UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR (15d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. : 0-11927
MOTO PHOTO , INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1080650
(State of Incorporation) (Employer Identification No.)
4444 Lake Center Dr. Dayton, OH 45426
(Address of principal executive offices) (Zip Code)
(937) 854-6686
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $.01 per share value
Common Stock Purchase Warrants, exercisable
on or before December 31, 1998
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part of this Form
10-K or any amendment to this Form 10-K. [ X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant:
$14,376,801.55 in Voting Common Stock
as of March 24, 1998
(last actual transaction price)
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under an plan
confirmed by a court.
Yes No
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock
as of March 24,1998:
7,805,973 shares of Voting Common
0 shares of Non-Voting Common
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1998 annual shareholders'
meeting, to be filed pursuant to Regulation 14A, are incorporated by reference
into Part III.
MOTO PHOTO, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PAGE
PART I
ITEM 1. BUSINESS ............................................ 1
General ............................................. 1
Development of the System in 1997 ................... 1
Summary of Store Development ........................ 2
Franchise Operations ................................ 3
Seasonality ......................................... 6
Trade Names, Service Marks and Logo Types ........... 6
Regulation .......................................... 7
Supply Contract ..................................... 7
Competition ......................................... 8
Expansion Plans ..................................... 9
Employees ........................................... 9
ITEM 2. PROPERTIES .......................................... 10
ITEM 3. LEGAL PROCEEDINGS ................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ................................. 11
ITEM 6. SELECTED FINANCIAL DATA ............................. 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................. 13
General ............................................. 13
Results of Operations ............................... 14
Liquidity and Capital Resources ..................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET 20
RISK...............................................
..............................................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......... 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ................. 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .. 20
ITEM 11. EXECUTIVE COMPENSATION .............................. 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ...................................... 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...... 21
Items 10-13 are incorporated by reference from the
definitive proxy
statement for the Registrant's 1998 annual meeting
of shareholders, which
is to be filed pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ......................................... 21
SIGNATURES .......................................... 22
</TABLE>
MOTO PHOTO, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
General
Moto Photo, Inc. (together with its subsidiaries, "the Company") is engaged in
the franchising and ownership of stores offering one-hour photo processing
services, portrait, and related imaging services and merchandise under the trade
names and service marks of `MOTOPHOTO'', "ONE HOUR MOTOPHOTO", and "ONE HOUR
MOTOPHOTO & PORTRAIT STUDIO.''
The Company was incorporated as an Oklahoma corporation on July 29, 1981 and was
reincorporated under Delaware law in 1983.
Development of the System in 1997
During 1997, the Company granted nineteen new franchises and converted three
independent stores to franchises, while twenty-one franchises were canceled or
terminated, for a net increase of one franchise in the United States.
The Company's international franchises decreased by five. The Company's master
licensor for the province of Ontario, Canada, Canadian Industrial Services,
Inc., granted one new franchise, while six franchises were canceled or
terminated. The Company's master licensor for Norway, Scan-Franchise, A/S,
Ltd., neither granted nor terminated any new franchises during 1997. In 1997,
all foreign source revenues represented less than 1% of total revenues.
1997 was a year of consolidation for the System. The Company terminated a
number of underperforming franchises and franchises failing to meet System
standards. Although this means that the number of franchises decreased, the
Company believes these terminations will strengthen the System overall, as
retail sales of the System increased to $140,000,000 in 1997 from $136,000,000
in 1996. To take advantage of the synergy and advertising power of groups of
stores, the Company concentrated its efforts on increasing the number of
franchises in target markets which already have a number of MotoPhoto stores.
During 1997, the Company opened no new company stores. In accordance with its
decision in fourth quarter 1995 to keep only a core group of approximately 25
company stores to serve as training sites and as testing and research sites for
products, services, and systems, the Company closed two stores and sold six
others as franchises during 1997.
Summary of Store Development
Set forth below is a summary of the store development of the Company in the
United States and abroad during 1996 and 1997:
<TABLE>
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1996 1997
U.S.Int'l.Total U.S.Int'l.Total
Stores Open at Beginning of Year 367 80 447 363 81 444
New Stores Opened 11 3 14 13 1 14
Conversions 11 0 11 3 0 3
Terminations or Non-renewals 26 2 28 23 5 28
Stores Open at End of Year 363 81 444 356 77 433
Company Stores Open at End of Year 51 (a) 51 43 (a) 43
Franchised Stores Open at End of 312 81 393 313 77 390
Year (b)
Stores Under Development at End of Year 13 1 14 13 0 13
(c)
</TABLE>
<TABLE>
a)All foreign stores, whether owned and operated by individual franchisees or
by the master franchisor, are franchised stores and thus this category is not
applicable to foreign stores.
b)As of December 31, 1997, a total of 232 franchisees owned the 313 franchised
stores in the United States.
c)Stores under development are those for which a franchise agreement has been
signed but which have not yet opened. There is no assurance that these
stores will open.
As indicated in the chart above, a number of franchises were terminated or
failed to renew in 1996 and 1997. Reasons for terminated franchises relate to
franchise management, failure to follow system requirements, market conditions,
location, sales of stores, inability to obtain acceptable financing and/or an
acceptable site (for stores never opened), and other factors typically affecting
franchisee operations.
Set forth below is the geographical location of the stores in operation at
December 31, 1997:
Arizona 14 Kentucky 6 Ohio 25
California 31 Maryland 22 Oklahoma 18
Colorado 15 Maine 1 Pennsylvania 9
Connecticut 13 Massachusetts 8 Rhode Island 4
Florida 3 Michigan 6 Tennessee 8
Georgia 12 Minnesota 1 Texas 6
Illinois 30 North Carolina 1 Utah 5
Indiana 5 New Jersey 48 Virginia 24
Kansas 3 New York 25 Wisconsin 5
District of Columbia 8
Canada 51 Norway 26
Franchise Operations
The Company offers franchises for stores which provide one-hour photo
processing, portraiture, and sales of related imaging services and merchandise
under the trade names and service marks of `MOTOPHOTO'', "ONE HOUR MOTOPHOTO",
and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO." See "Business - Trade Names,
Service Marks, and Logo Types." The Company, as franchisor, licenses to the
franchisee such trade names, service marks, and other proprietary names and
marks. The franchisee has the right to use such trade names and service marks
in an exclusive territory, the size of which varies based on factors including
the size of the market and the location of the store. The Company offers a
franchise agreement for a single store as well as a multi-store exclusive
territorial agreement.
The Company provides to franchisees operation, management and marketing programs
and systems and other services designed to promote the business of the
franchisee and develop goodwill and name recognition. The Company develops
advertising materials for its franchisees which promote the franchisee's
business and build goodwill and name recognition for the `MOTOPHOTO'', "ONE
HOUR MOTOPHOTO", and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO" trade names and
service marks and other proprietary names and marks of the Company. In turn,
management believes such advertisement and promotion expands the Company's base
of prospects for recruitment as new franchisees.
The Company enforces a strict quality control program to ensure the high quality
of products, services, and the maintenance of appearance and image of both
franchised and company stores. The quality control program requires the
franchisee to conduct daily testing of equipment and chemicals used in
processing and printing. Store management is encouraged to stress personal
service to build customer loyalty.
Generally, the franchise agreements are for a period of ten years and are
renewable at the option of the franchisee if certain conditions are met.
Franchise agreements for most franchises do not give franchisees a unilateral
right to terminate. However, twenty-four stores are operated under older
agreements which allow the franchisee to terminate the agreement on three
months' prior notice. Franchises are transferable only with the prior approval
of the Company. Except in limited circumstances, the Company charges a transfer
fee of 15% of the initial franchise fee.
The Company receives initial franchise fees for new franchises of up to
$35,000; it offers a discounted franchise fee for each additional store opened
by an existing franchisee.
The Company has arranged in the past and may in the future arrange for financing
of portions of the initial investment for franchisees through third parties,
which the Company may be required to guarantee in whole or in part.
Under the form of franchise agreement for new franchises, the Company receives a
royalty of 6% of the franchisee's net retail sales and 3% of net wholesale
sales. For franchise agreements signed before March 1996, if the combined net
retail sales for all stores owned by a franchisee exceed $2,000,000 annually,
the royalty on the net retail sales in excess of $2,000,000 is 4.5%. At
December 31, 1997, 1 franchisee owning 6 stores qualified for the reduced
royalty. The franchise agreement requires franchisees to expend or contribute
to their local advertising cooperative for advertising an amount of at least
5.5% of net retail roll processing and merchandise sales and 15% of net portrait
sales. In addition, franchisees are required to pay to the Company 0.5% of
combined net retail sales for advertising development.
The franchisee is required to purchase MOTOPHOTO private label film and single-
use cameras and certain start-up advertising materials from the Company. The
franchisee generally is not required to purchase other supplies or equipment
from the Company but is required to purchase or lease supplies and equipment in
accordance with certain specifications in order to maintain the quality and
integrity of the franchise. The Company is a distributor to franchisees of
photo processing paper, chemistry, promotional materials and other items and, at
the present time, is the sole approved supplier of certain photo packaging
materials and point of sale materials. The Company has negotiated arrangements
with a number of suppliers which provide favorable pricing to the Company's
franchisees on supplies and equipment. In return for providing services for
certain suppliers, the Company may receive a rebate or commission on certain
products and equipment sold directly to its franchisees by those suppliers.
The Company offers franchises in the United States through area developers and
Company personnel, who generate leads through advertising, brokers, referrals,
and franchise shows. At December 31, 1997, the Company had a total of twelve
area developers covering twenty-five states and the District of Columbia. An
area developer receives a portion of the initial franchise fee as compensation
for the recruitment of a franchisee in its area and also receives a portion of
the royalty paid to the Company by franchised stores in its area (including the
area developer's own stores) and of any transfer fee paid, as compensation for
performing training, marketing, quality control and other services which would
otherwise be performed by the Company. For the year ended December 31, 1997,
area developers accounted for twelve new franchises and Company personnel
accounted for ten new franchises.
During first quarter 1998, the Company began to offer a new financing program
(`the MotoPhoto QuickStartSM program'') which will enable franchisees to open a
MotoPhoto store for a much smaller initial cash investment (approximately
$70,600) than a franchisee who used traditional financing methods would have
(approximately $152,100), as well as reduced personal financial guarantees. The
MotoPhoto QuickStartSM program has two components: (1) the Company will
finance $20,000 of the initial franchise fee for qualified new franchisees,
payable at 1% of net sales over ten years, with a balloon payment at the end of
ten years if the fee has not been fully paid; (2) Provident Bank will finance
the cost of the photo processing equipment, office equipment, and the
computerized point-of-sale system and will provide a store build-out allowance
of up to $37,000, payable at a percentage of net sales over eight years
following the month the store opens. Under the business lease agreement, the
franchisee must make monthly payments to Provident Bank of the greater of a
specified monthly minimum or a percentage of sales as follows: Stores without
portrait studios will pay 15% of net processing sales and 3% of all other sales;
stores with portrait studios will pay 17% of net processing sales, 5% of net
portrait sales, and 3% of all other sales. During the first three years, the
franchisee must personally guarantee the minimum monthly payment. As a
condition of the MotoPhoto QuickStartSM program, the franchisee must purchase
all photo processing paper and chemicals from the Company and must purchase and
display certain other products made by Fuji Photo Film U.S.A., Inc. (`Fuji''),
and must use certain Fuji equipment. Fuji has agreed to guarantee the
franchisees' payments to Provident Bank under the MotoPhoto QuickStartSM
program and the Company has agreed to indemnify Fuji for one-half of any
guarantee payments it makes to the Bank. The Company believes that the lower
initial investment cost, together with the ability to pay for financing as a
percentage of sales rather than a fixed monthly rate, will make the franchise
opportunity more attractive to a wider group of potential franchisees because it
reduces franchisee risk and improves the internal rate of return.
The Company targets for conversion into the Company's franchise system
independently-operated stores offering one-hour photo processing services which
meet the Company's criteria for location and have an acceptable operating
history. The Company has developed certain programs and incentives described
below that are intended to encourage such `conversion franchises.'' These
programs provide to the Company additional means to penetrate new market areas
and to broaden the Company's base of franchise sales.
The Company has a program to increase the number of conversion franchises, which
is used primarily by franchisees already in the System who acquire non-
affiliated stores and convert them to MOTOPHOTO franchise stores. The Company
receives an initial franchise fee of $20,000 but gives the conversion franchisee
a credit equal to 6% of the previous year's sales, with a minimum credit of
$10,000. In addition, the Company offers an alternative royalty fee plan to
conversion franchisees, based on increases to the store's sales over the period
before conversion. A new system franchisee who acquires an independent store
for the purpose of converting it pays an initial franchise fee of $20,000
without any credit and pays a straight 6% royalty fee.
The Company also offers financing of up to $5,000 of the cost of required store
design changes to a conversion franchisee which purchases certain product and
merchandise from the Company.
As market conditions change, it may be necessary to change some or all of the
strategies discussed above.
Management of the Company believes that relations with franchisees and area
developers are generally satisfactory.
Seasonality
Seasonal demand in the photo processing industry is at its greatest during the
Christmas season and in the summer and at its lowest during the winter following
the Christmas season. Demand for photo processing services during spring and
fall is fairly equal.
Trade Names, Service Marks and Logo Types
The Company owns no patents. The Company's principal service marks "MOTO-
PHOTO," "ONE HOUR MOTOPHOTO," "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO," and "CLUB
PLUS" are registered on the principal register of the United States Patent and
Trademark Office. In addition, the Company has registered other secondary
principal service marks. The initial period of registration is for twenty years
and registration is renewable so long as the Company is using the marks. The
marks "MOTO-PHOTO", `MOTOPHOTO', and/or "moto-photo" plus design also are
registered in Australia, Belgium, Canada, Denmark, Finland, France, Italy,
Kuwait, Luxembourg, the Netherlands, Norway, Germany, and the United Kingdom.
In addition, the Company has registered the mark "ONE HOUR MOTOPHOTO" in Canada,
Mexico and Saudi Arabia and the mark "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO" in
Mexico and Saudi Arabia. The initial period of registration varies among the
countries. These registrations are renewable at the Company's option regardless
of usage but if the marks are not used, the registrations are subject to
expungement upon challenge by a third party. These trade names and marks are
licensed to franchisees under franchise agreement provisions strictly regulating
their use.
The Company has devoted substantial time, effort and expense toward developing
name recognition and goodwill for stores operated under the trade names of "ONE
HOUR MOTOPHOTO" and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO." The Company intends
to maintain the integrity of its trade names, service marks and other
proprietary names and marks against unauthorized use and to protect the
franchisees' use against claims of infringement and unfair competition where
circumstances warrant. Failure to defend and protect such trade names and other
proprietary names and marks could adversely affect the Company's sales of
franchises under such trade names and other proprietary names and marks. The
Company knows of no current materially infringing uses.
The Company also has devoted substantial efforts to the development of a series
of manuals which provide operation and management guidelines for stores. These
manuals deal with, among other things, technical operations, store design,
marketing, portraiture, and merchandising. All of these manuals are the sole
property of the Company but are available for use by a franchisee of the Company
so long as the franchisee operates its store pursuant to the terms of the
franchise agreement.
Regulation
The Company is subject to Federal Trade Commission ("FTC") regulation and
certain state laws which regulate the offer and sale of franchises. The Company
is also subject to a number of state laws which regulate substantive aspects of
the franchisor-franchisee relationship.
Several additional states have enacted or proposed legislation concerning
certain "key" aspects of the franchisor-franchisee relationship, including
termination and renewal of the franchise, franchise transfers, and encroachment.
Similar legislation has been proposed at the federal level. Although such
legislation, if enacted, could ultimately weaken the cohesiveness of franchise
systems, the Company believes that such legislation is not likely to affect
materially the operations of the Company. The Company believes that its
operations comply substantially with FTC regulations and applicable state
franchise laws.
Supply Contract
The Company acts as a distributor to franchisees for Fuji photographic chemistry
and film; it also purchases Fuji products for its Company stores.
The Company has a supply contract with Fuji in which the Company has agreed to
use best efforts to have system stores purchase Fuji products to meet the
stores' requirements for photographic paper, equipment, chemistry, certain film,
and other items. If the Company defaults under the supply contract, Fuji may
require the Company to redeem the Series G Preferred Stock (`Series G Stock'').
The supply contract has a term ending on December 31, 1998, and is subject to
renewal for an indefinite number of three-year terms. If the Company redeems
the Series G Stock, the supply contract will be extended to the third
anniversary of the redemption without right of renewal.
