FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 27, 1998 Commission file No. 0-15338
------------- -------
SEATTLE FILMWORKS, INC.
------------------------
(Exact name of registrant as specified in its charter.)
WASHINGTON 91-0964899
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1260 16TH AVENUE WEST, SEATTLE, WA 98119
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-1390
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No
----- -----
As of July 24, 1998, there were issued and outstanding 16,768,770 shares of
common stock, par value $.01 per share.
Index to Exhibits at Page 14
Page 1 of 27
SEATTLE FILMWORKS, INC.
INDEX
-----
Page No.
--------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Consolidated Balance Sheets as of June 27, 1998
and September 27, 1997 3-4
Consolidated Statements of Income for the third quarter
and nine months ended June 27, 1998 and June 28, 1997 5
Consolidated Statements of Cash Flows for the nine months
ended June 27, 1998 and June 28, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II -- OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
EXHIBITS 15-27
Page 2 of 27
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED) (NOTE)
June 27, September 27,
ASSETS 1998 1997
===================================================================================================
CURRENT ASSETS
Cash and cash equivalents $ 6,635 $10,252
Securities available-for-sale 6,173 5,062
Accounts receivable, net of allowance for doubtful accounts 2,237 3,680
Inventories 11,062 8,998
Capitalized promotional expenditures 302 211
Prepaid expenses and other 388 743
Deferred income taxes 385 313
------- -------
TOTAL CURRENT ASSETS 27,182 29,259
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 11,274 7,564
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 16,645 13,882
DEPOSITS AND OTHER ASSETS 125 285
NON-COMPETE AGREEMENT,
net of accumulated amortization 94 376
------- -------
TOTAL ASSETS $55,320 $51,366
======= =======
Note: The September 27, 1997 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements.
Page 3 of 27
SEATTLE FILMWORKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except per share and share data)
(UNAUDITED) (NOTE)
June 27, September 27,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
====================================================================================================
CURRENT LIABILITIES
Accounts payable $ 4,467 $ 3,588
Current portion of capital lease obligations 171
Accrued expenses 822 1,402
Accrued compensation 1,190 1,931
Income taxes payable 1,871 2,450
------- -------
TOTAL CURRENT LIABILITIES 8,521 9,371
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion (Note B) 751
DEFERRED INCOME TAXES 5,147 4,394
------- -------
TOTAL LIABILITIES 14,419 13,765
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value,
authorized 2,000,000 shares, none issued
Common Stock, $.01 par value, authorized 101,250,000
shares, issued and outstanding 16,768,770 168 164
Additional paid-in capital 779 2,459
Retained earnings 39,954 34,978
------- -------
TOTAL SHAREHOLDERS' EQUITY 40,901 37,601
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $55,320 $51,366
======= =======
Note: The September 27, 1997 consolidated balance sheet has been derived from
audited consolidated financial statements.
See notes to consolidated financial statements.
Page 4 of 27
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share data)
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------- -------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
============================================================================================
Net revenues $24,928 $25,553 $68,838 $68,446
Cost of goods and services 14,293 13,977 39,673 39,721
------- ------- ------- -------
GROSS PROFIT 10,635 11,576 29,165 28,725
Operating expenses:
Customer acquisition costs 4,309 4,289 12,669 11,533
Other selling expenses 1,882 2,332 5,872 6,192
Research and development 154 143 450 525
General and administrative 1,117 701 3,216 2,821
------- ------- ------- -------
Total operating expenses 7,462 7,465 22,207 21,071
------- ------- ------- -------
INCOME FROM OPERATIONS 3,173 4,111 6,958 7,654
Other income (expense):
Interest expense (11) (11)
Interest income 152 131 541 418
Non operating income, net 102 37 90 46
------- ------- ------- -------
Total other income 243 168 620 464
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,416 4,279 7,578 8,118
Provision for income taxes (1,175) (1,487) (2,602) (2,823)
------- ------- ------- -------
NET INCOME $ 2,241 $ 2,792 $ 4,976 $ 5,295
======= ======= ======= =======
Diluted Earnings per Share $.13 $.16 $.28 $.30
======= ======= ======= =======
Basic Earnings per Share $.13 $.17 $.30 $.33
======= ======= ======= =======
Weighted Average Shares and
Equivalents Outstanding - Diluted 17,490,000 17,728,000 17,540,000 17,771,000
=========== =========== =========== ===========
Weighted Average Shares - Basic 16,669,000 16,308,000 16,591,000 16,280,000
=========== =========== =========== ===========
See notes to consolidated financial statements.
