Fotomat Corp

Case Context

In January 1969, Fotomat Corporation registered a proposed offering of 500,000 shares of common stock with Securities and Exchange Commission. Proceeds from the sale were to be used to repay debt, finance expansion and increase working capital. On February 12, 1969, Eastman Kodak Company brought an action against Fotomat alleging unfair competition and infringement of trademarks and trade dress and requesting injunctive relief. Six days later, Direct Photo Services, Inc. also filed a case claiming unfair competition and requesting the court to declare what design of building plaintiffs may use in the conduct of its “drive-thru” photo building business. On April 30, 1969, Fotomat went public. The offering of shares was oversubscribed at an initial price of $20 per share and was even traded for as high as $35 per share on the same day. Fotomat Corporation, which was in the business of selling film and photographic equipment and supplies as well as in providing film processing services on a drive-in, discount basis, has 200 company-owned and 219 franchised outlets as of year 1969. In October 1969, Fotomat reported that it had lost over $114,000 from revenue of $12.2 million in its results of operation for six months ended July 31.

Problem Definition

Main Problem: Having considered all of the facts presented, is it wise to purchase shares of Fotomat?

Sub-Problems:

a. What are the main sources of revenue of Fotomat

b. What is their method of recognizing these revenues? Does it meet the criteria set in the accounting standards?

c. What do the sources of revenue indicate in terms of the company’s quality of earnings?

Description of Framework for Analysis

As potential investors of Fotomat Corporation, we intend to look deeper into the details of their reported and unaudited financial reports so that an informed decision will be made. We shall be searching for red flags that could possibly misstate their revenues and/or costs. We first...