, Inc. ("PhotoWorks" or the "Company") is a leading Internet
photo services company dedicated to providing customers with innovative ways to
create and tell the stories of their lives through photos. PhotoWorks is a
direct-to-consumer Internet and mail order provider of film and image processing
and online image storage and management services. The Company offers an array of
complementary services and products primarily under the brand names
PhotoWorks(R) and Seattle FilmWorks(R).
To promote its services and products, the Company relies primarily on
direct-marketing and online e-mail programs. The Company continually tests and
refines its offers in an effort to improve its effectiveness and reach a broader
market. Offers designed to showcase the PhotoWorks(R) services may include
introductory pricing, film or other offers. In past years, the Company primarily
relied on an introductory film offer and free processing to first time customers
with an e-mail address, to introduce potential customers to PhotoWorks products
and services. The Company's introductory offers have been advertised through
direct-response media, print media, and national advertising campaigns. The
Company also promotes its introductory offers on its Web site
(www.photoworks.com). In addition, the Company has a customer referral program
for online and mail order customers which encourages existing customers to
suggest family and friends that may be interested in the Company's services and
products. The Company also partners with other Internet companies to broaden the
marketing of its PhotoWorks' services by providing customers with new and
interesting ways to share their photos. Further, in fiscal 2000, the Company
initiated a marketing campaign to promote its PhotoWorks brand and introduce its
online services and products. The campaign included national print and media
advertising combined with direct marketing mailings.
Since 1978, the Company has been an industry leader in the introduction of
value-added photo-related services and products and has continued this tradition
by launching its online image management service, PhotoWorks(R) in April 1999.
The Company offers prints, slides, digital images and online archiving, all from
the same roll of 35mm film. PhotoWorks can process any brand of 35mm film,
Advanced Photo Systems (24mm) film or 35mm single-use camera. PhotoWorks was
among the first to provide express-mail delivery, cross-referenced data on
prints and negatives, a composite photo index and a convenient reorder system.
To a lesser extent, the Company provides products and supplies on a wholesale
basis.
Page 10 of 16
Since 1994, the Company has been a pioneer in providing digital-imaging
technologies which enable photofinishing customers to share personal photographs
with friends and family. Products incorporating these technologies include (i)
Pictures On Disk/TM/ a floppy disk containing digital images from a roll of
film; (ii) PhotoWorks(R) software, which can be used to create digital
photograph albums and screen savers and; (iii) Pictures On Disk/TM/ on CD, a CD
containing digital images from a roll of film. In April 1999 the Company
introduced PhotoWorks(R), an online image management system which enables
customers to view, share, archive and order reprints and organize their photos
online. Other recent products include PhotoWorks(R) Albums, an online tool to
easily create and share photo albums, PhotoWorks(R) Cards, an online service
which allows customers to create personalized greeting cards using their
favorite photos, and an assortment of personalized photo gifts. The Company has
targeted for development additional products and services to enable customers to
view and share their photos simply and conveniently. The Company expects to
continue to introduce products in 2001 which will provide traditional and
digital camera users with a simple and convenient way to store, print and use
their online digital images. In addition, the Company has partnered with other
Internet-related companies to broaden the marketing of its PhotoWorks services
and provide customers with new and interesting ways to share their photos.
The net loss for the first quarter of fiscal 2001 was $3,033,000, or a loss
of $.18 per share, compared to a net loss of $472,000 or a loss of $.03 per
share for the first quarter of fiscal 2000. Operating results will fluctuate in
the future due to changes in the mix of sales, 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 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, activities by competitors, production difficulties and
other factors. This seasonality has generally 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 incurring relatively higher marketing
program expenditures prior to the summer months.
Page 11 of 16
Results of Operations
The following table presents information from the Company's consolidated
statements of operations, expressed as a percentage of net revenues for the
periods indicated.