If the Company defaulted under the supply contract, the Company would have to
find a source of funds to redeem the Series G Stock if it chose not to redeem it
in common stock or if the holder choose not to accept redemption in common
stock. It would also have to find another supplier for system requirements of
paper, chemistry and equipment; however, these products are available from
alternate vendors at comparable prices. The Company has never defaulted under
the supply contract and does not anticipate any defaults in the future.
The Company has a supply contract with Fuji in which the Company has agreed that
it and its franchisees will purchase from Fuji at least 80% of forecasted system
requirements (`the Forecast Requirement'') for photographic paper, equipment,
chemicals and certain specified products. In the event of a failure to do so,
dividends otherwise payable on the Series G Preferred Stock in 1999 and beyond
may be increased. The supply contract has a term ending on December 31, 1998,
and is subject to renewal for an indefinite number of three-year terms. If the
Company redeems the Series G Stock, the supply contract will be extended to the
third anniversary of the redemption without right of renewal.
If the Company defaulted under the supply contract, the Company would have to
find a source of funds to redeem the Series G Stock if it chose not to redeem it
in common stock or if the holder choose not to accept redemption in common
stock. It would also have to find another supplier for system requirements of
paper, chemistry and equipment; however, these products are available from
alternate vendors at comparable prices. The Company met the Forecast
Requirement for 1997 and anticipates that it will be able to do so in the
future.
Competition
The Company is the largest franchisor of one-hour photo processing franchises in
the United States, based on number of franchises. However, competition in the
photo processing industry in general, and the one-hour photo processing industry
in particular, is intense. Photo processing services are provided through
various channels of distribution, including one-hour stores, specialty stores
and photographic chains, large retail stores, drug stores, and mail order. The
Company's competitors consist of many individuals and companies, some of which
are large and established and have substantially greater resources than those of
the Company. The Company competes in the marketplace with other individuals and
companies in securing attractive locations for the opening of one hour photo
processing stores, in the sale of one-hour photo processing and related products
and services, and in attracting franchisees for one-hour photo processing
stores. The success of the Company depends on the success of the Company's
franchises and Company one-hour photo processing stores.
Principal competitive factors in the industry are convenience, quality of
service, quality of product, price, and timeliness. Centralized photo
processors can offer their services at significantly lower prices than those of
the Company and its franchisees, although the customer may wait several days for
photo processing. The Company's one-hour concept provides the market with more
timely service. In addition, personnel at MOTOPHOTO stores are trained to be
able to advise customers on picture-taking. The Company maintains quality
control standards intended to assure that the quality of one-hour processing is
at least comparable to other methods of photo processing.
The operating history of the Company and its franchisees indicates that
substantial demand exists for the one-hour photo service offered by the Company
and its franchisees; however, significantly lower prices offered by already
established centralized photo processing outlets and others may adversely affect
the business of the Company and its franchisees. Factors allowing the Company
and its franchisees to realize higher prices are quality and speed of service,
the variety of imaging services offered by the Company and its franchisees, and
the personalized service and photographic expertise of store associates, the
result of the Company's training programs.
The photo processing industry in which the Company operates is introducing new
products and services, such as digital imaging products and the 24 mm Advanced
Photo System, introduced in 1996. The Company has introduced, and will continue
to introduce, these products and services into its franchised and company stores
as the markets for these products demonstrate commercial viability.
The Company does not have exclusive right to the use of the photo processing
equipment, which is available from several manufacturers. To the Company's
knowledge, no manufacturers currently offer exclusive rights to the use of their
equipment or are anticipated to offer such rights in the future.
In addition to competition in the photo processing industry, the Company faces
general competition from franchisors of other types of businesses. The
opportunities available and costs associated with other franchise operations may
affect the Company's ability to market MOTOPHOTO franchises.
Expansion Plans
The Company is planning to expand its offerings of one-hour photo processing and
portrait services as quickly as reasonably practicable in order to assure its
market position in the rapidly changing retail photo processing industry. The
Company has added portrait, enlarging, video transfer and related imaging
services to the services which may be offered by MOTOPHOTO stores.
During 1998, system expansion will be effected primarily through the
establishment of new franchises and conversion of profitable existing stores to
MOTOPHOTO stores. The Company may open a select number of stores in existing
markets and may make acquisitions. The Company plans to concentrate its efforts
on franchising new stores and refranchising existing Company stores, as well as
developing and implementing operations programs to improve the profitability of
existing Company stores and franchised stores.
Employees
As of February 28, 1998, the Company had 464 employees, 185 of whom are employed
part-time. None of the Company's employees belongs to any labor unions, and the
Company believes its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company's primary corporate offices are located at 4444 Lake Center Drive,
Dayton, Ohio 45426. Such offices, which have approximately 33,000 square feet
on approximately 2.4 acres of land, have been leased by the Company, pursuant to
a lease providing for rent of $18,083 per month through June 1999. This
facility is leased from a partnership which is controlled by certain officers
and/or directors of the Company. In the opinion of management, the terms of the
lease are no less favorable to the Company than terms which could be obtained
from unaffiliated third parties. The Company has also leased additional
warehouse space and space for its telemarketing department away from the primary
offices.
Management of the Company believes these facilities are generally adequate for
its current operations. In addition, management of the Company believes it will
not have difficulty in securing additional facilities as it expands its
operations.
In connection with the resale of stores acquired by it, the Company assigns or
subleases to the franchisee the lease for the store premises. In addition, in
certain instances, the Company has secured a lease for rental space and then
assigned the lease to a franchisee. The Company is currently the lessee or
assignee of the leases for approximately thirteen MOTOPHOTO stores, which have
in turn been assigned to franchisees. In addition, at December 31, 1997, the
Company was the lessee or assignee of the leases for 43 Company stores.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings which it believes are routine and
incidental to its business. These actions are being contested and defended.
Management of the Company is of the opinion that such actions are not likely to
result in any liability which would have a material adverse effect on the
consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to a vote of its security holders
during the quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The only shares of common stock which the Company has issued are Voting Common.
At March 3, 1998, there were approximately 712 record holders and approximately
2,000 beneficial holders of the Company's Voting Common. The Company's Voting
Common trades on The Nasdaq Small-Cap MarketSM under the symbol "MOTO."
The following table sets forth last actual transaction price for the Company's
Voting Common, as reported by The Nasdaq Small-Cap MarketSM. The stock prices
shown do not include mark-ups, mark-downs, and commissions.
Voting Common
Price
High Low
1996:
First Quarter $1.75 $1.13
Second Quarter 2.13 1.19
Third Quarter 2.13 1.75
Fourth Quarter 2.13 1.63
1997:
First Quarter $2.25 $1.63
Second Quarter 2.00 1.69
Third Quarter 2.25 1.63
Fourth Quarter 2.75 2.25
The Company has never declared a cash dividend on any class of its common stock.
It is the present policy of the Company not to pay cash dividends on common
stock and to retain earnings for use in its business and to pay debt. Dividends
on the Series G Stock in the aggregate amount of $600,000 are payable in 1998.
Any payment of cash dividends on common stock in the future will be dependent
upon the prior payment of any dividends on the Series G Stock, the amount of
funds legally available therefor, the Company's earnings, financial condition,
capital requirements, satisfaction of debt and other contractual covenants
restricting the payment of dividends, and other factors which the Board of
Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company is set forth below
<TABLEN>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 31, 31, 31, 31,
1997 1996 1995 1994 1993
Revenue $41,897,343 $43,287,566 $42,217,722 $40,144,886 $38,866,397
Net Income (Loss) $ 1,703,535 $ 1,073,873 $(5,673,647) $ 725,230 $ 537,516
Net Income (Loss)
Applicable
to Common Stock $ 1,420,707 $ 784,583 $(5,307,782) $ (395,495) $ (549,463)
Net Income (Loss) Per
Common Share - basic
basic and diluted $ .18 $ .10 $ (.69) $ (.07) $ (.10)
Working Capital $ 3,231,884 $ (250,611) $(1,551,817) $ (251,921) $(2,257,570
(Deficit) )
Stockholder's
Equity $ 3,771,156 $ 2,538,198 $ 1,908,325 $ 8,909,595 $ 7,660,215
Long-Term
Obligations $ 9,783,805 $ 8,207,762 $ 7,895,652 $ 7,288,842 $ 5,832,028
Total Assets $21,038,115 $20,485,212 $21,324,474 $26,568,526 $22,955,841
Common Shares 7,793,905 7,785,973 7,687,249 5,664,446 5,616,201
Outstanding (1)
Number of Stores
Open 433 444 447 433 397
<FN>
(1) Weighted Average Common Shares Outstanding - Basic
The Company has never paid a cash dividend on its common shares.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Through the granting of franchises, conversion of independent stores, and
acquisitions, Moto Photo, Inc. and its subsidiaries (`the Company'') have
developed a system of 433 operational stores at December 31, 1997 compared to
444 at December 31, 1996.
Systemwide sales increased to approximately $140,000,000 in 1997 from
$136,000,000 in 1996. The Company plans to grow through granting new
franchises, conversion of independent stores to franchise stores, sale of
selected Company stores as franchises (`refranchising''), opening Company
stores in core markets and selective acquisitions, as well as increasing the
average sales per store older than one year from $380,000 to $550,000. By 2002,
the Company plans to have a 600 store system with systemwide sales in excess of
$300,000,000.
The Company operates primarily in the specialty retail channel of the photo
processing industry (see `Item 1. Business-Competition'' on page 8). There is
a consolidation of specialty retail outlets occurring and the Company estimates
that the four largest chains, of which the Company is one, have approximately
35-40% of the specialty retail photo processing market. The Company estimates
its share at approximately 10% of the stand-alone one hour processing market.
The Company believes it is well-positioned to be one of the major chains in the
market as the consolidation continues because of its unique advantage of being
the only significant franchisor in the industry. In a business where customer
service and satisfaction are critical success factors, the Company believes that
franchisees generally provide a higher level of service and customer
satisfaction than Company stores. Furthermore, the Company believes its product
offerings are different from those of many of its competitors, thereby giving
the Company a further advantage.
The more system stores in a given local market, the better the stores in that
market will generally do. Therefore, continued growth in target markets is an
important strategy for the Company's long-range growth.
The Company believes it operates a `recession resistant'' business; however, a
growing economy is beneficial for demand for the Company's products and
services. Favorable weather, particularly on weekends, is important to store
results and, therefore, Company results.
Foreign currency transactions are not material to the Company because
transactions with the Company's suppliers are in U.S. dollars and the majority
of the key supplier's manufacturing is currently done domestically. However,
costs of certain photoprocessing equipment could be influenced by exchange
rates.
The Company's business as a whole is subject to seasonal fluctuations. The
demand for photo processing services is lowest in the first quarter and highest
in the fourth quarter of the year.
Year 2000
The Company is implementing plans to address potential exposures to various
systems caused by the approach of the Year 2000. Many of the Company's systems
are already Year 2000 compliant, while other systems are being upgraded, and, in
some cases, the Company is using this opportunity to implement more modern
systems which are already Year 2000 compliant. The financial impact of these
changes is not expected to have a material effect on the Company's consolidated
financial position, results of operations or cash flow.
In January 1995 the Company redeemed 417,500 shares of $1.20 Cumulative
Convertible Preferred Stock (`$1.20 Stock'') and satisfied a cumulative
dividend arrearage of $2,004,000 in exchange for $2.00 in cash and five common
shares for each share of $1.20 stock (`the Redemption''), resulting in a
$835,000 cash payment and the issuance of 2,087,500 common shares.
Concurrently, the Series E and Series F Preferred Shares were exchanged for
$10,000,000 of cumulative non-voting Series G Preferred Stock (`Series G
Stock'). The Redemption and the Series G transaction lowered the preferred
dividend requirements and accordingly increased the net income, or decreased the
net loss, per common share. (See Note G)
RESULTS OF OPERATION 1997 VS. 1996
In 1997 the Company recorded net income of $1,703,535, or $.18 per common share
(basic and diluted), compared to net income of $1,073,873 or $.10 per common
share (basic and diluted), in 1996. Company revenue decreased by $1.4 million
or 3.3% in 1997 compared to 1996.
Company store sales declined by $1.6 million or 8.6% in 1997 compared to 1996.
In 1997 the Company continued its plan to implement its concept through
franchisees while retaining a targeted core group of approximately 23 Company
stores. Six Company stores were sold to franchisees in 1997 and two others were
closed. Company store sales and related cost of sales and operating expenses
declined as a result of the decrease in the number of Company stores operated.
Company comparable stores sales increased $230,000 or 1.7% in 1997. The Company
anticipates a continued decline in Company store sales and related cost of sales
and operating expenses as the number of Company stores decreases from the
current 43 stores to the planned 23 stores thoughout 1998 and 1999. In
addition, the Company plans to open approximately six Company stores in its core
markets in 1998 and 1999.
Company store cost of sales and operating expenses increased by .5% of sales in
1997 compared to 1996 due to an increase in labor costs resulting from a more
competitive job market.
Merchandise sales increased by $356,000, or 2%, in 1997 compared to 1996 as a
result of an 8% increase in franchise comparable store sales being partially
offset by lower prices on film due to spot market conditions and a net reduction
of approximately 2% in the number of stores. The Company's strategy is to
remain competitive in its pricing of products sold to franchisees and spot
pricing conditions could alter these trends in the future.
Merchandise costs of sales and operating expenses in 1997 declined to 88% of
merchandise sales from 90.5% in 1996 because of a 1.5% decrease in bad debt
expense and a .5% decrease in paper costs as a result of the System using Fuji
paper for the full year in 1997 as opposed to only a partial year in 1996.
Royalty revenue increased by $294,000 or 6% in 1997 compared to 1996, primarily
due to an 8% increase in comparable franchise store sales offset by a net
reduction of approximately 2% in the number of stores.
The Company anticipates continued growth in royalty revenues and merchandise
sales as a result of the refranchising of Company stores, continued increases in
comparable franchise stores sales, the number of new franchise stores, and
continuing improvement in the quality of the average franchisee.
In 1997 franchise fees were 42% lower than in 1996, reflecting the opening of 14
domestic stores in 1997 compared to 22 stores in 1996. Of the stores opened in
1997, 11 were either conversions or added stores by existing franchisees, both
of which carry lower fees. This mix accounted for the further reduction of 1997
franchise fee revenue as compared to 1996. In the first quarter of 1998, the
Company began offering a new franchising program which requires a lower initial
investment and allows the franchisee to pay for the store investment as a
percentage of sales rather than a fixed monthly payment. The Company believes
that this new program, named MotoPhoto QuickStart SM., will increase the number
of franchises sold, to 25 - 35 stores in 1998 and to 60 - 70 in 1999. (See
`Item 1 -- Business)
The Company refranchised six stores in 1997 at a loss of $48,280 compared to
five stores refranchised in 1996 at a gain of $78,051. In 1997, the loss on
sales of stores is included in selling, general, and administrative expenses.
Telemarketing revenues increased by 35% in 1997 compared to 1996, due to sales
to non-competitive businesses outside the franchise system. In 1998, the
Company plans to rely less on sales to non-franchisees and, accordingly,
telemarketing revenues are projected to decrease to approximately $700,000.
Other income in 1996 was generated by the sale of a lease for a Company store.
Selling, general and administrative expenses were about the same in 1997
compared to 1996, although 1997 benefited from a reduction in bad debt expense
associated with telemarketing. In 1997 certain increases in selling, general
and administrative expenses were largely offset by lower selling expenses on
lower franchise fee revenue and reduced bad debt expenses. Since the Company
anticipates increased franchise fee revenues in 1998 there should be an increase
in associated selling expense.
Advertising expenses decreased by $136,000 or 9% in 1997 compared to 1996 as the
Company operated fewer stores in 1997 and implemented a planned decrease in
advertising expenditures. In 1998 the Company plans to increase advertising
associated with the introduction of MotoPhoto QuickStart SM. and increase other
advertising expenditures by approximately 10%.
Depreciation and amortization expenses increased by $90,000 or 11.9% in 1997
compared to 1996 as a result of depreciation on additions to fixed assets in
1997. In 1998 depreciation and amortization expenses are planned to increase by
approximately $150,000 as the Company continues to increase its capital
expenditures primarily to add new services, such as 24 mm Advanced Photo System
processing, digital kiosks, upgrading the design of certain Company stores, and
opening new Company stores..