Page 5 of 27
SEATTLE FILMWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
--------------------
June 27, June 28,
1998 1997
===================================================================================
OPERATING ACTIVITIES:
- ---------------------
Net income $ 4,976 $ 5,295
Charges to income not affecting cash:
Depreciation and amortization 2,648 2,030
Amortization of capitalized customer
acquisition expenditures 11,767 10,566
Deferred income taxes 681 1,435
Net change in receivables, inventories, payables and other (1,302) (1,340)
Capitalized promotional expenditures, net (91) (18)
Additions to capitalized customer acquisition expenditures (14,530) (15,097)
-------- --------
NET CASH FROM OPERATING ACTIVITIES 4,149 2,871
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (4,932) (4,346)
Purchases of securities available-for-sale (5,456) (7,549)
Sales of securities available-for-sale 4,345 6,344
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,043) (5,551)
FINANCING ACTIVITIES:
- ---------------------
Purchases of Common Stock (2,670) (824)
Proceeds from issuance of Common Stock 994 681
Payment on capital lease obligations (47)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,723) (143)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (3,617) (2,823)
Cash and cash equivalents at beginning of period 10,252 6,135
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,635 $ 3,312
======== ========
Supplemental Information - Noncash financing and investing activity:
- --------------------------------------------------------------------
During the third quarter of fiscal 1998 the Company incurred a capital lease
obligation of $969,000 related to the financing of equipment purchases.
See notes to consolidated financial statements.
Page 6 of 27
SEATTLE FILMWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer
marketer and provider of high-quality amateur photofinishing services and
products. The Company offers an array of complementary services and products,
primarily on a mail-order basis, under the brand name Seattle FilmWorks(R). To a
lesser extent, the Company provides services, products and photofinishing
supplies on a wholesale basis to a variety of commercial customers.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation of
interim results have been included. The Company follows a policy of recording
its interim periods and year-end on a 5 week, 4 week and 4 week basis for
comparability of results and to be consistent with its internal weekly
reporting. Operating results for the third quarter and nine months ended June
27, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 26, 1998. For further information, refer to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended September 27,
1997.
NOTE B -- LEASES
During the third quarter of fiscal year 1998, the Company financed the
purchase of $969,000 of equipment via a five-year capital lease consisting of
sixty monthly payments of $19,000 commencing April 1998. The equipment is being
depreciated on a straight-line basis over five years.
NOTE C -- EARNINGS PER SHARE
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options. Diluted
earnings per share is similar to the previously reported primary earnings per
share. All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
JUNE 27, 1998 JUNE 28, 1997 JUNE 27, 1998 JUNE 28, 1997
====================================================================================================================================
Numerator for basic and diluted earnings per share:
Net income $ 2,241,000 $ 2,792,000 $ 4,976,000 $ 5,295,000
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 16,669,000 16,308,000 16,591,000 16,280,000
Effect of dilutive securities:
Stock options 821,000 1,420,000 949,000 1,491,000
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 17,490,000 17,728,000 17,540,000 17,771,000
=========== =========== =========== ===========
Basic Earnings per Share $ .13 $ .17 $ .30 $ .33
=========== =========== =========== ===========
Diluted Earnings per Share $ .13 $ .16 $ .28 $ .30
=========== =========== =========== ===========
Page 7 of 27
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Information
- ---------------------------
Statements in this report concerning development and introduction of new
services, expected future expenses and any other statement which may be
construed as a prediction of future performance or events are forward-looking
statements, the occurrence of which are subject to a number of known and unknown
risks and uncertainties which might cause actual results, achievements or
occurrences to differ materially from those expressed or implied by such
statements. These risks and uncertainties include the Company's ability to
create and implement effective customer acquisition techniques; timely
development, delivery and market acceptance of products and services which
differentiate the Company from other photofinishers; technological changes;
service and product development; production difficulties or delays due to
technical difficulties, equipment failures, supply constraints or other factors;
changing economic conditions; the impact of competitive products and pricing;
and other risks including those described in the Company's Annual Report on Form
10-K and those described from time to time in the Company's other filings with
the Securities and Exchange Commission, press releases and other communications.