First Quarter Ended
---------------------------
December 30, December 25,
2000 1999
- ---------------------------------------------------------------
Net revenues 100.0 % 100.0 %
Cost of goods and services 82.1 65.6
------ -----
Gross profit 17.9 34.4
Operating expenses:
Marketing expenses 17.1 30.8
Research and development 7.8 2.3
General and administrative 12.3 6.0
------ -----
Total operating expenses 37.2 39.1
------ -----
Loss from operations (19.3) (4.7)
Total other income (expense) (.9) 1.2
------ -----
Loss before income taxes (20.2) (3.5)
Income tax benefit - 1.2
------ -----
Net loss (20.2)% (2.3)%
====== =====
Net revenues for the first quarter of fiscal 2001 were $14,985,000 as
compared to net revenues of $20,491,000 in the first quarter of fiscal 2000. The
decrease was primarily due to an overall decrease in revenue per roll as
compared to the prior period combined with lower processing volumes. The decline
in revenue per roll is a result of aggressive pricing in the online photo space.
Marketing promotions offering free film processing to first time customer,
combined with promotional and pricing decreases are the primary factors in the
decline in net revenues. Processing volumes decreased primarily due to lower
marketing expenditures and the mix of products and services ordered by customers
during the first quarter of fiscal 2001 compared to the first quarter of fiscal
2000.
Cost of goods and services consist of labor, postage, supplies and fixed
operating costs related to the Company's services and products. Gross profit in
the first quarter of fiscal 2001 decreased to 17.9% of net revenues compared to
34.4% in the first quarter of fiscal 2000. The decline in gross margin is
primarily due to declines in overall net revenue per order as discussed above
and decreased processing volumes accounting for approximately 14% of the gross
margin decline. In addition, the decrease in the gross margin reflects increased
scanning and archiving costs for online services such as depreciation and lease
costs for archiving equipment and facilities associated with the Company's
products and services. Fluctuations in gross profit will occur in future periods
due to the seasonal nature of revenues, mix of product sales, level and nature
of marketing activities and other factors.
Total operating expenses in the first quarter of fiscal 2001 decreased to
37.2% of net revenues compared to 39.1% in the first quarter of fiscal 2000. The
decrease in operating expenses is primarily due to decreased marketing costs
during the first quarter of fiscal 2001. Each year the Company prepares detailed
plans for its various marketing activities, including the mix between customer
acquisition and other marketing 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 or decreased operating costs due the timing and magnitude
of marketing activities and research and development activities.
Marketing expenses include current period expenses associated with customer
acquisition, building brand awareness, testing of new marketing strategies and
marketing to existing customers. Marketing expenses in the first quarter of
fiscal 2001 decreased to 17.1% of net revenues compared to 30.8% in the first
quarter of fiscal 2000. Marketing
Page 12 of 16
expenditures in the first quarter of fiscal 2001 were lower primarily due to the
Company's testing of programs to target its traditional and former customer
databases. During the first quarter, the Company was evaluating marketing
programs that focus on a shorter term return on investment. The Company plans to
target its customer database of approximately 20 million households through
targeted and cost effective promotions. Marketing expenditures for fiscal 2001
are expected to be significantly lower in fiscal 2001 as compared to fiscal
2000.
Research and development expenses increased to $1,175,000 for the first
quarter of fiscal 2001 compared to $465,000 in the first quarter of fiscal 2000.
The increase was due primarily to additional personnel hired to support research
and development for PhotoWorks(R) online archiving, photo sharing services and
development of new products and services. Research and development expenses
consist primarily of costs incurred in the development and enhancement of its
PhotoWorks(R) service, Internet and other online digital services and products.
General and administrative expenses increased to $1,849,000 for the first
quarter of fiscal 2001 compared to $1,235,000 for the first quarter of fiscal
2000. The increase is primarily a result of increased expenditures related to
information systems to support the Company's computer-based and Internet-related
operations. General and administrative costs were also higher due to increased
costs associated with wages, recruiting, legal fees and shareholder relations.
General and administrative expenses consist of costs related to computer
operations, human resource functions, finance, legal, accounting, investor
relations and general corporate activities.
Liquidity and Capital Resources
As of February 2, 2001, the Company's principal sources of liquidity
included $898,000 in cash. Although the Company does not currently have any
fixed material commitments with regard to capital expenditures (except as noted
below), it currently expects to spend approximately $1,000,000 during the
remainder of fiscal 2001, principally for data storage and computer network
equipment and photofinishing equipment.