Interest expense remained relatively constant in 1997 compared to 1996 as the
Company had slightly lower average borrowing in 1997 at slightly higher interest
rates. Investment income, which is primarily interest income from notes
receivable and temporary investments of cash, increased in 1997 due to increased
notes receivable and improved liquidity. As the Company continues to sell
Company stores and grow its franchise system, investment income will continue to
grow.
Income tax expense in 1997 was $800,000, with an effective tax rate of 32%
compared to $850,000, or a rate of 44% in 1996. The reduction is due primarily
to the closing of two Company stores which created a deductible tax expense for
assets previously written off for book purposes and for realization of other tax
deductions for which no net deferred tax asset recognition was available to the
Company. In 1998 the Company's tax rate should decrease again due to additional
planned closings of Company stores which will create deductible tax expense for
assets previously written off for book purposes.
RESULTS OF OPERATION 1996 VS 1995
In 1996 the Company recorded net income of $1,073,873, or $.10 per common share
(basic and diluted), compared to net loss of $5.7 million, or a loss per common
share of $.69 (basic and diluted), for 1995. The 1995 loss per common share
also includes a positive adjustment of $673,219, or $.09 per share, resulting
from the Redemption (See Note G). Company revenues increased $1 million, or
2.5%, in 1996 compared to 1995.
Company store sales in 1996 declined $1,300,000, or 6%, compared to 1995.
Company comparable store sales increased $500,000, or 3%, and the differing
number of Company stores operated in each period accounted for a $1.8 million
decrease in Company store sales. Company store cost of sales and operating
expenses decreased by 2.9% of sales or $544,000 in 1996 compared to 1995, as a
result of lower management overhead costs (.5%) and higher margins on certain
merchandise (1.2%). The balance of the cost and expense reduction was primarily
due to spreading fixed costs over higher sales per store for the remaining
Company stores.
In 1995 the Company determined that its concept is being more effectively
implemented in the marketplace by franchisees rather than through Company
stores. Accordingly, the Company decided to refranchise or close 39 of its
Company stores while retaining a core group of approximately 23 company stores
to be used for training and testing and research sites for products, services
and systems. The Company recorded a restructuring charge of $5.8 million to
write down the book value of these stores to their fair value less costs to sell
in 1995 and $510,000 in 1996. (See Note L). As a result, a significant decline
in Company store sales, cost of sales and operating expenses is anticipated once
the closings and sales are completed.
In 1996 merchandise sales increased $2.1 million, or 13.6%, compared to 1995,
primarily as a result of approximately a 7% increase in franchise comparable
store sales, more franchise stores ordering paper and chemistry supplies from
the Company (5%), and increased sales of film due to more targeted film
marketing efforts (2%). Merchandise cost of sales and expenses increased to
90.5% of merchandise sales in 1996 compared to 89% in 1995, due to increased bad
debt expenses of 2% of sales, partially offset by an increase in margins on
color paper. In 1994, the Company's principal supplier of photographic paper,
Fuji Photo Film USA, Inc. (`Fuji'') raised prices as a result of entering into
an agreement with the United States Department of Commerce to resolve dumping
claims brought by Eastman Kodak Company. This required the Company to make
transitional purchasing arrangements with another supplier who, because of the
relatively temporary contract, charged higher prices that the Company could not
pass on. A Fuji production facility in the United States became operational in
May 1996. The Company then returned to Fuji as its principal supplier at lower
prices than the transitional purchasing arrangements.
Royalty revenue increased $419,000, or 9%, for 1996 compared to 1995, primarily
due to a 7% increase in comparable franchise store sales and a generally
improved quality of franchised store.
In 1996, franchise fees were significantly lower than in 1995, reflecting the
opening of 22 stores in 1996 compared to 43 in 1995. Additionally, 11 of the
1996 openings were conversions of independent stores at a very low franchise
fee. (See `Item 1. Business - Franchise Operations''). The decision to
concentrate in core markets has led to reductions in selling, general and
administrative costs that are greater than the decreased franchise fee revenue.
The Company refranchised five stores in 1996 at a gain of $78,051 versus two
stores in 1995, at a gain of $46,266.
Sales of telemarketing services are expanding as a marketing method for portrait
appointments and the Company began performing telemarketing services for non-
competitive other businesses in 1996.
Selling, general, and administrative expenses fell $755,000, or 10%, for 1996
compared to 1995. For reasons noted above, the franchise development cost
component of selling, general and administrative expenses was lower by $895,000.
Advertising expenses declined $261,000 because of lower Company store revenues,
increased emphasis on telemarketing as a marketing method, and an $88,000
increase in franchise advertising consistent with the Company's 1996 development
plan.
Depreciation and amortization expenses in 1996 were down $773,000 from 1995,
primarily due to the restructuring and the revaluation of Company stores to fair
value in anticipation of refranchising or closing 39 stores.
Interest expense increased $57,000, or 14%, for 1996 compared to 1995, primarily
due to higher interest rates and increased borrowings.
The effective tax rate in 1996 was 44% compared to no income tax expense in
1995, reflecting profitable operations versus a large loss. In 1996 the
effective state income tax rate was 13% due to non-recognition of net operating
loss carrybacks by many states.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the Company's operating activities provided $169,000 of cash compared
to $2.3 million in 1996. The primary reasons for the decrease were $2 million
of increased payments of accounts payable resulting from paper stockpiling
purchases of late 1994, and payment of another $1.1 million in accounts payable
due to payments made in early 1997 that would have otherwise been made in 1996.
These payments were partially offset by a reduction in net accounts receivable
of $1.1 million, due primarily to more stringent credit practices with
franchisees and a generally overall improved franchise store performance.
The Company's 1998 financial plan anticipates increased cash provided by
operations primarily due to increased net income of at least 15% and cash
provided by changes in accounts payable.
In 1996 cash provided by operating activities increased by $2.2 million from
$100,000 in 1995 to $2.3 million in 1996. Contributing to this change were an
increase in net income prior to restructuring charges of $1.5 million, a
$900,000 increase in accounts payable and accrued expenses, and $400,000 less of
an increase in net accounts receivable. These increases were offset by an
$800,000 reduction in depreciation and amortization expenses.
In 1997 net cash provided by investing activities decreased approximately
$300,000 to $558,000. In 1996 net cash provided by investing activities was
$800,000 as compared to net cash utilized in investing activities in 1995 of
over $1 million. Reduced purchases of property and equipment in 1996 accounted
for most of the change because of a reduction of the Company's capital spending
program due to stores sold and closed.
Also, proceeds from the sale of property and equipment were almost $400,000 more
in 1996 than in 1995. As the Company completes its program of selling certain
Company stores as franchises, it will generate proceeds from the sale of
property and equipment; however, $395,000 in 1996 is a non-recurring transaction
due to the sale of the lease rights for a Company store lease.
In 1997 the Company entered into a five year financing arrangement with a bank
which resulted in a net increase of approximately $4,000,000 in proceeds less
repayments on borrowed funds as compared to 1996. This generated $1 million in
cash from financing as compared to a $3.2 million use in 1996 as funded debt was
reduced in 1996 as compared to 1995, when borrowings increased to fund the
Redemption.
The Company's material capital commitments consist primarily of long-term
obligations (See Notes E and F). Additionally, the Company has a dividend
commitment on its Series G Stock of $600,000 in 1998. Funds for repaying these
commitments are anticipated to be generated primarily from operations in 1998
and beyond; however, the Company anticipates obtaining financing for at least a
portion of its planned capital expenditures in 1998 and subsequent years and
anticipates extending its revolving credit agreement with its supplier. If the
credit agreement is not extended, the Company will be required to refinance the
agreement.
The Company has available a $3 million line of credit, none of which was
borrowed as of December 31, 1997. This line expires April 30, 1998. The
Company believes this is adequate to finance its seasonal working capital needs
and will likely renew this or obtain a similar line for 1998 and subsequent
years.
At December 31, 1997, the Company had working capital of $3.1 million. The
Company has historically operated with a working capital deficit. The Company
believes that the nature of its business allows it to operate adequately with a
working capital deficit. The factors that contribute to this are the
substantial percentage of sales from cash, favorable terms with suppliers, non-
cash charges to income resulting from depreciation and amortization expenses,
and the line of credit to meet seasonal needs.
The photo processing industry in which the Company operates is introducing new
products and services. For example, the 24 mm Advanced Photo System was
introduced in 1996, and there is an increasing number of digital imaging
products being brought to the market. As demand for some or all of these
products and services increases, the Company's commitments for capital
expenditures will need to be increased over its historical levels. This could
require additional financing, which the Company believes can be obtained.
However, it is uncertain as to when these expenditures will be needed and what
amounts may be required. The Company is planning capital expenditures of $1.2
million in 1998.
On December 31, 1997, the Company had income tax loss carryforwards, tax credits
and deductible temporary differences of approximately $3.9 million. The tax
benefit of these carryforwards has a $2.8 million valuation allowance for
financial reporting purposes (See Note I). These items, if and when used for
tax purposes, preserve liquidity and capital resources because tax payments are
reduced by realization of these deferred tax assets.
The Company has $10,000,000 of Series G Stock outstanding which is due in 1999
under certain circumstances. (See Note G) These shares can be retired only by
an exchange for common shares or from the proceeds of an equity offering. The
Company is uncertain at this time as to how or when the Series G Stock will be
retired.
All statements, other than statements of historical fact included in this
report, which address activities, events or developments which the Company
expects or anticipates will or may occur in the future constitute `forward
looking statements''within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are based on certain assumptions and analyses made by
the Company in light of its experience and its perception of historical trends,
current conditions, and expected future developments, as well as other factors
it believes are appropriate in the circumstances. These forward looking
statements are subject to all the risks, and uncertainties incident to the
Company's business, including, without limitation, competition in the photo
processing industry, possible development of new technology affecting the
Company's ability to compete, uncertainties with respect to the ability of the
Company to expand its business through franchising, new store development, the
level of consumer acceptance of the Company's programs and services, continued
stability in market prices of key supply items, decline in demand for the
products and services offered, continuity of management, liquidity of the
franchise system, the ability of the Company to locate and obtain favorable
store sites at acceptable lease terms, management's ability to manage its
franchisee, lender and supply relationships, economic conditions, the effect of
severe weather or natural disasters, and competitive pressure from other
retailers. For all of the foregoing reasons, actual results may vary materially
from the forward looking statements. The Company assumes no obligation to
update any forward looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company are included in
this report after the signature page.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Items 10-13 are incorporated by reference from the definitive proxy statement
for the Company's 1998 annual meeting of shareholders to be filed pursuant to
Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements: See Financial Statements and
Schedules immediately following signature page of this
report.
2. Exhibits: See Exhibit Index immediately preceding Exhibits
(b) Reports on Form 8-K. The Company filed no report on Form 8-K during
the quarter ended December 31, 1997.
SIGNATURES
MOTO PHOTO, INC.
By /s/ David A. Mason
David A. Mason
Executive Vice President
Date: March 30, 1998
/s/ Michael F. Adler March 30, 1998
Michael F. Adler Chairman of the Board,
Chief Executive
Officer, and Director
(Principal Executive
Officer)
/s/ David A. Mason March 30, 1998
David A. Mason Executive Vice President,
Treasurer, Assistant
Secretary, and Director
(Principal Financial
Officer)
/s/ Frank M. Montano March 30, 1998
Frank M. Montano President and Chief Operating
Officer
/s/ Frank W. Benson March 30, 1998
Frank W. Benson Director
/s/ D. Lee Carpenter March 30, 1998
D. Lee Carpenter Director
/s/ Leslie Charm March 30, 1998
Leslie Charm Director
/s/ Dexter B. Dawes March 30, 1998
Dexter B. Dawe s Director
/s/ Harry D. Loyle March 30, 1998
Harry D. Loyle Director
/s/ Douglas M. Thomsen March 30, 1998
Douglas M. Thomsen Director
/s/ Alfred E. Lefeld March 30, 1998
Alfred E. Lefeld Vice President and Controller
(Principal Accounting Officer)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Moto Photo, Inc.
We have audited the accompanying consolidated balance sheet of Moto Photo, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Moto
Photo, Inc. at December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Dayton, Ohio
February 9, 1998
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
<S> <C> <C>
DECEMBER 31
1997 1996
Assets
Current assets:
Cash $ 3,139,252 $ 1,398,944
Accounts receivable, less allowances of $1,590,000
in 1997 and $1,218,000 in 1996 4,416,899 5,518,380
Notes receivable, less allowances of $125,000 in
1997 and $133,000 in 1996 403,669 292,419
Inventory (Note B) 1,388,010 1,794,335
Deferred tax assets (Note I) 1,025,000 316,000
Prepaid expenses 223,176 47,176
Total current assets 10,596,006 9,367,254
Property and equipment (Notes C and L) 3,095,006 2,828,830
Other assets:
Notes receivable, less allowances of $893,000 in
1997 and $860,000 in 1996 2,157,360 1,876,444
Cost of franchises and contracts acquired (Note B) 167,741 214,479
Goodwill (Notes B and L) 3,932,883 4,407,058
Deferred tax assets (Note I) 57,000 766,000
Other assets (Note D) 1,032,119 1,025,147
Total assets $21,038,115 $20,485,212
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
<S> <C> <C>
DECEMBER 31
1997 1996
Liabilities and stockholders' equity
Current liabilities:
Note payable $ - $ 250,000
Accounts payable 3,206,342 6,245,879
Accrued payroll and benefits 1,060,188 1,167,112
Accrued expenses 1,472,306 1,213,765
Current portion of long-term obligations
(Notes E and F) 1,444,000 587,859
Other 181,286 153,250
Total current liabilities 7,364,122 9,617,865
Long-term debt (Note E) 9,220,469 7,752,070
Capitalized leases (Note F) 563,336 455,692
Deferred revenue 119,032 121,387
Stockholders' equity (Note G):
Preferred stock $.01 par value:
Authorized shares - 2,000,000:
Series G cumulative nonvoting preferred shares,
1,000,000 shares issued and outstanding with
preferences aggregating $10,000,000 10,000 10,000
Common shares $.01 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 7,802,973
in 1997 and 7,785,973 in 1996 78,030 77,860
Paid-in capital 6,670,981 6,858,900
(Deficit)retained earnings subsequent to
June 30, 1991 (2,987,855) (4,408,562)
Total stockholders' equity 3,771,156 2,538,198
Total liabilities and stockholders' equity $21,038,115 $20,485,212
<FN>
See accompanying notes.
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1997 1996 1995
Revenues
Company store sales $17,102,706 $18,704,617 $19,971,920
Merchandise sales 17,887,256 17,531,497 15,430,221
Royalties 5,158,577 4,864,783 4,445,891
Franchise fees 480,991 829,714 1,755,792
Investment income 364,420 214,614 179,778
Gain on sale of stores (Note B) - 78,051 46,266
Telemarketing revenue 903,393 668,754 387,854
Other income (Note F) - 395,536 -
41,897,343 43,287,566 42,217,722
Expenses
Company store cost of sales and
operating expenses 14,085,194 15,378,376 17,001,010
Merchandise cost of sales and
operating expenses 15,735,712 15,867,891 13,751,369
Selling, general, and administrative
expenses 6,946,318 6,924,163 7,679,666
Advertising 1,333,934 1,469,531 1,730,389
Depreciation and amortization 847,509 757,673 1,530,837
Interest expense 445,141 455,404 398,098
Restructuring charge (Note L) - 510,655 5,800,000
39,393,808 41,363,693 47,911,369
Income (loss) before income taxes 2,503,535 1,923,873 (5,673,647)
Income taxes (Note I):
Current 731,000 794,000 -
Charge in lieu of income taxes 69,000 56,000 -
800,000 850,000 -
Net income (loss) 1,703,535 1,073,873 (5,673,647)
Dividend requirements (Note G):
Adjustment to net income applicable to
common shares - - 673,219
Series E and F preferred shares 317,172 210,710 92,646
Series G preferred shares (600,000) (500,000) (400,000)
Net income (loss) applicable to common
shares $ 1,420,707 $ 784,583 $(5,307,782)
Net income (loss) per common share -
basic and diluted $ 0.18 $ 0.10 $ (0.69)
<FN>
See accompanying notes.