General
- -------
Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer
marketer and provider of high-quality amateur photofinishing services and
products. The Company offers an array of complementary services and products
primarily on a mail-order basis under the brand name Seattle FilmWorks(R). The
Company has experienced an increase in net revenues in each fiscal year since
1990. Management believes this growth is attributable principally to its direct-
marketing programs, including the customer acquisition technique of offering two
rolls of film for $2.00 or less (the "Introductory Offer"). The Introductory
Offer has been nationally advertised in package inserts, newspaper supplements
and magazines and through various other direct-response media.
Beginning in fiscal 1995, the Company shifted the focus of, and
substantially expanded, its customer acquisition programs. This shift in focus
included the targeted marketing of users of personal computers. Management
believes that these steps are the primary reasons for the growth of net revenues
during fiscal years 1996 and 1997. In addition, management believes its core
photofinishing business has benefited from the introduction of digital imaging
services and products, such as the January 1994 introduction of Pictures On
Disk(TM) and the October 1995 introduction of PhotoMail(TM) Internet delivery.
Customer acquisition costs are comprised of the costs of generating a lead
and the amortization of direct costs associated with the Company's promotional
offers sent to prospective and existing customers. The costs of generating a
lead include all direct-response media, advertising and other costs associated
with developing target customer lists. These costs per lead have declined during
each of the last three fiscal years. The direct costs of customer acquisition
include film, postage and printed material costs associated with mailings to
prospective and existing customers.
The direct costs of customer acquisition are capitalized as an asset on the
Company's consolidated balance sheet as "capitalized customer acquisition
expenditures." Capitalized customer acquisition expenditures relating to
prospective customers are amortized over three years, and capitalized customer
acquisition expenditures relating to certain marketing activities to groups of
existing customers are amortized over six months. These amortization rates are
based on estimates of the timing of future roll processing volumes per customer.
The proportion of capitalized customer acquisition expenditures to be amortized
over three years relative to those to be amortized over six months will vary
from period to period based on the timing and mix of promotional activities.
Rates of amortization are compared from time to time with the actual timing of
roll processing volumes in order to assess whether the amortization rates
appropriately match the direct costs of customer acquisition with the related
revenues. If the Company were to experience a material change in the timing of
roll processing volumes, it could be required to accelerate the rate of
amortization of capitalized customer acquisition expenditures, which could have
a material adverse effect on the Company's business, financial condition and
operating results.
Page 8 of 27
Customer acquisition costs as a percentage of net revenues increased to
18.4% in the first nine months of fiscal 1998 as compared to 16.9% in the first
nine months of fiscal 1997. Management believes this increase in customer
acquisition costs as a percentage of net revenues was due primarily to expansion
of the Company's customer acquisition programs and a decrease in the rate of
growth in fiscal year-to-date net revenues. Future periods may reflect increased
customer acquisition costs due to timing of the amortization of capitalized
expenditures or the development and initiation of additional marketing programs.
For tax purposes, customer acquisition expenditures are expensed as incurred,
thereby reducing current federal income tax liabilities and increasing deferred
federal income tax liabilities.
Net income as a percentage of net revenues decreased to 7.2% for the first
nine months of fiscal 1998 as compared to 7.7% for the same period of fiscal
1997 primarily due to the relationship between changes in costs of goods sold,
customer acquisition costs, other selling expenses and other operating expenses
which in turn are primarily driven by changes in sales mix and the Company's
customer acquisition strategy. Operating results will fluctuate in the future
due to changes in the mix of sales, intensity and effectiveness of promotional
activities, price increases by suppliers, introductions of new products,
research and development requirements, actions by competitors, foreign currency
exchange rates, conditions in the direct-to-consumer market and the
photofinishing industry in general, national and global economic conditions and
other factors.
Demand for the Company's photo-related services and products is highly
seasonal, with the highest volume of photofinishing activity typically 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, when combined with the general
growth of the Company's photofinishing business, has produced greater
photofinishing net revenues during the last half of the Company's fiscal year
(April through September), with a peak occurring in the fourth fiscal quarter.