On February 2, 2001, the Company entered into an agreement to purchase
selected assets related to the Web site of ememories.com for a cash purchase
price of $155,000 plus shipping and related transition expenses. The agreement
gives ememories.com users continued access to their online photos and albums
through PhotoWorks services and products. The equipment and technology purchased
will enable PhotoWorks to more effectively develop products and services. The
transaction is expected to close on or about March 30, 2001.
During fiscal 2000, the Company had negative cash flow from operations of
approximately $25 million, resulting from increased marketing expenses, a
decline in net revenues, and increased product costs. Cash and securities
available-for-sale declined from $19.5 million at the beginning of the period to
$2.7 million as of September 30, 2000 and the Company's current ratio declined
from 3.6 to 1.2. During the first quarter of fiscal 2001, the Company had
negative cash flow from operations of approximately $1 million. Cash and
securities available-for-sale declined to $1.2 million as of December 30, 2000
and the Company's current ratio declined to .9.
During fiscal 2000, a substantial portion of marketing expenses were
incurred for brand advertising and customer acquisition that was undertaken
pursuant to the Company's corporate name change. Marketing expenditures in
fiscal 2000 were heavily focused on establishing a leadership position in the
online photo space combined with rebranding and renaming the company from
Seattle FilmWorks to PhotoWorks. The Company does not anticipate this level of
marketing and advertising expenditures in future periods. Additionally, direct
marketing expenses will be reduced by utilizing more efficient communications
with customers. In November 2000, the Company realigned its organizational
structure and reduced its workforce. The Company also expects to lower its
production costs through a combination of greater capacity utilization and
decreases in materials costs under signed vendor contracts.
Page 13 of 16
In addition to the above operational plans, the Company has converted
certain current liabilities to long-term obligations and has secured a $2.5
million bridge line of credit. The Company is actively seeking additional
financing and is currently reviewing term sheets. Management believes that,
under its current operational and financing plans outlined above, current cash
balance, estimated future cash flows and anticipated financing, it will have
sufficient funds for operations through at least the next twelve months.
However, the Company's inability to successfully acquire additional financing or
generate cash flow from operations would have a material adverse impact on the
Company's financial position and liquidity which may require the Company to
further reduce its expenditures, seek additional capital or refinance its
obligations to enable it to continue operations for at least the next twelve
months. There can be no assurance that the Company will be able to obtain
adequate financing in the future.
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For an update concerning the legal proceeding filed by Fuji Photo Film Co.,
Ltd. On February 13, 1998, and the class action filed on March 29, 2000, see
Note H of notes to Consolidated Financial Statements in Part I above.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1* Eastman Kodak supply agreement effective November 1, 2000
10.2 Loan and Security Agreement, Form of Warrant with Imperial
Bank
27.1 Financial Data Schedule - 2001
27.2 Financial Data Schedule - 2000
* Portions of this exhibit have been omitted pursuant to an
application for an order granting confidential treatment filed with the
Commission on February 14, 2001. The omitted portions have been separately
filed with the Commission.
(b) Reports on Form 8-K.
None
Page 14 of 16
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.
PHOTOWORKS, INC.
DATED: February 12, 2001 /s/ Howard Lee
-----------------------------------------
Howard Lee
President/Chief Executive Officer
(Principal Executive Officer)
/s/ Loran Cashmore Bond
-----------------------------------------
Loran Cashmore Bond
(Principal Financial and Chief
Accounting Officer)
Page 15 of 16
INDEX TO EXHIBITS
PHOTOWORKS, INC.
Quarterly Report on Form 10-Q
For The Quarter Ended December 30, 2000
Exhibit Description Page No.
- ------- ----------- --------
10.1* Eastman Kodak Supply Agreement effective November 1, 2000 SEC Electronic Filing
10.2 Loan and Security Agreement, Form of Warrant with Imperial Bank SEC Electronic Filing
27.1 Financial Data Schedule - 2001 SEC Electronic Filing
27.2 Financial Data Schedule - 2000 SEC Electronic Filing
* Portions of this exhibit have been omitted pursuant to an
application for an order granting confidential treatment filed with the
Commission on February 14, 2001. The omitted portions have been separately
filed with the Commission.
Page 16 of 16