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK (Note G)
$1.20 SERIES E SERIES F SERIES G
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
Balance at
December 31, 1994 417,500 $4,175 370,000 $3,700 630,000 $6,300 - $ -
Exchange of $1.20
preferred stock
for common (417,500) (4,175)
stock
Exchange of
Series E and F
preferred stock
for Series G
preferred stock (370,000) (3,700) (630,000)(6,300) 1,000,000 10,000
Redemption payments
and costs associated
with the exchange of
stock
Reversal of Series E
and F previously
accreted preferred
dividend
Series G preferred
dividend paid
Stock option exercise
Net loss
Balance at
December 31, 1995 - - - - - - 1,000,000 $10,000
Reversal of Series E and F
previously accreted
preferred dividend
Series G preferred
dividend paid
Net income
Use of net operating
loss carryforward
(Note I)
Balance at
December 31, 1996 - - - - - - 1,000,000 $10,000
Common stock issued
Reversal of Series E and F
previously accreted
preferred dividend
Series G preferred
dividend paid
Warrants issued
Use of net operating
loss carryforward
(Note I)
Net income
Balance at
December 31, 1997 - - - - - - 1,000,000 $10,000
<FN>
See accompanying notes
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<CAPTION>
<S> <C> <C> <C> <C>
COMMON STOCK PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
Balance at December 31, 1994 5,695,140 $ 56,951 $ 8,050,613 $ 787,856
Exchange of $1.20
preferred stock for
common stock 2,087,500 20,875 (16,700)
Exchange of Series E and F
preferred stock for
Series G preferred stock
Redemption payments and
costs associated with the
exchange of stock (931,998)
Reversal of Series E and F
previously accreted
preferred dividend (92,646) 92,646
Series G preferred
dividend paid (400,000)
Stock option exercise 3,333 34 4,341
Net loss (5,673,647)
Balance at December 31, 1995 7,785,973 $ 77,860 $ 7,013,610 $(5,193,145)
Reversal of Series E and F
previously accreted
preferred dividend (210,710) 210,710
Series G preferred
dividend paid (500,000)
Net income 1,073,873
Use of net operating
loss carryforward
(Note I) 56,000
Balance at December 31, 1996 7,785,973 $ 77,860 $ 6,858,900 $(4,408,562)
Common stock issued 17,000 170 35,253
Reversal of Series E and F
previously accreted
preferred dividend (317,172) 317,172
Series G preferred
dividend paid (600,000)
Warrants issued 25,000
Use of net operating
loss carryforward
(Note I) 69,000
Net income 1,703,535
Balance at December 31, 1997 7,802,973 $ 78,030 $ 6,670,981 ($2,987,855)
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOW
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1997 1996 1995
OPERATING ACTIVITIES
Net income (loss) $1,703,535 $1,073,873 $(5,673,647)
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring charge - 510,655 5,800,000
Depreciation and amortization 847,509 757,673 1,530,837
Charge in lieu of income tax 69,000 56,000 -
Provision for losses on inventory and
receivables 908,377 1,325,101 698,193
Notes receivable increase as a result of
franchise activities (19,000) (185,500) (162,625)
Provision for loss on sale or disposition of
equipment 30,887 129,564 9,157
(Gain) Loss on sale of stores 48,280 (473,587) (46,266)
Increase (decrease) resulting from changes in:
Accounts receivable (374,471) (2,164,947) (1,956,431)
Inventory and prepaid expense 54,796 296,281 (39,789)
Other assets (45,616) (42,218) 2,429
Accounts payable and accrued expens (3,132,324) 999,482 72,222
Deferred revenues and other liabilities 78,009 (19,205) (133,590)
Net cash provided by operating activities 168,982 2,263,172 100,490
INVESTING ACTIVITIES
Purchases of property and equipment (404,013) (290,788) (1,547,606)
Payments received on notes receivable 509,848 499,806 138,034
Proceeds from sale of property and equipment 452,606 595,102 211,476
Loss from investments - 39,124 -
Net cash provided (utilized) in investing
activities 558,441 843,244 (1,198,096)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 9,324,274 7,100,000 7,550,000
Principal payments on revolving line of
credit, long-term debt and capital lease
obligations (7,711,389) (9,847,160) (5,912,869)
Payments of preferred dividends (600,000) (500,000) (400,000)
Payments related to redemption of $1.20
Preferred stock - - (873,934)
Proceeds from issuance of common stock - - 4,375
Net cash provided (utilized) in financing
activities 1,048,307 (3,247,160) 367,572
Increase (decrease) in cash and equivalents 1,740,308 (140,744) (730,034)
Cash and cash equivalents at beginning of year 1,398,944 1,539,688 2,269,722
Cash and cash equivalents at end of year $3,139,252 $1,398,944 $1,539,688
<FN>
See accompanying notes.
</TABLE>
A. THE COMPANY
Moto Photo, Inc. and its subsidiaries (`the Company'') operate in one business
segment-franchising and operation of retail photo processing stores and portrait
studios under the trade names and service marks of `ONE HOUR MOTOPHOTO'',
`MOTOPHOTO'' and ``ONE HOUR MOTOPHOTO & PORTRAIT STUDIO'' and related marks.
As of December 31, 1995, there were 471 system stores (of which 447 were
operational) including 58 operational Company stores, 24 stores in Norway and 56
stores in Canada. As of December 31, 1996, there were 458 system stores (of
which 444 were operational), including 51 operational Company stores, 26 stores
in Norway, and 55 stores in Canada.
During 1997, the Company closed two stores, refranchised six stores, and awarded
14 franchises. As of December 31, 1997, there were 446 system stores (of which
433 were operational), including 43 operational Company stores, 26 stores in
Norway, and 51 stores in Canada.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Company's significant accounting policies used
in the preparation of the accompanying consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Moto Photo, Inc.,
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
Franchise fees are recognized as income when substantially all services and
conditions relating to the granting of the franchise have been performed or
satisfied. Revenue from territorial development fees is deferred and recognized
as stores are opened within the development area. Royalty and company-owned
store revenues are recognized as sales are made. Merchandise revenue is
recognized when the goods are shipped. Telemarketing revenue is recognized when
the services are rendered.
INVENTORY
Inventories are valued at the lower of cost or market. Cost is determined using
the average cost method. Inventory is shown net of allowances of $115,000 in
1997 and $126,000 in 1996.
COST OF FRANCHISES AND CONTRACTS ACQUIRED
Cost of franchises and contracts acquired is valued at cost and are amortized by
the straight-line method over the term of the agreement. These costs are shown
net of accumulated amortization of $646,813 in 1997 and $609,314 in 1996.
STORES FOR RESALE
Certain company-owned stores are offered for sale along with a franchise
agreement. The Company generally cannot identify when or if such transactions
will occur. Consequently, until a store is franchised, sales, results of
operations, and related assets and liabilities are included with those of the
company-owned stores. The Company sold six stores in 1997, five stores in 1996,
and two stores in 1995 (See Note L).
GOODWILL
The excess of the cost over the fair value of the net operating assets of stores
purchased is recorded as goodwill and amortized on a straight-line basis not to
exceed 40 years. Goodwill is shown net of accumulated amortization of $2,353,905
in 1997 and $2,756,092 in 1996. The carrying value of goodwill related to
operating stores is reviewed if the facts and circumstances suggest that it may
be permanently impaired. If this review indicates that goodwill will not be
recoverable, as determined by the undiscounted cash flows of the store(s) over
the remaining amortization period, the Company's carrying value of the goodwill
is adjusted to its estimated fair value. When a decision is made to dispose of a
store through sale or closure, the Company's carrying value of the store,
including goodwill, is adjusted to its estimated fair value, less costs to sell
(See Note L).
PROPERTY AND EQUIPMENT
The costs of equipment and leasehold improvements are capitalized. Maintenance
and repairs are charged to expense as incurred while betterments and renewals
are capitalized. When equipment is retired or sold, the cost and applicable
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in operations.
Property and equipment, including capitalized leases, are depreciated or
amortized by the straight-line method over the estimated useful lives, primarily
up to seven years for processing equipment, up to five years for furniture,
fixtures, and automobiles, and over the lesser of the remaining term of the
lease or the lives of the leasehold improvements.
STOCK-BASED COMPENSATION
The Company accounts for stock based compensation under the principles of
Accounting Principles Board Opinion No. 25, `Accounting for Stock issued to
Employees''(APB 25) and related Interpretations. When stock options are
exercised, the proceeds increase stockholders' equity. No amounts are charged
or credited to operations.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using tax rates and laws expected to be in effect when the differences
are expected to reverse. Valuation allowances are provided against deferred tax
assets for which it is `more likely than not'' the assets will not be realized.
PROFIT SHARING PLAN
The Company sponsors a profit sharing plan covering all employees who meet
certain eligibility requirements. Company contributions to the Plan are
discretionary and subject to the approval of the Board of Directors. Profit
sharing expense was $60,000 in 1997, $125,000 in 1996, and $25,000 in 1995.
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Beginning in 1997, income (loss) per common share is computed in accordance with
statement of Financial Accounting Standards No. 128, `Earning Per Share'',
which became effective for financial statements issued after December 15, 1997.
Amounts for prior years have been restated.
Basic income (loss) per common share data are based on the weighted-average
number of common shares outstanding during the respective periods. Diluted
income (loss) per common share data are based on the weighted-average number of
common shares outstanding adjusted to include the effects of potentially
dilutive stock options and other common stock equivalents.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Net income (loss) applicable to common $1,420,707 $ 784,583 $(5,307,782)
shares
Reconciliation of Shares:
Weighted average common shares 7,793,905 7,785,973 7,687,249
outstanding
Effect of dilutive stock options and
other 101,034 46,644 0
common stock equivalents
Weighted average common shares assuming
dilution 7,894,939 7,832,617 7,687,249
</TABLE>
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts from prior years have been restated to conform to the
presentation used in 1997.
C. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31:
<TABLE>
<S> <C> <C>
1997 1996
Processing and other equipment $ 7,379,718 $ 7,304,560
Leasehold improvements 2,869,816 3,047,396
Furniture and fixtures 1,136,240 970,673
11,385,772 11,322,629
Accumulated depreciation and 8,290,766 8,493,799
amortization
Net book value $ 3,095,006 $ 2,828,830
</TABLE>
Depreciation and amortization expense on property and equipment for the year
ended December 31, 1997 was $653,822 ($567,131 in 1996 and $1,118,629 in 1995)
(See Note L).
D. OTHER ASSETS
Other assets as of December 31 include the following items, net of accumulated
amortization of $237,500 in 1997 and $212,500 in 1996:
<TABLE>
<S> <C> <C>
1997 1996
Non-compete agreements $ 762,500 $ 787,500
Other 269,619 237,647
$1,032,119 $1,025,147
</TABLE>
E. LONG-TERM DEBT AND OTHER OBLIGATIONS
<TABLE>
The detail of long-term debt as of December 31 is:
<CAPTION>
<S> <C> <C>
1997 1996
Note payable to bank due January
2002 with interest at 9.29% per
annum $ 2,748,469 $ 1,968,333
Note payable to bank due January
2002 with interest at 9.5% (prime
rate plus 1%) 1,500,000
Revolving credit agreements with
suppliers, non-interest-bearing,
due July 1999 5,971,000 6,081,000
10,219,469 8,049,333
Portion classified as current 999,000 297,263
$ 9,220,469 $ 7,752,070
</TABLE>
At December 31, 1997, the Company had an unused line of credit for $2,500,000 at
prime plus .75%. The Company pays a commitment fee of .25% per annum on the
unused portion of the line of credit. An additional $500,000 line of credit is
available to the Company at prime plus 1% which was unused at December 31, 1997.
The carrying value of all debt approximates fair value.
The aggregate annual maturities on long-term debt for the five years subsequent
to December 31, 1997 are $999,000, $7,002,000, $1,062,000, $1,095,000, and
$62,000. Interest paid in 1997, 1996, and 1995 was $436,808, $476,695, and
$377,780, respectively.
Long-term debt and borrowings on the line of credit are secured by substantially
all of the Company's assets. The revolving credit agreement requires the Company
and its franchisees collectively to purchase certain amounts of their
requirements for specified products including paper and film through the
supplier. Certain of the long-term obligations contain restrictive covenants,
all of which the Company was in compliance with at December 31, 1997.
F. LEASES
<TABLE>
At December 31, 1997 and 1996, property and equipment included the following
capitalized lease obligations:
<CAPTION>
<S> <C> <C>
1997 1996
Processing equipment $1,737,753 $ 1,379,194
Accumulated amortization 554,918 485,340
$1,182,835 $ 893,854
</TABLE>
<TABLE>
Future minimum lease payments for capitalized leases at December 31, 1997 are as
follows:
<CAPTION>
<S> <C>
Year ending December 31
1998 $ 480,812
1999 368,845
2000 225,066
2001 89,184
2002 29,419
Total minimum lease
payments 1,193,326
Amount representing
interest ranging from
5.7% to 16.2% 184,990
Present value of minimum
lease payments 1,008,336
Current portion 445,000
Capitalized leases $ 563,336
</TABLE>
During 1997, 1996, and 1995, the Company incurred or assumed capital lease
obligations aggregating $679,300, $283,106, and $94,766, respectively, in
connection with equipment purchases.
The Company also has operating leases for the real estate facilities of several
franchised and company-owned stores. The facilities for the franchised stores
have been subleased or assigned to the franchisees. The lease agreements
generally require the lessee to pay the property taxes, insurance, and
maintenance. Under most lease agreements, the lessee is required to pay common
area expenses and/or a contingent rental based on a percentage of gross sales.
The Company also leases automobiles, office facilities, and equipment under
operating lease agreements. Rental expense for operating leases was $2,275,443
in 1997, $2,554,979 in 1996, and $2,854,676 in 1995, net of sublease rentals of
$444,734, $409,088, and $406,174, respectively.
In 1996 the Company sold the lease rights for a company-owned store which
increased net income by approximately $300,000 for the year.
<TABLE>
At December 31, 1997, noncancelable operating leases provide for the following
minimum annual obligations and sublease rentals:
<CAPTION>
<S> <C. <C> <C>
LEASE SUBLEASE NET LEASE
OBLIGATIONS RENTALS OBLIGATIONS
1998 $ 1,991,318 $ 447,372 $ 1,543,946
1999 1,587,709 328,078 1,259,631
2000 1,051,353 246,445 804,908
2001 955,255 222,398 732,857
2002 639,176 87,283 551,893
2003 and 459,584 56,945 402,639
thereafter
Totals $ 6,684,395 $ 1,388,521 $ 5,295,874
</TABLE>
G. STOCKHOLDERS' EQUITY
The Company has authorized 30,000,000 voting common shares and 1,000,000
non-voting common shares. None of the non-voting common share are outstanding
and, unless otherwise stated, any reference herein to common shares refers to
voting common shares.
In January 1995, the Company redeemed each of the 417,500 outstanding $1.20
Preferred Shares in exchange for five common shares and $2.00 in cash. This
redemption extinguished the $2,004,000, or $4.80 per share, dividends in arrears
on the $1.20 Preferred Shares. The difference between the market value of the
common shares and cash issued in the redemption was $673,219 less than the
aggregate liquidation value and dividend arrearage of the $1.20 Preferred
Shares. This is shown as a positive adjustment to loss applicable to common
shares in 1995.
Concurrently with the redemption of the $1.20 Preferred Shares, the cumulative
non-voting Series E and F Preferred Shares were exchanged for 1,000,000
cumulative non-voting Series G Preferred Shares (`Series G Stock'').
The Series G Stock has a cumulative annual dividend per share of $.40 in 1995,
$.50 in 1996, and $.60 in 1997 and 1998. In 1997 $600,000 of dividends were
paid on Series G Stock. The Series G Stock has a dividend rate lower than the
rate of the Series E and F Preferred Shares. Therefore, the 1997 dividend
requirement on income or (loss) applicable to common shares was reduced by
$317,172 ($210,710 in 1996 and $92,646 in 1995) of previously accreted Series E
and F dividends.
The Series G Stock is redeemable at any time by the Company. The holder can
redeem the Series G Stock in 1999. This redemption could be delayed up to one
year if the Company's common share price is less than $3.00, in which case the
1999 dividend rate would be $.70 per share. Redemption must be in either the
Company's common shares at
90% of the then-current market price or in cash from the proceeds of an equity
offering. The holder has the right to refuse redemption in stock. If the stock
remains unredeemed, the Company would pay dividends of $.80 per share in 2000,
$.90 per share in 2001, and $1.00 per share per year in 2002 and thereafter.
The Company has 835,000 warrants outstanding each of which entitles the holder
to purchase one common share for $4.25, subject to adjustments in certain
events, through December 31, 1998. The holder of the Series G Stock also holds
warrants to purchase 1,000,000 common shares at $2.38 per share, subject to
adjustment in certain events, through September 2002. In addition, in 1997 the
Company granted 50,000 warrants each of which entitles the holder to purchase
one common share for $1.94 through September 2002.