Net income is affected by the seasonality of the Company's net revenues due to
the fixed nature of a portion of the Company's operating expenses, seasonal
variation in sales mix and the Company's practice of relatively higher
expenditures on marketing programs prior to the summer months.
RESULTS OF OPERATIONS
The following table presents information from the Company's consolidated
statements of income, expressed as a percentage of net revenues for the periods
indicated.
Third Quarter Ended Nine Months Ended
--------------------- --------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
================================================================================
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods and services 57.3 54.7 57.6 58.0
----- ----- ----- -----
GROSS PROFIT 42.7 45.3 42.4 42.0
Operating expenses:
Customer acquisition costs 17.3 16.8 18.4 16.9
Other selling expenses 7.5 9.1 8.5 9.0
Research and development 0.6 0.6 0.7 0.8
General and administrative 4.5 2.7 4.7 4.1
----- ----- ----- -----
Total operating expenses 29.9 29.2 32.3 30.8
----- ----- ----- -----
INCOME FROM OPERATIONS 12.8 16.1 10.1 11.2
Total other income 0.9 0.6 0.9 0.6
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 13.7 16.7 11.0 11.8
Provision for income taxes 4.7 5.8 3.8 4.1
----- ----- ----- -----
NET INCOME 9.0% 10.9% 7.2% 7.7%
===== ===== ===== =====
Page 9 of 27
Net revenues for the third quarter of fiscal 1998 decreased 2.4% to
$24,928,000 as compared to net revenues of $25,553,000 in the third quarter of
fiscal 1997. For the nine months ended June 27, 1998, net revenues increased
0.6% to $68,838,000 compared to $68,446,000 for the same period of fiscal 1997.
Net revenues for the third quarter and for the first nine months in fiscal 1998
were affected by lower-than-expected photofinishing volumes and a decline in net
revenues from ancillary businesses. Photofinishing revenues were weaker in the
latter part of June and this pattern has continued into the month of July. While
increased competition and other factors may be contributing to reduced
photofinishing volumes, management's statistical analysis of marketing programs
indicates photofinishing volumes continue to be negatively affected by extended
delivery times experienced by customers during last summer. Production problems
associated with implementing certain new equipment during the third quarter of
fiscal 1997 resulted in shipping delays during the third and fourth quarters of
fiscal 1997. Management believes the Company lost a significant number of
customers due to the extended delivery times. During the third quarter of fiscal
1997 delayed customer orders resulted in the recording of $600,000 in deferred
revenues. Also, net revenues in future quarters will be affected by the
Company's decision in June 1998 to discontinue wholesale film sales in certain
markets in Asia. During the fourth quarter of fiscal 1997 international
wholesale film orders produced $2,300,000 in net revenues.
Cost of goods and services consist of labor, postage and supplies related
to the Company's services and products. Gross profit in the third quarter of
fiscal 1998 decreased to 42.7% of net revenues compared to 45.3% in the third
quarter of fiscal 1997. For the first nine months of fiscal 1998, gross profit
increased to 42.4% compared to 42.0% for the same period of fiscal 1997. Gross
profit in the third quarter of fiscal 1998 was negatively affected by higher
production labor costs and equipment costs incurred to ensure timely delivery of
the level of photofinishing volumes that had been planned for earlier in the
year. The fiscal year-to-date increase in gross profit was due primarily to a
decrease in certain materials costs and a product mix containing a higher
percentage of the Company's Seattle FilmWorks(R) branded products, which carry a
higher gross profit margin than the Company's other services and products.
Fluctuations in gross profit may occur in future periods due to fluctuations in
revenues, mix of product sales, intensity of promotional activities, changes in
materials costs and other factors.