As of December 31, 1997, 8,746,212 shares of common stock were reserved for
issuance pursuant to various outstanding options, warrants, and redeemable and
convertible securities.
H. STOCK BASED COMPENSATION
The Company has several incentive plans under which the Board of Directors or
the Compensation Committee (`the Committee'') of the Board of Directors may
grant awards to officers and key managerial, administrative, and professional
employees of the Company. Awards may consist of incentive, non-qualified, and
deferred compensation stock options, stock appreciation rights, restricted stock
and restricted unit grants, performance equity and performance unit grants, and
any other stock-based awards, or any combination of these awards.
At December 31, 1997 additional awards aggregating up to 399,034 common shares
can be granted on the terms and conditions established by the Committee. The
Board of Directors may grant additional non-qualified stock options.
<TABLE>
The following summarizes the stock option activity for the years ended December
31:
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996
COMMON STOCK AVERAGE COMMON AVERAGE
PRICE STOCK PRICE
Outstanding at
beginning of year 985,286 $1.87 1,139,286 $2.23
Granted 163,460 $2.57 445,000 $1.57
Exercised - -
Expired (132,780) $1.82 (599,000) $2.04
Outstanding at end of
year 1,015,966 $1.99 985,286 $1.87
Exercisable at end of
year 608,002 352,028
</TABLE>
The exercise price of all options granted has been at least equal to the market
value at the date of grant. The options are generally exercisable up to five
years from the grant date except for 190,485 options which, under certain
circumstances, could be exercisable for up to nine years and nine months from
the grant date.
The Company has elected to follow APB 25 in accounting for its employee stock
options because of the alternative fair value accounting provided for under FAS
Statement No. 123, `Accounting for Stock-Based Compensation'' (``FAS 123'')
requires use of option valuation models that were not developed for use in
valuing employee stock options. Because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized under APB 25.
<TABLE>
Pro forma earnings amounts prepared under the assumption that the stock options
granted in 1997, 1996 and 1995 were accounted for based on their fair value as
determined under FAS 123 are as follows:
<CAPTION>
<S> <C> <C> <C>
Pro Forma Earnings 1997 1996 1995
Net income (loss) applicable to $ 1,234,223 $ 629,096 $(5,348,484)
common shares
Net income (loss) per common share- $ 0.16 $ 0.08 $ (0.70)
basic and diluted
</TABLE>
<TABLE>
The weighted average value of options granted during 1997 was $0.65 and, $0.67
in 1996 and was calculated as of the grant date by using the Black-Scholes
option pricing model using the following assumptions:
<CAPTION>
<S> <C> <C> <C>
Fair Value Assumptions 1997 1996 1995
Dividend yield 0% 0% 0%
Expected volatility 39% 39% 39%
Risk free interest rate 5.5% 5.5% 5.5%
Expected life in years 5-10 5 5-10
</TABLE>
FAS 123 does not apply to awards granted prior to 1995. Because additional
awards in future years are anticipated, the pro forma effects of applying this
statement are not necessarily indicative of future amounts.
I. INCOME TAXES
<TABLE>
The effective income tax rates differed from the federal statutory income tax
rates as follows for the years ended December 31:
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Statutory federal income tax $ 850,000 $ 654,000 $(1,929,000)
Increase (decrease) resulting
from effect of:
Operating losses with no
current tax benefit - - 2,086,000
Nondeductible amortization
and deductible goodwill
related to disposed assets (189,000) 39,000 (157,000)
Other Net 44,000 (15,000) -
State income tax expense, net
of federal tax benefit 95,000 172,000 -
$ 800,000 $ 850,000 $ -
</TABLE>
As a result of quasi-reorganization accounting treatment, $69,000 in 1997 and
$56,000 in 1996 are charges in lieu of income taxes and payment is not required
due to use of tax loss carryforwards. The resulting financial statement benefit
is an addition to paid-in capital.
At December 31, 1997, the Company had tax loss carryforwards of $34,000 which
expire in 1998 and are restricted to the operations of the entity which created
the loss. In addition, the Company has capital loss carryforwards of $1,500,000
which begin to expire and approximately $28,000 of alternative minimum tax
credit carryfowards which have no expiration date in 2001.
<TABLE>
Deferred tax assets at December 31 are:
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Loss carryforwards $ 586,000 $ 156,000 $ 604,000
AMT and other tax credit
carryforwards 37,000 211,000 223,000
Asset impairment reserves 1,983,000 2,271,000 2,204,000
Receivable allowances 945,000 914,000 681,000
Employee benefit accruals 138,000 124,000 123,000
Inventory valuation
allowances 65,000 80,000 54,000
Depreciation 28,000 367,000 506,000
All other items, net 109,000 121,000 74,000
Total 3,891,000 4,244,000 4,469,000
Deferred tax valuation
allowance (2,809,000) (3,162,000) (3,387,000)
Net deferred tax assets $ 1,082,000 $ 1,082,000 $ 1,082,000
</TABLE>
Realization of the net deferred tax assets depends on generating sufficient
taxable income to utilize the tax benefit of the assets prior to expiration of
the loss carryforwards. Although realization is not assured, management
believes it is more likely than not that the net deferred tax assets will be
realized.
The Company paid $304,000, $134,000, and $225,000 of income taxes in 1997, 1996,
and 1995, respectively.
J. RELATED PARTY TRANSACTIONS
The Company manages a franchise store controlled by certain officers and
directors of the Company. The Company derived revenues from this store,
including management incentive fees, of approximately $269,000 in 1997, $244,000
in 1996, and $297,000 in 1995.
Another franchise store is owned and managed by a corporation owned and
controlled by an officer and his family, from which the Company derived revenue
of $110,000 in 1997 and $180,000 in 1996.
The Company leases its headquarters from a partnership which is controlled by
certain officers and/or directors for annual rentals of $216,996. Rent expense
for each of 1997, 1996, and 1995, was $216,996.
K. CONTINGENCIES
The Company is involved in legal proceedings, arising in the ordinary course of
business, which are being contested and defended. Management is of the opinion
that there is no contingent liability that would have a material effect on the
consolidated financial statements.
L. RESTRUCTURING CHARGE
In 1995 the Company recorded a $5.8 million restructuring charge related to 39
stores it planned to sell as franchises or close. The restructuring charge
consisted of $5.7 million of asset impairment reserves related to goodwill ($5.3
million) and property and equipment ($400,000) to reduce the carrying value of
the 39 stores to their estimated fair value, less costs to sell and $100,000 for
lease terminations. An additional restructuring charge of $510,655 was recorded
in 1996, which brought the net book value of the stores to be sold or closed in
conformance with management's estimate of what price the stores will bring, less
costs to sell, in transactions with prospective franchisees. The 1996 charge
consisted of $372,409 of asset impairment reserves related to goodwill and
$120,246 to property and equipment and $18,000 for lease terminations.
At December 31, 1997, 20 stores remain to be sold or closed. The Company
anticipates the sale of the stores will take approximately two years to
substantially complete. The stores remaining to be sold had revenues of $4.3
million and income of $387,000 in 1997. The stores to be closed had revenues of
$1.7 million and losses of $157,000 in 1997.
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED BALANCE AT
YEAR ENDED BEGINNING COSTS AND TO OTHER END OF
DECEMBER 31, 1997 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
Reserves and
Allowances deducted
from Accounts and
Notes Receivable $2,211,000 $ 801,000 $226,000 $ 429,000(1) $2,809,000
Allowance for Cash
Discounts 61,000 -0- 16,000 45,000
Allowance for
Inventory
Obsolescence 126,000 99,000 110,000(2) 115,000
Allowance for
Property and
Equipment 5,820,655 547,224 556,618(3) 5,811,261
Total $8,218,655 $1,447,224 $226,000 $1,111,618 $8,780,261
<FN>
(1) Uncollectible accounts written-off
(2) Disposal of Inventory
(3) Disposal of Property and Equipment
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED BALANCE AT
YEAR ENDED BEGINNING COSTS AND TO OTHER END OF
DECEMBER 31, 1996 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
Reserves and
Allowances deducted
from Accounts and
Notes Receivable $1,354,000 $1,244,000 $359,000 $746,000(1) $2,211,000
Allowance for Cash
Discounts 73,000 (12,000) 61,000
Allowance for
Inventory
Obsolescence 70,000 93,000 37,000(2) 126,000
Allowance for
Property and
Equipment 5,328,000 492,655 5,820,655
Total $6,825,000 $1,817,655 $359,000 $783,000 $8,218,655
<FN>
(1) Uncollectible accounts written-off
(2) Disposal of Inventory
</TABLE>
<TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED BALANCE AT
YEAR ENDED BEGINNING COSTS AND TO OTHER END OF
DECEMBER 31, 1995 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
Reserves and
Allowances deducted
from Accounts and
Notes Receivable $1,152,000 $ 705,958 $ -0- $503,958(1) $1,354,000
Allowance for Cash
Discounts 96,000 (23,000) 73,000
Allowance for
Inventory
Obsolescence 94,000 15,235 39,235(2) 70,000
llowance for
Property and
Equipment -0- 5,328,000 5,328,000
Total $1,342,000 $6,026,193 $ -0- $543,193 $6,825,000
<FN>
(1) Uncollectible accounts written-off
(2) Disposal of Inventory
</TABLE>
EXHIBIT INDEX
Copies of the following documents are filed as exhibits to this report:
NUMBER DESCRIPTION
3.1 Certificate of Incorporation, as amended
(Incorporated by Reference to Exhibit 3.1
to Form 10-K dated March 29, 1995)
3.2 Bylaws, as amended
(Incorporated by Reference to Exhibit 3.2
to Form 10-K dated May 5, 1989)
4.1 Certificate of Designation of Series G
Preferred Stock (Incorporated by
Reference to Exhibit 4.2 to Form 10-K
dated March 29, 1995)
4.2 Securities Purchase Agreement
dated September 9, 1992 between
Moto Photo, Inc. and Fuji Photo Film U.S.A., Inc.
and Exhibits C, E, F and G to such Agreement
(Incorporated by Reference to Exhibit 28.1
to Form 8-K dated September 9, 1992)
*10.1 Employee Incentive Stock Option Plan,
as amended (Incorporated by Reference to Exhibit 4.1
to Form S-8 Registration Statement,
Registration No. 33-14356)
*10.2 1992 Moto Photo Performance and Equity
Incentive Plan (Incorporated by Reference to Appendix A
to the Definitive Proxy Statement for the 1992 Moto Photo
Annual Meeting of Shareholders)
10.3 Management Agreement dated April 15, 1983,
between Foto Fair International, Inc. and
National Photo Labs II, Inc. (Incorporated by Reference to
Exhibit 10.20 to Form S-1 Registration Statement,
Registration No. 2-99676)
10.4 Loan and Security Agreement dated as of
February 19, 1997, between Moto Photo, Inc. and The
Provident Bank (Incorporated by Reference to Exhibit 10.2
to Form 10-Q dated May 9, 1997)
10.5 Amended Supply Agreement dated as of
January 11, 1995 between Moto Photo, Inc.
and Fuji Photo Film U.S.A., Inc. (Incorporated by
Reference to Exhibit 10.12 to Form 10-K dated
March 27, 1996)
10.6 Amendment No. 1 to Warrant Certificate
held by Fuji Photo Film U.S.A., Inc.
(Incorporated by Reference to Exhibit 10.13
to Form 10-K dated March 29, 1995)
10.7 Project Agreement dated as of February 6, 1998 between
Fuji Photo Film U.S.A., Inc., and Moto Photo, Inc.
10.8 Master Lease Agreement dated as of February 6, 1998
between Fuji Photo Film U.S.A., Inc., Moto Photo, Inc.,
and The Provident Bank
10.9 Lease dated as of August 27, 1990
between Moto Photo, Inc. and Sycamore
Partnership (Incorporated by Reference to
Exhibit 10.18 to Form 10-K dated March 29, 1991)
*10.10 Employment Agreement effective April 1, 1997
with Michael F. Adler (Incorporated by Reference to
Exhibit 10.1 to Form 10-Q dated May 9, 1997)
*10.11 Amendment to Employment Agreement, dated as of
April 1, 1997, with Michael F. Adler (Incorporated by
Reference to Exhibit 10.1 to Form 10-Q dated August 7, 1997)
*10.12 Employment Agreement dated June 1,
1996 with David A. Mason (Incorporated by
Reference to Exhibit 10.2 to Form 10-Q dated
August 6, 1996)
*10.13 Amendment to Employment Agreement, dated as of
December 23, 1997, with David A. Mason
*10.14 Employment Agreement dated June 1, 1996
with Frank M. Montano
(Incorporated by Reference to Exhibit 10.1
to Form 10-Q dated August 6, 1996)
*10.15 Amendment to Employment Agreement, dated as of
December 23, 1997, with Frank M. Montano
*10.16 Employment Agreement effective as of
September 1, 1992 with Paul Pieschel
(Incorporated by Reference to Exhibit 10.31
to Form 10-K dated March 25, 1993)
*10.17 Bonus Arrangements for Certain Officers
11.0 Statement Re: Computation of Per Share
Amounts (Included with the financial
statements and supplementary data filed
after the signature page of this report)
22.0 List of subsidiaries of the Company
(Incorporated by Reference to Exhibit 22
to Form 10-K dated March 27, 1996)
23.0 Consents of Ernst & Young, LLP
27.0 Financial Data Schedule
EXHIBIT 10.7
PROJECT AGREEMENT
This Agreement ("Agreement"), made as of February 6, 1998 is entered into
by and between FUJI PHOTO FILM U.S.A., INC. ("Fuji"), a New York corporation
with offices at 555 Taxter Road, Elmsford, New York and Moto Photo, Inc. ("Moto
Photo"), a Delaware corporation with offices at 4444 Lake Center Drive, Dayton,
Ohio 45426.
WITNESSTH:
WHEREAS, Fuji currently sells minilab photo processing equipment as more
fully described in Schedule 1 ("Fuji Equipment") to certain financial
institutions for resale to Moto Photo's own stores and its franchisees (each
company-owned store and franchisee being collectively called a "Lessee" and
together the "Lessees"); and
WHEREAS, Fuji also currently sells color photographic paper, photographic
chemicals and various other related products to Moto Photo for resale to the
Lessees;
WHEREAS, Fuji and Moto Photo desire to provide, through this Agreement, for
a special lease financing program to lease Equipment and other items to the
Lessees.
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants contained herein and other good and valuable consideration, the
receipt, adequacy and sufficiency of which are hereby acknowledged, the parties
hereby covenant and agree as follows:
1.MASTER LEASE FINANCING AGREEMENT: As soon as possible after the date
hereof, Fuji and Moto Photo will arrange a master lease financing
agreement ("Lease Financing Agreement") with a financial institution
("Lessor") mutually acceptable to Fuji and Moto Photo pursuant to which
Fuji will sell Fuji Equipment to the Lessor. Pursuant to separate
leases (each a "Lease" and together the "Leases") between the Lessor and
each of the Lessees participating in this program, Lessor will lease to
a Lessee the Fuji Equipment. Lessor will also provide to the Lessees
and will add to the principal balance of the Lease, up to $60,000 per
Lease to enable the Lessee to purchase certain leasehold improvements
(``Leaseholds'') and certain third party equipment ("Other Equipment").
In addition, beginning with the first anniversary of a Lease, at the
beginning of each year of such Lease, an amount equal to an annual
equipment maintenance fee of $3,800 ("Maintenance Fee") will be added to
the principal balance of such Lease. The amount of the Maintenance Fee
will be set forth in the Lease. Fuji will guarantee to the Lessor the
monthly Rent (as defined herein) payments to be made by a Lessee under a
Lease. The general terms of the Leases are more fully described below.
2.LEASE AGREEMENTS: Lessor shall lease to Lessee, and Lessee shall lease
from Lessor, the Fuji Equipment, Leaseholds and Other Equipment
described in the Lease. Each Lease must incorporate the relevant terms
and conditions of this Agreement. Notwithstanding termination of this
Agreement as permitted herein, each Lease shall continue to remain in
full force and effect and subject to and governed by the terms and
conditions of such Lease for the term of such Lease.