Total operating expenses in the third quarter of fiscal 1998 increased to
29.9% of net revenues compared to 29.2% in the third quarter of fiscal 1997. The
increase was primarily due to increased legal expenses related to the defense of
an action filed by Fuji Photo Film Co., Ltd. with the International Trade
Organization against a number of importers, including the Company's OptiColor,
Inc. subsidiary, regarding the import and sale of recycled cameras. Operating
expenses also include higher costs related to information systems to enhance and
support the marketing and production systems. For the first nine months of
fiscal 1998 total operating expenses increased to 32.3% of net revenues compared
to 30.8% for the same period of fiscal 1997. The increase, as a percent of net
revenues, was due primarily to an increase in customer acquisition expenses
partially offset by a decrease in other selling expenses. These expenses affect
revenues in current and future periods. The Company's principal technique for
acquiring new customers is its Introductory Offer of two rolls of 35 mm film for
$2.00 or less. The Company capitalized $14,530,000 of customer acquisition
expenditures in the first three quarters of fiscal 1998 compared to $15,097,000
for the first three quarters of fiscal 1997 while amortization of these costs
was $11,767,000 and $10,566,000 during these two same periods, respectively.
Capitalized customer acquisition expenditures as of June 27, 1998 increased to
$16,645,000 compared to $13,882,000 as of September 27, 1997. The increase
reflects higher levels of customer acquisition activity undertaken to expand the
customer base and to replace customers management believes were lost in fiscal
1997 due to summer processing delays. Each year the Company prepares detailed
plans for its various marketing activities, including the mix between customer
acquisition expenditures and other selling expenses. However, the Company
occasionally changes both the mix and total marketing expenditures between
periods to take advantage of marketing opportunities as they become available.
Future periods may reflect increased customer acquisition costs due to the
timing of the amortization of capitalized expenditures or the development and
initiation of additional marketing programs.
Other selling expenses include marketing costs associated with ancillary
marketing activities building brand awareness, testing of new marketing
strategies and marketing to existing customers, as well as certain costs
associated with acquiring new customers. Other selling expenses in the third
quarter of fiscal 1998 decreased to 7.5% of net revenues compared to 9.1% of net
revenues for the third quarter of fiscal 1997. For the first nine months of
fiscal 1998, other selling expenses were 8.5% of net revenues compared to 9.0%
of net revenues for the first nine months of fiscal 1997. The decrease was due
mainly to a decrease in marketing activities directed at both new and existing
customers which the Company expenses when the activities occur.
Page 10 of 27
Research and development expenses increased to $154,000 in the third
quarter of fiscal 1998 as compared to $143,000 for the third quarter of fiscal
1997. Research and development expenses for the first nine months of fiscal 1998
decreased to $450,000 as compared to $525,000 for the first nine months of
fiscal 1997 as a result of lower contract services and equipment costs. Research
and development expenses consist primarily of costs incurred in researching new
computerized digital imaging concepts, developing computer software products and
creating equipment necessary to provide customers with new computer-related
photographic services and products.
General and administrative expenses increased to $1,117,000 for the third
quarter of fiscal 1998 as compared to $701,000 for the third quarter of fiscal
1997. General and administrative costs increased to $3,216,000 for the first
nine months of fiscal 1998 as compared to $2,821,000 for the first nine months
of fiscal 1997. The increases were due primarily to legal expenses associated
with the defense of an action filed by Fuji Photo Film Co., Ltd. with the
International Trade Commission. Fuji alleges that a number of companies,
including the Company's OptiColor subsidiary, violates patents on single use
cameras by bringing recycled single use cameras into the United States for
resale. The Company anticipates increased legal expenses to continue into the
future periods. General and administrative expenses also contain higher costs
related to information systems to enhance and support the marketing and
production systems. General and administrative expenses consist of costs related
to computer operations, human resource functions, finance, accounting, legal,
investor relations and general corporate activities.
Total other income for the third quarter of fiscal 1998 increased to
$243,000 as compared to $168,000 for the third quarter of fiscal 1997. For the
first nine months of fiscal 1998, total other income was $620,000 as compared to
$464,000 for the same period of fiscal 1997. The increases in the fiscal 1998
periods resulted from higher interest income and cash discounts from materials
purchases.
The federal income tax rate for the first nine months of fiscal 1998 was
34.3% as compared to 34.8% in the first nine months of fiscal 1997. The decrease
was due primarily to a higher balance of tax exempt investments.