3.LEASE TERMS:
a. Term of Leases. The term of each Lease shall be eight years. Leases
may only be terminated as expressly provided therein.
b. Calculation of Rent. For the lease of the Fuji Equipment, Leaseholds
and Other Equipment and the amortization of the Maintenance Fee,
Lessee shall pay to Lessor weekly payments ("Rent") equal to (i) a
percentage of such Lessee's net sales of photofinishing services, (ii)
a percentage of such Lessee's net sales of portrait products and
services and (iii) a percentage of such Lessee's net sales of other
merchandise and services (together the "Percentage of Sales"). The
Percentage of Sales will be determined by Moto Photo using a standard
store model to calculate, on a best efforts basis, the Percentage of
Sales required to fully amortize the principal balance of a Lease over
its eight year term. The Percentage of Sales at the commencement of
this Agreement is set forth in Schedule 1. The Percentage of Sales
may be adjusted from time to time for Leases not yet entered into upon
the mutual agreement of Fuji and Moto Photo. Notwithstanding the
forgoing, during the first three-year period of any Lease, weekly Rent
payments must be equal to or greater than the amounts set forth in
Exhibit 3(b) attached hereto.
c. Title to Equipment; Purchase Option. (i) During the term of a Lease,
title to the Fuji Equipment and Other Equipment (collectively, the
``quipment'') will remain with the Lessor and the Lessee shall not
receive any right, title or interest in the Equipment. Title to
Leaseholds shall be held by the Lessee, which will grant Lessor a
first priority security interest in the Leaseholds.
(ii) At the end of the full term of a Lease, the Lessee may elect to
purchase the Equipment based on the then market value of the Equipment
and any outstanding Lease payments and maintenance charges as of such
termination date (`Lessee Purchase Price''). If the Lessee elects to
purchase the Equipment at the end of the Lease and the Lessee Purchase
Price is less than the balance in the Lease Account (as defined in the
Lease Financing Agreement) (`Residual Value''), Fuji will pay the
Lessor the difference between the Residual Value and the Lessee
Purchase Price. Should the Lessee choose not to exercise its purchase
option, Fuji will repurchase the Equipment from the Lessor at a price
equal to the Residual Value. Fuji will then endeavor to resell the
Equipment to a third party at a negotiated price. Moto Photo will use
its best efforts to assist Fuji in any such resale of Equipment. If
the Lessee Purchase Price or the negotiated price of any such resale
of Equipment less all expenses of sale incurred by Fuji and Moto Photo
(the "Net Resale Price") is greater than the Residual Value such
excess shall be considered the "Resale Gain." Conversely, if the
Lessee Purchase Price or the Net Resale Price of any such resale of
Equipment is less than the Residual Value, such shortfall shall be
considered the "Resale Loss.'' If a Lessee's monthly Rent payments
amortize the Residual Value prior to the end of such Lease, the
aggregate of subsequent monthly Rent will be considered an "Inherent
Gain." At the end of such Lease, the Lessor will be required to remit
the Inherent Gain to Fuji.
d. Guarantee by Fuji. In order to induce the Lessor to enter into the
Leases with the Lessees, Fuji will guarantee the Rent payments.
Should a Lessee default under the payment terms of its Lease, Fuji
will pay the Lessor the guarantee amount due pursuant to the terms of
such Lease. Upon such payment by Fuji, the Lessor must assign all of
its rights in the Equipment and the Leaseholds to Fuji, at which point
Fuji may elect to recover such Equipment and Leaseholds from the
Lessee and resell them to a third party. If the net proceeds received
by Fuji from any such resale are greater than the amount it was
required to pay under the associated guarantee, such excess will be
considered the "Foreclosure Gain." If the net proceeds received by
Fuji from any such resale are less than the amount it was required to
pay under the associated guarantee, such shortfall will be considered
the "Foreclosure Loss." In the alternative, Fuji and Moto Photo may
agree that either Fuji or Moto Photo shall retain certain Equipment
and Other Items which it acquires pursuant to a default by a Lessee,
in which case Fuji and Moto Photo shall agree upon the value of such
retained Equipment and Other Items (the "Settlement Amount"). The
difference between any such Settlement Amount and associated amount
Fuji was required to pay to the Lessor under a guarantee will also be
considered a Foreclosure Gain or Foreclosure Loss, as the case may be.
To assist Lessor in the maintenance of records pursuant to Section 4
(a) below, Fuji and Moto Photo will report to Lessor the Net Resale
Price or the Settlement Amount from the sale or retention, as the case
may be, of any Equipment and Other Items.
4.ALLOCATION OF LOSSES OR GAINS ON LEASES:
a. Allocation Between Fuji and Moto Photo During the term of this
Agreement, Fuji and Moto Photo shall share equally in all Resale
Gains, Resale Losses, Foreclosure Gains, Foreclosure Losses and
Inherent Gains (collectively, the "Net Gains" or "Net Losses").
During the term of this Agreement, Lessor will maintain accurate
records of all such gains or losses incurred during each calendar
year. Within 15 days of the end of each calendar year during the term
of this Agreement, Lessor shall be required to provide Fuji and Moto
Photo an accounting of the Net Gains and Net Losses during such
calendar year. If neither party to this Agreement objects to such
accounting of such Net Gains and Net Losses within 30 days thereafter,
then settlement of the aggregate Net Gain or aggregate Net Loss, as
the case may be, shall occur immediately as follows: (i) if there is
an aggregate Net Gain for the calendar year (after subtracting any
payments to Pool Leases pursuant to Section 4(b) below), Fuji will
remit to Moto Photo an amount equal to 50% of such aggregate Net Gain,
and (ii) if there is an aggregate Net Loss for the calendar year Moto
Photo will remit to Fuji an amount equal to 50% of such aggregate Net
Loss.
b. Allocation Between Fuji and Moto Photo and the Lessees. At December
31 of each calendar year commencing December 31, 2006, the Lessor will
determine the Net Gains, if any, for all Leases which commenced during
the calendar year ending eight years before the date such
determination is made (the ``ool Leases''). If the Net Gains of the
Pool Leases for the year in question exceed the Threshold Amount (as
defined below) multiplied by the number of such Pool Leases (the
``ool Gains''), then 33.3% of the Pool Gains shall be paid pro rata
to those Pool Leases which never defaulted (``ualifying Lease''),
based on the amount of Rent paid on each Qualifying Lease and the
total Rent paid on all Qualifying Leases which commenced during that
year. The `Threshold Amount'' means the additional amount the Lessee
would pay under a Lease if, assuming consistently uniform average
sales over the period, the Lessee's gross sales of photofinishing
services, portrait products and services, and other merchandise and
services equal 110% rather than 100% of such sales under Moto Photo's
standard store model. As of the commencement of this Agreement, the
Threshold Amount is $86,100.
Example:
In 1999 - 11 Pool Leases
At December 21, 2007, the aggregate Net Gains for the 11 Pool
Leases is $1,000,000
11 x $86,100 (`Threshold Amount'') = $947,100
$1,000,000 - $947,100 = $52,900 (`Pool Gains'')
33.3% of $52,900 = $17,616.
One Lease defaulted. Therefore 10 Qualifying
Pro rata share for each Qualifying Lease = 10% of $ 17,616 or $1,762
(assuming each Qualifying Lease paid the same rent)
c. Representations to Lessees on Fuji's sharing of Net Gains or Losses.
Moto Photo shall not, except as required in its franchise, SEC or
other government filings, reveal to Lessees the sharing by Fuji in
Net Gains or Net Losses pursuant to this Agreement.
5.ADDITIONAL PROVISIONS: During the term of this Agreement, Moto Photo
will:
a. require all Lessees who lease Equipment under this program to agree to
purchase from Moto Photo or Fuji the following Fuji products:
(i) photographic film and one time use cameras, in sufficient
quantities as to maintain such products in at least 50% of the display
space for such products in each participating Lessee's store; provided
such Fuji products are competitive with other brands of the same or
similar products; and
(ii) all of such participating Lessee's requirements for color
photographic paper, photographic chemicals, and minilab and electronic
imaging equipment and related parts and accessories; provided such
Fuji products are competitive with other brands of the same or similar
products.
b. cause each participating Lessee to use its best efforts to increase
purchases of Fuji electronic products, cameras, video and audio tapes
and floppy disks for resale; provided such Fuji products are
competitive with other brands of the same or similar products.
c. cause each participating Lessee to prominently display Fuji's name and
marks in such Lessee's store; provided that such use of Fuji's name
must be approved by Fuji; and
d. cause each participating Lessee to enter into a service agreement with
Fuji or an affiliate of Fuji in the form attached hereto as Exhibit
5(d) for the maintenance of the associated Equipment during the term
of the Lease, with the annual fee for such maintenance agreement to be
added to the principal balance of the Lease as proscribed above.
6.TERM OF THIS AGREEMENT: This Agreement will commence on the day first
written above and will terminate upon the end of the term of the last
Lease to expire or to be terminated, provided, however, that at any time
after the first fifty Leases are entered into with Lessees under this
program, the parties to this Agreement will meet to evaluate the
effectiveness of this program. After the first fifty Leases are entered
into, Fuji may, at its sole discretion, elect to discontinue the program
for all or a portion of future Leases to Lessees, in which case this
Agreement shall terminate upon the end of the term of the last Lease to
expire or be terminated.
7.INDEMNIFICATION:
a. Moto Photo assumes liability for, and hereby agrees to indemnify,
protect and hold harmless, Fuji and its agents, employees, officers,
directors, partners, shareholders, successors and assigns from and
against all liabilities, obligations, losses, damages, injuries,
claims, demands, penalties, actions, costs and expenses, including,
without limitation, reasonable attorneys' fees and costs of
investigation, of whatever kind and nature, whether in contract or in
tort or otherwise arising out of or claimed to arise out of Moto
Photo's failure to perform or comply with any conditions or covenants
of this Agreement.
b. Fuji assumes liability for, and hereby agrees to indemnify, protect
and hold harmless, Moto Photo and its agents, employees, officers,
directors, partners, shareholders, successors and assigns from and
against all liabilities, obligations, losses, damages, injuries,
claims, demands, penalties, actions, costs and expenses, including,
without limitation, reasonable attorneys' fees and costs of
investigation, of whatever kind and nature, whether in contract or in
tort or otherwise arising out of or claimed to arise out of Fuji's
failure to perform or comply with any conditions covenants of this
Agreement.
c. Such indemnities and assumptions of liabilities and obligations shall
continue in full force and effect notwithstanding the expiration or
other termination of this Agreement.
8. MISCELLANEOUS:
a. No Partnership. Nothing contained in or relating to this Agreement,
or any Lease or associated guarantee, shall constitute or be deemed to
constitute a partnership or joint venture between the parties hereto
or between Fuji and any Lessee.
b. No Agency. Neither party has or shall have or hold itself out as
having any authority or agency to act on behalf of the other.
c. Entire Agreement. This Agreement and the Lease Financing Agreement
constitute the entire agreement of the parties with respect to the
subject matter hereof and supersedes all prior agreements and
understandings, oral and written, between the parties with respect to
the subject matter hereof.
d. Amendments. No amendment to this Agreement shall be effective unless
in writing and executed by Fuji and Moto Photo.
e. Benefit of Parties. This Agreement shall be binding on and shall
inure to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and assigns.
f. Severability. If any one or more of the provisions contained in this
Agreement or any document executed in connection herewith shall be
invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or
impaired; provided, however, that in such case the parties oblige
themselves to use their best efforts to achieve the purpose of the
invalid provision by a new legally valid stipulation.
g. Notices. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing and (unless
otherwise specifically provided herein) shall be deemed to have been
given at the time when mailed in any general or branch office of the
United States Postal Service, enclosed in a registered or certified
postpaid envelope and addressed to the address of the parties shown
below or to such changed address as such party may have fixed by
notice, or when sent by facsimile transmission and acknowledged by an
appropriate telephonic or facsimile receipt:
To Fuji: Fuji Photo Film U.S.A., Inc.
555 Taxter Road
Elmsford, NY 10523
Attention: President
Telecopier: (914) 789-8314
- copy to -
Fuji Photo Film U.S.A., Inc.
555 Taxter Road
Elmsford, NY 10523
Attention: Jonathan E. File, Esq.
Telecopier: (914)789-8142
To Moto Photo: Moto Photo, Inc.
4444 Lake Center Drive
Dayton, Ohio 45426
Attention: David Mason
Telecopier: (937) 854-0140
- copy to -
Jacob A. Myers, Esq.
Myers & Frayne Co., LPA
18 W. First Street
Dayton, OH 45402
Telecopier: (937) 224-5782
provided, that (a) any notice of change of address shall be effective only when
received and (b) a copy of any notice given other than by mail shall be given by
mail as aforesaid.
h.Counterparts. This Agreement may be executed simultaneously in
separate counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
i. Construction. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without
reference to choice-of-law rules. The titles of the sections of
this Agreement are for convenience only and shall not define or
limit any of the terms or provisions hereof. Plural terms herein
shall include the singular and "and" shall include "or", and vice
versa, unless the context requires otherwise.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Agreement on the date first above written.
FUJI PHOTO FILM U.S.A., INC.
Date
------------------------
By
-------------------------
Title
------------------------
MOTO PHOTO, INC.
Date
------------------------
By
-------------------------
Title
------------------------
Schedule 1 Equipment and Percentage of Sales
Exhibit 3(b) Minimum Monthly Rent Payments
Exhibit 5(d) Form of Service Agreement
Schedule 1
Equipment: Model 278A - Full List
Percentage of Sales for Stores with Portrait Studios
(i) of Lessee's net sales of photofinishing services
(ii)of Lessee's net sales of portrait products and services
(iii)of Lessee's net sales of other merchandise and services
Percentage of Sales for Stores without Portrait Studios
(i) of Lessee's net sales of photofinishing services
(ii)of Lessee's net sales of the other merchandise and services.
(iii)
(iv)
EXHIBIT 3(B)
MINIMUM MONTHLY RENT PAYMENTS
Average of $1,500 per month in the First 12 Months
Average of $2,000 per month in the Second 12 Months
Average of $2,500 per month in the Third 12 months
EXHIBIT 10.8
MASTER LEASE FINANCING AGREEMENT
THIS AGREEMENT ("Agreement") is made as of February 6, 1998 among FUJI
PHOTO FILM U.S.A., INC., a New York corporation ("Fuji"), MOTO PHOTO, INC., a
Delaware corporation ("Moto Photo"), and THE PROVIDENT BANK ("Provident"), under
the following circumstances:
A.Moto Photo and its franchisees own and operate photo finishing stores.
B.Fuji sells minilab photo processing equipment to certain financial
institutions for resale to Moto Photo and its franchisees and sells
color photographic paper, photographic chemicals and various other
related products to Moto Photo for resale to Moto Photo's customers and
franchisees.
C.Fuji and Moto Photo have entered into an Agreement of even date
herewith, a copy of which is attached hereto as Exhibit A (the "Project
Agreement"), which provides for a special lease financing program known
as Moto Photo QuickStart (the "Moto Photo QuickStart Program") which
Fuji and Moto Photo have agreed to make available to Moto Photo and
selected franchisees. In addition, Fuji and Provident have entered into
a Guaranty and Repurchase Agreement of even date herewith (the "Fuji
Guaranty") under which Fuji has guaranteed certain payments to be made
to Provident by the participants in the Moto Photo QuickStart Program
and has agreed to repurchase equipment leased by Provident in connection
with the Moto Photo QuickStart Program, under the circumstances
described in the Fuji Guaranty.
D.This Agreement is being entered into by the parties to effectuate the
Moto Photo QuickStart Program.
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Financings by Provident; Term. (a) Subject to the terms and
conditions of this Agreement, from time to time during the term of this
Agreement, upon written notice from Moto Photo and Fuji, Provident shall,
in each such event: (i) purchase from Fuji, and Fuji shall sell to
Provident, a Fuji minilab photo processor and related equipment described
on Exhibit B ("Fuji Equipment") at the price set forth on Exhibit B, (ii)
Moto Photo shall make available for purchase by Provident, and Provident
shall purchase, certain equipment manufactured by third parties described
on Exhibit B ("Third Party Equipment"), and (iii) Provident shall enter
into a business lease agreement in substantially the form of Exhibit C
hereto (a "Lease") with Moto Photo or a Moto Photo franchisee designated by
Moto Photo (a "Program Participant") pursuant to which Provident shall
lease the Fuji Equipment and the Third Party Equipment (collectively,
"Equipment") to the Program Participant for a term of eight years from the
last day of the month in which the Equipment is placed in service and shall
make a cash payment to the Program Participant of up to the maximum amount
specified on Exhibit B as a store build-out allowance (a "Build-Out
Allowance"). Provident, Fuji and Moto Photo shall follow the procedures
described in Exhibit D with respect to the authorization and closing of
each Lease (the "Closing Procedures") unless Provident and Moto Photo
otherwise agree in writing. Provident shall be entitled to rely on the
representations and warranties made by the Program Participant in the Lease
with respect to the Program Participant's organization, authority, due
execution and delivery of the Lease and the like.
(b)In accordance with each Lease and with the maintenance agreement to be
entered into by and between Fuji and each Program Participant, which shall be
in the form attached hereto as Exhibit E (each, a "Maintenance Agreement"),
so long as there is no default under the applicable Lease, Provident shall
pay to Fuji on behalf of the Program Participant at the beginning of each
year of the Maintenance Agreement (which shall commence at the beginning of
the second year of the Lease) the annual maintenance fee payable under the
Maintenance Agreement in the amount specified on Exhibit B. Provident shall
be reimbursed for amounts so paid to Fuji through the payments made by the
Program Participant to Provident pursuant to the Lease.
(c)At the time Provident is instructed pursuant to Section 1(a) to enter into
a Lease, Moto Photo and Fuji shall specify in writing to Provident: (i) the
manner in which the weekly rental and all other periodic payments (including
any minimum payments) to be made by the Program Participant under the Lease
are to be calculated, (ii) the identity of any guarantors who are required to
execute the Lease, and (iii) any terms to be included in the Lease that are
different from those set forth in the form of Lease attached hereto as
Exhibit C.
(d)Provident's obligations under Section 1(a) shall be subject, in each
instance, to satisfaction of each of the following conditions:
(b)The Program Participant which is a party to the Lease shall be domiciled
in, and the store in which the Equipment subject to the Lease will be used
shall be located in, the continental United States of America;
(c)The Program Participant shall have executed and delivered to Provident the
Lease and each other agreement or instrument (including, without limitation,
appropriate financing statements) which the Program Participant is required
to execute and deliver under the terms of the Lease, and all other conditions
to the effectiveness of the Lease set forth therein shall have been
satisfied;
(d)Fuji and Moto Photo shall have approved in writing the final form of the
Lease to be entered into with the Program Participant, if it will vary from
the form of Lease attached hereto as Exhibit C; and
(e)Provident shall have received a valid bill or bills of sale conveying to
Provident the Equipment to be leased to the Program Participant pursuant to
the Lease.
(f) For purposes of this Agreement, the sum of all amounts paid by Provident
with respect to the purchase of Equipment subject to a Lease plus the amount
of the Build-Out Allowance paid by Provident under that Lease hereinafter is
referred to as Provident's "Initial Investment" with respect to that Lease.
In no event shall the aggregate amount of Provident's Initial Investment with
respect to any Lease entered into pursuant to this Agreement exceed $200,000
nor shall the purchase price of any Third Party Equipment plus the amount of
the Build-Out Allowance under any single Lease exceed $60,000.
(g) This Agreement shall commence on the day first written above and shall
terminate at the end of the term of the last Lease to expire or to be
terminated; provided, however, that: (i) as soon as practicable after
Provident enters into the 40th Lease under this Agreement, Provident, Moto
Photo and Fuji shall cause their respective representatives to discuss
extending the Moto Photo QuickStart Program and the terms of any such
extension, and (ii) if Provident, Moto Photo and Fuji have not otherwise
agreed in writing, the obligations of the parties with respect to any
additional Leases (including Provident's obligation to enter into any
additional Leases with Program Participants) shall terminate at such time as
Provident has entered into the first 50 Leases with Program Participants
under this Agreement. Notwithstanding any of the foregoing, however, unless
Provident otherwise agrees in writing, Provident shall not be obligated to
enter into any additional Leases after December 31, 1999 if fewer than 50
Leases have been entered into on or before such date.
(h)Any security interest in the Equipment subject to a Lease or any other
similar lien or right with respect to any of such Equipment which Moto Photo
may hold under a franchise agreement with the Program Participant that is a
party to such Lease or otherwise shall be subordinate in all respects to the
rights of Provident and Fuji with respect to such Equipment under such Lease.
Section 2. ACH Collections; Allocations; and Payments. (a) Each Lease shall
provide Provident with the right to collect from a designated account of the
Program Participant, by means of weekly electronic fund transfers initiated
through the Automated Clearing House Association ("ACH/EFT") amounts due to
Provident from the Program Participant under the Lease ("Electronic
Payments"). On or before 11:00 a.m. Dayton, Ohio, time on Tuesday of each
week during which any Leases are outstanding, Moto Photo shall notify
Provident by fax or, if agreed by Provident and Moto Photo, by electronic
data transmission, of the proper amount of the Electronic Payments which
shall be charged by Provident to the account of each Program Participant by
means of ACH//EFT. In addition, if a Program Participant owes any amount
under a Lease with respect to Impositions (as defined in the Lease),
Provident may increase the amount to be collected from the Program
Participant by means of the ACH/EFT charge by the amount of the Impositions,
in accordance with the provisions of the Lease.
(b)In the event that Provident does not receive the full amount of the
Electronic Payments due from the account of a Program Participant by means of
the ACH/EFT charge, Provident promptly shall notify the Program Participant,
Fuji and Moto Photo (a "Payment Default Notice") that a payment default
exists under all Leases between Provident and that Program Participant. If
the Program Participant fails (a "Continuing Payment Default") to pay the
full amount due within seven days after Provident gives the Payment Default
Notice, Provident promptly shall notify Fuji and Moto Photo of the Continuing
Payment Default.
Section 3. Defaults by Program Participants under Leases. (a) As soon as
practicable after Provident receives notice, with respect to any Lease, of
the occurrence of any Default (as defined in the Lease), Provident shall
notify Fuji and Moto Photo of such Default.
(b) Following the occurrence of any Default under a Lease and prior to
demanding payment with respect to such Lease from Fuji pursuant to the Fuji
Guaranty, Provident shall, at its expense, unless otherwise instructed by
Fuji and Moto Photo in writing, take such actions with respect to the
enforcement of its rights under the Lease as are consistent with Provident's
normal and customary practices; provided, however, that Provident shall not
be required to initiate any legal action with respect to any such Default
other than pursuant to Section 3(c) below. Unless Provident, Fuji and Moto
Photo otherwise agree, Provident shall not make any demand for payment by
Fuji under the Fuji Guaranty with respect to a Lease as to which a Default
has occurred unless such Default is a Continuing Payment Default and the
failure to pay has continued without being cured in full for at least 90 days
after the date on which the payment was due under the Lease.
(c) Except as otherwise expressly provided in Sections 2(b) and 3(b), without
written instructions from Fuji and Moto Photo, Provident shall have no
obligation to take any action with respect to any Default under any Lease or
any action or omission which, with the passage of time or the giving of
notice, or both, might constitute a Default; provided however, that Provident
shall take such other actions with respect to any such Lease as Fuji and Moto
Photo reasonably may request in writing, if Fuji and Moto Photo acknowledge
in such request their obligation to reimburse Provident for all reasonable
expenses in connection therewith and to indemnify Provident in connection
therewith.
(d) Moto Photo shall use its reasonable best efforts to assist Provident or
Fuji, as the case may be, in seeking performance by each Program Participant
of its obligations under the Lease or Leases to which it is party (including,
without limitation, in attempting to cause any such Program Participant to
cure any Default under any such Lease).
Section 4. Equipment Trade-Ins. In the event that a Program Participant
desires to trade-in any Equipment subject to a Lease, Provident, Moto Photo
and Fuji shall cooperate and use reasonable efforts to accommodate such
desire and shall make appropriate modifications to the Lease and this
Agreement to reflect any such accommodation.
Section 5. Reports. (a) For so long as any Leases remain outstanding,
Provident shall provide to Moto Photo and Fuji, within 15 business days after
the end of each month, a report (the "Monthly Report"), presented for the
preceding month and, on a cumulative basis, for the period from the date of
this Agreement through the end of the month for which the Monthly Report is
being made, showing:
(i)for each outstanding Lease, an account (a "Lease Account") which shall
reflect the amount of Provident's Initial Investment with respect to such
Lease from the date when paid and:
(1)shall be increased by the amount of all maintenance fees paid by
Provident to Fuji with respect to the Equipment leased under such
Lease from the date when paid,
(2)shall be increased by any Impositions incurred by Provident under
such Lease from the date incurred,
(3)on a daily basis: (x) if the Lease Account has an outstanding
positive balance, shall be increased by an accrual for interest on the
outstanding balance (excluding from such balance for such purpose the
aggregate amount of all prior accruals pursuant to this clause (3)) at
the rate of 9.6% per annum (computed on the basis of a year of 360
days), or (y) if the Lease Account has an outstanding negative balance
and the Consolidation Account (as hereinafter defined) has a positive
balance, shall be decreased by an accrual for interest on the
outstanding negative balance (expressed as a positive number and
excluding from such balance the aggregate amount of all prior accruals
pursuant to this clause (3)) at the rate of 9.6% per annum (computed
on the basis of a year of 360 days), and
(4)shall be reduced by the amount of all payments collected by
Provident or paid to Provident under the Lease (including, without
limitation, any insurance recoveries received by Provident) or paid to
Provident with respect to the Lease under the Fuji Guaranty or Section
6(a) of this Agreement;
(ii)for all Leases entered into in the same calendar year (each, a "Pool"),
an account (a "Pool Account") which shall reflect on an aggregate combined
basis all of the Lease Accounts for the Leases in that Pool; and
(iii)for all Leases, a consolidation account (the "Consolidation Account")
which shall reflect on an aggregate combined basis all of the Pool Accounts;
provided, however, that for any periods during which the Consolidation
Account has a negative balance, the Consolidation Account also shall be
decreased by an accrual for interest on the outstanding negative balance
(expressed as a positive number) and excluding from such balance the
aggregate amount of all prior such accruals at a rate per annum equal to the
rate then paid by Provident with respect to positive balances in commercial
accounts under Provident's standard corporate cash management arrangements.
(b)Moto Photo and Fuji promptly shall notify Provident in writing of the
amount of any "Foreclosure Gain," "Foreclosure Loss," "Settlement Amount,"
"Net Resale Price" and "Settlement Value" (each as defined in the Project
Agreement) with respect to any Lease. All Monthly Reports, Annual
Reconciliation Reports and Pool Reconciliation Reports (as hereinafter
defined) prepared by Provident with respect to periods following receipt of
any such notice thereafter shall include a statement of such amounts.
Section 6. Settlement between Fuji and Provident. (a) If, upon termination
of a Lease, the Lease (other than a Lease as to which Fuji previously has
made payment to Provident under the Fuji Guaranty) Account with respect to
such Lease has a positive balance (the amount of such positive balance
hereinafter being referred to as the "Residual Value" of such Lease) and if:
(i) the Program Participant which is a party to such Lease does not purchase
the Equipment subject to such Lease in accordance with the terms of such
Lease, Provident shall sell such Equipment to Fuji, and Fuji shall purchase
such Equipment from Provident, within 15 business days after the termination
of such Lease, at a purchase price equal to the Residual Value, or
(ii)the Program Participant which is a party to such Lease purchases the
Equipment subject to such Lease in accordance with the terms of such Lease
and the net proceeds received by Provident from the Program Participant with
respect to the sale of such Equipment are less than the Residual Value with
respect to such Lease, Fuji shall pay to Provident, within 15 business days
after such sale, the amount by which such Residual Value exceed such net
proceeds, or
(iii)the Program Participant which is a party to such Lease purchases the
Equipment subject to such Lease in accordance with the terms of such Lease
and the net proceeds received by Provident with respect to the sale of such
Equipment are greater than the Residual Value, Provident shall pay to Fuji,
within 15 business days after such sale, the amount by which such net
proceeds exceeds such Residual Value.
(b)If, upon termination of a Lease (other than a Lease as to which Fuji
previously has made payment to Provident under the Fuji Guaranty), the Lease
Account with respect to such Lease has a negative balance (the amount of such
negative balance, expressed as a positive number, being referred to as the
"Inherent Gain" under such Lease), Provident shall pay to Fuji, within 15
business days after the termination of such Lease, an amount equal to the
Inherent Gain plus, if the Program Participant which is a party to such Lease
purchases the Equipment subject to such Lease in accordance with the terms of
such Lease, the net proceeds received by Provident with respect to the sale
of such Equipment to such Program Participant. In the event that such
Program Participant does not purchase the Equipment subject to such Lease in
accordance with the terms of such Lease, Provident also shall convey to Fuji,
at the time Provident makes such payment, all of Provident's right, title and
interest in the Equipment subject to such Lease.
(c)Within 15 business days after delivery of the last Monthly Report under
Section 5, if the Consolidation Account has a negative balance, Provident
shall pay to Fuji the amount of such negative balance.
Section 7. Settlements among Moto Photo, Fuji and the Program Participants.
(a) Within 15 business days after the end of each calendar year, Provident
shall prepare and provide to Fuji and Moto Photo a report (an "Annual
Reconciliation Report") showing the Net Gains and Net Losses (each as defined
in the Project Agreement) during the year then ended, based on the
information provided to Provident pursuant to Section 5(b) and the Monthly
Reports, sufficient to permit Fuji and Moto Photo to make any payments
required by Section 4(a) of the Project Agreement.
(b) Provident shall include with the Annual Reconciliation Report for each
year, commencing with the year ending December 31, 2006, another report (a
"Pool Reconciliation Report") showing the Net Gains and Pool Gains (each as
defined in the Project Agreement), if any, for the Pool consisting of Leases
entered into during the calendar year ending eight years before such December
31, based on the information provided to Provident pursuant to Section 5(b),
the Monthly Reports and the Annual Reconciliation Report, sufficient to
permit Fuji and Moto Photo to make any payments required by Section 4(b) of
the Project Agreement.
Section 8. Indemnification. Fuji and Moto Photo, jointly but not severally,
shall indemnify, defend, exonerate and hold Provident and each of its
officers, directors, employees and agents (collectively, "Provident
Indemnified Parties") harmless from and against any and all actions, causes
of action, suits, losses, costs, liabilities and damages, and all expenses
incurred in connection therewith (irrespective of whether any such Provident
Indemnified Party is a party to the action for which indemnification
hereunder is sought), including reasonable attorneys' fees and disbursements
(collectively, the "Provident Indemnified Liabilities"), incurred by any of
the Provident Indemnified Parties as a result of, or arising out of, or
relating to: (i) the calculation, collection or allocation of amounts in
accordance with the instructions of Moto Photo or Fuji pursuant to Sections
1(c) or 2(a) or the calculation of any amounts using information provided by
Moto Photo and Fuji pursuant to Section 4(b); (ii) any action or omission
taken by Provident in accordance with the written instructions of Moto Photo
and Fuji pursuant to Sections 1 or 3; (iii) any warranty or product liability
claims with respect to the Fuji Equipment (as to which only Fuji, and not
Moto Photo, shall have any indemnification obligation hereunder), (iv) any
breach of contract claims with respect to the Maintenance Agreement (as to
which only Fuji, and not Moto Photo, shall have any indemnification
obligation hereunder), (v) any warranty or product liability claims with
respect to the Third Party Equipment (as to which only Moto Photo, and not
Fuji, shall have any indemnification obligation hereunder), (vi) any claims
with respect to the Moto Photo franchise relationship (as to which only Moto
Photo, and not Fuji, shall have any indemnification obligation hereunder),
(vii) or any claims with respect to relationship between Fuji, Moto Photo
and/or a Program Participant, (viii) any claims with respect to the proper
characterization of a Lease for Uniform Commercial Code, tax or other
purposes, and (ix) all actions, suits, proceedings, settlements and judgments
arising out of any of the foregoing.
Section 9. Representations and Warranties. (a) Fuji and Moto Photo each
hereby represents and warrants to Provident, as to itself and not as to the
other, as follows:
(i) it is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation;
(ii)the execution, delivery and performance by it of this Agreement are
within its corporate powers, have been duly authorized by all necessary
corporate action, and do not (i) contravene its certificate of incorporation
or bylaws; (ii) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting it; or (iii)
result in, or require the creation or imposition of, any lien or encumbrance
on any of its properties;
(iii)no authorization or approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body or other person is
required for the due execution, delivery and performance by it of this
Agreement except as have been duly obtained or made and as are in full force
and effect;
(iv)this Agreement is its legal, valid and binding obligation, enforceable in
accordance with its terms; and
(v) there is no action or proceeding at law or in equity by or before any
court or governmental instrumentality or agency now pending which might
materially adversely affect its condition (financial or otherwise).