Net income in the third quarter of fiscal 1998 was $2,241,000, or $.13
diluted earnings per share, compared to $2,792,000 or $.16 diluted earnings per
share for the third quarter of fiscal 1997. Net income for the first nine months
of fiscal 1998 was $4,976,000 or $.28 diluted earnings per share as compared to
$5,295,000 or $.30 diluted earnings per share for the same period of fiscal
1997. The decreases in net income were primarily attributable to lower net
revenues and gross profit and increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of July 24, 1998, the Company's principal sources of liquidity included
cash and short-term investments of $14,230,000 and an unused revolving line of
credit of $6,000,000. The ratio of current assets to current liabilities for the
Company was 3.2 to 1 at the end of the third quarter of fiscal 1998, compared to
a current ratio of 3.1 to 1 at September 27, 1997. The Company increased
inventory levels by $2,064,000 to accommodate expanded marketing plans while
accounts receivable decreased by $1,443,000 primarily due to payments received
for wholesale film orders shipped in the fourth quarter of fiscal 1997. Accrued
compensation and accrued expenses decreased by $1,321,000 primarily as a result
of payment of fiscal year 1997 liabilities. Federal income taxes payable were
favorably affected by the increase in capitalized customer acquisition
expenditures which are expensed as incurred for federal income tax purposes,
thereby having the effect of reducing current federal income tax liabilities and
increasing deferred federal income tax liabilities.
On January 22, 1997, the Company announced that it may repurchase shares of
its Common Stock, either through open market purchases at prevailing market
prices, through block purchases or in privately negotiated transactions.
Repurchases may be commenced or discontinued by the Company at any time subject
to certain conditions established by the Company's Board of Directors. Although
the number of shares to be repurchased is uncertain, any repurchased shares will
to some degree offset the dilutive effect on earnings per share of shares of
Common Stock issued under the Company's stock option and stock purchase plans.
During the first nine months of fiscal 1998 the Company repurchased 270,767
shares of common stock for a total of $2,670,000.
Page 11 of 27
The Company currently expects to spend approximately $750,000 for capital
expenditures during the remainder of fiscal 1998, principally for photofinishing
equipment, data processing equipment to support its digital and Internet-related
imaging services and for leasehold improvements. During the third quarter of
fiscal 1998 approximately $969,000 of capital purchases was financed through a
capital leasing transaction consisting of sixty monthly payments of $19,000
commencing April 1998.
The Company is currently evaluating its computer systems to identify
potential problems relating to the Year 2000 date change but has not yet
determined whether it has material Year 2000 issues. The Company does not expect
the cost to modify its computer systems to address Year 2000 issues will be
material to its financial condition or results of operations, and does not
anticipate any material disruption in its operations as a result of Year 2000
issues. The Company is also contacting its suppliers to get information
regarding the potential impact of Year 2000 issues. In the event that the
Company or any of the Company's significant suppliers or customers does not
successfully and timely address Year 2000 issues, the Company's business or
operations could be adversely affected.
The Company currently anticipates that existing funds together with
anticipated cash flow from operations and the Company's available line of credit
of $6,000,000 will be sufficient to finance its operations and planned capital
expenditures and to service its indebtedness for the foreseeable future.
However, if the Company does not generate sufficient cash from operations to
satisfy its ongoing expenses, the Company will be required to seek external
sources of financing or to refinance its obligations. Possible sources of
financing include the sale of equity securities or additional bank borrowings.
There can be no assurance that the Company will be able to obtain adequate
financing in the future.
PART II -- OTHER INFORMATION
----------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
---------
10.1 First Amendment to Credit Agreement with Wells Fargo Bank,
National Association as of February 24, 1998
27.1 Financial Data Schedule 1998
27.2 Financial Data Schedule Restated 1997
(b) REPORTS ON FORM 8-K.
--------------------
None
Page 12 of 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEATTLE FILMWORKS, INC.
DATED: July 30, 1998 /s/ Gary R. Christophersen
--------------------------------------------
Gary R. Christophersen
President/Chief Executive Officer
(Principal Executive Officer)
/s/ Case H. Kuehn
--------------------------------------------
Case H. Kuehn
Vice President-Finance/Treasurer
(Principal Financial and
Chief Accounting Officer)
Page 13 of 27
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 1998
Exhibit Description Page No.
- --------- ------------------------------------------------------------------- --------
10.1 First Amendment to Credit Agreement with Wells Fargo Bank, National 15
Association as of February 24, 1998
27.1 Financial Data Schedule 1998 27
27.2 Financial Data Schedule Restated 1997
Page 14 of 27