(b)Provident hereby represents and warrants to Fuji and Moto Photo as
follows:
(i) Provident is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of Ohio;
(ii)the execution, delivery and performance by Provident of this Agreement
are within its corporate powers, have been duly authorized by all necessary
corporate action, and do not (i) contravene its articles of incorporation or
regulations; (ii) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting it; or (iii)
result in, or require the creation or imposition of, any lien or encumbrance
on any of its properties;
(iii)no authorization or approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body or other person is
required for the due execution, delivery and performance by Provident of this
Agreement except as have been duly obtained or made and as are in full force
and effect;
(iv)this Agreement is a legal, valid and binding obligation of Provident,
enforceable in accordance with its terms; and
(v) except as otherwise described in an Annual Report on Form 10-K or a
Quarterly Report on Form 10-Q filed by Provident or an affiliate with the
Securities and Exchange Commission, as of the date of the most recent such
filing, there is no action or proceeding at law or in equity by or before any
court or governmental instrumentality or agency now pending which might
materially adversely affect Provident's condition (financial or otherwise).
Section 10. Expenses. (a) Fuji and Moto Photo shall reimburse Provident for
all reasonable out-of-pocket costs and expenses incurred by or imposed upon
Provident in connection with: (i) the enforcement by Provident, at the
request of Moto Photo or Fuji, of any of Provident's rights under a Lease, or
(ii) the successful enforcement by Provident against them of any of
Provident's rights hereunder including, without limitation, in either such
case, the reasonable fees and expenses of Provident's counsel; provided,
however, that the aggregate amount of such costs and expenses for which Fuji
and Moto Photo shall be obligated to reimburse Provident shall not exceed
$100,000.
(b)Provident shall reimburse Fuji and Moto Photo for all reasonable out-of-
pocket costs and expenses incurred by or imposed upon either of them in
connection with the successful enforcement by them against Provident of any
of their rights hereunder including, without limitation, in either such case,
the reasonable fees and expenses of their counsel; provided, however, that
the aggregate amount of such costs and expenses for which Provident shall be
obligated to reimburse Fuji and Moto Photo shall not exceed $100,000.
Section 11. Miscellaneous. (a) Nothing contained in or relating to this
Agreement, any Lease or the Fuji Guaranty shall constitute or be deemed to
constitute a partnership or joint venture among the parties hereto or between
any party or parties hereto and any Program Participant.
(b) No party hereto has or shall have or hold itself out as having any
authority or agency to act on behalf of any other party.
(c) This Agreement and the Fuji Guaranty constitute the entire agreement of
the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral and written, between the parties
with respect to the subject matter hereof.
(d) No amendment to this Agreement shall be effective unless in writing and
executed by all of the parties hereto.
(e) This Agreement shall be binding on and shall inure to the benefit of the
parties hereto and their respective heirs, legal representatives, successors
and assigns; provided; however, that no party may assign any of its rights
hereunder or delegate any of the obligations hereunder without the prior
written consent of all other parties hereto, except that, upon prior written
notice given to Moto Photo and Fuji and their written agreement thereto
(which agreement shall not be unreasonably delayed or withheld), Provident
may cause one or more affiliates of Provident to fulfill Provident's
obligations to enter into one or more Leases in accordance with this
Agreement.
(f) If any one or more of the provisions contained in this Agreement or any
document executed in connection herewith shall be invalid, illegal or
unenforceable in any respect under any applicable law, the validity, legality
and enforceability of the remaining provisions contained herein shall not in
any way be affected or impaired; provided, however, that in such case the
parties shall use their best efforts to achieve the purpose of the invalid
provision by a new legally valid stipulation.
(g) All notices, requests, demands and other communications provided for by
this Agreement shall be in writing and (unless otherwise specifically
provided herein) shall be deemed to have been given at the time when mailed
in any general or branch office of the United States Postal Service, enclosed
in a registered or certified postpaid envelope and addressed to the address
of the parties shown below or to such changed address as such party may have
fixed by notice, or when sent by facsimile transmission and acknowledged by
an appropriate telephonic or facsimile receipt:
If to Fuji: Fuji Photo Film U.S.A., Inc.
555 Taxter Road
Elmsford, New York 10523
Attention: President
Telecopier: (914) 789-8514
- copy to -
Fuji Photo Film U.S.A., Inc.
555 Taxter Road
Elmsford, New York 10523
Attention: Jonathan E. File, Esq.
Telecopier: (914) 789-8142
If to Moto Photo: Moto Photo, Inc.
4444 Lake Center Drive
Dayton, Ohio 45426
Attention: Chief Financial Officer
Telecopier: (937) 854-0140
- copy to -
Jacob A. Myers, Esq.
Myers & Frayne Co., LPA
18 W. First Street
Dayton, Ohio 45402
Telecopier: (937) 224-5782
If to Provident: The Provident Bank
10 West Second Street
Dayton, Ohio 45402
Attention: Moto Photo QuickStart
Telecopier: (937) 223-3522
- copy to -
The Provident Bank
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Legal Department
Telecopier: (513) 763-8069
provided, however, that (i) any notice of change of address shall be effective
only when received and (ii) a copy of any notice given other than by mail shall
be given by mail as aforesaid.
(h)Whenever any payment to be made hereunder shall be stated to be due on a
Saturday, Sunday or any other day which is not a business day in the State of
Ohio, such payment may be made on the next succeeding business day and such
extension, if any, shall be included in computing interest in connection with
such payment.
(i)This Agreement may be executed simultaneously in separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(j)This Agreement and the rights and obligations of the parties hereunder
shall in all respects be governed by, and construed and enforced in
accordance with, the laws of the State of Ohio (without giving effect to
Ohio's principles of conflicts of law).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
FUJI PHOTO FILM U.S.A., INC.
By:
--------------------------------
Name:
Title:
MOTO PHOTO, INC.
By:
--------------------------------
Name:
Title:
THE PROVIDENT BANK
By:
--------------------------------
Name:
Title:
EXHIBIT A
PROJECT AGREEMENT
EXHIBIT B
1.Description of the Fuji Equipment (including Model):
FUJI EQUIPMENT: Model SFA-278A includes:
FP-362 Film Processor
PP-1828A Printer/Processor
Printer Crop Mask
Paper Magazines (3)
Crown 135MM Extractor
3120 Kinetronics Film Cleaner
880 X-Rite Densitometer
Crown 4508 Semi-Auto Sleever
2 UP Cluster Lens 5:
Greeting Card Kit/Lithos
Diffusion Box
Compact Mets Silver Recovery
Negative Receiver
AT/DT Attacher/Detacher
AT/DT Accessory Kit
THIRD PARTY EQUIPMENT:
Supplier Item
Aperlon Greeting Lithos(6)
Fuji-Hunt Chemical Labels
Perfect System Image Maker
Phototronics Tubing & Fittings
Phototronics Lockout/Tagout
Grainger Compressor
Identification Passport Camera/Die Cutter
Mini-Lab Lab Supplies/Film Stands
Calumet 15" Rotatrim
Unique POS System Including Training Fee
Local Office Equipment
BEF Electronic Printer Counter
2.Price of the Fuji Equipment: $135,643.60
3.Maximum Store Build-Out Allowance: $ 37,000.00
4.Annual Fee Payable Under Maintenance Agreement: $ 3,800.00
EXHIBIT C
FORM OF BUSINESS LEASE AGREEMENT
EXHIBIT D
CLOSING PROCEDURES
1.Moto Photo will obtain a completed and signed lease application (in a form
provided by Provident) and a recent personal financial statement from the
prospective Program Participant and will provide copies to Provident and Fuji.
2.Moto Photo and Fuji will notify Provident of their approval of the Program
Participant for the Moto Photo QuickStartO Program and will provide to Provident
in writing: (i) any modifications they propose to make in the standard Business
Lease Agreement form, (ii) the information to be included in Exhibit A of the
Business Lease Agreement, and (iii) the rent schedule to be attached to the
Business Lease Agreement as Exhibit B.
3.Provident will provide copies of the Business Lease Agreement (completed with
the information provided under #2 above), UCC-1 financing statements, an ACH/EFT
authorization form and identification tags to be affixed to the Equipment in
accordance with the Lease (collectively, the "Lease Package") to Moto Photo, and
Moto Photo will arrange for execution of the Lease Package and the Maintenance
Agreement by the Program Participant. Moto Photo will return an executed copy
of the Lease Package to Provident and will return an executed copy of the
Maintenance Agreement to Fuji. Moto Photo also will obtain from the Program
Participant and provide to Provident: (i) the insurance certificate required by
the lease, and (ii) a check for the required $6,000 prepayment of Rent.
4.Provident will file the UCC-1 financing statements with the appropriate
governmental authorities and will establish the ACH/EFT arrangements.
5.Provident will authorize Moto Photo to issue on Provident's behalf a purchase
order to Fuji with respect to the Fuji Equipment and purchase orders to the
appropriate vendors with respect to the Third Party Equipment.
6.Fuji and the third party vendors will issue to Provident invoices with
respect to the Fuji Equipment and the Third Party Equipment.
7.The Program Participant will complete and return to Provident the Acceptance
Certificate within a specified number of days after receipt of the Equipment
and, following receipt, Provident will confirm the commencement of the Lease to
Fuji, Moto Photo and the Program Participant, noting the "Commencement Date" for
purposes of the lease.
8.Following acceptance of the Equipment, Provident will pay the invoices from
Fuji and the third-party vendors.
EXHIBIT E
EXHIBIT 10.13
AMENDMENT TO EMPLOYMENT AGREEMENT
This Agreement is made as of December 23, 1997, by and between Moto Photo, Inc.
a Delaware Corporation (`Employer''), and David A. Mason (``Employee''):
The parties have entered into an Employment Agreement as of June 1, 1996 and
wish to amend that Agreement as set forth herein.
Section 3 is hereby deleted in its entirety and replaced with a new Section 3
which shall read:
`3. Term. The term of the Employee's employment with Employer shall continue
until December 31, 2000. Commencing January 1, 2000, the term of this Agreement
shall be extended so that the term of this Agreement shall always be for a
period of one year until and unless either party gives the other party a one
year notice to terminate the Employees employment under this Agreement, unless
sooner terminated in accordance with Section 11 of this Agreement. The term of
Employees Employment under this Agreement shall be extended in accordance with
Section 10 of this Agreement.''
The first paragraph of Section 2 of the Employment Agreement is hereby deleted
in its entirety and replaced with a new Section 2 which shall read:
`2. Compensation. As base compensation for Employee's services to Employer
during the term of this Agreement, Employer shall pay Employee a regular salary
at the rate of $125,000 per year payable in such manner as the Employer pays its
other executives. In addition, the Employee shall be entitled to a bonus for
the fiscal year ended December 31, 1998 in an amount equal to $25,000 if the
Employers pre-tax income is $2,600,000 or greater, plus 4% of the Employers pre-
tax income in excess of $2,600,000, including the gains or loses from the sale
of company stores, as determined by the Employers independent accountants. Such
income determination will be final and binding and any bonus will be paid to the
extent due according to the calculation in this Section, by March 30 of the
following year. Such pre-tax income will be determined after adding back any
bonuses of executives (including Employee) of the Employer who have a bonus
based on pre-tax corporate income to the pre-tax of income of Employer as
verified by Employee's independent CPA firm.''
IN THE WITNESS WHEREOF, the parties have executed this amendment the day and
year first above written:
Witnesses EMPLOYER:
MOTO PHOTO, INC.
By:
---------------------------
Michael F. Adler
- -------------------------
Chairman & CEO
EMPLOYEE:
By:
---------------------------
David A. Mason
- -------------------------
EXHIBIT 10.15
AMENDMENT TO EMPLOYMENT AGREEMENT
This Agreement is made as of December 23, 1997, by and between Moto Photo, Inc.
a Delaware Corporation (`Employer''), and Frank M. Montano (``Employee''):
The parties have entered into an Employment Agreement as of June 1, 1996 and
wish to amend that Agreement as set forth herein.
Section 3 is hereby deleted in its entirety and replaced with a new Section 3
which shall read:
`3. Term. The term of the Employee's employment with Employer shall continue
until December 31, 2000. Commencing January 1, 2000, the term of this Agreement
shall be extended so that the term of this Agreement shall always be for a
period of one year until and unless either party gives the other party a one
year notice to terminate the Employees employment under this Agreement, unless
sooner terminated in accordance with Section 11 of this Agreement. The term of
Employees Employment under this Agreement shall be extended in accordance with
Section 10 of this Agreement.''
The first paragraph of Section 2 of the Employment Agreement is hereby deleted
in its entirety and replaced with a new Section 2 which shall read:
`2. Compensation. As base compensation for Employee's services to Employer
during the term of this Agreement, Employer shall pay Employee a regular salary
at the rate of $165,000 per year payable in such manner as the Employer pays its
other executives. In addition, the Employee shall be entitled to a bonus for
the fiscal year ended December 31, 1998 in an amount equal to $30,000 if the
Employers pre-tax income is $2,600,000 or greater, plus 5% of the Employers pre-
tax income in excess of $2,600,000, including the gains or loses from the sale
of company stores, as determined by the Employers independent accountants. Such
income determination will be final and binding and any bonus will be paid to the
extent due according to the calculation in this Section, by March 30 of the
following year. Such pre-tax income will be determined after adding back any
bonuses of executives (including Employee) of the Employer who have a bonus
based on pre-tax corporate income to the pre-tax of income of Employer as
verified by Employee's independent CPA firm.''
IN THE WITNESS WHEREOF, the parties have executed this amendment the day and
year first above written:
Witnesses EMPLOYER:
MOTO PHOTO, INC.
By:
---------------------------
Michael F. Adler
- -------------------------
Chairman & CEO
EMPLOYEE:
By:
---------------------------
EXHIBIT 10.17
BONUS ARRANGEMENTS
The following bonus arrangements have been made for the officers named with
respect to profits of the Company for fiscal year 1998:
Regular Bonus Super Bonus(1)
Mr. Adler $40,000 N/A
plus 7%
of any excess
Mr. Montano $30,000 N/A
plus 5%
of any excess
Mr. Mason $25,000 N/A
plus 4%
of any excess
Mr. Lefeld 5% of salary 10% of salary
Mr. Swartz $7,500 plus $11,000 plus
3% of excess 4% of excess
over budgeted over budgeted
profit for his profit for his
department and department and
1% of dollars 2% of excess
over budgeted over budgeted
profit for wholesale profit for wholesale
department department
(1)The `regular bonus'' and the ``super bonus'' are based on target levels for
corporate profits, which vary by position. If corporate profits reach the
``regular bonus'' level, the named officer will get the `regular bonus''
indicated. If corporate profits reach the ``super bonus'' level, the named
officer will get only the ``super bonus'' indicated, not both the `regular
EXHIBIT 23.0
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
Numbers 33-10784 on Form S-3 dated December 24, 1986, 33-14356 on Form S-8 dated
May 15, 1987, 33-53188 on Form S-8 dated October 13, 1992, Number 33-59673 on
Form S-8 dated May 30, 1995, and 333-39347 on Form S-8 dated November 3, 1997,
of our report dated February 9, 1998, with respect to the consolidated financial
statements and schedules of Moto Photo, Inc. and subsidiaries included in the
Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Ernst & Young LLP
Dayton, Ohio
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from Moto Photo
Inc.'s 1997 10-K and is qualified in its entirety by reference
to such 10-K filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,139,252
<SECURITIES> 0
<RECEIVABLES> 9,585,928
<ALLOWANCES> 2,608,000
<INVENTORY> 1,388,010
<CURRENT-ASSETS> 10,596,006
<PP&E> 11,385,772
<DEPRECIATION> 8,290,766
<TOTAL-ASSETS> 21,038,115
<CURRENT-LIABILITIES> 7,364,122
<BONDS> 0
0
10,000
<COMMON> 78,030
<OTHER-SE> 3,683,126
<TOTAL-LIABILITY-AND-EQUITY> 21,038,115
<SALES> 34,989,962
<TOTAL-REVENUES> 41,897,343
<CGS> 18,652,096
<TOTAL-COSTS> 29,820,905
<OTHER-EXPENSES> 2,181,443
<LOSS-PROVISION> 809,349
<INTEREST-EXPENSE> 445,141
<INCOME-PRETAX> 2,503,535
<INCOME-TAX> 800,000
<INCOME-CONTINUING> 1,703,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,703,535
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
